Volume 8: Family Business: In Safe Hands?

In co-operation with the Economist Intelligence Unit

Barclays Wealth Insights

2

Foreword At Barclays Wealth, we are dedicated to providing our clients with the means to manage their wealthsuccessfully. For this reason, we are committed to investing in research to better understand the value ofwealth and its importance in the future.

In partnership with the Economist Intelligence Unit, we have developed the eighth volume of Barclays WealthInsights, a series of research reports which aim to provide a definitive picture of what being wealthy means inthe 21st century.

In this report “Family Business: In Safe Hands?”, we examine the structure, motivations and characteristics offamily businesses around the world, within the context of a challenging economic environment.

Family businesses have long played an important role in economies around the world and this remains thecase today. This report explores what makes family businesses different and looks at what the wider businessenvironment can learn from the unique set of values and approaches often adopted by them.

As well as consulting with 2,300 wealthy individuals globally, including almost 300 family businesses, theEconomist Intelligence Unit worked with a panel of experts drawn from academia, industry and financialcircles, to provide additional insights and perspectives.

I hope you find this report an informative and entertaining read.

Thomas L. Kalaris Chief Executive Barclays Wealth

Barclays Wealth, the UK's leading wealth manager with total client assets of £145 billion globally (as of 31 December

2008), serves affluent, high net worth and intermediary clients worldwide. It provides private banking, fiduciary services,

investment management and brokerage. Thomas L. Kalaris, the Chief Executive of Barclays Wealth, joined the business

at the start of 2006.

Barclays Wealth is part of the Barclays Group, a major global financial services provider engaged in retail and

commercial banking, credit cards, investment banking, wealth management and investment management services

with an extensive international presence in Europe, the USA, Africa and Asia. It is one of the largest financial services

companies in the world by market capitalisation. With over 300 years of history and expertise in banking, Barclays

operates in over 50 countries and employs over 134,000 people. Barclays moves, lends, invests and protects money

for over 27 million customers and clients worldwide.

For further information about Barclays Wealth, please visit our website www.barclayswealth.com.

About Barclays Wealth

Written by the Economist Intelligence Unit on behalf of Barclays Wealth, this eighth volume of Barclays Wealth

Insights examines the characteristics and motivations of family businesses, with particular emphasis on today’s

challenging economic environment.

It is based on two main strands of research. First, the Economist Intelligence Unit conducted a survey of 2,300

affluent and wealthy investors with investable assets ranging from £500,000 to in excess of £30 million. Among these

2,300 respondents, almost 300 were family members within a family business. Those respondents that represent a

family business were spread across a wide variety of sectors, including retail, construction, financial services,

agriculture, energy and utilities, and IT and telecoms. Almost one quarter have liquid assets in excess of £10m. Family

business respondents were distributed internationally, with around 80% in Europe and Asia-Pacific, and the

remainder in North America, and Middle East and Africa.

This was supplemented with a series of in-depth interviews with experts on family business. Our thanks are due to

the survey respondents and interviewees for their time and insight.

About this report

For information or permission to reprint, please contact Barclays Wealth at:Barclays Wealth Insights, Barclays Wealth, 1 Churchill Place, London, E14 5HPTel. 0800 851 851 or dial internationally +44 (0)141 352 3952 or visit www.barclayswealth.com

1

Introduction

Family businesses are the backbone of the globaleconomy. According to some estimates, family-ownedcompanies account for between 70 per cent and 90 percent of global GDP. As well as being the world’s mostprevalent organisational form, the family business is alsoamong the most enduring – Houshi Onsen, a hotel andspa business based in Japan, was founded in 718 and iscurrently in its 46th generation of management.

Our Insights Panel

Fergal Byrne, Report Author

Etienne Eichenberger, Founder of Wise, a philanthropy advisory service

Emmanuel Fievet, Head of International Private Banking at Barclays Wealth

Grant Gordon, Director General of the Institute of Family Business in the UK

Hakan Hillerström, A Family Business Consultant based in Switzerland

Andrew Keyt, Executive Director of the Loyola University Chicago Family Business Center

Mark Kibblewhite, Managing Director of Barclays Wealth

Danny Miller, Director of the Centre for Research in Family Enterprise at HEC Montreal Business School

Amin Nasser, who runs the Family Business Practice in the Middle East for PricewaterhouseCoopers

Ghassan Nuqul, Vice-Chairman, Nuqul Group

Jonathan Warburton, Chairman of Warburtons

Sir Ian Wood, Chairman of the Wood Group

43

Yet despite centuries of success for this most durableof models, there remains a common perception thatfamily businesses are dysfunctional organisations thatare plagued with nepotism, family conflict and drama.Even in the sophisticated business press, the familybusiness model is often characterised as outmodedand problematic, and commentators tend to focuson the difficulties of the model, rather than itssuccesses and advantages.

While there is no doubt that family businesses faceparticular challenges – governance and successionissues, to name just two – they also have uniquestrengths. They will often have a long-term perspective,stable leadership and a strong identity drawn from theshared objectives of family members. Taken together,these factors can give the family business a strongadvantage over many listed companies.

In the wake of the worst financial crisis for decades, andwith developed countries around the world falling intorecession, these relative strengths of the familybusiness model versus other ownership structures takeon a particular relevance. As the share prices of listedcompanies continue to endure substantial volatility, ascredit slows to a trickle and as highly leveragedcompanies struggle to rebuild their balance sheets,could the family business sector offer a rare bright spotin an otherwise unsettled outlook?

Based on a global survey of high-net worth individuals,including almost 300 family business owners, theeighth instalment of Barclays Wealth Insights providesfresh analysis into the state of family businessesaround the world today. The report will assess thecurrent situation and prospects of family businesses,and examine in detail their unique characteristics,advantages and disadvantages, with particularreference to today’s challenging economic, financialand operating environment.

Executive summary

Family businesses possess certain attributes that couldmean they are well positioned to survive and eventhrive in a downturn. Respondents to our survey whorepresent family businesses perceive a long-termperspective to be among the most important advantagesof the family business model. They also exhibit greaterrisk aversion and are less motivated by money than otherwealthy individuals in the survey. In combination, thesetraits can lead to a conservative financial and businessstrategy which, while it is rarely favoured during boomyears, comes into its own when the economy enters adownturn. A methodical and careful approach, it seems,can lead to sustainable success.

Philanthropy and a close relationship with society arekey motivations for the family business. Familybusiness members are far more likely than other wealthyindividuals in the survey to consider the ability to helpothers and increase their social status as key motivationsto amass and protect their wealth. More than half seethe ability to help others through their wealth asimportant, compared with 39 per cent of other surveyrespondents, and there is a similar difference in opinionregarding the ability to increase social status. Thesefindings reflect the widely held view that familybusinesses often have a strong relationship with thecommunity and have broader motivations when startingtheir business than merely making money.

Family relationships are a double-edged sword for thefamily business. The key advantages of the familybusiness model, according to survey respondents, are thestrong network of family relationships and clear andshared objectives among family members. These areindeed important benefits, as they enable the business toforge a strong identity and common purpose. Yet thecloseness of family relationships can also lead to disaster,as respondents themselves admit when they point toconflict between family members, and the difficultyseparating home and work life as being the biggestdisadvantages of the family business model.

Experts questioned for this research suggest thatexternal management can be a powerful tool tooffset governance weaknesses. Strong governance isthe bedrock of any business, yet all too often, there is atendency among family businesses to be complacentabout this vital capability. Less than one in five surveyrespondents from family businesses consider a stronggovernance structure to be an important characteristicof success for their business. They also tend to thinkthat the family business model compares favourablywith other types of business when it comes togovernance, whereas non-family business respondentslargely disagree with this statement. Expertsquestioned for our research point to the importance ofbringing external management rigour into the businessto offset some of the governance problems associatedwith family businesses.

