by Agatha Bordonaro
When it comes to growth, family businesses face challenges that are distinct from those of non-family enterprises. After all, family businesses have shareholders with the utmost at stake: their families. Add to that the potential tensions of household dynamics, as well as the challenges of competing in an ever-changing world, and one has to wonder: as a family business, how do you grow?
This is the question that the Fourth Annual Family Business Conference, organized by Columbia Business School’s student-led Family Business Club with support from the School’s Family Business Program, tackled. "From Family Business to Family Enterprise: Successfully Climbing the Growth Ladder" brought together more than 150 attendees on February 17 to listen to family business leaders, consultants, experts, and investors talk about the paths to growth through four critical channels, each with its own discussion panel: internationalization, digitalization, financing and ownership structure, and advisors and governance.
The conference also included a keynote speech from Paul Fribourg, CEO and chairman of Continental Grain Company, an agricultural business founded in 1813 by his ancestor, Simon Fribourg, that is today one of the largest privately held companies in the world. "The old assumption that family businesses grow slowly and die fast may not be true — and perhaps never was," said Professor Patricia Angus, co-director of the Family Business Program with professors Michael Preston and Daniel Wolfenzon and moderator for the event, during her opening remarks. "Family business is the dominant form of business worldwide. About two-thirds of all global businesses are, in fact, family businesses. One third of the companies in the Fortune 500 are family controlled. And by some estimates over half of US public companies are family controlled. So today it's especially appropriate that our theme is growth. [We will] hear real stories of growth."
Paul Fribourg
During his keynote fireside chat with Professor Preston, Paul Fribourg offered a perfect example of such "real growth," recounting how his family’s business expanded from a modest, nineteenth-century grain-trading firm in Belgium to a multi-pronged, global agricultural conglomerate, investment firm, and foundation. "The world has changed a lot. The company has changed a lot. And the family has changed a lot," he explained. "Every generation basically has to reinvent the company — and the family, because families aren’t static either. That’s the nature of today’s times: if you stay the same, you’re going to die very quickly."
This flexibility and openness to change started at the very top for Fribourg’s family business. He stressed that one of the things Continental Grain has done differently from other family businesses is make it relatively simple for each generation to sell their stock. "Why is that important? If families are locked in to a company, you can have dissatisfied unhappy shareholders," he explained. And if each successive generation is locked in, you can very quickly end up with "six or seven hundred family members that are all shareholders, and it’s still a private company." This could make for, at best, an unwieldy and inefficient governance structure — and at worst, a fractious and hazardous one. Fribourg also suggested that successive generations of family members should work outside the business for some period of time. "Get a broad-based business education first. Learn, prove yourself, get experiences outside," he said, adding, "then make sure you really want to do it because the worst thing for you [and] for the business is to have lots of family members that aren’t driven, passionate, and capable." That’s the approach Continental Grain takes with its employees. "We want people with grit," Fribourg explained. "We have made it difficult for family members to come in, because one of the things that will keep a business successful is making sure you don't just fill it with family members. So, any family member that wants to come in, you have to start at the bottom and learn the business from the ground up."
Fribourg also stressed the vital role of an independent management structure, including a separate board, for each division of his family business; the reason for implementing this structure, he said, was witnessing the surprising fall of a large, stalwart, family-controlled accounting firm thanks to the firm’s involvement with Enron through just one of its branches. Just like this accounting firm, Continental Grain was highly centralized — financing, guaranteeing, and managing all of its subsidiaries through the headquarters office. "If any one business in one part of the world were to hit the rocks, you could bring the whole, worldwide company down," he said. So Continental Grain restructured, "spinning off every business as a standalone company with its own debt, its own management, its own board of directors — even if we own 100 percent of it," he said. The restructuring took 10 to 15 years, but the result preserved the company’s long-term viability and fostered a culture of flexibility and growth. "The minute each of these businesses was standalone, we could strategically take them in any direction that made sense for that particular business."
Going Global
As Fribourg discussed the complexities of managing a worldwide family enterprise, the first panel tackled how a family business can go global in the first place. Titled "Growth Through Internationalization," the panel featured Manuel Dominguez, MS ’16, CEO of the family-controlled children’s clothing company Mayoral Moda Infantil SA; Amy Binder ’94, founder and CEO of independent communications firm RF Binder and former partner in her family’s public relations firm, Ruder Finn Group; and Belén Villalonga, professor of management and organizations at New York University’s Stern School of Business. The panel was moderated by William Kambas, regional practice group leader for the US personal income tax group at Withers Worldwide.
Villalonga set the stage by sharing that in her research, roughly the same number of family businesses export their products and services internationally as non-family businesses, but only about a quarter of sales for family businesses come from abroad. In fact, a recent PwC survey found that in 2014, only about a third of family companies surveyed said they would attribute more than 10 percent of their income to foreign sources. To compare, S&P 500 companies attribute just over 44 percent of their sales to foreign sources.
