Sharechat Logo

Family Ties

By Rebecca Macfie

Saturday 1st June 2002

Text too small?
Family businesses are a powerful economic force, but, with succession planning, governance issues and emotional baggage to grapple with, their lot is not an easy one

Robert Stewart could have easily joined the ranks of cashed-up former industrialists when the time came for him to retire. For over 35 years he'd worked at growing his company Skope Industries from a small heater manufacturer to a world-class designer and producer of commercial refrigerators. It would have undoubtedly been snapped up for a tidy sum, had he decided to flog it off. Instead, 61-year-old Stewart continues to share ownership with his wife Barbara and his family trust, and he's installed his oldest son, 33-year-old Guy, as the new chief executive.

Dynastic or otherwise, family companies are a crucial part of the New Zealand economy. For proof, you only need to run an eye down the Sunday Star Times' Top 100 Rich and Powerful list. New Zealand's largest real estate company, Barfoot & Thompson, is still controlled by the Barfoot and Thompson families, now into their third generations. The Nightingale family (Resene Paints) and the Turner family (Sleepyhead beds) are also into their third generations. Name a well-known New Zealand brand (Smith & Caughey, Hopper Developments, Talley fisheries, Bayley real estate, Yarrows the Bakers and Douglas Pharmaceuticals, to list just a few) and there's a good chance there's a family behind it. And that's not including the substantial family farming business.

US research suggests the family-owned sector accounts for 60% of GDP and 50% of employment.

That's not to say keeping family businesses going is easy - far from it. In some ways, running a family business is harder than running any other sort. There are issues of succession, complicated interrelated shareholding, warring generations and plain emotion muddying the waters.

Skope's Stewart senior is the oldest son of Sir Robertson Stewart, one of Canterbury's most successful industrialists, who controlled PDL Industries until last year, when it was sold to French multi-national Schneider Electric. "My father was the least patriarchal person you could imagine. He recognised at an early stage that he and I were very similar and there wasn't room for the two of us," says Stewart.

So Stewart left PDL, bought Skope (with the help of a loan from his father) and spent his life building it into a thriving business, pulling in $50 million in foreign exchange each year and employing 300. The business is run with all the corporate disciplines of a public company: Guy may be the owners' son, but he's still answerable to a board that includes two independent directors and is chaired by Stewart.

Stewart admits it's not easy to let go of day-to-day management of the business. And Guy confesses that emotion sometimes gets in the way. "He's my father - when you have a fight at home it goes to work, and when you have a fight at work it goes home. We actively argue and debate and that's one of our family traits. But I have absolutely no ego about running this company. He's been in business longer than I've been alive, so I'd be foolish in the extreme not to listen to any advice he wanted to give me."

The decision to appoint Guy chief executive is clearly tinged with hope that the company will remain in family hands long-term, but his tenure in the top job is still contingent on his performance over the next couple of years. Assuming he is successful, Stewart then has to grapple with the difficult question of ownership succession. He must find a model that is both fair to his two children who are not employed in company management, but that also recognises the need for the chief executive to have a strong personal stake in the business.

These are difficult, sensitive issues. "The reason so many founders of family-owned businesses sell their companies is that it's too hard not to," says Stewart. After all, if he'd decided to sell up, he could have simply divvied up the cash and taken Barbara on a world cruise.

Indeed, a 1998 survey of New Zealand privately and family-owned businesses by Peter Evans, formerly with Deloitte Touche Tohmatsu and now with FR Partners, showed over half the respondents planned to sell their business rather than pass it on to the next generation.

Successful succession

The survival rate of family businesses is poor. US research suggests up to 70% of family-owned businesses are either liquidated or sold after their founders retire. One cause is thought to be a failure by company founders to implement succession plans. Evans' research suggests New Zealand entrepreneurs are equally remiss. According to his survey, only 17.3% had a written succession plan. Recent research by the Independent Business Council tends to confirm this picture, showing 75% of small business owners have no strategy in place for exiting the business. Of those who do, 75% plan to sell out.

Selling up is all very well, but according to Grant Jarrold, senior manager with Deloittes in Christchurch, owners who fail to plan their exit well in advance often wind up short-changing themselves. "Often when a family has decided it wants out, the business isn't in the right shape to get the best return. Planning is crucial to the exit, and you may need to think five, ten or more years ahead."

Stephen Mockett and Don Jaine of Auckland executive search company Swann International have developed a succession model for family-owned businesses aimed at resolving this dilemma. Swann recently worked with one company whose founder was 51 and wanted to be in a position to semi-retire by 59 or 60. An outside chief executive was signed up, with responsibility to meet certain targets. Provided they are met, he will be offered options to buy 20–30% of the business. Mockett says the chief executive usually doesn't have the cash to buy the shares in cases like these, so the money is advanced at commercial interest rates by the founder and repaid through dividends.

Mockett reckons the biggest problem faced by family businesses is that their founders didn't have a clear philosophy about the company's purpose: is the goal to create a family dynasty, or is it simply to make money? Either way, the long-term succession strategy needs to match the family's ambitions for the company.

While some company founders dream of keeping the family hand on the tiller in the grand dynastic tradition, Mockett reckons the reality is that kids often lack the drive or ability to pick up where mum and dad left off.

