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FAMILY BUSINESSES: ACTING NOW FOR A LEGACY TOMORROW

Family businesses have shown surprising resilience during a period which tested all industries and disrupted countless livelihoods. PWC’s 10th Global Family Business Survey which received 2,801 responses from family business owners and executives worldwide, found that 79% respondents reported needing no additional capital in 2020. Additionally, a majority of the respondents expected a return to strong growth by 2022.

Although this is good news, there were many problem areas identified by the PWC survey which family businesses need to work on. Progress with digital transformation and sustainability strategies have been slow. On average, 38% of respondents stated that they have strong digital capabilities, while only 37% reported to have an established sustainability strategy. There has also been a resistance to the professionalization of family governance, which can lead to dire consequences during times of conflict. This report summary will address such problem areas and provide the advice put forth by a panel of leaders in family business included in the original survey.

FAMILY DYNAMICS: A DOUBLE EDGED SWORD

While personal relationships can help a business adapt and take action quickly, it can also be what inhibits growth and slows down decision making processes. The build up of personal issues in the family sphere, personal bias, and differences in views between members can all make communication in the business less transparent, and conflicts more difficult to navigate. Therefore, it might be better to hire someone from the outside to analyse your numbers and give you a clear idea of where your business stands. For instance, if you have an optometry clinic, you could go for professionals from the likes of PECAA or similar companies to do optometry practice valuations on your database. Similarly, depending on what business your family runs, you can find experts who can perform detailed analysis and allow you to improve your numbers.

Statistics from the survey paint a concerning picture. Only 58% of the respondents said that all family members share the same views regarding the company’s direction. While two thirds of respondents reported that family members maintain regular communication regarding the business, one fifth reported to have established no formal mechanisms to settle potential disagreements. When it comes to conflict resolution, respondents seemed to prefer keeping issues under the radar, with 80% of respondents reporting that they settle all disagreements internally, 13% reporting that they have an established conflict resolution system in place, and only 12% reporting that they have taken the help of external third party resolution services.

Leaders in the panel viewed involving neutral, outside perspectives to be extremely beneficial. The emotions which are usually involved in family conflicts and discussions can often be very challenging to sort out while keeping matters within the family. External support and guidance from a business transformation consultant or other such experts can help professionalize the business, and help family members evaluate problem areas, along with the role, responsibilities and composition of the board and management in an impersonal way.

According to the leaders, a professional governance structure and a clear-cut conflict resolution process, preferably incorporating an independent party, can help strip emotions and personal bias out of decision-making processes. A professional approach can help eradicate the obstacles faced by family businesses which may stem from personal issues rather than business ones. That means, a proper system for finance and account keeping. Firms like HLB Mann Judd are hired by several family businesses for leveraging the support of auditors and Tax Accountants Sydney.

Governance structures should also reflect the dynamic nature of families. Family dynamics may change as newer generations enter the business and members get married. It is hence important to create parameters for family constitutions and ensure that they are kept up to date.

Finally, panel members suggested that a written record of family business values can enhance communications and transitions. When values are recorded they can help guide decision making processes while also ensuring that strategies take issues such as sustainability into consideration. Statistics in the study showed that better performance, transparent communication while sharing information, better preparation for succession, and better support towards the staff and community are all strongly correlated to recording company values in a written form.

DIGITALISATION: IMPLEMENTING LESSONS LEARNED

The pandemic substantiated the importance and urgency of digital transformation. Digitalized services rapidly transformed from a novelty to a norm. Businesses which had strong digital capabilities and access to good data fared better during the transition compared to those which did not. Family businesses which fell into this category in the PWC survey were unfortunately just a minority. Around 62% of respondents reported that they have a long way to go with their digital journey. About 29% reported that they lack strong digital capabilities and that the development of such capabilities are not necessarily high on their agenda list.

The lived experience of family businesses which improved their digital capabilities exemplify the vitality of digitalization. 60% of family businesses with strong digital capabilities went through growth in the pre-COVID period, while 71% expect to grow in 2021 as well. Approximately 86% of family businesses which reported to have strong digital capabilities have access to reliable and timely information and data which influence decision making. Strong digital capabilities also enhance transparency, as 73% with digital proficiency reported that information is usually shared in a transparent and timely manner between family members in their business.

The panel recommends family businesses to re-evaluate the possibilities and opportunities which updated technological capabilities can provide for business models and governance especially in challenging times such as this. They also recommend letting the next generation take the lead as they are an important motivating force when it comes to digitalization and can add value in this area.

It was also advised that in order to pick up pace in the digital journey, family businesses must have a thorough understanding of data and analytic tools, along with a dedication towards upskilling their workforce. It is also necessary for family businesses to remember that technological transformations and changes must be embedded in an overall cultural shift that is supported by leaders who are highly engaged and involved. An overall change must be aimed, not rushed transplants.

ESG: TRANSFORMING MINDSETS

There has been rising pressure on all businesses to contribute to a cleaner environment and a fairer society, which has led to sustainability agendas taking on a new sense of urgency.

Established approaches regarding how sustainability is thought of along with how family businesses are governed creates an obstacle for family businesses in their pursuit for ESG. While listed family businesses have slowly been nudged into ESG practices and policies due to pressure stemming from customers, lenders, shareholders and employees, ESG has gradually become an existential issue for all family businesses. To create a lasting legacy, family businesses must fully commit to ESG, or risk being punished by consumers, the media and even regulators.

Family businesses have already built a reputation for prioritizing their employees’ welfare and the community they operate in. More than 80% engage in one variation of social responsibility activity or another, while 42% have reported to engage in philanthropy. Nevertheless, how sustainability is thought of must be changed, with sustainability being made central to business operations, rather than something embedded only within philanthropic activities. Family business leaders on the panel believe that ESG must be embedded in the business and operating model, and into every business decision that is made. This can have an assortment of benefits, from lowering the cost of capital to enhancing the company’s brand value.

ESG measurement is a budding discipline. As of yet, no internationally consistent system for reporting ESG progress has been established. It can be very beneficial to ask for external help when it comes to figuring out how to measure and meet ESG targets. Inviting outside expertise is a vital element of solving the sustainability puzzle, according to leaders in the panel.

A lack of pressure being exerted by capital markets on family businesses can be a handicap for them when it comes to ESG. The panel of leaders believe that a diverse board involving independent input could work as a good proxy for capital markets and challenge the thinking surrounding sustainability for family businesses.

Involving younger generations can also be fruitful as they are one of the strongest driving forces behind sustainability. ESG tends to be a natural fit for them considering they usually seek to achieve greater responsibility when it comes to their family businesses. The survey found that fourth generation family businesses are more likely to embed sustainability in their decision making processes and are also more likely to already have a detailed sustainability strategy.

The PWC 10th Global Family Business Survey possessed both good news, and a wake-up call. Although they have shown great financial resilience throughout dire times, many adjustments need to be made so that family businesses can build a legacy for their future generations. For a better, stable future, changing thinking around sustainability, transforming digital capabilities and professionalizing family governance hold the highest urgency.

Report Summarized By Tasfia Ahmed

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