Fiscal pressures, the search for talent, international expansion. Family companies need to deal with a wide array of challenges. Without doubt, however, the most critical challenge involves generational change. More specifically, what happens when the third generation – the grandchildren of the founders of the company – takes over. How can companies deal with the opening of new markets and with globalization and growing competition from multinationals? How can companies that have a family character confront the professionalization of their structure? What does this mean for the debate about the meaning of a family dynasty on the daily management or about whether family owners should become mere shareholders?
In addition, what measures must a family company take in order to grow? What alternatives does it have so that it does not lose its competitiveness? What countries offer better opportunities for growth? All these questions were addressed during the Eleventh Congress of the Institute of the Family Enterprise, which took place for three days in the Spanish city of Valencia. Representatives of more than 300 Spanish family-owned companies participated.
Juan Roure, a member of the International Advisory Board of IESE, participated in the event. He gave an interview to Universia-Knowledge at Wharton about the opportunities and challenges that family-owned companies face in the new international context.
Universia-Knowledge at Wharton: What are the main challenges that family owned companies face today? What are some of the solutions in the short and medium term?
Juan Roure: Naturally, the challenges vary according to the size of the company and its level of development. On the one hand, we have several large family-owned corporations that are active on an international level, and which have made the transition from family company to a corporate family. They have professionalized their management boards, diversified their ownership and, in many cases, issued shares on the stock market that enable them to grow more easily and have liquidity…. In these cases, the challenge is for the family to maintain some institutions of governance; to have a family council and assembly as well as assets and cash that enable the family to promote and channel talent from within the family; to maintain strong and effective relationships between the business and these governing organs, that is to say, between the management board and groups of shareholders.
On the other hand, a great many family owned companies of small and midsize – as well as some large companies – have become more sensitive to these challenges thanks to the excellent work of the Institute of Family Companies and to regional associations. Nevertheless, the true challenge is to make the transition into family projects that enable them to free their talent and simultaneously maintain good relations between the members of the family. They need to move from the culture of a family enterprise to a culture of a corporate family. These enables them to overcome the “formal agreement syndrome” and have some governing organs of the enterprise and of the family (such as the management board and family council) and some forums that have maximum professionalism and seriousness that deal with both business matters as well as family matters. When it comes to the topics relevant to the board of directors, there is much room for improving efficiency.
Progress has been made, but to the extent that I can perceive things, and my own experience and the research that I have carried out, there is a great shortage in the management and the regularity with which topics involving the family are treated. For example, when it comes to developing talent, [insufficient attention has been paid to such topics as] the arrival of family members in the business and their compensation; the planning for succession; representation [of family members] on the board of directors; and, in general terms, creating a family plan that has a vision and has values that are attractive for all its members.
Unfortunately, many families seem to believe that they can solve all of their problems simply by asking a lawyer or consultant to draw up such an agreement. At times, it is not the most convenient thing to begin by signing an agreement and at other times, if you have an agreement, it does not help a great deal. For me, the key is to set up forums where, every month or two months, the various challenges of the business and the family are treated separately; where people respond to those challenges occasionally with external support, and with the goal of creating a plan that is attractive on both the family level and on the corporate level. And where, simultaneously, people continue to develop and carry out pacts that govern the smooth functioning of the family enterprise.
Finally, the big challenge of every enterprise today, whether family owned or not, is globalization. Globalization provides more opportunities but also more competition than ever before.
UKnowledge at Wharton: How would you compare conditions for family owned businesses in Europe with conditions in Latin America?
J. R: When it comes to Latin America, the situation is quite different in each country and, surely, quite different from Europe. The size of the market and sociopolitical uncertainties make it very different to compete in Latin America and in Europe. In Europe, we have a great opportunity [to do business] in Central and Eastern Europe. As for Latin America, the United States and such large countries as Brazil and Mexico are natural markets. Finally, Asia is a great opportunity as well as a great threat for both Europe and Latin America.
UKnowledge at Wharton: Do family owned companies have the strength and financial resources to undertake ventures in foreign markets?
J.R: Several family-owned Spanish companies serve as extraordinary examples of international expansion such as Ferrovial, Entrecanales and OHL in the construction sector; Mango and Zara in the textile and apparel sector; Barcelo, Riu, Sol-Melia and Iberostar in the hotel sector; Roca, CELSA, and CH-Werfen, industrial companies; and Freixenet, Codorniz, Nutrexpa and Puig, which make consumer products. I think that the largest limitation is not a financial one. A good plan always attracts financing, especially today. The shortage is not about capital but about the ambition and the skill of the management team. Ownership must, through its governing organs, create a family business plan that is ambitious, and it must attract a management team that is capable of carrying it out.
