5 myths of family firms

When myths are demystified, they teach us about reality. Here, the business of family firms does the same. 

Family firms have a lot they can teach the rest of the business world if we can get behind the common myths about them and see how their special qualities can be replicated elsewhere.

For example, the idea that the interconnected digital world is a place for businesses that runs on rational principles, free from emotional baggage, primitive thinking and old-fashioned values is a fact, right? In fact, it’s a myth. In this world, the cosy sentimentality and traditionalism of the family firm has no place, right? Wrong!

Family firms invariably mess things up eventually because of five fatal flaws:

1. They mostly can’t make it beyond more than two generations – it is no accident that around the world you hear versions of the saying “clogs to clogs in three generations"

2. Sooner or later emotional overspill from the family tears the business apart

3. Outsiders, needed for the firm to grow, are treated as pathogens to be killed off by the immune system of the family

4. Families make bad decisions, slowly and conservatively

5. They are under-governed and badly led.

All five are myths. It’s time to set the record straight. In a turbulent world, we need the unique strengths of family firms more than ever. It is true that they can derail for these five reasons but so can many non-family firms.

Five paths to success

Family businesses have special advantages: they just have to reflect and act on these five paths to success.

1. Seize succession as an opportunity. A change between generations doesn’t have to be a killer speed bump. In too many non-family firms, succession is designed to clone the leader. In family firms, it offers the chance to refresh by blending the new perspectives with the old through a single unified family commitment. It is worth remembering that the oldest family firm in the world has been around for more the 2,000 years (it’s in Japan, and repairs temples) and in the UK we have a bunch who are more than 300 years old and plenty that regularly go well beyond three generations. All firms face what is called “the liability of newness” and family firms are no more vulnerable than others if they manage succession intelligently. Non-family firms can help themselves by seeing how cloning leaders through succession is not a pathway to adaptive success.

2. Love is a secret weapon. There is good conflict and bad conflict. Family firms can have more of both. A key strength of family businesses is that they are able to have constructive conflict and entertain radical perspectives without fear of disintegration. This is because they are held together by the confidence that bonds of love give them. It is when conflict gets personal and focuses on win-lose conflicts over money, power and ownership that things get nasty. That can be avoided by good governance (see point five below). Can non-family firms generate the same ethos? Certainly. Many great businesses have strong positive pro-social emotions at their heart.

3. Extend the family. In Japan, sons-in-law can be adopted, including taking the family name, to help run a business. Professionalising the family does not mean replacing family with non-family leaders but ensuring that everyone acts with professional standards and quality. Non-family entrants are rejected when the family fails to open itself up to them as new honorary members, and when the incomers have not been properly prepared for the new relationship. It needs to be taken slowly and sensibly, with everyone understanding and benefitting from the power of the family culture pervading all the hearts and minds in the firm. Likewise for non-family firms – a general family feeling within the culture is what has given many of the best entrepreneurial firms their cohesive power, and helped them to mature into the best big businesses.

4. Decide with purpose. The best family firms are often very quick, open-minded, and pragmatic when it comes to making decisions and taking action. This is because they know who they are and they know what they want. They are embedded in strong and enduring networks with their stakeholders (employees, suppliers, customers), and are able to make difficult decisions with confidence – avoiding attachment to products and services as sacred cows. They know that what they really care about are the enduring values of business and the family as one organic whole. You don’t have to be a family firm to cultivate this ethos.

5. Honour the culture. The worst leadership in any business is driven by ego and power. The best leaders in family firms surround themselves with top talent – they have no fear of rivalry – and realise their unique responsibility as enlightened stewards, acting as the chief servants of the commonwealth; embodying its values and goals. Governance is more complicated in family firms than other types but can be readily crafted to ensure the family speaks with one voice, selection decisions are made according to professional standards, and strategic decisions are guided by the explicit and shared goals of the business. These include a powerful sense of social responsibility and principled relationship with the wider communities and societies they are part of. In every firm, corporate culture is the only sustainable and inimitable source of competitive advantage that you have.

There are many family firms around the world that exemplify these principles – such as the construction firm Wates in the UK, Henkel in Germany and the Murugappa Group in India. These are powerful, adaptive and ethical businesses, owing to their smart use of family at its best.

At London Business School, we believe family firms with the will to succeed can do so, avoiding the pitfalls that others have fallen into. To help them we have The Sustainable Family Business programme, running from 29 October - 3 November 2017. We aim to help firms from around the world find the best path, from diagnosis to action, to achieve their potential.