Family Inc: The Waiting Game

How family unity can be a magnet for patient capital

In 1996 the president of a New England distributor of heating, cooling, and refrigeration equipment began an eight-year process of preparing the next generation of his family to run the company. He and his four siblings—three brothers and a sister—owned an equal number of shares in the company founded by their father. All three brothers worked in the business, as did the sister's husband. Experts would never have recommended this ownership structure, at least not without majority control by the president, but it was the situation the CEO—let's call him Dan—faced as he announced he would retire in 2004.

To create a sense of urgency about succession planning, he established a system of family meetings aimed at developing all eight members of the family's third generation. The meetings were also a determined effort to illustrate the value of family unity, not just to family members but to all the company's employees.

Despite some disagreements and difficult conversations along the way, the extended family managed to come together. And Dan's son worked hard to earn the respect of the shareholder group of his seven cousins. After much deliberation during family and board meetings, Dan handed the reins to his son. Because of that smooth transfer of power, the son didn't have to divert capital to shareholders exercising an existing buy-sell agreement, or pay out large dividends in order to keep shareholders loyal in the short run. The business was able to continue to invest in its own growth.

Nurturing that kind of family unity allows for the development of one of the rarest virtues in business: patient capital. When a shareholder, business owner, or heir decides to remain a loyal shareholder because he trusts his relatives and business partners, he is a patient capitalist. That trust leads him to perceive less risk in keeping or even reinvesting his assets in the company for the long run.

That is quite a contrast to the public companies that manage quarterly results largely to appease Wall Street. Patient capital makes it possible for family companies to deploy competitive strategies unavailable to multinationals and other publicly traded firms without a controlling family. The benefits of the strategy are clear in industries such as construction, wine, real estate development, and others whose products can't be judged successful only on the basis of quarterly results, and where many companies remain in the hands of family owner-managers despite waves of consolidation.

Over the past decade, I looked at more than 100 small and medium-sized family companies, and found that family unity and career opportunities stemming from a company's growth were the two sources of the positive relationships that led to long-term survival. Much of that unity and growth was the result of the owners employing best practices for family-business management, such as establishing advisory boards with independent outsiders, frequently holding family meetings or having a more formal family council, transparent financial management, disciplined strategic and succession planning, and hiring nonfamily managers for top management positions. In this fashion they created a virtuous cycle among information, knowledge, trust, family unity, best practices, and business growth that supported patient capital.

There is a potential downside to taking the long view, however. It can obscure the need to hold company leaders accountable for short- to medium-term results. Patient capital can never be used as an excuse for not doing what needs to be done to ensure that the business remains healthy and competitive in the short run. A family company will thrive only when family unity funds a long-term perspective and innovative management makes the adaptations needed to remain competitive.

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