Family Business

Center of Excellence

Built to last
Family businesses lead
the way to sustainable growth
In collaboration with

Contents

Methodology

Preface

Growth and resilience

Talent

18

Sustainability

24

Summary and conclusions

30

Appendix

31

Our commitment to family business

32

Methodology
In June 2012, Ernst & Young conducted a survey of 280 family business members in
collaboration with the Family Business Network International (FBN-I) and Credit Suisse.
The aim of the survey was to gain an insight into how family businesses have continued
to perform and remain relatively immune to the economic turbulences of the past years.
We explored wide-ranging areas such as current business strategies, professionalism,
growth strategies, people management and financing.
Some 33 countries were represented, 43% of respondents were family businesses with
a workforce of over 1,000 employees and over 60% were in their third generation.
One-to-one interviews were conducted with the leaders of ten prominent and successful
family businesses and renowned academics in the field, to gain further insights into the
key characteristics that contribute to family business success.

The role of the FBN-I is to articulate the

positive role of family business and its
contribution to the economy and society.
The FBN-I works to create opportunities
for sharing best practice through national,
regional and international programs
and events. It also seeks to provide a
thorough understanding of the micro
and macroeconomic framework of family
business and to promote its sustainability

worldwide. Its strapline is, By families,

for families for successful enterprises.
Founded in 1990 as a federation of
family business associations, the FBN-I
has grown to 30 national associations.
It is composed of 5,500 family business
members (owners, leaders and next
generation successors). Members come
from medium to large companies in
50 countries, across ve continents.

2 | Built to last Family businesses lead the way to sustainable growth

Preface
How should we navigate through turbulent times? We all have been asking this question for quite a while.
More than ever, companies are facing uncertainties in the global economic environment. The impact of the
euro crisis, the increasing public debt in the US and the shift of economic power from the mature to the
rapid-growth markets brings volatility and puts some current business models at risk.
Family businesses are an important part of the worlds economy and the backbone of the economic systems
in most countries. In fact, they make up more than 60% of all companies in Europe and the Americas, and they
account for about 0% of employment, encompassing a vast range of rms of different si es and from different
sectors.1 For instance, the engine of Germanys economy, the largely family-owned Mittelstand businesses,
are the envy of Europe, with their reliability, excellence and an ability to penetrate emerging markets. And in
those very emerging markets, local family businesses are thriving as the entrepreneurs hand on fast-growing
companies to their ambitious and well-educated offspring.
For years, family rms have been unfashionable, overshadowed by the spectacular performance of publicly
owned companies. Their return on investment was lower than star-listed businesses and their capital turnover
was insigni cant compared with boom-time success stories. And yet it is clear that much of that fast growth
has, in some cases, proved unsustainable and the promises of future success not always realistic. Now, many
see that family businesses are the real winners.
Since the global nancial crisis, more people have come to reali e that stability and resilience are very desirable.
They see the bene t of businesses that think not in months, but in generations.
As this report shows, family businesses have weathered the storm admirably. Despite turmoil in the markets
and fundamental readjustments in major economies, many are growing. They see the rebalancing of the global
economy as an opportunity for expansion into developing markets.
They are succeeding by remaining true to the family culture and values, while embracing the best management
practices that the corporate world has to offer.
This report analy es the three key factors that underpin family business success
growth and resilience, talent management, and sustainability.
Yours sincerely,

Peter Englisch
Global Leader
Ernst & Young Family Business
Center of Excellence

1 European Commission DG Enterprise and Industry Overview of family-business-relevant

issues research, networks, policy measures and existing studies, November 00 .

Built to last Family businesses lead the way to sustainable growth | 3

Growth and resilience

4 | Built to last Family businesses lead the way to sustainable growth

Growing against the economic odds

The aim of this research was twofold on the one hand, we wanted to demonstrate
family businesses resilience and ability to grow steadily against a backdrop of slow
economic recovery and Euro one crises and on the other, to understand what
they felt were the key factors behind their growth and success. There is a copious
amount of excellent academic literature proving that family businesses outperform
non-family businesses in times of downturn and success factors behind this
phenomenon have been identi ed and analy ed in detail. Therefore, it was not the
aim of this report to conduct this very same exercise, but instead to nd out what
family business owners themselves perceived to be these factors and competitive
advantages. We have supplemented our research with one-to-one interviews with
family business leaders and experts in order to deepen our insight and gather rsthand experiences and anecdotes.

One reason family

businesses are so able to
withstand shocks is that
they are specifically
built to do so
Philip Aminoff
President Emeritus of the European Family Businesses Group
and Chairman of Electrosonic Group, Finland

Built to last Family businesses lead the way to sustainable growth | 5

The most important nding of the survey was that, in the

12 months to une 2012, 60% of respondents reported growth
of 5% or more, and one in six of 15% or more. This is even more
remarkable when you reali e that almost three-quarters of
the rms surveyed were based in Europe and the US, where
economic conditions have been most dif cult. This shows that
the family business model remains robust in the face of adversity.
Furthermore, it con rms the old adage that family businesses
succeed by operating a different management style focused on
long-term vision and investment.
Another important consideration emerging from the survey is
that the majority of the respondents were from mature businesses
in at least the third generation of family ownership. This leads us
to conclude that the more embedded the family business culture
and values, the more likely rms are to be thriving in these
dif cult times.
What do family businesses themselves think makes them so
resilient in times of economic turmoil? And what do they think are
their competitive advantages and driving success factors?
Throughout this report, we will look at a number of the key success
factors underpinning resilience and sustained growth, starting
with family businesses long-term management style, their unique
agility in reacting, their ability to adapt to change, their attitude
toward funding growth, innovation and succession intentions.

