Prof. Ivan Lansberg, for 30 years you have been supporting family businesses around the world, as the founding partner of LGA Global Family Enterprise Advisors, can you give some examples of the typical dilemmas and problems?
" The main reason they call us is for changes and intergenerational transfers of the business. It may seem trivial, but it turns out that owners often don't know how to think ahead. What the enterprise we built will look like in the next generation. They don't think enough about their family's demographics. Not the family that exists today, but the one that will be in ten years. The hard work is finding out from the owners where they are going and why they are going in that particular direction."
As people, it is often difficult to think about the future
"Yes that is a generic problem. We are terrible at imagining a world that we don't know well. We are all trapped in the present. There is a famous statement by former President Eisenhower that 'plans are useless, but plans are everything'. I mean, the question is what do I do to get what I want. This exercise increases the chances of success."
I suppose there are two main aims that guide family businesses in transitioning between generations: the continued success of the business and maintaining peace and harmony in the family
Exactly and families walk this double path. Let's say, a family that doesn't know what it wants (regarding the model desired in the intergenerational transition). Research shows that the best way to find out is to look at the experiences of other families. For example, a family is debating whether to transfer the business to a group of siblings or pass it on to one child. The solution would be to bring them together with families who have experienced the models, to hear from those with experience.
"As soon as the discussions around this begin, then the possibilities begin to gain depth. The tendency of these types of families is to maintain a high degree of privacy, and we try to normalize these issues, so that families feel more comfortable talking to each other."
Family companies show greater continuity
"Inheritance and money disputes can undermine even the wealthiest families from within. In recent years, several stories like this have stood out concerning two of Israel's wealthiest families: the Ofer family and the Wertheim family.
"In both cases this happened after the founding fathers divided the empire unequally between their children. The late Moses Wertheim, who founded the Central Bottling Co. (Coca-Cola Israel) gave 63% of the holdings to his son Dudi, and his daughter Drorit received the rest. In 2010, he justified this in an interview with Naama Sikular, then with "Calcalist" and now editor of "Globes," by saying that "when there are two, you have to put one at the helm, and naturally it will be Dudi."
In the Ofer family - an empire that currently encompasses the fields of real estate, shipping, chemicals and banking - it was actually the daughter, Liora, Yuli's daughter, who received control of Ofer Investments (51%) according to the will, while her brother Doron received only 15%. The previous will signed by the father gave each of the children a 33.3% share in the company, and a bitter conflict broke out between the siblings until at the beginning of the year Liora purchased her brother's share in the company, becoming the 100% owner of Ofer Investments.
Are unequal distributions of this type a "seed of disaster" that the founding generation should avoid at all costs? Lansberg believes that even if there is not a precise division to every last penny, the principle of justice should be maintained. He explains that a situation is possible in which the business is not divided equally among all the children, but those who received less are compensated "through other assets."
"There are two kinds of justice. There is distributive justice, which is the result of how you cut the cake. And there is procedural justice, which has to do with how you came to this decision in the first place. The more you deviate from equality, the more important the process is. For example, a long time ago we worked with a family where the brothers were rich, and one of the sisters needed the inheritance money more than they did, because her daughter was sick. The brothers told the parents: It is not right to divide up equally between us. The brothers insisted that this would not happen."
To what extent does gender play a role in inter-generational transfer?
"It certainly plays a role, and that's a shame. It wastes the talent of women, which as shareholders, as directors, and as managers is enormous. In a family company everybody loses out because of this. Making judgements on the basis of gender seems to me an absolute mistake. Some of the most successful heirs I have met were women."
There is a famous saying which is not very encouraging for family business. The first generation builds, the second generation maintains and the third generation destroys. What is your opinion?
"To judge family firms from this perspective, you also need to compare them to non-family firms. The reasons why family businesses disappear are often not related to the family, but to matters that can happen in any company. In fact, recent research shows that when you compare family companies to non-family companies, the family companies show greater continuity."
How can this be explained?
"Family companies are in business for generations to come. Their investment horizon is long-term and therefore they also make long-term decisions. These are businesses that think about the children and grandchildren. Also in terms of risk management, family companies are more careful. They take on less debt. They are also more aware about the quality of their products, because the quality is a reflection of the family."
Credit Suisse has evaluated the performance of a thousand family businesses from around the world, which are also publicly traded. Consistently, family businesses perform better than non-family businesses. On the other hand, the bank observes that "the performance is stronger where earlier generations manage." What do you think?
"Indeed, the performance of first-generation family companies tends to be the best. But, this is also true of all companies - family or not. Think of Bill Gates - it is very difficult for Microsoft to reproduce the growth rate that drove the company during his tenure, simply because linear growth is not sustainable. The bigger the company gets, the harder it is to keep up with the rapid rate of growth."
Before starting you have to tell the children: These are your targets
Lansberg, who was born and raised in Caracas, Venezuela, became interested in the field of family businesses because the subject touched him personally. He comes from a family that founded a prosperous family business in insurance, but the transfer to his elder brother did not go well. The business - which he said was "one of the largest insurance corporations in Latin America," is now "a fraction of what it was".
"My father immigrated to Venezuela from the Netherlands, where he met my mother. The company he founded was large and diverse, and when it came time to plan its transfer to the next generation, he took it seriously. My father was by nature more of an 'academic' than a businessman. We used to joke in the family that I inherited his academic side, and my brother the entrepreneurial side. My sister is smarter than all of us, but she wasn't interested in business."
And what happened?