Planning for the next generation is an essentialcomponent of success. Survey respondents identifysuccession planning as the most important characteristicof a successful family business. Yet all too often, plans forthe transition of the business to the next generation arenot made early enough. A related risk is that familybusinesses can be prone to nepotism – indeed, surveyrespondents see this as the third most importantdisadvantage of the model. As well as representing poorgovernance, a nepotistic approach to succession can leadto deficiencies in corporate performance and lead to lowerretention rates for talented non-family employees.

65

The family business in

a downturnThe global business community has rarely faced amore challenging outlook. A financial crisis that hadits origins in sub-prime loans in the US has spread toinfect not just the financial services sector, but thereal economy as well.

Despite unprecedented interventions fromgovernments and central banks around the world,credit remains scarce and expensive, even for themost highly-rated companies. Major economies,including the US, UK, Eurozone and Japan have allfallen into recession, and confidence among bothbusinesses and consumers has slumped. Manycompanies have shelved investment plans, and joblosses are expected to mount throughout the rest of2009. Even the economic juggernaut of China hasslowed, ending suggestions that leading developingeconomies would somehow ‘de-couple’ from theslowdown in the west.

Against this highly challenging backdrop, companiesaround the world undoubtedly face a difficult future,and family businesses are no exception. In order tosurvive, they must rein in costs, scrutinise investmentscarefully, put in place the right management team,and ensure that their products or services meet thechanging needs of today’s customer base.

Yet compared with listed companies, unquotedbusinesses that remain in family ownership may havecertain attributes that can prove advantageous intoday’s challenging environment. While there is nopanacaea for coping with a downturn, theorganisational structure, values and outlook of thefamily business can often provide a strong foundationfor coping with difficult economic conditions.

There are numerous reasons why family businessesmay be well placed to survive in a downturn. First,they have a long-term perspective and are not subjectto the short-term demands of external investors inthe way that listed businesses are. Second, they tendto be financially conservative, and do not employleverage to the same extent as many othercompanies. Third, they have close alignment betweenownership and control, which helps to prevent the‘principal agent’ problem, whereby a separation ofownership and control (as is seen in listed companies)can lead to managers pursuing opportunities that arenot in the interests of the company and itsshareholders. Fourth, they have a close network offamily members who control the business,

Andrew Keyt, Executive Director of the Loyola UniversityChicago Family Business Center, points out that thefamily shareholding structure facilitates longer-termthinking. “When you have a smaller group of shareholderswith more in common than just a financial investmentperspective, it becomes easier to take a longer-termview,” he says. “All the research shows that family firmsare much more committed to the longer-term and notdriven to maximise returns from one quarter to the next.”

A long-term perspective means that family businessescan exercise prudence during both upswings anddownswings in the economy. They are less likely thanlisted companies to pursue adventurous growthstrategies to satisfy short-term investors during a boomand some academics have argued that they are morelikely to invest through a downturn, giving them asustainable advantage over companies for whom thereare wider swings in performance and investment.

Family business owners’ ability to take a longer-termperspective may be tempered in the US by a generalcultural bias towards a shorter-term decision-makingfocus. “There are always exceptions, but it’s fair to say ingeneral that family businesses in Europe tend probablyto take a longer-term perspective than in the US,” saysHakan Hillerström, a Family Business Consultant basedin Switzerland. “In general, the business culture in theUS is more short-term. Everything is shorter-term.When you are talking about long-term to an investmentbanker it may be a year or two, when I speak to familieswe are talking about a couple of generations. When welook at succession, we look 50 years ahead. It’s a totallydifferent perspective.”

The survey reveals that family business members whorepresent service-based companies (such as financialservices, media and professional services firms), andthose who represent industrial or manufacturingcompanies (such as chemicals, automotive or naturalresources firms) tend to have different perceptionswhen it comes to time horizons. In general, respondentsfrom service industries are more likely to view the abilityto think long-term as an advantage of the familybusiness model. This is likely to reflect the differing timehorizons of services and industrial companies. Whileservice companies may in general have a time horizon

that spans one or two years, industrial companies musttake a longer view because of their greater requirementfor capital expenditure and fixed investment. So forservice companies, the ability to look beyond theirtraditional time horizon is naturally a greater advantage.

An important underlying reason why family businessespursue a longer-term time horizon is to do with theirmotivations. For many family business owners, the goalis not simply to make as much money as possible, andthis deters them from seizing the short-termopportunities that may be more widely adopted bylisted companies.

“Most family businesses tend to have a wider range ofvalues besides pure financial values,” says Grant Gordon,Director General of the Institute of Family Business inthe UK. “The family business means a lot to them.Their name is on the door, they have a reputation andstanding in their community. So it’s rarely just aboutmaking money. They tend to care about the longer-termstanding of the brand and business, and about theirlegacy. Families want to pass on a business to the nextgeneration that is stronger and more likely to succeed.”

The notion that family business members runcompanies for many more reasons than just to makemoney is a strong theme that runs through the survey.Asked about their motivations for creating andprotecting their wealth, family business members wereless likely than non-family business members to cite theenjoyment of making money as being important.

When we split the data by region, we find that familybusiness members from Asia are especially unlikely tocite the enjoyment of making money as an importantmotivation. Just 30 per cent said that it was important,compared with 43 per cent from Europe and 48 percent from North America (although it should be pointedout that the pool of family business respondents fromNorth America was fairly small at 30 individuals). Thisfinding no doubt reflects the very strong familystructure that characterises many Asian societies,which means that the family business is viewed as anasset to be passed down the generations, rather thansimply as a source of personal wealth.

87

which helps with quick decision-making andmaintaining an agile approach to strategy. And finally,they will typically have long-term, steady leadership,which means that management will often have beenat the helm during previous downturns.

Indeed, there may be opportunities during adownturn that family businesses will be betterpositioned to exploit than listed companies. “In 2009and 2010, there will be some significant opportunitiesfor family businesses,” says Mark Kibblewhite,Managing Director of Barclays Wealth. “They are notas highly geared, many are cash rich, they can be lighton their feet and the chain of command is morestraightforward than for a larger, listed company.”

A long-term perspective pays dividends

The most commonly cited advantage of the familybusiness model is its long-term perspective. Withouta stock market listing, private family businesses areinsulated from the need to respond to the short-termdemands of investors. They can adopt a more long-term, so-called ‘patient capital’ approach that couldmean that they are better placed to ride out volatilitythan their listed peers.

“A well-structured family business that has clearobjectives can have a significantly longer timeframethan other types of organisation,” says Mr Kibblewhite.“This allows them to exploit opportunities that otherscannot because they do not need to achieve such aquick payback. They are not under pressure to hitcertain benchmarks and have the advantage of beingable to anticipate longer-term trends.”

Danny Miller, Director of the Centre for Research inFamily Enterprise at HEC Montreal Business School,agrees that there is less pressure on family businessesto generate a quick return. “They have fewerimpatient shareholders breathing down their neck, orshort-term hedge fund investors, so they can makelonger-term investment decisions and focus on thingsthat do not pay off immediately.”

Emmanuel Fievet, Head of International PrivateBanking at Barclays Wealth, agrees that a long-termperspective flourishes in the absence of externalpressure, but counsels that demands from investorsare not necessarily a bad thing. “Certainly in a familybusiness, the management can have more time to seethe results of their action and there is less externalpressure on them,” he says. “But I would add thatexternal pressure is not always negative – sometimesit forces companies to do the right thing soonerrather than later, so it’s not black and white.”

According to the respondents to a major surveyconducted by the Economist Intelligence Unit on behalfof Barclays Wealth, the ability to think long-term isperceived to be among the most important advantagesof the family business model. Only the strong supportnetwork among family members and their sharedvalues and ethos are seen as more important – andindeed, these factors may help to reinforce the long-term perspective of the family business.