6 | Built to last Family businesses lead the way to sustainable growth

Revenue growth July 2011 to June 2012

Increase by 15% or more

Increase by 10%15%

Increase by 5%10%

More or less the same

Decrease by 5%10%

Decrease by 10%15%

Decrease by 15% or more

0

10%

Shown in all charts percentage of respondents

20%

30%

40%

The top 50 global challengers

There is also the most extreme side of the spectrum when it
comes to growth of family businesses.
Ernst & Young has recently collaborated with Campden FB in
order to identify the fastest-growing family businesses at global
level and what contributed to their growth. This investigation
led to the publication of a list of the 50 fastest-growing family
businesses in the world that achieved average growth of 65%
between 200 and 2011.
Half of the companies that made the list are based in Europe,
mirroring our survey results and again proving how remarkably
robust family businesses are especially considering the economic
landscape in which they operate. This is a testament to the
resilience of the family business sector in Europe.

When the top 50 fastest-growing family businesses were

challenged as to which factors contributed to their spectacular
growth, most of them put their success down to being a family
business before any other consideration.
Peter Englisch, the global leader of the Ernst & Young Family
Business Center of Excellence, commented these phenomenal
achievements How the global challengers were able to turn
their potential advantage of being family businesses into superior
growth and success is very impressive. These companies embody
the spirit of innovation and entrepreneurial power.
You can view the full report on www.ey.com/familybusiness

Built to last Family businesses lead the way to sustainable growth | 7

Taking the long-term view

One feature that sets family businesses apart from others is
their focus on the long term. It is no surprise that, when asked
what was most important to the ongoing success of their
business, over half of the respondents singled out a long-term
management perspective.

The survey suggests that this approach has helped family

rms to weather economic storms. The highest-performing
rms over the past years those with growth of more than
10%) were more likely than the worst-performing ones to say
that long-termism was a factor in their success.

Factors most important to ongoing business success

Comparison between how long-term management

perspective was rated as success factor by low-performing
and high-performing respondents

Long-term management
perspective
Established brand recognition
and customer loyalty

Long-term
management perspective

Focus on core business

rather than diversi cation

Established brand recognition

and customer loyalty

Rapid-growth economies

Focus on core business

rather than diversi cation

Focus on high
product quality

Focus on high
product quality

Unique, niche or
innovative products

Unique, niche or
innovative products

Alignment of owner
and management interests

Alignment of owner and

management interests

Superior talent
management

Superior talent
management
Flexible, focused
governance

Flexible,
focused governance

Focus on sustainability and

social responsibility

Focus on sustainability and

social responsibility
Cost leadership

Cost leadership

Easy access
to nance

Easy access to nance

0

A relay race

10%

20%

30%

40%

50%

60%

10%

20%

Low performing

30%

High performing

Mario Preve
Chairman of Riso Gallo, an Italian rice producer since 1845
The bene t of taking a long term view were borne out
by the interviews with family business members. Mario
Preve says The family business has the advantage
that it is not only a matter of pro t its like your home.
I always say that its like the relay race someone passes
you the baton and then you pass it on to someone

8 | Built to last Family businesses lead the way to sustainable growth

40%

else. We say that we didnt get the company from my

parents, we are borrowing it from our children. And
this is important. We are thinking of how it affects
our offspring. We dont think in quarters, we think in
generations.

50%

60%

Focus on

Building a robust business

Philip Aminoff
President Emeritus of European Family Businesses Group and Chairman of Electrosonic Group, a Finnish family business
One reason that family businesses are so
able to withstand shocks is that they are
speci cally built to do so. These days
people give them fancy names, like black
swans, but a long-term family business
has usually seen a number of catastrophic
events, either internal or driven by
technological innovation or geopolitical
forces, says Philip Aminoff, whose family
owns several businesses in Finland.
This drives them to try to build robust
businesses, he says. They make sure
they have a strong balance sheet and build
long-term relationships. Long-termism is
a key feature of this robustness. People
always say that life is too short, but instead
we should think that life is too long and that
you cant betray people or be dishonest
because it will come back to haunt you later
on, says Aminoff.

However, the features that make family

companies robust or resilient dont only
ow from the fact of who owns them.
Something less tangible is important. Its
more about the mindset of the owner,
Aminoff says. Family businesses are
usually of the same mindset as foundationowned businesses or even, in some cases,
cooperatives. They own without the
intention to sell and this makes it completely
different because you think of the company
as creating a stream of revenue from the
assets. And while, to some extent, you
can understand the assets by reading the
balance sheet, the customer relationships,
the employees and so on are also assets.

they can conceivably see into the future,

continues Aminoff. This means that
you really see the assets as something
you want to develop and cherish. You
make sure that you dont load the balance
sheet with too many liabilities that could
hinder the long-term development of
your assets. If you talk to private equity
or people in listed companies with
fragmented ownership, its about return
on equity, top-line growth and key
ratios. And the easiest way to achieve
those things is to load up with debt
and make acquisitions. A long-termist
family business doesnt do that. I think
there really is a fundamental watershed
between the philosophies.

Family businesses tend to want to

enhance the very, very long-term earnings
capacity of those assets for as long as

Anne Kirstine Riemann

Long-termism
in practice

Chairman of Riemann, a Danish second-generation sunblock and perspirants manufacturer

In some cases, long-termism is related to a rms
ownership structure. Anne Kirstine Riemann, a
second-generation Danish family business, says that
being completely privately owned means that we
can actually make the long-term investments we are
not reporting quarterly earnings. As an example, she
explains that the business was able to build a factory
that has a return-on-investment timeline of 20 to 30
years. She adds It was very expensive, but worth it.
In a public companys terms, we should have done a
sell and lease-back deal, because that makes a much
smaller drain on liquidity, although it costs more in the

long run. But we can afford to look ahead and make the
investment.
While it is a constant refrain among family businesses
that they look to the long term, its important not to be
seduced by the rhetoric, says Andrew Wates, recently
retired chairman of British construction company
Wates. One has to be careful not to use the long-term
approach to justify poor performance, he says. Every
company needs rigorous performance measurement.
It is often easy to attempt to justify missing delivery by
suggesting it will come right in the long term.

