In the decade ahead, many Australian family businesses will be unrecognisable. We will see a massive transformation as baby boomers retire and the next generation, or Next Gen, moves in. Over the next decade, there will be greater focus on governance and performance management. It will be a different kind of family business. Perhaps less inclined to take risks, but more professionally run with formalised governance structures.
With more stakeholders involved as families get bigger and the number of family members with an interest in the enterprise increasing, it raises one question: Will family businesses be more unstable with those tensions, different expectations and agendas bubbling within? One thing is for sure, there’ll be more politics between siblings and in-laws, even in some cases parents and children, so the need for better family business governance will become much more acute. Certainly the existing governance structures, where they exist, won’t be able to cope.
Whether those changes will be adequate is another question altogether. The reality is most family businesses fail to succeed past the third generation. According to research from the Family Firm Institute in Boston, only one-third of family businesses are passed on to the next generation successfully. Hence the saying: shirt sleeves to shirt sleeves in three generations.
Perhaps that’s because incumbents and the next generation are in two completely different worlds. That certainly seems to be the suggestion from research carried out by KPMG and Family Business Australia.
Their survey of family businesses identified profound governance gaps. More than half had no board or governing body, formal or otherwise. And families were kept pretty much in the dark with two-thirds not having a family council to let family members know what was going on with the business. In three out of four family companies, there was no independent review of management. Only 15 per cent had a formal process in place for managing conflicts. When conflicts happened, the most senior members of the families were called in to sort things out.
And yet 70 per cent claimed governance structures were important, suggesting that the companies were held together more by informal implicit processes and arrangements that had worked quite well in the past. And of those that had some sort of governance, just over a third thought the structures were adequate, suggesting there were still issues for about two out of three.
The interesting part comes when you compare the attitudes of the incumbents with the next generation, and Next Gen here can include 55 year olds.
When incumbents were asked about the priorities of the next generation, only 4 per cent thought they would regard governance as an issue. More than a third thought their successors would be focused on business strategy and 29 per cent thought they would treat management structures as their top priority.
Basically, the incumbents thought there would be no change at all. The companies would basically be the same, they said, regardless of who was in charge. One in five thought there would be no change in business priorities or direction when the next generation took over and 19.5 per cent of incumbents said nothing would change.
They’re in for a surprise. Next gen is a completely different proposition. For a start, they’re better educated than their predecessors. According to the survey, more than 75 per cent of respondents had completed some vocational or tertiary education and 20 per cent had post-graduate qualifications. And many had gained experience working for companies outside the family. “My father told me to spend someone else’s money making mistakes, before I was ready to join the family business,” one respondent said.
None of the next gen leaders thought they would maintain the status quo which they regard as too informal. Their aim was to professionalise the firm.
Hence, a completely different approach. For a start, Next Gen said governance was a top priority. According to a separate survey, one out of four or 23.5 per cent saw governance structures as an issue that had to be tackled. Family governance and business governance had to be sorted out together, something unheard of previously. And 13.75 per cent said they intended to change the culture of the business (only 8.5 per cent of incumbents had expected that).
More than 60 per cent said their style of leadership was different. Fifty-five per cent said they were not satisfied with the family firm’s performance review process, and 50 per cent said their salaries were not benchmarked with similar positions outside the family business. Their focus was on creating a more professional and less informal outfit.
Significantly, they agreed they would be more conservative and less risk-taking than their predecessors. This will change the dynamic of a sector created through bold entrepreneurial flair and the courage to take risks. Nonetheless, the new leaders saw their roles as being more the custodians for future generations. That remains to be seen.
If nothing else, the KPMG Family Business Australia research tells us this is a space that has to be watched.