Evergreen password of Chinese family business management From BCG

The following is the Evergreen password of Chinese family business management From BCG recommended by recordtrend.com. And this article belongs to the classification: Investment & Economy, Boston Consulting.

Family businesses are crucial to economic development: globally, family businesses account for 30-60% of the seats in large-scale enterprises and contribute 60-70% of the jobs. However, it is not easy for family enterprises to truly achieve “everlasting foundation”: research data from China and Europe and the United States show that only about 30% of family enterprises can inherit two generations, and about 10% can inherit three generations. From the perspective of business management, how can family businesses avoid “not being rich for three generations” and achieve everlasting development?

In terms of enterprise vision, values and strategy, the management wisdom of family enterprises and general private enterprises is similar, and the “industry attribute” is stronger than the “family attribute”. But at the same time, family enterprises face unique challenges in governance and management mechanism: for example, at the ownership level, the ownership structure of family enterprises needs to pay attention to the balance between family control and external investors; At the level of management mode, family enterprises should pay special attention to the balance between control and decentralization, so as to realize the coexistence of “keeping business” and “entrepreneurship”. On the basis of modern corporate governance and management methodology, family enterprises need to build “system engineering” around the inheritance of power.

In order to ensure the smooth inheritance and stable development of enterprises, family enterprises must first do a good job in the distribution of governance power. The governance and control mode determines the relationship between the family and the enterprise, as well as the relationship between the governance institutions in the enterprise. It is an important basis for the stable operation of family enterprises. Family enterprises should also consider how to do a good job in the distribution of management power, and properly deal with the power relationship between the enterprise headquarters and different industries, subsidiaries or business divisions. In the process of inheritance, family enterprises should also clarify who owns these powers, that is, improve the leader forging and generation mechanism, and systematically cultivate family members and professional managers. Finally, the family business should also lead the leaders to make good use of the power they are given, and promote them to contribute value to the family business for a long time.

To sum up, Chinese family enterprises should not only pursue excellence at the enterprise strategy and business level, but also do a good job in the construction of governance and management mechanism, including “governance power distribution”, “management power distribution”, “who owns power” and “how to make good use of power” – these four issues together constitute the four pillars of the long-term foundation of family enterprises.

Pillar 1: Governance and control

01. Establish a stable and reasonable ownership structure

A stable ownership structure is the foundation of a family business, which includes two aspects:

One is to pay attention to the ownership control of the family over the enterprise. For family enterprises, families play a “Polaris” guiding role in guarding enterprise values and grasping the direction of enterprise development. In the daily decision-making of enterprises, properly centralized ownership is conducive to strengthening the strategic concentration of enterprises; In times of crisis, the family’s ownership control over the enterprise is the cornerstone to prevent the enterprise from falling apart. Many Chinese family businesses have the problem of unclear or centralized property rights in the early stage of development. Families can choose to increase the proportion of equity of the family through equity acquisition to strengthen control. When raising funds from outside, the family should also pay special attention to keeping the bottom line of equity ratio, or protect the actual control right through equity structure design (such as a/ B shares, preferred shares, unanimous action agreement, etc.), and protect the family’s control right over the enterprise while sharing income with more investors.

Second, be alert to the risks brought by the decentralization of ownership within the family. With the development of the family, the ownership of the enterprise may be continuously diluted. If unchecked, it may lead to the lack of control of the successor over the enterprise. In order to prevent such risks, the family can regulate the inheritance and transfer of equity, or purchase equity from some family members as needed to ensure a certain degree of equity concentration. In addition, families can also set up family trust funds to ensure that the equity is not divided.

case

The ownership structure management of French Muriel family

Starting from the cotton textile mill in the 19th century, the Muriel family in France has developed into one of the largest retail groups in the world through five generations. At present, the muriye family has nearly 800 family members, of which more than 250 are directly involved in the operation and management of some businesses under the family group. The huge family pedigree puts forward high requirements for the management of ownership structure.