Built to last Family businesses lead the way to sustainable growth | 9

Family businesses are adapting to new realities

and changing conditions
The most successful family rms have always adapted to new
realities, reinventing themselves as times change. It is evident that
we are currently living through a period of economic turmoil and
the survey found that family rms are under no illusions about the
challenges they face. Asked what they considered the biggest risk
factors for their businesses, the rms most popular answer was
the global nancial situation.

Factors motivating change in management structure

The need to adapt to new
business conditions
New or different skills required
Non-family members coming into
signi cant management positions
New family members
coming into the company

Perceived risk factors in todays economic landscape

Globalization or
regional expansion
Introduction of new or
different products

Economic environment

Family members leaving

the company

Rising costs (e.g., input

costs, labor costs)

No changes made

More acute competition

Key non-family personnel

leaving the company
Financial constraints

Financial risks
(e.g., market volatility)

Operating and regulatory

environment (e.g., dif culty in
doing business, tax system)

10%

20%

30%

40%

50%

More than one response was allowed

Family governance risks (e.g.,

introducing an independent
advisory board)
Eurozone debt crisis
Political and social risks (e.g.,
corruption and social unrest)
0

20%

40%

60%

80%

More than one response was allowed

And asked which factors are motivating changes in management

structure, two- fths of respondents said it was the need to adapt
to new business conditions.

10 | Built to last Family businesses lead the way to sustainable growth

But there is evidence that family rms see the new normal as
an opportunity. Almost half of respondents and four- fths of the
highest-performing ones said that they saw the rapid-growth
economies as a source of new markets and customers. Less than
half as many considered these new markets as a source of
added competition.
Despite the challenging backdrop and trend toward retrenchment,
family businesses are planning to expand. Over half of respondents
said that they were looking to introduce new products and services.
The same proportion said that they were looking to increase
existing market share, while almost 4 in 10 said that they planned
to move into new countries.

The impact due to the rise of rapid-growth markets

Focus of expansion plans

New products/services

Opportunity of new markets

and customers

Increasing existing
market share

Added competition globally

New countries

Increased speed to markets

for new products

Related industries
(in which they are already active)

Added competition locally

Increasing capacity

Cheaper input prices

Capital investment

More regulations
and red tape

New industries

Supply chain inef ciency

No plans for expansion

in place

20%

40%

60%

20%

40%

60%

More than one response was allowed

Guido Corbetta Professor of Family Business at Bocconi University in Milan

and Jens Fiege Member of the executive board, Fiege Logistics, a fifth-generation

Globalization

German contract logistics firm

Many family businesses from advanced economies
have serious plans to expand into emerging economies.
All the medium and larger sized family companies
understand that emerging markets are very important.
They are preparing for M&As, says Guido Corbetta.
But that doesnt always mean China. When they
are thinking of which markets to go into, it is often a
question of a cultural t. For example, its easier for
Italians to go to Brazil or Argentina than to India or
China, Corbetta says. For others, expansion can be
closer to home. Many German rms are also looking to
Eastern Europe.
ens Fiege points out an added complexity of
globalization From the nancial market perspective,

there is a certain volatility and uncertainty in the

exchange rates market. We might do work for clients in
one currency and then be paid in another. For example,
the same client might require us to work in European
currencies at certain times and in Chinese currency at
others. That makes life more complex and more risky
for us.
It is well known that Germanys family-owned
engineering businesses have been very effective at
penetrating China. But other European rms have also
globalized effectively. You might have thought of risotto
rice as an Italian, or at any rate, European commodity.
Not so. Riso Gallo sells rice in 4 countries and 30% of
its business is done overseas.

Built to last Family businesses lead the way to sustainable growth | 11

Financing growth
Businesses need nancing to expand and family rms are not
completely immune to the credit freeze. When asked how hard it
is to obtain nancing, around a third said that it was more dif cult
than before, and about the same percentage said that conditions
were the same as previously.
These funding problems are perhaps a result of respondents
geographical spread. Many were from Western Europe, where bank
lending has traditionally been the preferred channel for business
credit. But in its absence, family rms may have an advantage over
other businesses, as they often have more retained earnings with
which to fund expansion. Indeed, the survey respondents said
that using retained earnings was their preferred current method
of funding.

Difficulty in obtaining financing by firm size

(number of of employees)

1 to 49

50 to 249

250 to 999

1,000+
0

20%

40%

About the same as before

60%

80%

100%

Becoming easier to obtain

Becoming more dif cult to obtain

Re-investing retained earnings could be a real competitive advantage

for family businesses, as it allows them be more independent
from capital markets and to stay focused on innovation and
further development of core competencies, rather than satisfying
stakeholders quarterly expectations.
However, over-reliance on retained earnings, bank loans and
family funding also has its limitations and is not always necessarily
the most ef cient way to fund growth family businesses should
increasingly consider alternative sources of funding such as private
equity or even oatation. As this survey shows, external funding
is the less desirable route, however, if family businesses wish to
remain competitive and ef cient, they should not dismiss these
external funding options that, if rightly handled, they can be very
effective and bene cial and have worked extremely well for many
successful family businesses.

