Photography by Shannon Drawe
In a Texas A&M study of the S&P 500, family-owned businesses beat other firms in both revenue and employment growth. A recently published study by the Harvard Business Review found family firms are more innovative than other companies even though their R&D budgets are smaller. Some of the reasons are because family businesses often have a longer-term view and are more stable, inspire more trust, and benefit from a greater commitment by their employees.
For a successful family business crossing multiple generations, communication, conflict management and succession planning are some of the keys to success. Some of the challenges to success include nepotism, difficulty separating personal feelings from business, multiple generations and an intense pressure to succeed.
An Enlightened Speakers’ Series event in Houston delved into these issues. The two speakers were Sharon Birkman, the CEO of the family-owned behavioral and occupational assessment company, Birkman International, and Cory Jackson, the CEO of CTG — a specialty manufacturer of gaskets and seals for the oil & gas and semiconductor industries. The event was moderated by Robert Smith, the Director of Investments for the Friedkin Family Office. Some of the family’s holdings include Gulf States Toyota, Westside and Northside Lexus and U.S. Auto Logistics.
Smith kicked off the discussion with a question: What values made the family successful?
Birkman said her father was the first in the family to break the tradition of becoming a Lutheran minister. After World War II, he went into social psychology. “For him, it was all about helping people and his mission was primary,” Birkman said. “The financial growth we have is designed so that we help more people rather than making a family fortune.”
For Jackson, it’s unselfishness. “In my family, one of the things we’ve talked about is the unselfish nature of the transitions within our family — from my grandfather to my father to me,” he said. “We treat our customers much like we treat members of our family. If you become selfish, you sacrifice a great deal of that good that your organization has the potential to do, because the focus is on you.”
Trust is another important value, Jackson said. He’s seen some family businesses do well and others do poorly. “One of the major characteristics of the families that do well are family members that are trusted and have a high level of character,” he said.
Smith noted the difference between family dynamics and business dynamics. A family is concerned about loved ones, fairness and equality, relationships and blood being thicker than water. But a business must be successful. “How do you bridge that gap between a meritocracy and being more socialistic?” Smith asked.
“You’ve got the challenge,” Jackson said. He told of a family business conference he attended, where a speaker asked how many in the audience were communists. No hands went up. But, said the speaker, we’re all communists in a family. Each receives according to their needs, and fairness across generations is important. “But businesses cannot be run that way,” Jackson said. “Businesses have to run as meritocracies. You are rewarded based on your merit.”
Birkman said that emotional versus meritocracy dynamic can be very touchy. “The decision my parents made financially, in terms of owning the business, was that it would be communistic,” she said. “In terms of running the business, it would be a meritocracy.” Now her daughter, who is being groomed for a leadership role in the company, sometimes complains that she is being held to a higher standard, and wonders if it’s “reverse nepotism.”
Another challenge can be merging family values with the governance structure of the business. Smith asked if these family businesses have boards of directors, and if so, are they independent, or all family members?
Birkman said her board is independent. “When I started there was a small board that met now and again and they were
primarily good friends of my dad, the founder,” she said. “They were not functioning as a strong board of directors. Now, that’s changed and I think it’s been critical to keeping the business on track.”
Jackson relies on a management team, rather than a board. He and his father bought out his grandfather, and now Jackson holds all the equity in the company, although his father still has some voting rights and influence. However, the company has a management team that includes non-family members. “That is a big part of our success,” Jackson said. “That management team helps us steer the business in the direction it needs to go to function well.”
Then there’s estate planning — not necessarily from the wealth protection angle, but from the human angle. How did the businesses work to include younger generations in the succession plan?
Birkman said her family didn’t do much planning. She hadn’t planned to become involved in the business, but found herself thrust into that role. “When my parents got to the point where they were 78 and 80 and there was still no succession plan in place, I decided it was time to learn about the business and help out,” she said. “I am the poster child for having two careers in one lifetime.”
Jackson’s situation was similar. His grandfather started the gasket business in 1947, and transitioned out of the business 12 years ago. For him, moving into a management position was like someone coming in from the outside. “I went through a difficult transition with people in the organization who had been in the organization for a long time,” he said. “We had been in business over 20 years at that point. There were some people who were not going to go along for the ride.”
Birkman said she had to learn the business quickly and got help wherever she could find it, including spending time in the Owner Present Management program at Harvard — a three-year MBA program. “One of the most important lessons was how difficult it is to get from second to third generation,” she said. Now, she has daughters in their 20s and 30s who are preparing to move into the company’s management. Birkman said the environment for them is more receptive.
One reason for that is technology, Jackson added. Even though his company is technical one —“a rugged business in a rugged environment,” as he put it — technology makes it easier for his daughters to work into it. “Leadership is the big key,” he said. “You learn over time how to lead.”
Birkman agreed. “When you’re at the top dealing with strategy and leadership issues, that transcends gender,” she said.
Smith told of a family-owned company he worked with that was not growing. “One thing became clear,” he said — “a fear of sharing the brutal truth with the owner. Is there something you do deliberately to enable people to feel comfortable to tell you the truth, as the owner?”
“As the leader, people learn from your behavior,” Jackson said. “The negative behavior I had was being unwilling to share all the brutal financial truth of the business to my team. I had to get over that fear myself.”
Both Birkman and Jackson keep their companies’ equity in the family. Birkman said giving equity to a non-family member can add problems. “If you do have non-family members with equity positions, you have ramped up the complexity at least 1,000 times,” she said. “And, if it doesn’t end well, you’re stuck.” Jackson said some people might think they want an equity position, but what they really want is compensation. He said the compensation should be transparent, and tied to the performance of the company.
Finally, both agreed that it’s important to stay disciplined about mixing company business and family business. Jackson said he and his brother are naturally competitive, but can’t let that affect the way they run the business. “One thing we have to be mindful of is letting every family meal become a business conversation,” Birkman said. “You can’t let it creep in and take over.”
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