The first panel featured alums Amy Binder ’94 and Manuel Dominguez, MS ’16. She added that this may be partly due to the fact that going global requires that either the enterprise be large enough to open its own international offices, or that it form partnerships to expand its reach — which family companies are less likely to do. "About half of non-family businesses are willing to make alliances, and about a third of family businesses are willing to," Villalonga said. She added that family businesses are also less likely to grow by acquisition. "There’s a sense that the families don’t want to lose their independence, and anything that will threaten that independence, they shy away from." But Binder stressed that the right alliances can not only help a family business grow, they can also maintain and strengthen its quality abroad. "I actually find working with the best-in-class local agency, which I’m a source of business for, has really given me more control over the quality of [the resulting work]," she said, explaining that her affiliates are incentivized to do high-quality work in order to keep getting her referrals — for which she gets a 10 percent commission. "My growth has really come from the fact that not only can I support [my clients] where they need around the world but also that I can ensure that I will deliver the same quality work for them around the world as I do here."
Dominguez added that family businesses can absolutely benefit from partnerships, as long as the leaders first reflect on what kind of partnerships they are best suited for. "Think about your own culture," he said. "Are you ready to be a good partner? Do you want to be in control? Because if you have an alliance, there are parts of the business which you will not be able to control."
In closing, Villalonga pointed out that enterprises with strong family governance, support from the broader family unit, and effective boards were more likely to internationalize effectively.
The Importance of Tech
The second panel, "Growth through Digitalization," focused on the role of technology in expanding a family business and featured Mitchell Kaneff, CEO and chairman of Arkay Packaging, his family’s 95-year-old packaging-material business; Brian Pallas ’14, CEO and founder of Opportunity Network, an invitation-only platform that allows premier businesses to connect with each other for business deals over $1 million; Steven Peltzman ’99, chief business technology officer for Forrester Research; and Edouard Thijssen, CEO and co-founder of Trusted Family, a provider of technology and other advisory solutions for family businesses. The panel was moderated by Josh Baron, PhD ’05GSAS, partner and co-founder of Banyan Global, where he advises family businesses.
Kaneff pointed out that digitization is a necessity in business today, because the pace of business is fast and there is a need to be constantly innovating. "You can never rest on your laurels, because as soon as you do, you’re resting on a bed of nails," he said. "Be open to all ideas from every angle. Educate yourself." At the same time, he stressed, family businesses need to be deliberate about their adoption of technology for innovation purposes. "Don’t rush. Make sure you take your time and analyze it." Pallas said he thinks the place where technology will have the most impact will be in helping businesses find local producers who can provide custom products, thereby enabling economic growth on a broader basis around the globe. "You are able then to create decentralized poles that can really build local capacity, expertise, and economic growth," he said. "That’s one of the things that we really believe in."
Thijssen said family businesses that are new to the innovation game might want to sit on tech company boards as a first step. "It’s smaller stakes," he said. "By doing that, [a few family businesses I know] learned together; they discovered new technologies. It’s a good way to get started."
Steven Peltzman ’99 spoke on a panel with Brian Pallas ’14. Peltzman added that family businesses that wish to innovate and apply technology effectively should follow what he has dubbed the "four Cs": customer, crude, curious, chaos.
The first "c" stresses putting yourself in the shoes of your customer and asking yourself, "What do they want, and how do I get it to them?”"Peltzman said. "Second is crude," he continued. "If you have an idea, crudely figure out how to show it, how to experiment with it, how to prove it out, how to learn. Every idea comes with a massive price tag. You can do a little crude experiment for nothing, and you can figure out whether there’s something there or whether there’s another angle that you haven’t thought of." The third "c" emphasizes keeping an open mind and not trying "to prove your innovation is the right thing," Peltzman says. "You might actually get another innovation" in the process. The fourth and final "c" stands for "chaos," and it’s about being a strong leader and helping people through the complex feelings that a change can bring. "You have to have people comfortable with the chaos that an innovation can cause," Peltzman said. “You have to, as a leader, welcome that chaos and insulate people from what it might be, and actually give them room to not be yelled at if they try something new. They’ll be more open to innovation."
Structure for Success
The third panel tackled how family businesses can structure their organizations to encourage expansion. "Financing and Ownership Structure to Support Growth," organized by Brown Brothers Harriman (BBH), founding corporate partner to the School’s Family Business Program, featured Alexandre Leviant, president of his family’s commodity manufacturing, trading, and distribution company ICD Group International; Jason Rubin, president and CEO of his family’s Republic Metals Corporation; and Matthew Pemberton, vice president at BBH Capital Partners. The panel was moderated by Carter Sullivan ’84, partner in private banking at Brown Brothers Harriman.