12 | Built to last Family businesses lead the way to sustainable growth

Preferred financing options by rank

Rank
Retained earnings

Bank

Family

Syndicated bank loans

Private placements

Bond

External

Focus on

Finance
Heinrich Spngler
Chairman of the Supervisory Board, Bankhaus Carl Spngler & Co Aktiengesellschaft, 180-year-old Austrian private bank

On the money

Is it hard for a family business to get

funding right now? I dont think that
its a disadvantage to be a familyowned company at the moment, says
Heinrich Spngler. In recent times, it
was fashionable to be big and listed on
the stock exchange and those companies
might have got nancing more easily. But
for now, I dont see a difference between
publicly or privately owned companies.
What I would say is that, because of the
long-term orientation and the values
in a family business, I would trust that
business to do everything to survive.

For us, it is an advantage to be a family

business and to have family-owned
companies as our customers. You
personally know the family and the
successors whether they actually come
into the business or not and that helps.
You see the strengths and weaknesses
of the owners, says Spngler, who is the
sixth generation of his family to work for
the bank, founded in 1828. The fact that
the management and ownership does not
change every ve years makes for stability
and means that the companys values are
less likely to change overnight.

In both Northern and Southern Europe, family rms say

that businesses that have good relationships with their
banks can still get nance from them. That said, some
rms are looking to alternative sources of nance.
There are some deals being done with private equity,
says Guido Corbetta. For example, in France and in
Italy, new public-private funds of private equity are
taking a minority stake in a lot of family companies.
Other families can also help with funding. There have
been cases of European families that want to move into

The personal involvement also means

that people can make decisions without
being pushed and pulled by share prices.
We talk on a personal basis and dont get
involved with the craziness of the market,
Spngler says. I like the markets and
understand that they play an important
role, and a necessary one, if a company
is beyond a certain size. But they overdo
it in one direction or another and force
you into running a company in a certain
way. Especially in a time like this, it is an
advantage to be a family-owned company.

China linking up with other families, either European

or Chinese, to do so, Corbetta says. Flotation is also a
real option. Often people in family businesses are very
anti-IPO, but otation has worked for Prada, Ferragamo
and Brunello Cucinelli to give three Italian examples.
I think that there can be bene ts. For example, you can
get some money in, and you become more attractive
to managers because you have to be more disciplined
and pragmatic as a business.

Built to last Family businesses lead the way to sustainable growth | 13

Innovation
Family firms are not standing still
When asked how they intended to use new nance,
innovation emerged as a clear focus. Almost half of
the surveyed rms said that they expected to focus
more on innovation in the coming years. The gure
rose to 6 in 10 for rms with over 1,000 employees.

Uses for additional finance

Developing innovation,
new products, new technology
Support investment
into new markets
Mergers and acquisitionrelated investment
Support growth in
current market
Mixed investments
New staff
Relocation
0

10%

20%

30%

Jouni Salo

Youth and innovation

Hollming, a Finnish conglomerate in waste management renewable energy,

industrial services and shipping
Innovation is a common aspiration, but how can it
be made a reality? One way is to listen to the next
generation. ouni Salos family is an owner of the
Hollming shipping business. He brings knowledge
from his day job as a project manager for a shipping
software company called NAPA to the family rm. He
encouraged the family rm to integrate its onboard
and shore-based computer systems. This had several
upsides, including allowing onboard staff access to
social media, something which was extremely popular.
Staff retention rates have since gone up.
Youngsters, says Salo, are good at bringing modern
know-how into the business. We are more into new
technological stuff, smartphones, LinkedIn, Facebook,

14 | Built to last Family businesses lead the way to sustainable growth

and we can take this mindset and apply it to our family

companies. Usually, family companies are in elds that
are less high-tech than perhaps the sorts of businesses
where young professionals are working at the start of
their careers.
The technological edge is coming more into shipping,
due to the rising price of fuel. Everybody needs to do
something to survive and technology is going to boost
ef ciency in any eld of business, says Salo. In other
business, he says, tech-savvy next generations could
help with production management, modularization or
warehouse-to-customer applications. Its about taking
the web-based global mindset and using it in local
businesses, he says.

40%

50%

Focus on

Innovation
Jean Mane
President of MANE, the French flavor and fragrance manufacturer, founded in 1871
MANE has fty R&D of ces around the
world and spends 9% of its revenue on them.
We are constantly working in chemistry
and biochemistry to create new building
blocks, new fragrancing substances and new
avoring substances, says Mane.
MANE also produces technological
innovations that help produce fragrances
and avors. These include gelatin microcapsules twenty microns in diameter that
are used in chewing gum or clothes. We
have innovation at the level of the ingredient
and then technological innovations to deliver
the product at the right moment, Mane says.

Innovations are no use, however, if they cant

be used by MANEs factories all over the
world. Mane personally chairs the Innovation
and Technology Transfer Committee, which
ensures that innovations are spread to
where they are needed. An innovation that
stays in the books is worthless, he says. It
needs to be put into the pilot plant, brought
to the attention of clients, adopted and then
produced. We have to be able to industrialize
the innovation.
Being 100% family owned helps create the
innovative culture that is vital to MANE.
Independence means that the business

does not have to take decisions for bankers

or shareholders. We can spend money on
developing R&D and on the things that
will bene t the business, says Mane. And
employees appreciate it. A few years
ago, our chief avorist was courted by a
competitor, but he told me he liked working
for us because he got ve more minutes
in bed in the morning. I asked him what he
meant and he said I dont need to wake
up ve minutes earlier, rush to the mailbox
and go through the newspaper to nd out
if you have sold us the day before. We have
3,300 employees, so our family ownership
buys us 3,300 times ve minutes every day.

