2019 Pan-European RRA Study on Family-Owned Business

Introduction

Family-owned firms are key contributors to the global economy. According to statistics from the Family Firm Institute, family companies represent two-thirds of all businesses around the world and generate 70 percent of annual global GDP. In Europe, according to the European Commission, family businesses are a cornerstone of all economies, accounting for 60 percent of companies and creating 40 percent to 50 percent of jobs.

While exact figures may differ from one source to another, there is common agreement that fewer than 30 percent of family businesses survive into the third generation of family ownership.

To better understand family leadership and their challenges, Russell Reynolds Associates recently analyzed 242 companies’ boards across eight European countries (Italy, Spain, France, Germany, Denmark, Norway, Sweden, Finland), half of which are family owned. In addition, Russell Reynolds Associates gathered further input through discussions with CEOs, as well as board chairs, family members and independent directors at family firms across these countries.
 

Family Leaders Have Three Specific Critical Challenges

Our discussions indicate that, on top of preserving or improving the company’s performance and shareholders’ returns, family-owned company leaders have three specific critical challenges:
 

1. Successfully Handing Over The Business To The Next Family Generation

Nearly every family-owned company leader hopes to pass the torch to another family member when the time comes. Yet fulfilling that hope is surprisingly difficult. Family-run businesses can experience serious complications for a variety of reasons, including family conflicts and inadequate skills. However, a recurring difficulty is a lack of appropriate succession planning and the readiness of family members currently involved in the management and/or in the governance of the organization to truly hand over power.

One chair of a second-generation family business recently admitted to us that not only did he not know how to go about planning the transition, but he was also afraid of not being objective in evaluating the skills of the third generation.

Our analysis reveals that a concentration of board power among family owners can pose a challenge to succession planning. For one thing, family members represent, on average, 22 percent of directors on the boards of family companies. In addition, in a majority of the cases, board chairs are family members, raising the possibility that agendas and discussions may not be as nonpartisan as they should be. In our study, 65 percent of the chairs were family members (across the eight countries excluding Germany) and, respectively, 86 percent and 90 percent in Italy and Spain.

As a family chair of a listed company in its sixth generation noted: "It can be perilous for the family to stay isolated when evaluating strategic options" 

To strengthen decisions about future leadership, the presence of independent board members, who are neither part of the family nor too close to it, is vital. Multiple family representatives spoke about the importance of independent directors actively listening to the different members (branches) of the family and sharing their opinions. As a result, they could develop a nuanced and balanced point of view in the interest of the company and all of its shareholders. The presence of non-family directors at family companies is also extremely valuable in tackling succession processes with clarity and objectivity.

Family companies are careful to integrate non-family board members with CEO experience—even more than nonfamily companies (43 percent vs. 40 percent in non-family companies). “Having led a business is taken into high consideration,” a family member shared with us, and a CEO of a family company admitted that he “really missed CEO experience on [his] board.” Having CEO experience on the board is essential to help the family mitigate risk on strategic business questions, as well as to identify potential upcoming issues.

Whatever the generation of a family business, the selection of the next family leader—be it the CEO or the chair of the board—comes with emotional, business and governance challenges. Ensuring a positive handover to the next generation should therefore be central to the purpose of a family company’s board.

2. Preserving Family Control Over the Business' Future

Business today is characterized by relentless change and remaining competitive is vital. Whatever the size, the development stage or the generation the family business is in, strategies need to evolve continuously. As McKinsey pointed out, the “most large, successful family-influenced survivors are multi-business companies that renew their portfolios over time.” Yet maintaining the family’s influence over the company’s future while raising enough fresh capital for new development, as well as satisfying the family’s dividends needs, is a complex equation.

To solve the equation, some families will choose to open their company to external partners. But, as our discussions suggest, most will avoid trading their capital to keep control—unless they must. “The only strategic decision I will decline to take is losing control,” said a family chair of a large listed company that has already gone through several family generations.

3. Safeguarding The Family's Values And Heritage

Multiple family leaders described to us the pressure they face to maintain their “family chain” and preserve their family values. As the family business moves from one generation to the next, family leaders have the responsibility to preserve and promote the family values across generations—the family’s most important heritage.

A powerful way to ensure the preservation of family values is to engage the new family generations early on— especially when they are numerous and not all of them can either chair the board or lead the company. The new family generations should be integrated into the family office, into the family foundation or into the company board—and encouraged to grow.

As our analysis of more than 120 family companies indicates, some family members join the company board before the age of 30. If, on average, 19 percent of family members are 45 years old or younger, this represents around 30 percent of their family members in France, Finland and Denmark—and just 7 percent and 0 percent in Spain and Germany, respectively. The average tenure of a family director is 13 years and there are fewer disparities between countries (a low of 10 years in Finland and a high of 14 in Spain, Sweden and Italy).

