Much has changed in the commercial road transport industry since the housing collapse in the US triggered the Global Financial Crisis in 2007, but the powerful role that family-controlled enterprises play in the world economy has remained a constant even through this time of turmoil.
Despite that remarkable resilience, it is estimated that only one in ten family businesses will survive beyond the third generation, as children often struggle to find their role within the family firm.
To find out how families can engage more deeply with the next generation – not just to improve the mood around the Christmas dinner table, but also to support on-going business success – London Business School (LBS) conducted a study on the role of bonding in a family business context. After all, it is the joint sense of connection and identity both current and future owners feel with the business that is truly driving them.
Titled ‘Emotional Ownership’, the study is said to be the first international survey of its size to specifically focus on the bond between the next generation and the family business they may or may not join. As the report shows, that bond is very much a product of the family as a social construct – it is based on informality as well as close involvement and inclusion. But as both families and businesses evolve constantly, only those who are able to adapt will inspire what LBS has dubbed ‘emotional ownership’ or EO.
According to LBS’ Åsa Björnberg and Nigel Nicholson, EO is palpable – people feel it – but it is also intangible, hard to define and measure. “EO is defined as a sense of closeness and belonging to the family business – what psychologists call ‘attachment’. It is more than just a warm fuzzy glow – it penetrates below the surface of the mind into the identity of the person who experiences EO.”
Robert Kleiman and Eileen Peacock already recognised that connection in a 1996 study – albeit without putting a name to it. They realised family businesses’ focus on maintaining the soundness of the family name can be a real competitive advantage and positively affect both bottom line and staff development. “The operating philosophy of family firms is often guided by a personalised mission related to the integrity of the family name.”
Only recently, Allen Fishman, founder and executive chairman of business coaching services provider The Alternative Board, reaffirmed that finding in an interview with Business News Daily journalist, Nicole Fallon. “What truly drives many family businesses is the sense of connection and identity the owners and their family members feel with the business,” he told her in June.
Yet, LBS’ research shows that emotional ownership is not a one-way street, as the psychological aspects of ownership are enhanced by active engagement on either side of the table. “The more positive and two-way the relationship between the next generation … and the business, the stronger EO will be,” Björnberg and Nicholson admit. In other words, the more the business actively involves a family member, the more it will raise his or her EO; and the higher the person’s EO, the more inclined they will be to give service and to be involved.
What’s more, that correlation could even extend to life satisfaction in general. Björnberg and Nicholson found that high EO can lead to more satisfaction, and people who have a positive and proactive orientation to life tend to develop higher EO.
Naturally, emotional attachment and identification tend to fluctuate from company to company and from family to family. Björnberg and Nicholson therefore identified four types of family members involved in every scenario, each differentiated by a varying degree of closeness to the business – from ‘supporting’ to ‘disillusioned’.
What’s interesting is not the categorisation itself, but the conclusion the LBS team is drawing from it – that EO is not necessarily compromised by having critical thoughts and feelings about the firm. “EO is not a ‘fair weather’ factor, which people only feel when the firm is doing well,” they say.
As a result, it just might be the ‘family’ aspect that makes these organisations thrive even when times are tough – if it is nurtured accordingly. “Our study demonstrates that a dynamic, cohesive, flexible and loving family is the best guarantor of EO among the next generation,” Björnberg and Nicholson say, revealing that EO may even flourish in somewhat paternalistic families – where seniors offer clear leadership and boundaries to juniors waiting for their turn.
However, a 2014 report by Salford Business School shows that capitalising on the skills of the younger generation to innovate and explore new markets can positively affect the long-term success of family firms – sticking to an all-too static structure could therefore be a strategic mistake.
Either way, fellow UK institution LBS found that good governance is even more important than structure to stimulate the EO of the next generation. But having a family strategy or even a council in place is not enough. “Our analysis suggests that family governance mechanisms only yield higher EO when they are used as part of an integrated approach to manage the diversity of views and arising conflicts by providing a voice for family members. Single measures alone are not enough.”
In fact, there are three main components that promote and foster EO – support structures, family flexibility and personal work involvement. All three rely on information flow, as knowledge about the business can help form a two-way positive channel between the new and the old generation, as Björnberg and Nicholson point out.
Arguably, that pro-active approach to forming a strong bond within the family is also key to handling the inclusion of managerial talent from outside. Forbes found that in order to maintain a competitive advantage, family businesses eventually need to look outside the family and tap into the larger pool of professional talent. A high level of EO could help families secure control in such a situation and support them in making sensible choices.
However, Björnberg and Nicholson also warn that there is a dark side to it all. EO – the lifeline through which family firms survive and pass between generations – can have a hazardous potential where family members feel entitled to take the lead. “[EO] is a sharp sword that can be wielded to cause much damage in family businesses. It is important to remind [families] that identifying and being attached to the family business does not give you rights. Problems arise in family firms when one member claims rights over another. Battles for the soul of the business by family members claiming different visions are the cause of many a family war.”
Only recently, US research company Family Business Alliance found that just 30 per cent of family-owned businesses are passed down to the next generation, and only 12 per cent remain viable into the third generation – potentially due to a lack of inclusion a low rate of EO.
Well-run family businesses, however, are likely to prosper even in a time of turmoil, as they have a unique mix of long-term orientation, a strong commitment to quality – which is related to the soundness of the family name – as well as care and concern for staff who are often likened to an extended family. And, they can serve as positive role models in a time where many an executive is focusing on short-term growth only.