Quick to react

Guido Corbetta
and Anne Kristine Reimann
Guido Corbetta talks about the importance of agility.
Family businesses can decide in a few days to invest
money in the company, or they can decide to take
a reduction in their salaries, or decide that they are
not going to pay dividends for the next three years.
Obviously, these are things that you cannot so easily
do in a public company. Family businesses can also
react more quickly to dif cult situations. Anne Kirstine
Riemann, the second-generation chairman of Riemann,

a manufacturer of antiperspirants and sunblock,

says Family businesses often have much shorter
chains of command. This equips them to go faster. If
my CEO wants to make a speci c investment that is
not in the budget, he doesnt have to go to committees
and boards. He has to make me a business case and ask
me what I think and he can have a yes or no answer
in 15 minutes.

Built to last Family businesses lead the way to sustainable growth | 15

Succession intentions
As mentioned earlier in the report, a long-term perspective is one
feature of family rms that separates them from other businesses,
and the most crucial element that ensures the viability of the longterm perspective is succession the aspiration that the business will
continue to be run by future generations. This dynastic aspiration
is the one element that sets family businesses aside from all other
businesses and makes them resilient. In our survey, two-thirds
of all businesses questioned said that they planned to keep the
control of the business in the family. Three-quarters of those in
rapid-growth economies planned to do the same.
Generational change in family businesses is a highly complex
process and often constitutes a balancing act for everyone
involved family, company and owner. Resolving issues around
succession is both emotionally led as well as practical alongside
scal, legal and nancial questions are the very personal aims
and values of the family members and, in particular, the views and
ambitions of the next generation of family business owners.
Succession intention by firm generation and by advanced
vs. rapid-growth economies

The graph below shows a very high succession intention in family

businesses, but the reality is that only 30% of rms survive
through the second generation, 13% survive the third generation,
and only 3% survive beyond that.2 Furthermore, earlier this year
Ernst & Young, in collaboration with University of St. Gallen,
reported some extremely worrying results of a global survey of
students with a family business background only 22.7% express
an intention to succeed in the family business.3
Low succession intentions of the young generation are an
alarming signal for family rms across the world, which is
aggravated by the fact that many family rms face successions
in the years to come, explains Peter Englisch, Global Leader
of the Ernst & Young Family Business Center of Excellence. Of
course, there may also be capable successors outside the family.
However, companies that are particularly successful in the long
term are those where numerous generations are at least involved
in its development. An unsolved succession issue can compromise
rms performance signi cantly, says Englisch. When corporate
succession is not solved convincingly, companies may face
turbulence and, in the worst case, even sale or closure.
Comparing the two surveys, there seems to be a clear mismatch
between the succession intentions of family businesses themselves
and those of the next generation, which opens an interesting debate.

Generation 1 and 2
companies

Generation 3 and 4
companies
All

Respondents
headquartered
in advanced economies
Respondents
headquartered in
emerging economies
0

20%
Yes

40%

60%

80%

No
2 Ward ., Keeping the family business healthy, San Francisco, CA ossey-Bass. 1987
3 ellweger, T., Sieger. P, Englisch P., Coming home or breaking free? Career choice intentions of
the next generation in family businesses, Ernst & Young/University of St. Gallen, 2012

16 | Built to last Family businesses lead the way to sustainable growth

Built to last Family businesses lead the way to sustainable growth | 17

Talent

18 | Built to last Family businesses lead the way to sustainable growth

Managing people is at the heart

of family businesses success
More than most other businesses, family rms think about how to manage complex
corporate governance challenges and ensure that they have the right people in the
right job. Talent and its effective management are always key drivers of business
performance. One reason why family rms have performed well in recent times is
that they have a competitive advantage in attracting and retaining talent. On the
other hand, this is a particular challenge for a family business because it is inextricably
linked to that of succession, both from within and outside the family.

The days when genetics

were seen as a qualification
for an executive job are
long gone
Peter Englisch, Global Leader
Ernst & Young Family Business Center of Excellence

Built to last Family businesses lead the way to sustainable growth | 19

One of the differences between the best- and worst-performing

businesses surveyed was their attitude to talent management.
Some 23% of best performers thought talent management
important to their future success, compared with to 16% of the
worst-performing businesses who didnt. Modern family businesses
also know that non-family managers are essential to their ongoing
success. The days when genetics were seen as a quali cation for
an executive job are long gone. Family rms know that they need to
absorb the best practices from the corporate world. One in six rms
said that bringing non-family members into key positions had been
a motivator of governance change over the past three years.

Factors motivating change in governance

New family members
coming into the company
No changes made
New or different
skills required
Non-family members
coming into signi cant
management positions
Family members leaving
the company
Globalization or
regional expansion
Financial constraints
Set up of family of ce
Key non-family personnel
leaving the company
0

More than one response was allowed

20 | Built to last Family businesses lead the way to sustainable growth

10%

20%

30%

Family rms are appealing more to top managers

The open-mindedness and ease with which families can hire nonfamily executives is key to their future success. When asked how
hard they had found it to hire non-family executives in the year to
une 2012, a quarter of rms said that they had found conditions
no different from usual. However, it is more dif cult for rms in
the rst and second generation to attract non-family executives

compared with those in the third generation and above, in

which at least two successions have taken place and the family
business culture is rmly engrained. In addition, the controlling
egos often associated with the founders generations are much
diluted and therefore less of a threat for non-family executive
in terms of control and executive autonomy.