Leviant and Rubin discussed special financing scenarios to encourage growth, including phantom equity (rewarding non-family senior management with compensation packages that mimic stock, so as to provide the same benefits that come with ownership without diluting the equity pool) and reinvesting profits back in the business to build up a healthy equity base for future expansion — both popular family business tactics. Rubin also talked about the importance of maintaining stability at the leadership level when aiming for long-term growth. "We try not to manage the business with a ton of volatility, giving millions of dollars [in bonuses] one year and then cutting people the next year. We really tailor the management of the company towards long-term success, continuity, and the viability of the company," he said.
The panelists also discussed the benefits of bringing on an equity partner to encourage further development. To that end, Pemberton stressed that it’s key to align on goals upfront, particularly when it comes to partnership timeline, governance, and exit.
The third panel, moderated by Carter Sullivan ’84. "The best conversations start in a place that is far before the time when a decision is made to [bring] on equity," he said. "[We ask], when will you potentially need financing? What’s the best way to bring it on? What are the best debt markets to access? Is there a way to pull financing out of the existing balance sheet from real estate or working capital? Lastly, is it time to bring on an equity partner?" he continued. "Do you want to bring on a control partner? Do you want to bring on a minority partner? How should the exit and governance rights be set up? Matching the cultures of the business and the family with the equity partner that they bring on — that’s really important."
Rules and Regulations for Growth
The fourth and final panel, titled "The Role Played by Advisors and Governance to Support Growth," featured Bruce Benesh, partner-in-charge of human capital services for Grant Thornton LLP and consultant to family businesses; Jack Mitchell, chairman of the three-generation clothing business Mitchells Family of Stores and executive in residence at Columbia Business School; Mark Rubin, senior managing director of FTI Consulting; and Brett Sovine, CPA, JD, LLM, managing director for Brown Brothers Harriman. It was moderated by Professor Angus.
Mitchell revealed that his family business has two main governance rules. The first is to use an outside consultant: "My brother, Bill, and I took over the business in 1974; we always knew we needed help," he said, noting that the consultant "helped us with two years of tough love. We sorted out our business relationship." The second rule is around future generations entering the business. "[Children] have to work outside the family business, after they graduate from college, for at least five years. And if they decide they wanted to come in the business, they have to be interviewed by the outside advisory board, as well as by my brother and myself," Mitchell explained, adding that implementing the advisory board brought discipline to the family’s governance of the business. Further, the company stipulated that any children entering Mitchells Family of Stores would not replace existing non-family executives. "We wouldn’t fire the head buyer, the head manager of a store, and put one of our [kids] in the business," Mitchell said.
The panelists also discussed the importance of succession planning, which ideally starts early, said Sovine. "One of the things that we always try to do is get the junior generation to take on projects with the senior generation," he said. "Foster a relationship and demonstrate that you can add value, and through that process you will become more comfortable making suggestions and questioning the way things are done in a respectful way." This can aid in making the older generation more relaxed about relinquishing control and encourage retirement when the time is right, he pointed out.
This is also where outside advisors have a significant role to play, Rubin added. "It is incumbent upon the advisor community to be more courageous" in having difficult conversations with family members, he stressed. As an example, he pointed to a common situation where family offices are asked to fund a family member’s investment or new business idea. "We are often asked to assist with tax structuring or to due-diligence the merits of an investment. Often that involves developing recommendations for a family to either commit (usually more) capital to the opportunity, attract outside capital that brings some expertise to the project, or minimize losses and sell (or pass on it)," he said. "A [courageous] consultant would say, 'What is the rationale for considering the investment in the first place?' Sometimes, the truth of the matter is that a family will invest a lot of money to support a family member’s dream because they were concerned about the family member’s direction. When we raise that type of question with the family, there is often a lot of emotion and tears, quite honestly. I give [our consultants] a lot of credit for engaging families in very meaningful conversations — that [takes] courage. The easier thing to do would be to say, 'Sure, give us all your financial statements, your projections for the next five years. We will go back into our ivory tower, analyze the heck out of the options, and issue a report.'"
Benesh agreed. "I always used to say, 'Do you want my best consulting?' Most of your clients are going to say, 'Well, yeah, I do hire you to do that,' Then you can say, 'Here is what we really need to do; here is what we really need to make the decisions; here is what we really need to get in place."
"Sigmund Freud [once said], 'For a good life, one needs to work and to love.' Family enterprise combines both," said Professor Angus, noting that it comes as no surprise that family companies dominate the global business scene and that there is increasing interest in these companies from both Columbia Business School students and the world at large. "Everyone I've ever worked with, and every student I've ever taught, has wanted to make an impact. Family enterprise is an incredible way to align that desire for love, desire for meaning, and desire for impact."
The Family Business Conference was organized by the School’s 210+-member, student-run Family Business Club with support from the School’s Family Business Program, which is co-directed by professors Patricia Angus, Michael Preston, and Daniel Wolfenzon. The Program is dedicated to supporting curriculum, research, and its rich community of students, scholars, and alumni related to family business management and family enterprises. Through targeted courses and extracurricular offerings, the program explores all aspects of owning, managing, advising, and working with family businesses worldwide.