Which of the following do you think are the most important advantages of the family business model?(Family business members only)

Ability to think long-term

Ability to make decisions quickly

Stronger relationships with local community

Focus on future generations creates lasting stability

0

Values and ethos shared between family members 39%

Strong support network from family members 48%

38%

37%

35%

28%

High levels of loyalty and commitment from staff 19%

0%Other, please specify

10 20 30 40 50 10060 70 80 90

The ability to compete

Graph 1

109

“With most family businesses, risk is taken

at the business level, and the wealth

creation strategy is often the business,

less the family’s financial assets.”

Mr Fievet, Barclays Wealth

Steady leadership and the stewardship of familymembers also help to foster a long-term perspective.While a listed company may see chief executives comeand go every few years, the management team of afamily business is likely to be there for an entiregeneration. “There is a higher emotional value to thefamily business and the family is more dedicated to thelongevity and survival of the company,” says Mr Keyt.“Family businesses tend to have a more consistentvalue set in the way that they run their business.”

A recognition that long-term stability is an importantquality for the successful family business means that,in general, family business members are less tolerantof risk than other executives: only 22 per cent of familybusiness members consider enjoyment of risk as animportant motivation for creating wealth comparedwith 30 per cent of the non-family business members.

“With most family businesses,

risk is taken at the business level,

and the wealth creation strategy

is often the business, less the

family’s financial assets.”

Mr Fievet of Barclays Wealth emphasises the distinctionbetween assets of the business and personal wealth interms of risk appetite. “With most family businesses,risk is taken at the business level, and the wealthcreation strategy is often the business, less the family’sfinancial assets.”

This combination of relative risk aversion, along with arecognition that money is not the predominantmotivation, may be one reason why family businesses,in general, do not apply leverage to the same extentseen in listed companies. Another, of course, is thatthey do not suffer the pressure from activist investors togear up their balance sheets. “There is evidence thatlarge family firms are less leveraged than publiccompanies,” says Mr Gordon. “Family businesses tendto very cautious when it comes to their balance sheets.”

Further evidence of a long-term perspective amongfamily businesses comes from a survey finding thatillustrates their relatively low willingness to sell thebusiness. According to the research, just 10 per cent offamily business owners say that they have or wouldconsider selling their business, compared with 22 percent of other business owners in the survey. Althoughan exit, such as initial public offering, is a goal for somefamily businesses, the vast majority, it seems, prefer toremain in family ownership.

Family business members in Asia-Pacific were leastlikely to have sold or sell – just four per cent said thatthey had done so or were planning such a move,compared with 13 per cent in Europe. Again, thisreflects the very strong family values in many Asiansocieties, which see the business as an asset to bepassed down the generations, rather than as one thatcan be sold to make a return. It might also reflect therelatively earlier stage of capital markets in the region,which mean that there are fewer opportunities for exit.

12

Financial security for dependents also proves to be avital consideration for family business members, whichencourages a time horizon measured over decadesrather than years. According to the survey, 67 per cent ofrespondents consider financial security for dependentsas an important objective for wealth creation and

protection, compared with 58 per cent of non-familybusiness members. “Family business owners tend to bevery paternalistic,” says Mr Keyt. “They see theirbusinesses as an extension of themselves and havingtheir children involved heightens their sense that takingcare of the business is also taking care of their family.”

11

When creating and protecting your wealth, how important are the following motivations? (per cent whodescribe as important or very important)

0

Enjoyment of making money42%

52%

Family business members Non-family business members

Enjoyment of risk22%

30%

The ability to help others (for example through philanthropy)55%

39%

Ability to increase social status50%

36%

Opportunity to beat the competition49%

39%

10 20 30 40 50 10060 70 80 90

When creating and protecting your wealth, how important are the following motivations? (per cent whodescribe as important or very important)

0

Generating regular income64%

53%

Family business members Non-family business members

Funding retirement63%

65%

Providing financial security to dependents67%

58%

Staying ahead of inflation57%

63%

Increasing value of portfolio72%

71%

10 20 30 40 50 10060 70 80 90

Have you previously sold/ are you consideringselling a business? (Family business members only)

0

No 90%

Yes 10%

10 20 30 40 50 10060 70 80 90

Graph 2

Graph 4

Graph 3

1413

The Patient Capitalists

Not all family businesses in the survey saw the abilityto think long-term as an important advantage of thisform of organisational model, and the differencesbetween the group that does recognise thisadvantage and the group that does not is especiallyrevealing. When asked about their motivations toamass and protect their wealth, those respondentswho believe that the ability to think long-term is animportant advantage (let us call them the patientcapitalists) were less likely than other familybusiness members to consider the enjoyment ofmaking money or the enjoyment of risk to be animportant motivation for them to amass and protecttheir wealth. And they were more likely to see theability to help others as an important motivation.

When asked about their objective for creating andprotecting their wealth, long-term goals, such asproviding financial security for dependents, andfunding retirement, are seen as more important to

this group than to the other family businessrespondents. And crucially, when asked how thefamily business model compares with listedcompanies across a number of criteria, patientcapitalists are more likely to report better relativeperformance of the family business than thoseoutside that group.

The long-term thinking exercised by the patientcapitalists does have its downside, however. Askedabout the disadvantages of the family businessmodel, patient capitalists were significantly morelikely than other family business members to see thepotential for conflict between family members as akey area of concern. This may stem from differencesin opinion regarding the strategic direction of thebusiness – for example, some family members mayfavour greater risk-taking or be frustrated by whatthey perceive as the business’s failure to pursueshort-term opportunities.

When creating and protecting your wealth, how important are the following motivations?(per cent who saw as important or very important)

0

Enjoyment of making money38%

45%

Family business members who see long-term planning as an advantageof the family business model

Family business members who do not see long-term planning as an advantage

Enjoyment of risk12%

28%

The ability to help others (for example through philanthropy)66%

48%

Ability to increase social status46%

52%

Opportunity to beat the competition51%

48%

10 20 30 40 50 10060 70 80 90

When creating and protecting your wealth, how important are the following objectives?(per cent who saw as important or very important)

0

Generating regular income73%

58%

Funding retirement70%

60%

Providing financial security for dependents80%

59%

Staying ahead of inflation53%

59%

Increasing value of portfolio77%

68%

10 20 30 40 50 10060 70 80 90

Family business members who see long-term planning as an advantageof the family business model

Family business members who do not see long-term planning as an advantage

This broader set of motivations and values that are held byfamily businesses should not be interpreted as reflecting alack of entrepreneurial zeal or competitiveness. Indeed,compared with non-family businesses in the survey, familybusiness members are more likely to consider theopportunity to beat the opposition as an importantmotivation to amass and protect their wealth.

They are also fairly confident about their ability to competewith listed companies. Almost four in 10 family businessrespondents believe that they are successful in their ability

to compete with listed multinationals. There is however, adifference between service-based companies andindustrial or manufacturing businesses. Among the familybusiness respondents, those from service companiesbelieve that they are much better placed to compete thanthose from manufacturing or industrial companies. This islikely to reflect the much greater fixed investment andcapital expenditure required by manufacturing andindustrial companies, which may be easier to implementwith the assistance of investment from public markets.

The ability to compete

Graph 5

Graph 6

Every business model has its unique mix of intrinsicadvantages and disadvantages, and family businessesare no different. What is interesting, however, is that thevery factors that can give family businesses the edge –the strength of family relationships and their close-knitleadership team – can also be their downfall. In the next

section, we look at some of the advantages anddisadvantages of the model, and discuss ways ofaddressing the unique challenges that familybusinesses face.