Ease of attracting non-family executives

Attracting non-family executives by generation

Gen 4 or later

Very dif cult

Gen 3

Relatively dif cult

Gen 2

No different
from to usual

Gen 1

Relatively easy
0

Very easy

Family
appeal

10%

20%

30%

40%

Philip Aminoff says that, in the Nordic countries,

family businesses are increasingly appealing.
Over the past ten years, it has become easier to
hire non-family people to chief executive and
senior management positions in family
businesses, he says. People are sick and tired
of the quarterly panic and reporting idiocy,

20%

40%

60%

Relatively dif cult

Very dif cult

No different from to usual

Relatively easy

Very easy

Not applicable

80%

100%

where you cant do any business because you

have to report to compliance all the time. Lots of
people just dont want to be in listed companies
any more. The focus of family businesses on
robustness and resilience so long derided by
the advocates of ever-faster growth now
appeals to the best managers.

Built to last Family businesses lead the way to sustainable growth | 21

As it has become clear over the past few years that bonuses and
high pay do not guarantee good results, incentives have become
a hot topic. When asked what incentives were used to bind nonfamily executives to the rm, respondents very clearly prefer to
use non-monetary incentives, namely offering executives greater
levels of involvement in the decision-making process. Half of the
respondents chose this option almost twice as many as the next
most popular answer, which was deferred compensation packages.

Notably, the highest-performing companies were almost twice

as likely as low-performing ones to give non-family executives a
greater level of involvement. The best performers also made more
use of deferred remuneration, while low-performing businesses
were far more likely than high-performing ones to offer executives
rates of remuneration above industry standards.

Factors binding non-family executives

Binding non-family executives: high-performing vs. low-performing

family businesses

Greater levels of involvement

and sharing decision-making

Global workforce and

international assignment
opportunities
Compensation levels
above industry standards

Deferred compensation
packages
Treat them like
a family member

Non-monetary bene ts

Non-monetary bene ts

Treat them like

a family member

Compensation levels above

industry standards

Deferred compensation
packages
Greater levels of
involvement and sharing
decision-making

Global workforce and

international assignment
opportunities
0

20%

40%

60%

10%
Low performing

More than one response was allowed

22 | Built to last Family businesses lead the way to sustainable growth

20%

30%

High performing

40%

50%

Focus on

Keeping it in the family?

Jens Fiege
Member of the executive board, Fiege Logistics, a fifth-generation German contract logistics firm
These days, all family businesses are
aware of the value of non-family executives.
But how do rms manage the needs of
both family and non-family employees?
One example of a new generation of family
members successfully entering the rm
is the Fiege logistics company, based in
Germany. ens and Felix Fiege, cousins
in their 30s, recently became the fth
generation to work at the family rm and
are tipped to one day become co-CEOs.

Incentives

So how is succession best handled? It is

always good to get external experience
before joining the company, because you
learn things that you might not learn in the

family company, says Fiege. Secondly,

because in the family company you gain
important positions at a younger age, it is
important that the non-family managers
can respect you for what you have done
before, not the heritage you have.
Structure is vital. Its also important that
roles and parameters are transparent and
clear to everybody, Fiege says. Those
sorts of rules have to be discussed before
you go into the business. If you look at
cases when things dont work out, its
because there is a frustration on one of the
two sides or because there is a lack of trust,
because there is confusion about

In terms of binding non-family talent to the business

and incentivizing loyalty, even the most experienced
families are always looking for new strategies. When
it comes to incentive plans, our own family has worked
with phantom shares, with real preference shares
and with long-term incentive plans of different sorts.
But I would say that the jury is still out on which work
the best, says Philip Aminoff. However, he does say
they will never have the same mindset as the family
owner, who will think in terms of decades. A non-family
manager thinks in a three-to- ve year timescale and
incentives should take this into account.

what was agreed on. Guidelines and

transparency are key.
The interaction between family and
non-family members has to be handled
properly and recruiting the right nonfamily executives is extremely important.
How do you do that? Fiege says One
important aspect is to make sure that they
are working as if they were working in any
other business. You cant have a family that
is working as patriarchs, and takes all the
decisions away from non-family executives.
You have to work with them in partnership.
It is very important that people feel
motivated and empowered, not frustrated.

But it is not just about the money. Its also important

that both the family members and non-family
executives are very clear about their respective roles
and responsibilities. In the Nordic family business
culture at least, there are a lot of checks and balances
in the companies, to make sure that families respect
non-family managers. While this may appeal to nonfamily managers, clarity about decision-making can
also be positive. Everybody knows that the family
member has the nal word, Aminoff says. In a
fragmented holding structure, you just dont have that.

Built to last Family businesses lead the way to sustainable growth | 23

Sustainability

24 | Built to last Family businesses lead the way to sustainable growth

Sustainability is a core principle

for family businesses
An inevitable part of the long-termist outlook that is typical of family businesses is a focus
on sustainability, which manifests itself as environmental, economic and social responsibility.
Notably, a third of the businesses surveyed said that they had introduced green technologies
in the past three years. Such investments are unlikely to pay off in the short term, especially
given that the cost of such green technologies is often high. Over a fth of the businesses
surveyed also said that they had recently introduced or revised their corporate value
statement, demonstrating the central importance of values to family businesses. Almost the
same proportion had reviewed their supply chain for sustainability and humane practices,
while a slightly lower proportion said that they had reduced their carbon footprint.

Steps toward the sustainability process

Introduced green technologies (cleantech)

32.9

Introduced new and revised corporate value statement

of your company

22.5

Reviewed your supply chain for sustainability

and humane practices

21.8

Reduced your global footprint against climate change issues

21.1

Purchased sustainable raw goods from local resources

13.6

None

27.1

In terms of the overall focus of their sustainability strategy, almost 40% of rms said
this was orientated around environmental issues, followed by social issues and governancerelated issues.