In this sense, one problem that many family owned companies face is the challenge of growth, especially on an international scale. They have to have a management team that is a bit inflated and, to use a sports term, also “a good bench.” They may have the funding to construct a plant in the Czech Republic, or open a business office in the United States or acquire a company in India. But if you don’t have a strong managerial team and the confidence that they can manage things without affecting operations in the head office, you are lost. The easiest thing for many family-owned companies is to accept what gradual growth of the market means for their management team; even for those members of the family that work in the company. In many cases, this means maintaining the status quo and avoiding the risks, tensions and the training required for specific international growth projects. Sometimes, the other limitation that family companies confront is that international expansion means opening up the company to other owners, including through joint ventures. This is something that many families are hesitant to do.
UKnowledge at Wharton: When it comes to choosing foreign destinations, what are the latest developments for Spanish companies in Latin America?
J.R: It depends on the sector. For example, hotel chains find that heading to the Caribbean is increasingly an extension of their service to the Balearic and Canary island chains, and they are pressured by their customers and tour operators to create a season that lasts 12 months.
Other companies in the service and construction sectors have gone along with the big Spanish investors such as Telefonica, Endesa, Repsol YPF, BBVA and Santander.
The automobile suppliers have gone, above all, to Mexico and Brazil, because of the requests of the big brand manufacturers that have set up in those countries.
Finally, in the consumer goods and retail sectors, companies have been naturally setting up operations that respond to the potential of each market and its linguistic and cultural ties [to Latin America].
UKnowledge at Wharton: How does competition from China, India, Russia and Brazil affect these companies? Should they also outsource their production, the way that the multinationals are doing that?
J.R: Family owned companies are affected by competition from emerging countries and that is an essential consideration when it comes time to creating a strategy for the future. They need to manage that threat. However, they need to manage their opportunities. Nowadays, these countries are already extraordinary markets for companies in the industrial, service and consumer sector. Chains such as Mango, Zara and Ermengildo Zegna from Italy are enjoying a higher growth rate in these markets because they want to satisfy the needs of Chinese, Indian, Russian and Brazilian customers. If we compare ourselves with countries like Germany, Holland and France, companies from Spain – especially family-owned companies – are clearly behind when it comes to having a presence in emerging countries. If managers of family businesses want to compete better on the global playing field, they have to make a real effort at globalization. Responding to the various sectors and characteristics of their business, they need to establish a meaningful presence in emerging markets.
In this sense, a timely strategy of outsourcing can be an extraordinary competitive advantage, and a training ground in some of these markets, in order to compete more effectively in the country of origin.
UKnowledge at Wharton: What do you need to consider when it is time to undertake a generational change [in management]?
J.R: Managing generational transitions is essential for family owned business because of the impact that it can have on its members and their ability to compete in the business in the future. Although this subject has been studied at length and there are certain general rules, you have to recognize that each family company is different.
The first thing you have to understand is that the succession process must be planned and managed. This process has a much higher probability of being a success in future generations that have developed some values, and where there is a family plan and there is sufficient training, and where some organs of corporate and family governance have been established in clearly written agreements. If all of these things do not exist, there is a lot of complexity. Nevertheless, it can help to be aware that this is a process, and to think that it can take between four and six years. The process is easier when the business is performing well, and when there is a clear strategy and an efficient board of directors. It also helps if there are no significant conflicts within the family and if the plan is clear. Another essential point is that the preparation and motivation of the people who are going to take control must be appropriate. In addition, you have to establish clear guidelines about the time-periods and conditions, and you have to meet benchmarks. The plan also has to be consistent, and must be rigorously monitored by an organization that has the authority required to correct it, and [the authority] to take measures that will vary according to the way things are developing. And it is prudent to have a contingency plan.
All of these things are not a substitute for good communication between the parties involved, nor for generosity and patience, and a capacity for negotiating and resolving conflicts in a constructive way. Given the complexity and the high stakes of the game — the potential economic and emotional costs — I recommend that companies ask for outside help.
Barceló, a family owned hotel chain, offers a very good example of a successful process of managerial transition. I had the opportunity to watch closely as the IESE developed a case study focused on the relationship between generational change and the sustainability of the entrepreneurial spirit. The Barceló case dramatizes 75 years of corporate development and, in particular, the management of generational change that has served as a catalyst for growth, which is unlike the situation in many companies where families act to inhibit or destroy the company.