16

We have seen that unquoted family businessespossess a number of attributes that may give theman advantage over listed companies at certain pointsin the business cycle. But a key question is whetherthese perceived advantages translate into strongerperformance – especially during a downturn.

Numerous academic studies have been conducted intothe performance of family businesses versus other typesof company, and a wide range of conclusions have beenreached. Indeed, studies can be cited that suggestpositive, negative and indifferent associations betweenfamily-owned businesses and superior performance.

For example, a study in 1994 by the accountancy firmBinder Hamlyn of 667 private companies in the UKfound that non-family businesses outperformed familybusinesses in terms of growth in sales revenues andproductivity. Yet more recent studies, such as those byWesthead and Howorth, and Castillo and Wakefield,both from 2006, found no correlations between familyownership and performance in unlisted companies. Andother studies, such as that by Daily and Dollinger in1992, found a negative correlation between familyownership and performance.

Why should the evidence be so conflicting? Part of theproblem is that commentators define family businessesin different ways: for some, the key factor is the level ofequity held by the founding family; for others, it is thedegree of involvement by family members inmanagement; and for others still, it is the degree ofwillingness to transfer the business from onegeneration to the next. With studies relying on differentdefinitions, it is easy to see why conflicting results cancreep into the analysis.

But perhaps a more important factor is that familyinvolvement in a business can have both a positiveand a negative effect on performance. While there areattributes that give family businesses an advantageover non-family companies, these can easily becancelled out by problems associated with the model,such as the potential for conflict, poor governanceand a reluctance to bring in independent directors orprofessional management. So at this stage, it is worthexamining the advantages and disadvantages of thefamily business in more detail, and drawing on thesurvey results to examine how these may impact theprospects and performance of family businessesaround the world.

Does a long-term focusequal outperformance?

Pros and cons of the familybusiness model

Nowhere are the advantages and disadvantages of thefamily business model better encapsulated than in thenature of family relationships. According to the familybusiness members questioned for the survey, the strongsupport that they derive from other family members intheir network is perceived as being the biggestadvantage of the family business model, more importanteven than the ability to take a long-term perspective.

Strong, mutually supportive relationships help to fosterloyalty to the business and increase levels of motivation.Close relationships between family members can alsohelp to facilitate decision-making in what can be a lesscumbersome and bureaucratic organisational structure.

“In theory, one of the benefits of a family businessshould be the lack of internal friction and politics,compared with a big organisation where people have tofight for resources and capital allocation,” says Mr Fievet.

The support network should not just be restricted tothose family members who play an active role inmanagement. “A strong support network allows thefamily to support itself in the longer-term with bothinsiders and outsiders – those that don’t have activeroles – rallying around and working together unified asa group,” says Mr Gordon. “In my experience, it’s notenough to work with the insiders. If you take theoutsiders for granted, that is liable to lead to problems.”

Family relationships

15

Divergence of perspectives can lead to disagreement,and this can further fester into conflict, which can be theundoing of the family business model. The most seriousdisadvantage, according to the family businessmembers questioned for this report, is the potential forconflict between family members. Over the years, therehave been numerous examples of serious quarrels infamily businesses, perhaps the most notorious being the

murder of Maurizio Gucci, third-generation head of theluxury goods business. In March 1995, Mr Gucci wasshot dead outside his offices in Milan. Then in 1998, hisex-wife Patrizia Reggiani was convicted of ordering thekilling and sentenced to 29 years in jail. During the trial,it emerged that Ms Reggiani had been furious at her ex-husband’s business decision to sell a 50 per cent stake inthe Gucci company to a third-party investor.

There are many potential sources of conflict, includingsibling rivalry, succession, the misalignment of strategicobjectives and internal power struggles. Equally, conflictcan arise between members of the family that areinvolved in the business and those that are more distant.

To some extent, conflict is inevitable in family business –just as it is in any other kind of organisation. But thedanger in a family business context is that thedisagreement occurs not just between individuals whowork together, but who share other aspects of their lives.For this reason, conflict in family business can be far morepernicious and difficult to solve than in other companies.

Conflict resolution

The key issue with conflict in a family business is not howto avoid it – as some degree of friction is inevitable in anyfamily – but how to address and resolve it. An importantfirst step is to keep family and business disagreementsseparate, to ensure that family squabbles do not spillover into the work environment and to ensure that thereis some downtime from the businesses so that a normalhome life can be enjoyed. This is clearly easier said thandone – according to our survey, the difficulty separatinghome and work life is the second biggest disadvantageof the family business model.

18

Shared values and ethos fromfamily members

Every family has its own unique or distinct set of values,and these values underpin the family business to alesser or a greater degree. According to the survey, theshared values and ethos held by family members isanother big advantage of the family business model,and again is seen as slightly more important than theability to take a long-term perspective.

“Family values are the bedrock on which familycompanies deal with change,” says Mr Gordon. “Theyprovide a compass that helps guide how decisions areshaped, and they impact the unique culture thatdevelops in every family firm. Every family brings theirown set of values which they transmit into thebusiness. What’s important is that the values arecommunicated and shared across the family.”

In his research on successful family businesses, MrMiller notes the prevalence of broad religious values infamilies. “We noticed that many of the most successfulbusinesses were run by religious families,” he says. “Itdid not matter what religion, but they were religious andthey were disciplined. Their long-term values, such asserving the community, doing the right thing, makingtheir wealth count in a socially positive way and notbeing personally over-indulgent, really kept the familytogether. In our research, these values kept coming upagain and again.”

The need for clear and shared objectives

Shared values and ethos should extend into clear andshared objectives among the family members. This isparticularly important because of the potential overlapbetween the goals of the business and the goals of thefamily, and the fact that there may be family membersthat are not working closely with the company, whomay have different financial goals and perspectives.

According to the survey, clear and shared objectives areessential for the family business, and were identified as akey characteristic for success by 44 per cent ofrespondents. “This is where it all starts,” says Mr Gordon.“The family needs to have clear goals and objectives forthe business. The ultimate role of the family businessowner is to answer these questions: why are we inbusiness together? What do we want to achieve? Theanswers to these questions feed into the business andgive the management clarity. Strategy is driven by familyvision, but this should be a two-way street – the businesshas to feed into the family’s vision as well.”

The potential for differences of opinion and perspectivegrow as more family members become involved, bothdirectly and indirectly. “As the family grows, thediversity of values, ideas and opinions grows,” says MrKeyt. “The challenge that family businesses face is: howdo you deal with this divergence and how do you keepeveryone focused on a common goal? In the best familybusinesses, the families spend a lot of time and energydealing with these questions.”

17

Which of the following do you think are the most important advantages of the family business model?(Family business members only)

Ability to think long-term

Ability to make decisions quickly

Stronger relationships with local community

Focus on future generations creates lasting stability

0

Values and ethos shared between family members 39%

Strong support network from family members 48%

38%

37%

35%

28%

High levels of loyalty and commitment from staff 19%

0%Other, please specify

10 20 30 40 50 10060 70 80 90

Which of the following do you think are the most important disadvantages of the family business model?(Family business members only)

Potential for nepotism makes it difficult to retaintalented non-family employees

Potential for weak corporate governance

Successive generations may prove lesscommited than founders

Reluctance to dilute control may hamper growth

0

Difficulty separating home and work life 39%

Potential for conflict between family members 39%

36%

27%

27%

26%

Difficulty separating family and business finances 24%

18%Reluctance to bring in outsiders mayhamper new ways of thinking

0%Other, please specify

10 20 30 40 50 10060 70 80 90

The dangers of conflict

Graph 7

Graph 8

20

“You need to set very clear expectations about issuesthat can be talked about in family business meetingsand those that cannot,” says Mr Keyt. “Sometimes youhave to accept that a particular family conflict will neverbe resolved and that is fine. The family can still have avery successful business as long as the conflict is notbrought into the business.”