Built to last Family businesses lead the way to sustainable growth | 25

Philanthropy
Traditionally, business-owning families have been involved in
philanthropy, and almost half the respondents said that they
engage in philanthropy or impact investing. Interestingly, it
was slightly more likely for rms owned by the second or third
generation to have such activities, with around a half compared
with just 4 in 10 of those in the fourth generation or more. Family
businesses in rapid-growth economies were also far more likely
to be involved in philanthropy or impact investing, with two-thirds
compared with just under two- fths in advanced economies. This
could re ect the fact that businesses in rapid-growth countries
are more likely to be rst generation entrepreneurs, who often
have a greater interest in giving rather than conserving wealth.
Or perhaps it could re ect that times are hard for family rms
in advanced economies and they have had to cut back on their
good work.
The most popular area for giving was education, with over a
quarter of families saying that this was now their focus twice as
many as the second most popular area, poverty alleviation.
Targets of philanthropic investing
Education
Poverty
alleviation
Health and
medicine
Arts and culture
Biodiversity
and wildlife
Women's rights
and inclusion
Not applicable
0

5%

10%

15%

20%

25%

26 | Built to last Family businesses lead the way to sustainable growth

30%

Built to last Family businesses lead the way to sustainable growth | 27

Focus on

Sustainability
Andrew Wates
Retired Chairman of the Wates Group, a British construction firm
now in its fourth generation, and Vice-Chairman of FBN-I
Sustainability is a complex term with
several different aspects. For a start, it
is about succession, which is an almost
continuous process for a family rm
says Andrew Wates, who now leads
Wates Giving, the corporate foundation
of the Wates Group. Wates has recently
transferred the business to the fourth
generation which already has a program for
the fth generation, the eldest of whom
is just 18.
Families instinctively focus on
intergenerational transition, says Wates.
Contemplating what shape of business you
want to pass on comes quite naturally. This
makes you think about risk, competencies
and markets.
As a builder, the environmental side of
sustainability also looms large for Wates.
We are all beginning to seek to understand
the global environmental consequences
of our actions today, says Wates. Ten
to fteen years ago, such matters would
not have been on the agenda. What is
interesting is that the next generation are
asking these questions and are already
thinking of their childrens future.

Family businesses, perhaps, have an

advantage when it comes to sustainability.
All companies with a strong value set are
beginning to address the issue, but the
difference with family businesses is that the
next ownership generation are in the same
room, points out Wates.
Wates stresses that sustainability is not
an added extra, but an integral part of
how family rms do business. There are
practical aspects of long-termism around
nancial gearing, risk analysis and people
and team development that rise to the
top of the agenda when you break away
from chasing short-term results, he says.
Ultimately, to build a sustainable business,
all these matters need to be prioritized.
I would add that long-term customer
relationships are something for which every
good company strives. These are often
achieved by having strong core values
and gaining an understanding of your
customers needs over time sometimes
decades. There can be a natural af nity
with like minded customers.

28 | Built to last Family businesses lead the way to sustainable growth

Mario Preve ...

Putting people first

For some, sustainability is about the

environment. But for many family
businesses, it is also about people. That
is a part of the mentality of the family
business. You think about it automatically,
says Mario Preve of Riso Gallo. Its really
about your everyday behavior, the way
you look after people. We want to make
sure that our employees are happy and we
have families that have worked for us for
generations too my secretary is the third
generation to work for Riso Gallo.

People know that if they need something

then we will be there. For example, if
they need a doctor, we will give them a
recommendation. They know they can come
to us for that. People are more productive
if they are happy in the work that they are
doing. Also the salaries we pay are on the
higher side, so the people who work for us
arent looking for other work.

... and Anne Kirstine Riemann

Anne Kirstine Riemann echoes the
sentiment. My father was kind and took
care of people, including his staff, she
says. We do things for the staff that not
all companies would do. For example,
on lifestyle issues, we help people with
therapy or even to go to an addiction
center. We may help people nd a lawyer
or doctor or the like.

Looking after people is the right thing to

do, says Riemann. But on a practical level,
it also keeps the business running well.
If someone has a problem, they become
preoccupied with it and at work their
head is not in the game. Happy people
are productive people. Sustainability has
many faces.

Built to last Family businesses lead the way to sustainable growth | 29

Summary and conclusions

Do the right things
and the figures will follow
Do the right things and the gures will
follow is the central message of this report.
It also highlights how the link between
ownership and business and between
current success and long-term perspective
creates unique opportunities.
Family rms focus on their customers and
core competencies in order to constantly
improve the quality of their product or
service and maintain their competiveness.
So they look more to long-term value
creation rather than short-term pro t
maximization.
Attracting and retaining the best talent is
also a top priority for family rms as with
any other business. But family rms seem
to have a clear advantage high- ying
managers are nding the open-mindedness
and long-term view of family rms
increasingly attractive. Nevertheless, our
survey suggests that it remains a constant
challenge to nd and manage experienced
external managers who are quali ed to run
the business and who also understand the
familys goals and objectives.

Another key nding is that good

governance is also essential to the
establishment of trust and reliability
especially during and after a generational
transition. It is no wonder that most
respondents indicated that such a transition
is the top factor for motivating a change
in governance. Therefore, each process
of succession should be started early and
communicated clearly. Transition planning
should become a permanent process in
more mature family businesses.
Another important factor to consider is that
strong governance and a good competitive
position, combined with customer and
employee loyalty, results in a better
nancial rating. This opens up access to
more nance facilities. Even if the preferred
nancing options are retained earnings,
bank loans and family funding, the ability
to access the capital market becomes more
important in the future.

