ESG is undoubtedly an area of competitive strength for family businesses. It’s been a core part of how family businesses operate, in some cases for many generations. But as the subject evolves and the focus on it increases, it’s well worth family firms reviewing how it interplays with the rest of their business strategy and operations.
We conducted a survey earlier this year of 2,500 family businesses globally, called Mastering a Comeback, the results of which provide us with a great frame for discussing ESG, as the three core themes to emerge have ties to it:
1. Social responsibility
Family businesses told us they were refocussing on employee welfare, society as a whole and their wider stakeholders.
For many family businesses, there is an innate sense of importance tied to community and place. Many will be significant employers in local communities, often providing financial support to local clubs and societies. The impact may not be material to the family firm in raw numbers, it may not jump out in the annual report, or warrant mentioning, but the support can be an important lifeline to the local community organisations they support and the consequential benefit to the firm's staff in terms of engagement and morale is both invaluable, and immeasurable.
Social responsibility, for me, is about both the big things and the small.
Which brings me onto employees. A number of my clients refer to their staff as their family - imbuing a close bond between the family and the employees. In many cases, that support to staff goes far beyond fair reward, it's about providing a supportive environment, developing skills and giving staff a voice.
For example, one of my clients has a buddy system which allows people to air their concerns or share ideas, with clear lines of escalation to ensure that these matters are heard where they need to be and can be actioned. Another enables staff to pitch for funds to go and pursue their own venture - if it works then great. If it doesn’t, the employee brings their learning back to the business.
The other consideration is visible leadership, in particular where the family are visible - even if they aren't executives in the firm, they can still have impact. For example, at a business run by non-family management, the two family NEDs attended all of the staff town halls to show they are there, active and listening.
Our survey showed that the reduction in staff during the pandemic in family firms was 20 percent lower than in their non-family-owned counterparts. For me, that's a strong indicator that family firms think in generations rather than 3-5 year blocks and aren't simply focussed on the bottom line. Which leads me onto the second theme from our research.
2. Leveraging patient capital
With family business tending to take a long-term perspective, many of the larger firms had the financial resources to withstand major challenges, allowing them to take their time through the crisis, to consider what the impact of the pandemic may be, and to observe what their competitors were doing and then respond.
However, the ability to make decisions on strategy was predicated on three things:
- Firstly, the concentration of family ownership
- Secondly, the clarity of purpose amongst the family and the executive
- And finally, the quality of the family governance structures to aid decision making
As we emerge from the crisis, many are revisiting both their purpose and their governance, to ensure that they are fit for the future.
We are also seeing a huge amount of innovation, divestment and diversification at the moment. A common theme is that family firms apply an ESG lens to these deliberations. Linked to their review of purpose, they move on to revisit and often strengthen their ESG commitments, then apply that to their business strategy.
And that leads me onto the third and final theme.
3. Business transformation
COVID-19 has been an accelerator for change, requiring businesses to reassess the products and services they offer, streamlining operations and exploring new markets.
It has also accelerated succession. In many cases we see that the next generation have taken a more prominent role. They are bringing new perspectives to the family firm, pushing the business to be more ethical and sustainable as well as fuelling innovation.
The firms that had multiple generations working together were 45 percent more likely to undertake some form of transformation. Multi-generational ownership is unique to family firms and it is worth reflecting on how to harness and make the most of it.
Family firms should ensure their ESG strength is articulated. One of my clients had engaged a third party to conduct a review of their international operations and report back on their ESG maturity.
The findings were that they were doing a lot, more than they knew, and that the job was to improve systems to capture the data, then set KPIs and targets to drive performance. This is a common theme - data drives decisions and strategy, and so conducting a gap analysis can be useful to begin the dialogue about how you measure performance and drive behaviours. Often that results in addressing systems and data.
The questions I’m asking my family business clients are listed below:
- Are the family and the executive clear on the family's purpose?
- Are the governance structures working well? Could they be improved?
- How do you harness the multi-generational perspective, it’s a differentiator?
- Do you have a clearly defined ESG strategy, with KPIs attached and data to measure performance?