One approach taken by many family businesses is toestablish a family council that meets regularly to discussgoals for the business and provides an opportunity to airissues or disagreements before they deteriorate intoconflict. Mr Fievet points out that, in some countries, thebusiness will draw up legal family agreements to provideguidance on what is expected of family members. “Alegal family agreement will typically contain rules aroundissues such as selling shares or leveraging againstthem,” he says. “You need someone with vision toimplement this type of agreement, someone who hasthe multi-generational aspect of the business in mind.”

Sometimes, however, the family members are unable toresolve disputes on their own. In this instance, third-partymediation, using an external consultant who is able toprovide an independent perspective, becomes essential.

Mr Kibblewhite adds, however, that externalmanagement can be a powerful means of preventingconflict from arising. “You can’t eliminate conflict, but thepresence of external management can prevent certainepisodes from occurring,” he says. “The key is to have thegovernance in place that gives the company the flexibilityto bring in external management when it is needed.”

The danger of nepotism

The reality for most family businesses is that the familywill run the business. Often, they will be the best-qualifiedindividuals for the job. They may have grown up in thebusiness and have a deeper understanding of it thanoutsiders, which makes it difficult to find strong alternativecandidates from elsewhere. The recruitment of familymembers can also help to keep down human resourcescosts, as family members will typically stay in the businessfor longer and may accept a reduction in compensation ordividends during difficult economic times.

But as the business grows, external employees willinevitably form part of the mix. This can be extremelybeneficial as it brings new ideas to the business andhelps to create a more diverse combination of skills andperspectives. There is also research to suggest thatfamily-owned businesses attract greater loyalty andcommitment from employees than other companies, inpart because employees feel part of an extended family.

Problems arise, however, when nepotism occurs, andqualified and suitable employees are overlooked for keypositions in favour of family members. This remains arelatively common problem. According to a 2007survey by accountancy firm PricewaterhouseCoopers,almost two-thirds of North American family businessesaward family members a role in the company withoutmeasuring them against external candidates.

According to the Economist Intelligence Unit survey, thepotential for nepotism to have an adverse effect onrecruitment and retention was seen by respondents asthe third most serious disadvantage of the familybusiness model. There are several consequences ofnepotism in the family business. Most obviously,performance in the firm can suffer as the most suitableleader is not chosen to run the business. A secondproblem is that the existence of a glass ceiling in anorganisation can de-motivate ambitious non-familyemployees and ultimately encourage talentedindividuals to further their career goals elsewhere.

Mind the expectations gap

A further problem associated with the combination offamily members and outsiders within a business is thatthere may be a gulf between the expectations of eachgroup. For example, family members may be primarilyfocused on building an asset for the next generation,and this highly long-term focus may be at odds withthe shorter-term career and financial goals of somenon-family employees. The leadership of the familybusiness must work carefully to ensure that theobjectives of family members and outside employeesare aligned as closely as possible, and that the companyas a whole benefits from the goals and motivations ofits various constituents.

19

There is a common perception that family businesses lackthe more rigorous governance associated with companiesthat have more widely distributed ownership. Recentscandals, such as the fraud-related collapse in 2003 of thefamily-controlled Italian company Parmalat, and the morerecent fraud at Satyam, a family-controlled Indianbusiness, have done little to address this criticism.

Yet from a governance perspective, family businessescan have important advantages. A close network offamily leadership can lead to fast and effective decision-making, while the combination of ownership and controlremoves the agency problems associated withmanager-led firms. Moreover, stable and long-termleadership helps to ensure careful stewardship of thecompany’s assets – both for the family members andoutside investors.

There are numerous governance problems associatedwith family businesses, however. For example, they maybe reluctant to bring in independent non-executivedirectors, preferring to retain oversight of the businesswithin the family arena. Decision-making – while oftenfaster and more efficient than in non-family companies –may lack rigour and primarily serve the interests of theclose family network, rather than the business as a whole.There can also be a reluctance to take difficult decisions:family pet projects or assets may be preserved whenmore rational evidence points to the need to cancel or sellthem; while concern to prevent conflict or avoid upsettingindividual family members may lead to altruisticbehaviour that is not in the best interests of the business.

Overall, family business members questioned for oursurvey do not consider weak corporate governance to bean issue. Asked about the disadvantages of the familybusiness model, problems with governance are towardsthe bottom of the list, and the majority of familybusiness respondents think that their business modelperforms well on governance compared with listedcompanies. Yet the view among survey respondentsfrom outside the family business universe is ratherdifferent and only a minority of 36 per cent thinks thatfamily businesses compare well on governance withnon-family businesses.

“Family business owners often play down the importanceof governance but they do so at considerable risk,” saysMr Gordon. “Good governance helps to ensure thatbetter decisions are taken both in the business, througha well constituted board, and among the ownersconcerning policies that affect the family.”

Governance and leadership

Good leadership is a crucial part of governance and,among the survey respondents, it is seen as one of themost important characteristics of a successful familybusiness. “Culture and leadership is probably even moreimportant in a family business than it is in a large listedcompany,” says Mr Fievet of Barclays Wealth. “If you haveone very strong individual who is driving the family in acertain direction, that’s going to help with cohesion andensuring that goals and objectives are shared. Infightingin large organisations means death over time, infightingin family businesses can be lethal very quickly.”

“Culture and leadership is

probably even more important in

a family business than it is in a

large listed company”

Traditionally, leadership in family businesses has tendedto come from within the family. This is not always a badthing, according to Mr Miller. “Family members often havethe opportunity to be apprentices at a very early age,” hesays. “They get to see how that business is run and howvalues are imparted within the family. They can learn theropes better than any outsider by absorbing very intimateknowledge of how the business is run.”

An early apprenticeship and deep knowledge of thebusiness is not always enough to ensure strongleadership, however. While founders may be highlymotivated and entrepreneurial individuals, theirdescendants may lack interest or be reluctant to takethe reins, they may come from an excessively smalltalent pool, or there may be family conflict that preventsa smooth transition. “In some cases, the impact can beterribly negative,” continues Mr Miller. “When familysuccession works, it is fantastic, but when it doesn’t, itis terrible.” The key, he concludes, is simply to get thebest leader, whether they are a family member or not.

Choosing leaders can be a challenge for many families,according to Mr Gordon. “These are very harddecisions,” he says. “Leadership is complicated in afamily business because the family is involved. Thereare strong emotions that come with making decisionsinvolving family members. The whole process ofmoving from one generation to another needs a lot ofreflection. You need to be able to step back and take a35,000 ft perspective.”

2221

Compared with listed, non-family companies, how well do you think family businesses perform across thefollowing areas? (Family business respondents)

18%

Very successfully 1 2 3

Reputation and ethics

Willingness to innovate

Willingness to expose the businessto new ways of thinking

0 10 20 30 40 50 60 70 80 90 100

Ability to attract and retain employees 17%

Ability to compete with non-family multi-nationals 10%

Strength of governance 14%

19%

18%

18%

34%

29%

42%

40%

37%

34%

26%

32%

27%

26%

26%

32%

15%

22%

9%

9%

13%

10%

7%

9%

8%

5%

5%

6%

48% 23% 8% 3%Overall performance

4 Not at all successfully 5

Compared with listed, non-family companies, how well do you think family businesses perform across thefollowing areas? (Non-family business respondents)

13%

Very successfully 1 2 3

Reputation and ethics

Willingness to innovate

Willingness to expose the businessto new ways of thinking

0 10 20 30 40 50 60 70 80 90 100

Ability to attract and retain employees 10%

Ability to compete with non-family multi-nationals 10%

Strength of governance 10%

15%

13%

12%

28%

25%

26%

33%

31%

25%

32%

34%

32%

33%

31%

33%

22%

23%

26%

13%

18%

22%

8%

9%

7%

6%

7%

7%

39% 32% 11% 6%Overall performance

4 Not at all successfully 5

The role of leadership

Graph 9

Graph 10

2423

Growth and change at the Nuqul Group

The Nuqul Group was established in 1952 by EliaNuqul as a small food importer and distributer.Today, it is one of the Middle East’s leadingmanufacturers of fast-moving consumer goods andconstruction materials. Headquartered in Amman,Jordan, the Nuqul Group is a conglomerate of 30regional and global companies operating in ninecountries with over 5,000 employees. The businessis wholly family-owned by Mr Elia Nuqul, and hissons Ghassan and Marwan.

