Key Ideas Newsletter . January . 2004 

At the beginning of this brand new year, Key Ideas bring good news about family businesses. This issue will explore some of the factors that give family businesses the edge over their non-family competitors.

In this issue…

• Featured Article: "Managing Conflict Creatively in Family Business
  - Keys to Success"
  
  
• Book Review: Centuries of Success: Lessons from the World's Most Enduring Family Businesses, by William T. O'Hara
  
  
• In the News: "Family, Inc. Surprise!" Business Week reports on family business
  
  
• It's About Time: Ethics courses at business schools!

What's So Important about Having a Conflict Management Process?

You've probably heard the saying "the bone is strongest where the break heals" (that is actually medically true!). The same applies to relationships, and this may, if fact, give family firms a competitive edge...

Read the Full Article >

Book Review
Centuries of Success: Lessons from the World's Most Enduring Family Businesses
by William O'Hara. (Published by Adams Media, Avon, MA 2004)

In this remarkable book, the author shares his experiences traveling the globe in search of the world's oldest family businesses. If the odds are that only 12% of the family businesses will make it to the third generation, what must it take for one to survive say since its beginning in 578, such as Kongo Gumi, a temple restoration company in Japan? With each chapter, the author introduces us to one of the twenty companies that he discusses, covering such topics as "meeting the new leader", the history of leadership, industry timeline, passing the torch, looking to the future, and the next generation.

Centuries of Success is beautifully written and wonderfully researched. As I read about these businesses, I felt as if the author had invited me along on his travels to meet the families who own them. I felt as if I was walking through the countryside of Northern Ireland to visit William Clark & Sons, one of Ireland's last linen manufacturers, or touring Norwell, just south of Boston to visit the Avedis Zildjian Company, the oldest in the US, a manufacturer of cymbals. But this is not just a description of the companies it is also a thoughtful exploration of what makes them survivors. Calling on his experiences as an arbitrator for the American Arbitration Association, his term as president of Bryant College, and having established the Institute for Family Enterprise at Bryant in 1991, O'Hara presents a multidimensional look at these history-rich families and their businesses.

What are his conclusions? What can we learn from his research, interviews, and experiences? O'Hara concludes with a core group of eleven attributes associated with old family businesses, although not all families in the book share all eleven. Furthermore, the author concludes that 'family unity' and 'a commitment to continue the legacy' are the bedrocks of survival. He puts these in context in the last chapter as he compares them to the findings of the 2002 MassMutual/Raymond Institute American Family Business Survey. He also describes the exceptions he finds and concludes: "It's been a unique opportunity to chronicle and recognize twenty extraordinary family businesses and their astonishing records of endurance." Thanks, Dr. O'Hara for looking at the strengths of these long surviving companies!

In the News
Family, Inc. Surprise!
Business Week reports on the success of family business, 11/10/2003

Surprise! One Third of the S&P 50 companies have founding families involved in the management. And those are usually the best performers, according to "Family, Inc.", a special report from Business Week November 10, 2003 (100-114).

Expanding on a study in the June issue of the Journal of Finance, which found that the performance of family companies in the S&P far outstripped that of non-family companies. "Family, Inc."summarizes their findings (those in which the founders or their families maintain a presence in senior management, on the board, or as significant shareholders):

• Annual shareholder return averaged 15.6% in family firms compared with 11.2% for nonfamily companies.
• Return on assets averaged 5.4% per year for the family group vs. 4.1% for non-family companies.
• Family firms "trumped the others on annual revenue growth, 23.4% to 10.8%, and income growth, 21.1% to 12.6%"!

So what gives family businesses the edge? "In part, it's having managers with a passion for the enterprise that goes far beyond that of any hired executives, no matter how much they are paid. That's especially true for the more than 100 companies in our ranking that still have a founder on the scene…" Even though family influence can sometimes work against success, as in the case of Rite Aid, in which Marin Grass former CEO and son of the founder, who pleaded guilty to conspiracy to commit accounting fraud, having tight-knit family leaders at the top that can make faster, easier decisions, motivation provided by legacy, loyalty, 'in for the long haul', and a collective desire of family members to maintain unity and preserve their wealth, to get through the bad times.

Five Key Factors That Give Family Businesses an Edge:

1. Born to lead -
With Cintas and Comcast as examples, Business Week authors challenge the adage that you should work out side the company first: "Work at a company from your teenage years, or before, and you're bound to gain a sense of it that outsiders simply can't match. Combine those years of experience with oft-repeated advice from an elder, throw in the responsibility for one's family fortune and a drive to surpass an elder's accomplishments and you get a potent resume for a CEO."

2. Quick decisions -
Family businesses, when "run by a few tight-knit family members, can almost always move far faster than corporate bureaucracies." Mark Mays and his father, L.Lowry Mays, of Clear Channel Communications, were able to put together a $23.5 billion deal in little more than five days. "Once we had the ability to move, we moved like lightening." (The criticism of Clear Channel for homogenizing the airwaves, not withstanding, they are the third-fastest profit growth company of all the family companies in the study.)

3. Breeding loyalty -
Family companies often demand a lot of their employees but often give a lot back. At several of the larger family companies that I work with, I often hear from the employees, "This is like a big family." J.Willard Marriott who founded the international hotel chain urged his managers to "find, hire, and train good employees and treat them like your family." This attitude exists today.

4. Investing in growth -
Family businesses tend to reinvest more heavily in their companies, to build and preserve the wealth, whether it's "geographic expansion, R&D or conquering new markets, founder or family companies such as Gap, Microsoft, and DuPont are not shy about stoking the growth furnace with cash." The Waltons of Wal-Mart take the role of 'patient capital', for as board member John Walton says, "We view it really more as a trust, or as a legacy we're responsible for, rather than something we own."

5. No absentee landlords -
"By current governance standards, which emphasize independent directors and watchdog boards, there is no shortage of 'bad boards' among family companies." However, as the article points out, the very characteristics that give family boards low marks may give them their competitive edge. "Large personal stakes and financial stakes in the company's future give family directors something many independent directors lack: a powerful incentive to hold management accountable-and the clout with which to do so… Where shareholders see family boards as incestuous, other see owners deeply committed by blood and money to the company's welfare." By maintaining a huge personal and financial stake in the company, the controlling families have every incentive to the long-term health of the company and, the authors conclude, "that extra sense of commitment is something that stock options and eight figure salaries just can't buy."

Read full Report at Business Week Online >

It's About Time
Ethics Courses at Business Schools!

"Art, like morality, consists of drawing the line somewhere". - G.K Chesterton

Harvard Raises its Hand on Ethics

1st year MBA students must take a new course at the Harvard Business School which is now offering an interdisciplinary course called "Leadership and Corporate Accountability" taught by 10 faculty members and will include case studies of Enron Corp and WorldCom Inc. Other business schools such as MIT Sloan School of Management and the Tuck School of Business at Dartmouth are similarly rethinking how they teach ethics in the post-Enron era and the 'ethically challenged' business school graduates such as Andrew Fastow (MBA Northwestern University) of Enron and Marin Grass (MBA Cornell) of Rite Aid. Within the context of teaching ethics, the schools must address CEO pay, business school culture and overall reform.

To read more about this, see Boston Globe, 12/30/03.

That's all for this edition of Key Ideas. As always, feel free to contact us with feedback, questions or comments.

Until next time,

Jane Hilburt-Davis

CONTACT US:

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Phone: 781-861-0586
Fax: 781-862-3499
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