Only 20 percent of family businesses make it to the third generation and only 13 percent past that. Yet mounting research documents the superior profitability of family firms, even over widely held public firms. My research of the 1,000 largest public firms worldwide suggests those controlled by families earn a 30+ percent higher return on capital.
What helps these firms thrive?
Beyond an independent board of directors, regular family meetings, and a family constitution, I have observed ten subtler capabilities and lessons for continuity.
1. Skill at Resolving Paradoxes. Successful families recognize and discuss paradox-based dilemmas such as balancing individual freedom with collective commitment. They make difficult compromises to resolve these, always with a long-term perspective.
2. Focus on Process. Successful families constantly focus on family communications, problem-solving, and decision-making, giving themselves stress tests and putting challenging questions on the table.
3. Human Resources Committee. Family human resource committees, which may include the HR head, an industrial psychologist, and/or an independent director, assess and counsel next-generation family members to match roles and responsibilities with qualifications and interests, promoting harmony and smooth transitions.
4. Succession Task Force. This ad hoc group supports the transition between generational leaders by managing the timing of succession and dealing with succession-related issues including compensation, titles, and career-path impacts.
5. Students of Family Business. Successful families seek outside education and counsel, along with input from other high-performing business families, to benchmark, identify best practices, and avoid previous generations’ problems.
6. Facilitate Pruning the Family Tree. Continuity-minded families recognize that not every member is best served joining or staying in the business. They also use generational harvest to provide the senior generation with funds for philanthropic purposes, while passing much of their ownership to their heirs.
7. Wealth Is Neutral. Successful families steward the wealth for future generations, maintain their drive for achievement, and live life not feeling guilty about their privilege, never allowing money to define them.
8. Education for Decision-Making. Successful families recognize that consensus-based decision-making is not always best, and that all decision-making processes must include genuine respect for each member and no covert personal agendas. They carefully manage the distribution of voice among generations.
9. More Than Business Is Key. Long-lasting families know that members must have access to highly valued roles and activities outside the core business—among these are philanthropy and roles with the family council or family office.
10. Family Philanthropy Is Not Easy. Taking time to think strategically about philanthropy is crucial, helping successful families avoid inter-generational conflicts about donor’s intent and allowing them to use giving as a means of generating greater comfort with inherited wealth.