When Ghassan Nuqul joined the business in 1985,he set himself a mission: to put in place a morestructured approach to running the business.“My father is a great entrepreneur—a risk-taker,determined and charismatic, and had achieved somuch, but I knew that in order to take the companyto the next stage we would need to professionalisethe management of the business,” he explains.

Since that time, the Nuqul Group has been on ajourney that has left virtually no area of thebusiness unchanged. The company has workedon a major decentralisation initiative, helped toestablish clear operating procedures and amanagement structure across the business, andappointed a board with independent directors—ararity in the region. The process was driven by theNuqul family, but senior managers have played akey part in the process. The goal was to achievethe highest principles of corporate governance and,eventually, an initial public offering.

Over time, the Nuqul family’s relationship with thebusiness has changed. They now see their priority tobe good owners of the business, rather than justgood managers. “We realised that if we wanted tocontinue to grow, we would need to hire the verybest people in the business, to be the employer ofchoice in the region, and to do that we had to makesure that the senior positions of management wereavailable to anyone whether they were a familymember or not,” says Mr Nuqul.

The board of the company now includes familymembers, senior managers and two independentdirectors. They work on the principle of what theycall “NIFO” (Noses In, Fingers Out), a term they useto reflect their view that the board is involved in thebusiness on an as-needed-basis.

“We have launched many new

business investments, the group

has had its fourth year of double

digit growth and we have hired

many excellent new employees.

I think it’s fair to say that the whole

group has been re-energised.”

The Nuqul Group has grown rapidly in the past fiveyears. Mr Nuqul believes that this growth would nothave been possible without the ongoingprofessionalisation of the business and opening upmanagement to non-family members. “The effecthas been extraordinary,” he says. “We have launchedmany new business investments, the group has hadits fourth year of double digit growth and we havehired many excellent new employees. I think it’s fairto say that the whole group has been re-energised.”

Most family business experts agree that succession –the process of passing the business from one generationto the next – poses one of the greatest risks to thesuccess of a family business.

The Institute of Family Business in the US makes thispoint clearly in a recent report. “The major problemwhich will prevent family businesses from successfultransition into the next generation isn’t estate taxes, it’snot competition from the Wal-marts of the world, it’s notthe lack of reasonably sound financial planning, and it’snot the lack of industriousness or work ethic of today’ssuccessor generations. It’s the epidemic behaviourexhibited by senior generation or founding generationbusiness family members who refuse to let go of thecompanies they helped build.”

According to the Economist Intelligence Unit survey,clear succession planning is the most importantingredient for a successful family business. Given thatsuccession is such a key issue, it is surprising how littleattention is paid to this question. In a recent survey byPricewaterhouseCoopers, almost half of all respondingcompanies due to change hands within the next fiveyears had no succession plan in place.

Part of the reason why succession is not dealt with isthat owners can be weighed down with the pressures ofrunning the business on a day-to-day basis. But perhapsmore important are the psychological and emotionalissues associated with succession. Some businessleaders find it difficult to let go of the reins and there canbe a reluctance to confront difficult decisions that relateto the uncomfortable topic of death. “Family businessowners know that they have to make a successiondecision and that is not easy,” says Mr Miller.

“They know intimately their children’s strengths andweaknesses and they may prefer one child more thananother. No matter what decision they make, theyknow there is likely to be criticism from a loved one.Another reason they delay appointing a successor isthe power they retain in the family. As long as theyhave not made a decision, they will have a lot ofpeople being nice to them.”

Mr Miller believes that careful advance planning can bevery helpful. “If the family can set up the ground ruleswell in advance, this can be a great help to structure theissues concerning family involvement and succession,”he says. “If you know from a young age what hurdlesyou’re going to have to clear before you are consideredto be a manager, you would not take it so personallywhen you are ruled out.”

Financial independence for family members is animportant question that needs to be dealt with whenaddressing the issue of succession. “One of the difficultquestions in succession is: how do you assure financialindependence for family members so that they are notbeholden to the jobs and working in the familycompany,” says Mr Gordon. “It’s about separatingownership and management so that the owners canhave more financial freedom to pursue their own careersindependently from the family firm, and so that they arenot reliant on the family firm for their jobs, where theymight squeeze out talent.”

Succession planning

26

Amin Nasser, who runs the family business practice inthe Middle East for PricewaterhouseCoopers, says thatsuccession challenges are currently prevalent in theregion. “We estimate that there are roughly 5,000medium to large families in the Middle East with netassets of about US$600bn,” he says. “These familycompanies run 75 per cent of the private sectoreconomy and hire 70 per cent of the labour in the GCC.Most of these businesses are unstructured, with noformal holding company structure in place and controlbeing exercised entity by entity. The continuity of thesefamily businesses becomes a major concern whenthere is a generational change or when the founder ofthe business passes away. If the change is not properlymanaged, it could result in the destruction of thefamily wealth. In recent years we have seen manyfamilies that have either split up or are in the process ofsplitting up as a result of these problems and conflictsbetween the family members.”

He adds, however, that there is a growing recognition ofthe need to decouple management from ownership inorder to address these issues. “Some families arebeginning to appreciate that their main role in thefamily business is to build clarity of vision or strategy,and to become ‘active’ owners even when they arepassive in management. A significant amount offamilies quarrel about the competence of familymembers working in the business or about who shouldbe allowed to work in the business”

Increasingly, family businesses are recruiting seniormanagement from outside the family, says Mr Keyt.“The family needs to ask whether it can continue toturn out talent that can run these businesses as theygrow,” he says. “And the answer for many is no.External management has been growing over the pastdecade in US family firms. Maybe 10 to 15 per cent offamily businesses in the US now have non-familysenior management. ”

Mr Kibblewhite of Barclays Wealth believes that familyownership, when combined with professionalmanagement, can be a powerful model. “Familybusinesses often go through a transition from beingowner-managed to bringing in professionalmanagement,” he says. “When you have the long-termnature of the shareholder in combination withexperienced professional management – who may not befrom the family – that’s when you get the real benefits.”

This combination of family ownership and externalmanagement is a characteristic of many of the world’smost successful family businesses. Research from theLoyola University of Chicago into what makes forsuccessful external management in a family-ownedbusiness concluded that non-family chief executiveswho act as if the company is just a business are morelikely to fail. “The chief executives who succeededunderstood that they were working in a family business,that they needed to understand the family and that theyneeded to work with family stakeholders,” says Mr Keyt.

25

Which of the following characteristics do you think are most important to be a successful family business?(Family business members only)

Strong leadership

Ability to resolve conflicts quickly and effectively

Ownership restricted to core family members

Ability to take risks

0

Clear and shared objectives 44%

Clear succession plans 47%

41%

30%

26%

20%

Strong governance structure 19%

15%Willingness to recruit outsiders if necessary

0%Other, please specify

10 20 30 40 50 10060 70 80 90

Looking beyond the family at Warburtons

Warburtons is the UK’s leading independent bakerand one of the UK’s top five grocery brands. Theroots of the business go back to 1876, when Thomasand Ellen Warburton opened their first grocery shop,later a local bakery, in Bolton. Members of theWarburton family have run the business for most ofits 130-year history, as the business has extended itsreach across the UK. Jonathan Warburton, one of thefifth generation of the family, is current Chairman,and his cousin Brett is Director of the business.

