By definition, the controlling family in a family business is a driving force for deciding how the business chooses to operate and how it defines success based on the shared purpose of the family and its business. Striking a balance between what is good for the business and what is good for the family is a critical consideration.
When family businesses put family first, they may be criticized for showing nepotism in their succession and recruitment practices. However, this is not necessarily the case. If appointing family members to leadership and management roles is based on merit, putting the family first doesn’t contradict the importance of operating a professionally managed business. In most cases, I believe that it reflects the family’s aim to achieve both the economic and non-economic goals of the controlling owners.
However, in some family business situations, KPMG Private Enterprise is beginning to see an emerging trend where there is a gradual shift away from being family owned and run – which is particularly common in first- and second-generation family firms – to being family owned and non-family managed. It puts business first when it comes to the day-to-day management of the family enterprise by non-family executives.
I believe that there are two key factors that contribute to a business first decision in family business. The first is that the ownership and management structure of the business has to be fit for purpose; to be right for each family at specific times in the business and family lifecycle. As recent history has shown us, putting the business first often meant stepping outside the family to secure the skills and experience that were necessary to sustain many family businesses in response to COVID-19.
The second factor is the impact of changing demographics. Today KPMG Private Enterprise sees multiple generations of the family who are co-existing and bringing with them a fresh multi-generational outlook and new aspirations. For GenX and Millennials, in particular, these aspirations don’t always include an interest in contributing to the family business, making non-family management a viable option for achieving what is right for both the business and the family.
To strike a good balance between the needs of the business and the family at various points in time, good governance practices and mechanisms play important roles.
KPMG Private Enterprise and the STEP Project Global Consortium recently collaborated on research that explored the impact of changing demographics on family business practices, including family governance. It included a survey of more than 1,800 family business leaders across the world, followed by personal in-depth interviews with a selected number and resulted in a series of co-authored articles on contemporary issues that are relevant to family businesses. One of the insights often heard is that the intention of next-generation family members to make the family business their career choice is reinforced when they see a clear development path ahead of them.
Families who make the choice to put family first when it comes to succession often adopt formal family governance systems that establish a dedicated education and career committee for future generations. These mechanisms are useful in identifying the career aspirations of family members and bridge their aspirations to the development plans of the business and the family.
In addition to the importance of education and career development, nurturing entrepreneurship across the generations is often a family priority. It is seen to be essential for the continued development of innovations that will bolster the competitiveness of the business while also sustaining the core purpose, principles and values of the family. Family governance structures have a role to play in this regard as well by formalizing the processes that provide family members with opportunities to unleash their entrepreneurial spirit.
In one family business that KPMG Private Enterprise and the STEP Global Consortium encountered, for example, this spirit is kindled among young family members by giving them the freedom to start their own ventures. The governance mechanism of the family constitution is used to prescribe the monetary support and mentorship that will be provided to family members who want to pursue their own ideas and new ventures outside the traditional family business.
I see many examples of family governance systems such as this that are helping family businesses to operate decisively to protect the family business without losing sight of the family’s core purpose and values. Putting family first or business first isn’t necessarily a choice that has to be made if the right systems are in place to keep both balanced.
If you are interested in exploring deeper insights on the subject of family governance and the new multi-generational outlook, I encourage you to read the co-authored article, “Creating value through good governance: How to balance what is right for the business and right for the family”. I also encourage you to learn more about family business dynamics and invite you to take the Family Business Dynamics Assessment, a complimentary diagnostic tool that helps family businesses uncover insights for a successful family business across six key areas including growth, risk, governance, wealth, transition, and people.
Deeper insights can also be found in these additional co-authored articles: “The courage to choose wisely: Why the succession decision may be a defining moment in your family business” and “The power of women in family business: A generational shift in purpose and influence" and "The enduring legacy of business families: Sharing what matters across the generations".
Interested in learning more about how KPMG Private Enterprise can help your family business? Contact your KPMG Private Enterprise adviser or find a KPMG Private Enterprise Family Business adviser.