The muriye family stipulates that family members must pass strict training and examination before they can acquire the equity of the family business holding company when they reach the age of 19. In order to ensure the concentration of family ownership, the muriya Family Association (AFM) regularly holds internal equity trading meetings every year. Family members can transfer shares to each other as needed in the traders’ meeting. This not only ensures the family’s control over the enterprise, but also enables the equity to be more concentrated on family members who are interested in the family business, providing an exit channel for those members who have other aspirations, effectively avoiding the risks caused by excessive decentralization of equity.

Source: AFM official website; Desk research; BCG analysis.

02. Clarify the positioning of family in corporate governance

On the basis of clarifying the ownership structure, how should the management right of family enterprises be placed? According to the degree of separation between ownership and management, there are several different governance models in family enterprises.

In China, most families have a strong desire to control the management right of enterprises, and the “family governance model” is the most conventional choice. In this mode, family members serve as the core management, deeply participate in the daily operation of the enterprise, control various decisions of the enterprise, and the ownership and management rights are highly overlapped.

However, if there are many conflicts within the family, or the willingness and ability of the next generation to succeed is weak, the family business may need to consider the “professional governance model”, that is, the family members control the direction of the enterprise through the board of directors, and the core management is mainly held by professional managers, which not only maintain a certain degree of family participation, but also expand the development potential of the enterprise with the help of the ability of managers. This model requires family enterprises to have a perfect talent training mechanism and form a “Pan family group” that works with family members for a long time.

In addition, some family businesses have a weak desire to control the management right of the enterprise, and tend to choose the “family investment mode”, that is, family members do not participate in the daily operation of the enterprise, only retain the identity of shareholders, and corporate governance depends more on external investors, independent directors and regulators.

The governance model of family enterprises is not static, but can be adjusted as needed with the development of enterprises. However, the choice of family business governance mode is not necessarily related to the stage of enterprise development. According to BCG research, in Europe and the United States, the development of family businesses is often accompanied by the decline of family participation, but some developing countries show the opposite trend. Since today’s family businesses in China are generally founded after the reform and opening up, we are still unable to conduct a macro survey spanning a century. However, with a large number of Chinese family businesses facing the key nodes of inheritance, choosing a suitable governance model will become an important topic for many family businesses.

Pillar 2: Group Center

Group center is an important topic that enterprises of different ownership should pay attention to. However, influenced by the traditional business structure and management thinking inertia, Chinese family enterprises are facing more historical burdens and challenges on the central issues of the group.

Looking back on the initial stage of family business, the founding family often focuses on a single main industry based on the accumulation of resources, experience and contacts in specific industries, and strives to gain a firm foothold in the market competition. Under this “single core” business structure, the organizational capacity of family enterprises is naturally rooted in the main industry, while the platform capacity of the group headquarters is often lacking. In recent decades, many Chinese family businesses have changed from a single main industry to diversified business portfolio management; At the same time, family businesses have promoted digital, international and other changes. Whether it is from “single core” to “multi-core”, or the transformation of new and old capabilities under the reform, it puts forward new requirements for the positioning and platform capabilities of the group headquarters.

However, most Chinese family businesses are subject to the inertial thinking of “strong control” and comprehensively manage the daily operation decisions of their businesses. In the past “single core” business stage, the family senior management still had the energy and ability to deal with a large number of management affairs. However, under the “multi-core” business, the management and control of everything not only makes the family senior management feel powerless, but also curbs the vitality of business development and innovation, which is not conducive to the cultivation of talent ability and brings higher risks to intergenerational inheritance. For many Chinese family businesses, appropriate decentralization has become a top priority.

In fact, many Chinese family business executives have realized the importance of “decentralization”, but “decentralization” is by no means easy. In order to avoid the dilemma of “being caught and thrown into chaos”, family enterprises need to “take four steps” to build the group center.

Clarify the role of the group center. The first step in building a group center is to clarify the role of the group headquarters, that is, what value the headquarters plays and what key rights and responsibilities it retains. Most Chinese family businesses used to adopt the headquarters positioning as “comprehensive managers” and adopt “one size fits all” strong control over all industries. Facing the future, family enterprises need to change the role of headquarters to “strategic director”, “functional leader” or “platform supporter” according to the actual business needs.