In 2005, after a decade of strong growth whenturnover went from about £50m to more than£300m, the family decided that they were ready fora chief executive from outside the family. ForJonathan Warburton, this decision was a naturalevolution for the business. “The decision was nomore sophisticated than the normal progression ofchange that takes place in a growing business,whether family or public,” he says. “Although thebusiness was doing very well and growing steadily,we realised that it was time to look for newmanagement to take the business to the next stage.At the same time, as a family we thought that it wasmore important to be good owners rather thanmanagers. It was a board decision driven in part bythe non-executive directors.”

Mr Warburton says that the goal of the recruitmentprocess was to find the best person, regardless ofwhether they were connected to the family or not.The company considered hiring a new chief executivefrom outside the company, but this idea was rejectedon the grounds that an external candidate would notunderstand and support the values of the business.Instead, the company promoted Robert Higgonson,finance director of the company.

According to Mr Warburton, the biggest challengehas been remembering that the family was no longerrunning the company. “At the outset, there was anatural temptation for us as family members to feelthat we know better,” he says. “But we have toremember that Robert is responsible for running thebusiness on a day-to-day basis.”

“At the outset, there was a

natural temptation for us as

family members to feel that

we know better”

Since the transition, Mr Warburton has remained theconduit through which family members express theirthoughts and concerns, and through whichdecisions taken by Mr Higgonson are relayed tofamily members. “Part of my job [as chairman] is tokeep other family members in the loop, so that theyunderstand and are informed about plans anddecisions as they evolve, are fully briefed and up todate, know what’s happening, and feel included.Also, there is a challenge for Robert in that he has todeal constantly with three family members who arevery knowledgeable and experienced and care verymuch about the business success. In fact, Roberthas made a great success of the job.”

What about the future? There are numerousWarburtons in the next generation and, althoughJonathan is still in his 50s, he knows that they needto think about the next generation and their role inthe business. “I would love it if one of my childrenwas interested enough to want to join and work inthe business,” he says. “But it’s clear that none ofthe managers will want to work for them if they arenot up to the job, irrespective of their surname.”

Graph 11

The ability to help others was seen as particularlyimportant among older family business members in thesurvey. Almost two-thirds of those respondents over 50saw it as important or very important, compared withone-half of those below that threshold. It was also moreprevalent among respondents from Asia-Pacific thanthose from either Europe or North America. Sixty-oneper cent of those respondents from Asia-Pacific cite theability to help others as being an important motivation,compared with 55 per cent from North America and 42per cent from Europe.

As one of the fastest-growing regions for high-net worthindividuals in the world, philanthropy in Asia is showingrapid development. Development philanthropy, wherebyfoundations support microcredit initiatives orcommunity work, is particularly common in the region.Leading philanthropists in Asia include Li Ka-Shing, theHong-Kong based Chairman of Hutchinson Whampoa,who has pledged more than US$1bn to philanthropiccauses, and Anil Agarwal, Chairman of VedantaResources, who pledged US$1bn in 2006 to set upan elite university in India.

Mr Nasser of PricewaterhouseCoopers says thatphilanthropic values are also strong in the Middle East.“Philanthropy is deeply rooted in the Arab world andmany families support initiatives involving theunderprivileged,” he says. “Such families are beginning toformalise their charitable activities by developingstrategic plans, programmes, funding and sustainability.”

Sir Ian Wood is not convinced, however, that familybusinesses in general are more generous than othercompanies. “In the first instance, many familybusinesses are too preoccupied with survival andlooking after managing the day-to-day business,” hesays. “More generally, I am not sure that familycompanies are always as generous and philanthropic asbigger companies, which are more aware of theirrelationships with government, and with political andcommunity bodies.”

2827

Family businesses have a reputation for being strongsupporters of the communities in which they operate.

“Family businesses tend to have a close relationshipwith their local community. They often see theirrelationship with the community as a two-way street,”says Mr Gordon. “Many family firms understand thatthey have benefited from the skills of the employees inthe community and they want to give something back.They have a tendency as benefactors of the communitythat goes beyond the business itself.”

The importance of this relationship with the communitybecomes particularly apparent in difficult economictimes when cut-backs become necessary. “In difficulttimes, family businesses pay a lot of attention to thelikely impact of the downturn on their employees andcommunities,” says Mr Keyt. What you see is that familybusinesses tend to be slower to lay off people in adownturn than non-family business because there isthis emotional connection. Often, family members willtake pay cuts to keep the business alive and manybusinesses will suspend dividends if necessary. For apublic company, this would send signs of panic, so beinga public [non-family] company can make it difficult todo what makes sense from a business perspective.”

This close connection with the community can maketough decisions even more difficult, according to MrKibblewhite. “Making the kind of decisions regardingstaffing levels that are likely to be made in 2009 and2010 is disproportionately hard for the family business,”he says. “There’s a tendency that they will hold on topeople during a recession for longer than they should,unless they have the rigour of management. That’s whyyou tend to see family businesses giving a lot to thecommunity while they can.”

The geographical scope of a company’s business is animportant influence on its engagement with thecommunity, according to Sir Ian Wood, Chairman of theWood Group. “I think one of the most importantdeterminants of a company’s relationship with thecommunity is whether it is a local, national orinternational company,” he says. “Clearly a local businessthat is owned and run in Aberdeen with the family livingin the local area is very different from the small office ofa major centralised US corporation in Aberdeen. It’smuch easier to lay off people 5,000 miles away, ratherthan in your local town, when you know them and seethem every day.”

Philanthropy

Another key aspect of the relationship of the familybusiness with society is its role in philanthropicendeavour. There has long been a strong link betweenfamily businesses and philanthropy, dating back at leastto Victorian family business founders, such as Jesse Bootand George Cadbury. This is a theme that also resonatesin the survey, in which the ability to help others wasseen by family business members as a more importantmotivation to amass and protect wealth than a range ofother factors, including the enjoyment of making moneyand the ability to increase social status.

The family businessand society

When creating and protecting your wealth, how important are the following motivations?(Family business members only)

19%

Very important 1 2 3

Opportunity to beat the competition

0 10 20 30 40 50 60 70 80 90 100

Ability to increase social status 19%

The ability to help others (for example throughphilanthropy or charitable projects) 20%

Enjoyment of risk 8%

18%

31%

35%

14%

31%

26%

27%

34%

26%

15%

10%

28%

14%

9%

8%

16%

11%

23% 30% 17% 10%Enjoyment of making money

4 Not important 5

Graph 12

30

Philanthropy among family businesses has traditionallybeen seen as strongest in the US, but recent researchsuggests that family businesses in other regions may infact be more generous – depending on the basis formeasurement. A recent UK survey by the Charities AidFoundation found that donations by the largest 100 UKfamily foundations amount to 0.07 per cent of GDP,exceeding the figures for the US (0.04 per cent) and forthe rest of Europe (0.02 per cent).

Top five largest UK family foundationsby giving (2006)

1. Wellcome Trust (£324.7m)

2. Gatsby Charitable Foundation (£53.8m)

3. Wolfson Foundation (£38.1m)

4. Garfield Weston Foundation (£37.8m)

5. Leverhulme Trust (£29.6m)

Source: Family Foundation Philanthropy, Charities Aid Foundation

Donors in Europe differ in their approach to evaluatingthe impact of their donations, according to EtienneEichenberger, Founder of Wise, a group advisor towealthy families on their philanthropic aspirations. “Ithink there is a more statistical approach to evaluatingdonations in UK,” he says. “And this certainly is a goodthing—we can get more transparency, clearer visibility. Iwould say in Europe that donors probably pay moreattention to qualitative aspects of their donations. So aswell as measuring how many people get jobs from aparticular training programme, for example, they arealso very concerned about how people enjoyed theirtraining,” he says.