New Zealand's doyen of socially responsible business, Dick Hubbard, whose company Hubbard Foods sold $28 million of breakfast cereal last year, isn't counting on his two sons, both overseas, to take over when he retires. But he's acutely conscious of the need to develop a succession plan for the company. Like many, he sees the establishment of strong company governance as a crucial step in the development of a long-term survival plan for the business.

Last year he handed ultimate control of the business to a board of directors, in which he and his wife Diana have only a third of the voting power. The board is chaired by an independent director, Paul Brosnahan (business consultant and professional director), and includes David Irving (ex-chief executive of Heinz Watties) as well as two company executives.

In the process, Hubbard went from governing director to plain old managing director and chief executive. "I'm expected to perform to their demands like any other chief executive."

Hubbard believes this structure makes him more accountable to the company's various "stakeholders". Having a competent board overseeing the business also means those stakeholders can be assured that if Dick goes under a bus tomorrow, there's a sound governance structure in place to ensure the company lives on.

"I see shareholding as a guardianship thing. We do have the total shareholding, but it's not ours to do whatever we like with at a whim."

In the case of family-owned Christchurch company Gough, Gough and Hamer, the Gough and Hamer families decided 16 years ago that the best way to protect their investment was to move to an entirely hands-off management and governance model. There are no family members employed in the business or on the board of directors. The family's interests are held in trust, and the trustees appoint the board. Chief executive Brian Hogan believes it's an outstandingly successful model for a family-owned business, providing the corporate discipline of a public company while retaining the shareholder stability of a private company.

Other family owned businesses don't find it so easy, or appropriate, to hand over ultimate control to a board of directors.

Peri Drysdale, founder of Snowy Peak, a Christchurch clothing company that's grown 200% in the last three years, has shied away from appointing independent directors to oversee her business. Instead, she taps into a raft of advisors around the world, and retains Christchurch businessman Craig Boyce as permanent chair of her advisory board.

Drysdale says if she'd handed control over to a board of directors it would have been impossible to launch her lifestyle brand Untouched World when she did, smack in the middle of the Asian crisis. "The rag trade is not an easy business. I may have been able to get a board to agree to Untouched World in the end, but it would have taken a huge amount of time and energy, and by that time the opportunity may have been lost."

When she set up the company 20 years ago, she had no dynastic ambitions or preconceived ideas about whether her two children would join the company. As it happens, daughter Emily - just a toddler when Snowy Peak was born - is now a talented young designer who believes passionately in her mother's company and in the Untouched World brand. But Drysdale confesses it's not always easy divorcing emotion from business.

She has told Emily that, as a member of staff who happens to be related to the owner, "Initially she has to work harder and be paid less than others to be seen as deserving. In the future her colleagues will recognise her for what she contributes to the team, rather than as the boss's daughter, and she will earn and be treated as any other member of staff."

Despite the complications, most agree that being family-owned has been a hugely positive factor in the growth of their companies. As Hubbard says, "You don't have to worry about returns to shareholders each year or a fluctuating share price. You can take a much longer term approach to the business."

Family fact file

  • 55% plan to sell rather than pass the business on to the next generation

  • 40.5% plan to pass the business on to the next generation

  • 17.3% have a written succession plan

  • 60% have non-family members on their board of directors

  • 3% have no family members on the board

  • 87.3% have family members in senior management

  • 57.7% have non-family members in senior management

  • 38.2% had sales growth of 20–49% from 1995 and 1997. Average sales growth was 20.3%

Median number of employees: 24

Average age of owner: 50

Source: "A survey of family and private businesses in New Zealand, 1998" by Peter Evans in partial fulfilment of a Master of Business Administration; 500 companies with turnover of over $1 million were surveyed

Protect yourself

Five major hazards for family-owned companies, and how to avoid them

  1. The founder doesn't plan ahead: Whether your ambition is to create a family dynasty or simply a good company you can flick on when you retire, it's essential to think ahead. Succession planning is all about ensuring the company has the right people, ownership structure and governance in place to keep the business healthy long after you've moved into the rest home.

  2. The kids wreck the business: Handing your kids all the top jobs in the company may sound like a nice idea, but what if they haven't got a clue or spend their days sniping at each other? They need more than just a silver spoon to set them up for a life of corporate success. If you definitely want them to take over when you retire, start grooming them early - send them off to gain work experience elsewhere, set them up with a mentor and, as a final check on their competence, make the job contestable.

  3. The founder can't let go (I): You install son/daughter as your successor but you can't help watching over their shoulder and questioning every decision. It's called emotion, and there are no textbook answers. Open communication and clear ground rules are a good start, though.

  4. The founder can't let go (II): You install an independent chief executive as your management successor and appoint yourself board chairman, and after a year you're at war because the new boy wants to take the company in a different direction. Having independent directors on the board should help mediate these conflicts, keep the company on a steady strategic course, and keep corporate and family egos in their place.

  5. Your family dynasty is blown apart by squabbling descendants: So much for your grandpa's legacy - the kids want to claim their inheritance and squander it on fast cars. Holding the company shares in a trust overseen by independent trustees is still the best way to protect the company from the ravages of ungrateful offspring. The new Property (Relationships) Act makes it even more important to protect the company from opportunist rellies and hangers-on. Well, unless you fancy seeing half the shares you gifted to your daughter when she was born disappear into the back pocket of that lout she happened to shack up with for three unfortunate years.

Rebecca Macfie

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

The big sleep
Norgate responds
An extra incentive
Scragged, beaten and bitter
Emerging from the merger
Pigs might fly