When it was time to initiate the transition process from the second generation to the third, during the 1990s, Barceló was a hotel chain that had 37 hotels. By four years later, the period of time it took to make the transition, the chain had grown to 90 hotels with a staff of 6,000 employees. It had made significant progress in the structuring and professionalization of the company and its governing bodies, as well as relations between the company and the family. Ten years later, in 2005, the company had become one of Spain’s leading hotel companies, a chain that comprised 108 hotels, a network of travel agencies with 380 offices (Barceló Travel), and revenues that exceed one billion euros.
The generational transition process was planned so that it took between three and five years, and it involved a challenge of the first order for the family and the leadership of the company. From the outset, there were no mechanisms for adequately coordinating the managerial structure, and there no relationships between the management of the company and the family. And the functioning of the company’s institutions of governance was far from desirable. The generational transition process came at a time when the company was undergoing a high rate of growth. Its financial condition was strong, and it planned to expand into the Caribbean full-force and enjoy high profitability there.
Given the complexity of the business, it’s worth emphasizing that the process involved passing the leadership of the company from two brothers (who were responsible for the company’s initial growth) to a group of cousins, in which 11 members of the two family branches were involved. The process was orderly, and based on the following key premises: It dealt with the business development needs of the company and the professionalization of the company. It established the distribution of ownership, maintaining the control of management in three sons. It effectively incorporated a third generation into management, increasing that generation’s responsibility as owners, and letting go of those executives who did not do any work, with the exception of two co-presidents. It also established ways for the second generation to leave management.
It is also worth emphasizing that the process was very well planned, and relied on external support. It began with a phase when the philosophy of the company was formalized and communicated to employees. This process transmitted the values of the family to incoming generation. It developed specific channels for establishing contacts between the incoming generation, the outgoing generation, and the management of the company. It explained the results of an internal strategic plan, and formally established a management board composed of members of the second and third generation. It created a family council and, finally, created regulations based on a consensus among family members. The three key factors in the success of this exemplary transition can be helpful for other family-owned companies: First, the formalization of a corporate philosophy and a process for succession. Second, the planning of the process. Third, the creation of substitute activities for facilitating the departure of the second generation.
UKnowledge at Wharton: How must relations between the family and the company be structured?
J.R: This is a major concern; a permanent concern for managers of family businesses. In a family business, the various interest groups – the family itself, the management team, and the ownership – all exercise their influence and power from day to day and over prolonged periods in the life of the company. Each one of them is a source of challenges and questions that can determine the emotional conditions that affect the process for planning and for making decisions in the company. Put differently, business decisions are constantly adjusting, or should be adjusting, to the family interests and to the interests of the company. Frequently, the two planes can conflict. In this kind of system, where questions that crop in one area wind up influencing other areas, one person or several people can belong to the three groups involved, which only leads to additional complexity. Moreover, conditions in the company and within the family are changing over time, and they determine the different needs and challenges in all the structures and governance processes of the company, no matter how formal the process is.
If you are trying to preserve equilibrium in every area of the company, and I assume that this is what family enterprises are trying to do, you have to find structures, arenas, forums and occasions where these points of view and perspectives – which are potentially divergent – can be resolved and reconciled on the basis of respect and tolerance. Another factor is the amount of definition and formalization, which depends again on each company and each family.
It is good to make an effort to provide separate realms for resolving those questions that are specifically family-related and those that involve the company. If you progress in formalizing a structure for corporate governance and, in particular, for the family, you must have a clear separation of the functions that these organizations exercise. Communication between these two areas is fluid, which is good, but we must not be confused by a clear delimitation of these tasks. You derive an advantage by avoiding the introduction of family questions into the work done by managers or by the company’s board of directors. Not resolving this separation carries some costs – and considerable problems – when it comes to the functioning of the family and the enterprise.
The family council must concern itself with how to share the vision and the values of the family and the company; how to train and retain future generations [of managers]; how to manage the arrival and departure of family members and non-family members; how to plan for the professionalization of family members and how to compensate them; how to tackle the process of succession; how to prepare shareholders in the family for the responsibilities of ownership and governance. It must also determine which family members and non-family members have a role on the board of directors, and it must develop regulations or carry out those regulation that already exist. It must determine which dividend strategies are most appropriate, policy for investments by family members in new businesses – and so forth. In contrast, the board of directors should deal with the strategy of the company; the nature and development of the management team; strategic moves for making acquisitions and engaging in joint ventures; evaluating risks; financial policies; and, obviously, approving the accounting results, among other concerns.
Creating formal rules is a process that helps to improve relationships between the company and the family. By extension, it also helps the way governance bodies function in every realm of activity. However, it is neither a panacea nor an absolute necessity.