Optimize the control mode and clarify the boundaries of rights and responsibilities. The headquarters’ positioning and control mode complement each other. In the transition from “operational control” to “strategic control”, family businesses need to systematically sort out the boundaries of rights and responsibilities between the group headquarters and various industries (including research / mining / production / marketing and other business matters, as well as human / financial / legal and other matters), and grasp the balance between power collection and decentralization. In the process of decentralization, family enterprises also need to carefully handle the transfer of power, and follow the principles of gradual progress, visible process, timely feedback and institutionalized process.

Build the professional platform ability of the group center. While properly delegating power, the group center also needs to enhance the platform capacity to provide “guidance” and “empowerment” for various industries. On the one hand, family businesses need to build a “headquarters brain” to provide direction guidance for all business departments in terms of strategic guidance, cadre forging, risk control, etc; On the other hand, family enterprises should also improve the shared service functions (such as finance, human resources, procurement, etc.) in the headquarters to provide sufficient enabling support for the development of various industries.

Deal with the management complexity of diversified businesses. From “single core” business to “multi-core” business, family enterprises should carry out differentiated management on resource allocation, performance assessment and incentive mechanism between different industries to achieve a delicate balance between efficiency and fairness. At the same time, family enterprises also need to think about how to play a synergistic effect between different industries and achieve related diversified competitive advantages.

Pillar 3: leader forging

Intergenerational inheritance is an important and urgent issue for Chinese family enterprises. The forging of succession leaders has become a compulsory course for family enterprises, including two issues: one is “selection”, that is, how to select and produce the next generation of leaders, and the other is “education”, that is, how to cultivate potential leaders.

01. “Selection”: clarify the selection criteria and generation mechanism

The ideal successor of a family business should not only have outstanding ability (low succession risk), but also protect the core values and long-term interests of the enterprise (low agency risk). But in reality, family businesses often face trade-offs: the agency risk of family members’ succession is low, but the succession risk is high; The agency risk of external professional managers is higher, while the succession risk is lower; Endogenous talent cultivation is between the two.

Family enterprises need to evaluate the succession risk and agency risk of different candidate successors, and also evaluate the enterprise’s tolerance to these two risks in combination with the external market and internal mechanism construction, so as to select the most suitable successor.

In order to ensure the smooth transition of intergenerational inheritance, family enterprises also need to introduce “leader generation” into the standardized discussion and decision-making process, and reach a consensus on inheritance issues within the family with the help of family governance institutions. In this series of follow-up articles, we will further explore issues related to family governance institutions.

02. “Education”: double track parallel training of leadership groups

For the leadership group, it is not enough to just know “how to choose”, but more importantly, to ensure “some options”. Whether choosing family members or professional managers to succeed, family businesses need to lay out leadership training in advance, ensure the quality and quantity of potential leaders, and reduce the agency risk or succession risk of successors after taking office.

The leader forging of family members includes two aspects: value shaping and ability training. Influenced by the “family” culture, Chinese family enterprises often pay more attention to the shaping of family members’ values, but the training of professional knowledge and management ability is insufficient. Facing the future, Chinese family enterprises should strive to cultivate the ability of family members from three aspects:

System planning: plan a systematic training system according to each growth stage, including wisdom enlightenment and interest training in childhood, higher education and social practice in youth, and experience forging after officially entering the family business.

Practical training: intergenerational inheritance is not a point in time, but a long journey. Before the formal handover, the family successor needs enough time to grow up and adapt to the new role in practice.

Teach students in accordance with their aptitude: pay attention to the guidance of family members’ interests and teach students in accordance with their aptitude. On the one hand, it does not limit their pursuit of personal interests, on the other hand, it actively guides potential family members to participate in family business affairs.

case

The Rothschild family trained successors through actual combat

The Rothschild family has experienced eight generations of inheritance in the past 200 years, and has been prosperous ever since. The cultivation of the second generation family members by old Rothschild laid a good foundation for the development and growth of the Rothschild family.