Mr Eichenberger notes that there is a big drive by familybusiness owners to have their next generation involvedin philanthropy. “It’s not just an end in itself, but ameans to an end,” he says. “It helps younger people tobecome associated with philanthropy from an earlystage. Parents want the younger generation to learn theimportance of good works.”

29

Partnering for philanthropy at the Wood Family Trust

The John Wood Group has its origins as a wholly-owned family business, but in 2002 it carried out asuccessful initial public offering on the London StockExchange. Today, it is a FTSE 100 internationalenergy services company with revenues ofUS$4.4bn, although the Wood family retains a 24per cent stake in the company.

In March 2007, Sir Ian Wood, Founder and Chairmanof the company, established The Wood Family Trustwith the aim of “developing and supportingindividuals to become independent, contributing andcaring members of society”. The Trust holds £50mand, in its first year, donated £2.4m to charitableprojects around the world, including a £372,670grant for the Youth and Philanthropy Initiative inScotland and £374,000 to a programme calledGlobal Xchange, which was established by VoluntaryService Overseas to promote youth exchanges.

“For a long time I have thought

that you can’t have the

advantages of trading as a global

business and not have some

responsibility for what happens

in the rest of the world”

“For a long time I have thought that you can’t havethe advantages of trading as a global business andnot have some responsibility for what happens in therest of the world,” says Sir Ian. “I’ve had this idea formany years, but it was only really possible after wewent public in 2002. This was the first time thefamily had serious funds. Also I am now 66 and asChairman of Wood Group I have a little bit more timeto think about broader issues.”

Sir Ian decided to focus the activity of the trust onSub-Saharan Africa, and likens his approach toventure philanthropy. “If you are going to give awaymoney, you need to make sure you give it awayproperly to try and create systemic and sustainablechange. And that’s not that easy, particularly in Sub-Saharan Africa. We are not just looking for a goodcause but trying to decide who we can workalongside to achieve our objectives on the ground.”

An important goal of the Trust is to help theorganisations with which it partners to improve theircapacity and performance. Rather than simplyprovide funds, the Trust sees itself as an activepartner that lends support and helps organisationson the ground to become more effective. “We’re notabout giving people the fish but teaching them howto catch fish,” says Sir Ian.

Sir Ian has recently been pursuing a new approach inAfrica that focuses on value chains. Rather thansimply provide funds via tools such as microfinance,he believes that greater thought needs to be given tothe ways in which the output from economic activityreaches the end customer. “People tend to look atspecific parts of the chain,” he says, “but it’s only bylooking across the whole value chain that long-termsystemic change will result.”

Closer to home, the Wood Family Trust is financing aYouth and Philanthropy Initiative in partnership withthe UK Philanthropy Institute, with plans to roll thescheme out in 50 schools across Scotland. Over aneight-week period, teams of teenagers select,analyse and champion a local charity they believebest addresses the social needs in theirneighbourhood. The winner gets £3,000 to donateto their chosen charity. “We have spent quite a bit oftime visiting local schools where they are runningthe projects and it’s amazing to see the results,” saysSir Ian. “It’s particularly interesting with some of theprivate schools where the students are often lessexposed to the social problems around them. I thinkthey have really benefitted from this programme.”

Conclusion

Rumours of the death of the family business modelhave been greatly exaggerated. Despite the ongoingglobalisation and liberalisation of financial markets,family businesses continue to play a vital role in theworld economy. Indeed, the recent sharp downturn ininternational stock markets, coupled with concernamong some commentators about the shortcomingsof the Anglo-Saxon model of shareholder ownership,are likely to lead to a revival of interest in the familybusiness as an organisational form.

Although family businesses differ widely in theirobjectives and motivations, it is clear that a largeproportion have certain attributes in common. Moreoften than not, family businesses have a long-termfocus, steady leadership, and a strong identity andvision shared by a close network of family members.

At a time of great uncertainty in the global economy,these are attributes to be cherished. Unlike listedcompanies, which may have grown rapidly in boomyears and geared up balance sheets to maximise gains,family businesses have typically avoided theseexcesses. And as boom turns to bust, family-controlledcompanies have the opportunity to benefit from theirstability, conservative approach and foresight.

Yet just because family businesses possess certaincharacteristics that should play to their strengths in adownturn, the strong performance of the sector is farfrom assured. Academic research that comparesperformance of family businesses with otherorganisational models is inconclusive at best. If they areto make the most of their advantages, familybusinesses must also overcome a host of thorny issues,including succession, family conflict and nepotism. Inorder to meet these challenges, they should considerthe full range of tools available to them, including agreater separation of ownership and control, and wideruse of external management. After all, it takes morethan a long-term perspective and steady leadership toguarantee sustained growth or strong profitability.

3231

Written by the Economist Intelligence Unit (EIU) onbehalf of Barclays Wealth, the report examines themotivations, characteristics and perceptions of familybusinesses around the world, with special emphasison how they are dealing with the challenges of today’seconomic environment.

It is based on two main strands of research: a globalsurvey of more than 2,300 mass affluent (with up to £1million in investable assets), high net worth (with up to£10 million in investable assets) and ultra high net worth

individuals (with up to and in excess of £30 million ininvestable assets) and a series of in-depth interviews withexperts on family businesses. Among these 2,300respondents, almost 300 were family business memberswithin a family business.

Please note that in some cases percentages used in thereport may not equal 100, either because surveyparticipants were asked to select three choices or becauseneutral or ‘don’t know’ responses have not been included.

Methodology

The 2,300 respondents were recruited from EIUdatabases of individuals around the world.The survey was undertaken between March andApril 2008 by the EIU.

Geography: Canada, the United Arab Emirates, HongKong, India, Monaco, Spain, Singapore, Switzerland,the United Kingdom and United States were eachrepresented by 100 respondents. Additionalrespondents were generated from elsewhere in theworld (30 per cent North America; 30 per cent Europe;30 per cent Asia-Pacific; 5 per cent Latin America; 3 percent Middle East; 2 per cent Africa).

Net worth: 40 per cent between £500,000 and £1 millionin investable assets; 40 per cent between £1 million to£10 million; 10 per cent between £10 million and £10million; and 10 per cent have more than £30 million.

Survey demographic

33

Legal noteWhilst every effort has been taken to verify theaccuracy of this information, neither the EconomistIntelligence Unit Ltd. nor Barclays Wealth can acceptany responsibility or liability for reliance by any personon this report or any of the information, opinions orconclusions set out in the report.

This document is intended solely for informationalpurposes, and is not intended to be a solicitation oroffer, or recommendation to acquire or dispose of anyinvestment or to engage in any other transaction, or toprovide any investment advice or service.

Contact us

For more information or to be involved in the nextreport email Barclays.wealthinsights@barclayswealth.com

Tel. 0800 851 851 or dial internationally +44 (0)141 352 3952

www.barclayswealth.com

This item can be provided in Braille, large print or audio by calling 0800 400 100* (via TextDirect if appropriate).If outside the UK call +44 (0)1624 684 444* or order online via our website www.barclays.com

*Calls may be recorded so that we can monitor the quality of our service and for security purposes. Calls made to0800 numbers are free if made from a UK landline. Other call costs may vary, please check with your telecoms provider.Lines are open from 8am to 6pm UK time Monday to Friday.

Barclays Wealth is the wealth management division of Barclays and operates through Barclays bank PLC and its subsidiaries.

Barclays Bank PLC is registered in England and is authorised and regulated by the financial Services Authority. Registered No. 1026167.

Registered Office:1 Churchill Place, London, E14 5HP.

© Barclays Wealth 2009. All rights reserved.

34