Family-Company Boards Have Two Common Peculiarities

Each family company is unique. Nevertheless, our study uncovers that most family-company boards have two common peculiarities:

1. Importance Granted To Board Leadership 

Holding the reins of the board is critical to most families. In our discussions, many family companies explained that they also see a real benefit in splitting the chairmanship from the CEO role, as soon as their development stage allows, for the long-term success of their business. Indeed, separating the chair leadership role from the CEO management function enables the chair to refocus his/her attention on the family’s governance and its long term view.

Our analysis indicates that already more than 70 percent of family companies in Italy, Spain and Norway have separate CEO and chair roles (vs. less than 45 percent in France).

Exhibit 1. The Specific Role of a Chair in Family Companies 

The key to the long-term success of a family company is the right leadership and this complex task falls mainly under the responsibility of the chair. 

CEO
Appointing a new CEO is rarely easy. Despite the political hurdles it might create, the chair, with the help of the board, needs to prepare a robust succession process to achieve consensus among the family members and must have the courage to hire a professional outsider if no family member is the right CEO (a growing trend).

Family Governance
To succeed in the handover of ownership to the next generation, the chair has the key responsibility of keeping the family committed and of integrating—and educating—the members of the next family generation (family culture, heritage, long-term view …) into the board and the company’s governance so that they are 
poised to grow and are prepared to take over when the time comes.

Chair Succession
Boards are often more familiar with succession planning for CEOs and senior managers than for the board itself. Whatever the ownership of the company, selecting the right chair is perhaps as important as selecting the right CEO. But in the case of family businesses, the cost of a neglected succession process for the chair could simply be the loss of family control over the business.

Family company chairs have, on average, a 14-year tenure, on top of an earlier average six-year board induction, which makes their succession process even more complex. 
From our experience, two factors are key to success: 

• The chair needs to be personally involved in the succession process, and
• Ultimately, the chair needs to have built a strong governance regime with qualified external 
  independent directors to best advise him/her in this sensitive moment

2.  Customization Of The Board Composition 

Having an A-class board, composed of a significant proportion of qualified outside members to accompany and challenge the company’s long-term strategy, is key to the success of family-owned companies. One family chair of a listed company even described to us how they incorporated the national equity market’s rules and recommendations in their governance, five years before going public.

Our study reveals that family companies tend to privilege contained board sizes and have slightly fewer directors on their boards despite the natural presence of family members. Family companies have, on average, eight directors vs. nine in non-family companies (chairs not included in these numbers).

The data collected in our study also confirms that family boards generally tend to embrace diversity—both in terms of women and foreign directors. Women represent a third of the boards—and just under 40 percent and 50 percent, respectively, in Sweden and in France. International members comprise almost 20 percent of the boards—with up to 33 percent in France but as low as 7 percent to 8 percent in Italy and Sweden.

The results of our study show, however, that less than 5 percent of the family-company board members have digital and new technologies experience. Family companies almost all agree that board members with digital or technological skills are not sufficiently represented on their boards and seek to remedy that by recruiting “digital” directors or by leveraging external advisors. The grass is not much greener on the boards of nonfamily companies, however, where only 8 percent of board members of companies surveyed have these “new” competencies.

It is interesting to note that family firms have the tendency to keep their non-family directors longer on their board than non-family companies (non-family chairs have 23 percent longer tenure and non-family directors have 31 percent longer tenure). This is not explained by only the affectio they develop with the independent directors, but also by the more difficult task of finding the “right” non-family members to bring onto their boards. As independent directors rightfully pointed out to us, however, “soon after an independent director loses independence, he/she is replaced.”

Nevertheless, as noted in our discussions, the actual composition of each family-company board is tailored to address the family’s specific situation and will evolve as need be to respond to new challenges (for instance, the enlargement of the board to integrate new family members as directors and prepare the chair succession path).

Exhibit 2. Appraisals 

Companies, whether they are family owned or not, tend to perform board assessments regularly. However, this is heavily dependent on local governance requirements. In Italy, where board assessments are compulsory, 95 percent of family companies and 100 percent of non-family companies in our analysis 
performed these assessments. In Germany, however, where regular board assessments are recommended but not required, only 58 percent of family companies and 55 percent of non-family companies conducted board assessments. 
Family businesses typically tend to perform board assessments internally to protect their intimacy. Our analysis illustrates that in Italy less than 20 percent of the family companies leveraged external advisors to perform these assessments; in France and Spain, this figure stood at 38 percent and 41 percent, respectively.

Conclusion

No matter the generation of a family business, family-owned company leaders have three specific critical challenges:

Profile Of A Family-Company Chair In Europe And By Country Analyzed

Profile Of A Non-Family Director On The Board Of A Family Company In Europe And By Country Analyzed

Additional Authors:

Isabel Rousseau Calisti is Global Knowledge Leader of the Board and CEO Advisory Partners group. She is based in Paris.