When the five brothers of the second generation of the Rothschild family were 30 to 40 years old, the old Rothschild sent them to various parts of Europe to develop branch businesses, so as to improve their professional knowledge and management ability from actual combat. Old Rothschild also asked the five branches to cooperate closely and support each other.

For the Rothschild family, this kind of practical training in the front line of business can help the family members grow rapidly on the one hand, help the family evaluate and screen suitable succession candidates on the other hand, and help the family business expand business boundaries to achieve the effect of killing three birds with one stone.

Source: Neil Ferguson, Rothschild family; Rothschild family database; Desk research; BCG analysis.

At the same time, family enterprises should improve the leader training mechanism of professional managers and cultivate a group of professional managers with excellent ability and high recognition of values. Family businesses can improve their comprehensive management ability by arranging cross regional / cross business / cross functional job rotation. The training method of such professional managers is similar to that of general private enterprises, but we need to pay attention to a series of unique talent management problems of family enterprises, which will be discussed in detail in the subsequent articles of this series.

In the process of training family members and professional managers in parallel, family enterprises should pay attention to the continuity in the vertical dimension, that is, fully recognize that leader training is a long-term return cycle issue, and firmly invest in it with long-term thinking; At the same time, we should also pay attention to the complementarity in the horizontal dimension. We should not only pursue the unity of individual ability and values, but also strive to form the ability complementarity, background complementarity and style complementarity of leaders, so as to prepare for the various challenges that family businesses may face in the future.

Pillar IV: excitation traction

Looking at the long-term development of family businesses, the change of leadership groups is only one “site” in the intergenerational inheritance, and the contribution of leadership groups to the long-term value of family businesses is equally important. With the expansion of business, even in the case of a high degree of family control, the value of professional managers can not be underestimated: they can not only fill the gap in the number of family talents, but also supplement the ability and experience and “outsider perspective” that family members do not have.

However, the long-term dedication of professional managers to family enterprises is not taken for granted. On the material level, professional managers get remuneration and a small amount of shares from family enterprises, and the binding relationship with family enterprise property is much smaller than that of family members; At the spiritual level, professional managers have no natural blood connection with the family, and the time to infiltrate the core values of family enterprises is shorter than that of family members.

The premise of building a “Pan family group” is to improve the binding degree between professional managers and families from the material and spiritual aspects, guide them to serve family businesses for a long time, and reduce agency risks. An industrial enterprise in Germany with more than a hundred years of heritage has constantly changed its incentives for professional managers with its career stage:

At the beginning of their career, professional managers pursue the first level of “security”. During this period, family enterprises should pay attention to providing competitive compensation and benefits for these professional managers, meet their basic material needs, and plan attractive learning and training opportunities and career promotion channels for them to guide their growth.

In the middle of career, with the growth of age, the accumulation of qualifications and personal wealth, the needs of professional managers will gradually migrate to the second level of “identity”. At this stage, family enterprises should pay more attention to professional managers’ pursuit of professional ideals and status, give them equal scope of responsibility and authority, and do not hesitate to give oral appreciation and formal honors. In addition, we can also strengthen the interest binding between professional managers and family enterprises through long-term equity incentives.

In the late stage of career, when the “sense of security” and “sense of identity” have been achieved, the pursuit level of professional managers will further leap to the “sense of mission”. At this stage, compensation, status and equity have become the basic commitments of family businesses to them, and what can really motivate them is the pursuit of corporate vision and social responsibility. At this stage, they gradually retreated behind the scenes in the daily operation of the family business, but the family business can give them appropriate supervision rights to give play to their residual heat in identifying and employing people and making major decisions.

The above incentives can help family enterprises attract the long-term retention and enthusiasm of professional managers. At the same time, family businesses will face a series of unique challenges in managing professional managers – we will explore these issues in subsequent articles in this series.

epilogue

This paper sorts out the four pillars for Chinese family enterprises to achieve long-term success. Chinese family enterprises can make self diagnosis and carry out targeted improvement based on this. At the same time, China’s family businesses also urgently need to improve the level of family governance and lay the foundation for the long-term development of family businesses – the next article in this series will decode the “rule of law” and “rule of virtue” of family governance for readers.

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