30 | Built to last Family businesses lead the way to sustainable growth

For successful family businesses, spending

is targeted on innovation and expansion,
rather than satisfying shareholder
expectations. This creates long-term
opportunities. For example, this approach
offers the next generation the opportunity
to introduce new technologies or change
the business model.
These key ndings reinforce our initial
statement on how important family
businesses are to the worlds economy and
how their business model and responsible
practices ought to be emulated.
Family businesses have a competitive
advantage that delivers sustainable growth
and prosperity. But it is up to each family
to turn this potential advantage into real
success by doing the right things.

Appendix
1

Size

All demographic charts

Generation

1,000+

Gen 4 or later

250 to 999

Gen 3

50 to 249

Gen 2

1 to 49

Gen 1
0

20%

40%

60%

Geographical breakdown

10%

10%

20%

30%

40%

30%

40%

Sectors

Western Europe

Heavy Industries

South America

Materials

Asia

Consumer
products
Energy

Eastern Europe
FMCG
North America

Financial Services

Africa

Health care
0

20%

40%

60%

80%

IT
Utilities
Telecommunications

20%

Listed/non-listed company
No
Yes
0

20%

40%

60%

80%

100%

Built to last Family businesses lead the way to sustainable growth | 31

Our commitment
to family business
For more information about the Family Business Center of Excellence,
please visit www.ey.com/familybusiness

The growth DNA

of family business
Ernst & Young understands what keeps you busy during the day and awake
at night. We appreciate the dif culties you face trying to balance the
concerns of the family and the intricacies of your business. We know what
makes a family business successful.
Our ongoing in-depth research and work with companies similar to yours
provides us with the basis to give you advice based on the leading practices
of other successful family businesses around the world.
The Ernst & Young approach is anchored in our growth DNA of family
businesses model. Our bespoke services support both the personal and
company performance agenda of family business leaders and aim to help
you succeed for generations.
We know that an aligned family and business strategy secures both your
familys and your companys values on a long-term and sustainable basis it
also forms the foundation for the planning of ownership and management
succession.
The practical assistance and professional advice we offer your business can
help you unlock your companys potential to enhance your performance.
The highly personalized services we offer will enable you and your family to
plan successfully for the future.
This model re ects our approach and focus on the main areas of concern
for family businesses those where we believe we can be most useful.

Managing capital capital is the lifeblood of a growing company, and many

family businesses will be looking ahead and considering new investments.
If you are opening new subsidiaries, taking on new staff, planning an
acquisition, upgrading your technology or developing new products, you may
need to consider re nancing or restructuring or to explore private or public
capital injections.
Sustaining growth and pro tability to sustain growth and continue to drive
pro tability, you may be looking to explore new markets and broaden your
product or service mix to exploit opportunities, achieve optimum returns and
mitigate risk. This may involve pioneering innovative entry strategies, with
any acquisitions seamlessly integrated into your business and realizing
back-of ce ef ciencies that will improve top and bottom line.
Managing and retaining talent a company is only as good as its employees
this principle applies even more in our globalized world. Increased costconsciousness, market volatility, international assignments, legal
requirements, tax complexities and the retention of top performers, present a
whole host of challenges to family businesses.
Next generation planning generational change in family businesses is a
highly complex process and often constitutes a real balancing act for everyone
involved family, company and owner. The issues to resolve always have an
emotional component in addition to practical, objective and technical aspects.
Alongside scal, legal and nancial questions, the very personal aims and
values of the entrepreneur and family members will always be a major
consideration.

Ernst & Young cares about your family and your family business
Each family business is unique. Yet successful family businesses
have much in common. Taking advantage of that knowledge and
understanding the factors of success underpins what we call the
growth DNA of family business.

We know what makes a family business successful. We can

help you manage the delicate balance between sustaining
growth and innovation, while managing risk and maintaining
personal wealth.

As an organization focused on entrepreneurship that has a dynastic

will to build a stronger business, generation after generation,
Ernst & Young understands your issues. Our experienced professionals can help you deal successfully with the challenges of todays
marketplace and assist you and your family in planning for the future.

Our advice is independent and practical. We have sector and

subject matter professionals that understand industry-speci c
issues and can help you implement leading practices and bene t
from them. And our highly globally integrated team can support
you wherever you do business.

Balancing risk the need to be able to react quickly to market developments

makes additional demands of family businesses exibility and adaptability to
risk. This can be achieved through forward-looking risk management
combined with an effective control system that allows you to both keep your
business out of trouble and improve performance simultaneously.

Future
management
structure

Effective tax
management

Next
generation
planning

Managing
capital

Family

Business
Balancing
risk

Culture and
responsibility

Sustaining
growth and
pro tability

Managing and
retaining talent

Effective tax management tax has a strong impact on a family

companys investment decisions, nancing and liquidity situations
affecting competitiveness and growth. It is therefore vital to ensure
that you understand the tax implications of the business and
personal wealth decisions you make.

Future management structure family businesses revolve tightly around

the current owner yet arranging a successor within the family may not
always be possible. For instance, your descendants could lack the desire and
the willingness to assume the entrepreneurial risk, or they may not have the
necessary quali cations and experience to manage the company.
Contingency management, appointing non-family executives and family
charters all contribute to ensuring your business succeeds for generations.
Culture and responsibility customers and employees alike are attracted by
a long-standing family business commitment to sustainability, whether it is
an uncompromising commitment to use local products, to source from
renewable resources, or to avoid using cheap labor. You may need to
consider how best to integrate ethics and values into your performance
strategy, and align it with the achievement of company goals with respect to
growth, market positioning and optimizing internal processes such as
nancial and non- nancial stakeholder reporting.

Ernst & Young

Assurance | Tax | Transactions | Advisory
About Ernst & Young
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