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Last Updated: Thursday, 3 July, 2003, 07:54 GMT 08:54 UK
Keeping your business in the family

By Professor Nigel Nicholson
London Business School

Family firms tend to be treated as anachronistic oddities by management science and the business media, even though they account for the majority of firms in every economy and a substantial portion of GDP.

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And these are not just mom and pop enterprises - many of the largest, longest lived and most successful firms the world over retain their identity as family firms.

At their best they generate an unparalleled spirit and cultural coherence.

The hallmarks of this - underlined in a new study of family firms just completed at London Business School - is a "genetic" bond between the leaders and the identity of the business.

Greatest challenge

This brings the benefits of a uniquely powerful culture - binding the internal and external constituencies of customers and employees together with spirit and purpose.

Families who think they can outsmart the gene pool by "grooming" junior to take over are making their businesses hostages to fortune
Nigel Nicholson

The best family firms manage to achieve simultaneously continuity and longevity, confidence and commitment, pragmatism and ethics.

They do so by mastering a range of major challenges and dilemmas, and as in most organisations, the greatest tests come at points of transition.

For the family firm, there is none more difficult than leadership succession.

Reasons for failure

At this point many firms dissolve, sometime in a slow slide to failure, sometimes more dramatically in a maelstrom of big emotions and bad decisions.

It is said that family firms go from "clogs to clogs in three generations", an aphorism based on the observation that it takes one generation to found a business, the next to build it, and the third to spend it.

Although only around 10-15% do make it beyond three generations, there is no inevitably to this sequence.

The reasons for succession failure are the opposite side to the coin of their strength and success:

  • For continuity read, "won't let go". The genetic identity of the leader with the business means that separation is a kind of death. They hang on too long - losing touch with the outside world, frustrating the next generation and narrowing strategic options.

  • For strong family culture read, "won't discriminate". Family identity clouds judgement when it comes to settling who does what or owns what. When fairness rather than fitness determines these decisions you get bad outcomes.

  • For confidence and commitment read, "illusions of control". Families who think they can outsmart the gene pool by "grooming" junior to take over are making their businesses hostages to fortune. What's best for the offspring and best for the business may be two different things.

How to beat this rap?

Reflective leadership, effective governance mechanisms, and sound outside advice.

These are often brought together by the establishment of a family forum or council, aided by a trusted facilitator.

This mechanism can help to balance the separate but overlapping needs of the family and the business as they grow from one stage of their development to the next.

Nigel Nicholson is the author of "Managing the Human Animal in the Information Age".

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