"I'll be honest: my brother was not the right man for the job. He had a CEO working alongside him who was an insurance expert. My brother and the CEO grew the company fast, and added a lot of debt to it. Then the collapse of the Venezuelan economy happened, which exacerbated the problem."
What could your father have done differently?
"He shouldn't have to wait so long to get my brother out of office. There was a whole family dynamic here, because my mother was also in the background saying 'You can't do this to our son.' The process became more difficult."
Your experience sharpens the question: what do parents do when they have to tell their son or daughter who will inherit the business 'you are not suitable'?
"The way to do this is through data that shows whether the child has added value to the company. Before they start the job, you should tell the children: here are your targets, and we will measure you according to them. So you don't start such a conversation from a place of judgment, but from a place where in advance you have created the conditions for the data to allow a decision to be made."
What is your role in directing owners towards firing one of their children?
"This is certainly not the part we enjoy the most. There is no more difficult job than telling a parent: you love your boy or girl, but they are not suitable for the job. We need to find the courage to have a conversation with them that says - there are bad consequences to the situation in which the wrong person is placed in a managerial position."
What about the children who do a good job, but feel they are walking in their father's shadow?
"I wrote an article about it called: 'The Prince's Test', in which I use ideas from Machiavelli to talk about what heirs should do to convince all stakeholders that the system is going to be in good hands. The authority they have has to be earned. Another important element is modesty. When a son or daughter enters the business, there is no escaping being humble, generous and respectful towards others. It is more difficult to be a family member in the business than a non-family member in the business."
Two billionaires: opposite models
Recently, two of the richest people in the world - the Frenchman Bernard Arnault, the founder and CEO of the luxury brand company LVMH and the American financier and philanthropist George Soros began the process of transferring the business to their children. But in doing so, the two adopted opposite models.
While Arnault had educated his five children in business since childhood, brought them all into the business and is now examining their performance, Soros recently chose his youngest son, 37-year-old Alex, to take the reins of the fund Open Society Foundation, which is worth $25 billion.
What does Lansberg think about these two models? In the end, he emphasizes, we still don't know how the heirs will function in reality. "What is important is do the businesses have the institutional mechanisms to monitor the performance of the chosen successors, and do they have the authority to give the successors real feedback. Even if they do a good job, the question arises as to whether those mechanisms will be able to support and nurture their development."
Is the IPO of a family company a good way to create a channel to ensure continuity? After all, through an IPO, a company gains transparency, and in an intergenerational transfer, this may be important.
"Going public - it's a tool designed to serve a certain purpose, right? In the public offering there are opportunities - for example, another source of capital that can fuel growth. It also opens an avenue for more rigor in management and more awareness on the part of the owners regarding accountability towards outside shareholders.
"On the other hand, people are starting to pay more attention to how the stock progresses on a quarterly basis than over the long term, and the market itself is looking for quick changes. Your responsibility to the market is starting to eat away at the ability to think long term and thus grow the company for the benefit of future generations. This can be a limitation.
"Good family companies, which are also traded on the stock exchange, thought about this move deeply and decided that they are ready to do so for the benefit of future investments. Ford is a good example, in the sense that it made a nice transition to the production of electric cars, a transition that required a large investment in infrastructure. 35% of Fortune 500 companies are family-public, meaning they are controlled by the families and the public, for example Estee Lauder and the New York Times.
"But there are also giant family companies, multinationals, which are private, and are not traded on the stock exchange, such as, for example, Cargill or the food company Mars. Their turnover is on the scale of Fortune 500 companies."
"Groups of siblings that manage a company can be a huge advantage"
In your book "Succeeding Generations" your write at length that contrary to the past conclusions of researchers, according to which a company must have one leader, a model of joint leadership can definitely exist. For example: a group of siblings who run the company. How exactly does it work?
"The model of a 'leadership team' made up of siblings is not uncommon, and Fortune 500 companies operate this way. If the team is not committed to the same vision, it is a recipe for trouble, but if it is coordinated - it can be a huge advantage in terms of decision-making. However, the ability to work together in a team is rare. It is certainly not a solution for families who avoid having the difficult conversation about who is more suitable."
Can you illustrate how such a 'leadership team' might look?
"There are all kinds of formats, for example a brother who functions as a parental figure and has most of the control, or is 'first among equals', when there is a leading brother or sister who makes the decisions, but they share the responsibility with the other siblings. And there are also brothers who actually function as a 'leadership team' - then one brother can be the chairman, a sister a president, another sister as CEO and another brother as VP operations. In this case, the responsibilities are usually well defined."
In other words: This model can work well when the siblings get on well with each other, is that what you mean?
"That's right. When the siblings get along very well and are able to tell the truth to each other, share the burden and benefits of being in leadership positions and speak with one voice to the outside world then such a partnership can last even 25 years."
The HBO series "Heirs," which recently came to an end after four seasons has gained a lot of popularity and presents quite extreme scenarios. Did you watch the series?
"The truth is, it was hard for me to watch the series. The way it depicts the heirs, as incompetent and liars, is a sin against all those heirs I have met throughout my career who were thoughtful and dedicated. The reason the series was so successful is probably a sign of the spirit of the times."
Were there parts that were familiar to you?
"Occasionally. There is a phrase in Spanish that says: 'If you raise crows, they will pull out your eyes'. So the father of the family in the series, the one in control, contributed with his behavior to the type of children he had. On the one hand, the series is good entertainment and it opened the door to conversations that are important to have. On the other hand, it did no good to the image of family businesses, because the image is distorted, a caricature."
Published by Globes, Israel business news - en.globes.co.il - on July 19, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.