There exists a persistent belief that the wealth amassed by a hard-working first-generation business founder will inevitably dissipate by the third generation, leading the family back to poverty.
Numerous languages have expressions encapsulating this cycle, such as ‘shirtsleeves to shirtsleeves in three generations’ (American), ‘clogs to clogs in three generations’ (British), and ‘stables to stars to stables’ (Italian).
Contrary to this notion, many family enterprises thrive and endure well beyond three generations.
Cargill, a multinational headquartered in Minnesota and owned by third- and fourth-generation descendants of its founder, stands as the largest privately held corporation in the United States, with revenues totaling $114.7 billion and a workforce of 155,000 individuals spanning 66 countries.
Thierry Hermès, who established his eponymous firm in Paris as a humble leather saddle and harness workshop in 1837, saw it evolve into the world’s most esteemed luxury brand 182 years later.
The Tata Group, a colossal Indian conglomerate, traces its origins back to 1868 when it was founded by Jamsetji Tata and has since remained in the hands of his descendants.
Let us delve into the history of one of the oldest family businesses.
Kongō Gumi, a Japanese construction company, traces its roots to 578 when it was established by Shigemitsu Kongō, a Korean immigrant renowned for his expertise in constructing Buddhist temples and other religious monuments.
Alongside two fellow carpenters from the Korean kingdom of Baekje, Shigemitsu answered Prince Shōtoku’s summons to Yamato (Nara) and contributed to the construction of Japan’s inaugural Buddhist temple, the Shitennō-ji, situated not far from Osaka.
Prince Shōtoku bestowed upon the son of Shigemitsu Kongō the title of his official palace carpenter, entrusting him with the task of constructing numerous monuments to promote the unity of the country under the newly introduced religion.
Over the course of the following 1,400 years, Kongō Gumi played a pivotal role in the construction and restoration of some of Japan’s most renowned landmarks, including the magnificent Osaka Castle in the 16th century.
However, by the 1980s, the company’s 40th family CEO grew apprehensive about the long-term viability of its business model and opted to diversify into property investments.
Unfortunately, these investments were heavily leveraged and suffered significant losses during the 1990s Asian financial crisis, which punctured the Japanese real estate bubble.
Consequently, in January 2006, Kongō Gumi succumbed to liquidation, accruing debts amounting to $340 million before being absorbed by another longstanding Japanese construction firm.
The narrative of Kongō Gumi yields valuable insights into the factors contributing to longevity.
Firstly, the endurance of a family business is facilitated by its operation within a stable and enduring industry.
Secondly, long-lasting family enterprises often possess a successful succession model, frequently reliant on primogeniture.
Thirdly, the continuity of a family business cannot be taken for granted; each successive generation must innovate and diligently preserve the enterprise for future successors.
Lastly, many enduring family businesses meet their demise due to either their diminishing relevance in the market or the poor decisions made by family leaders.
While the experience of Kongō Gumi is not singular, our collaboration with numerous longstanding family firms worldwide reveals shared familial and business experiences among them.
We identify six fundamental elements crucial to longevity:
1. Adaptive Long-Term Business Strategies
Successful family enterprises exhibit agile and robust long-term business strategies capable of withstanding global competition and the dynamic shifts of the economy.
While many enduring family businesses operate within stable industries, they showcase an exceptional ability to adjust their strategies to evolving circumstances.
These strategies often contribute to the development of intangible family assets, including the esteemed legacy and rich history, as well as the extensive family and business networks cultivated over centuries.
Through a process of continual refinement across generations, business families enhance their strategies, rendering them more resilient to abrupt market changes, shifts in global trade dynamics, and economic downturns.
Each successive generation builds upon the foundation laid by its predecessors, ensuring the firm’s sustained differentiation from competitors.
2. Succession Planning
Long-lasting family enterprises prioritize seamless transitions and active engagement of the succeeding generation.
These firms have historically implemented structured processes to facilitate internal family succession, ensuring transparency in their succession strategies.
Traditionally, succession rules were often based on primogeniture, favoring the eldest legitimate son as the heir to the business.
This practice was sometimes supplemented by adoption or arranged marriages to maintain continuity.
AS THE BUSINESS FAMILY GROWS IN NUMBERS, OWNERSHIP CAN BECOME OVERLY DILUTED BY THE REPEATED DIVISION AND DISTRIBUTION OF SHARES TO NEW FAMILY MEMBERS.
However, contemporary long-standing family businesses increasingly embrace meritocracy in their hiring practices, selecting the most capable and committed next-generation members regardless of birth order or gender.
Moreover, these firms frequently integrate professional managers into their operations.
Owner-managers now often rely on non-family members within supervisory boards to establish clear processes and criteria for family members seeking to enter and advance within the company.
These criteria commonly emphasize educational qualifications from prestigious business schools and relevant managerial experience gained outside the family enterprise.
3. Ownership Structure
The implementation of legal frameworks that incentivize value creation and mitigate familial conflicts is paramount.
A well-crafted ownership model ensures that the firm’s objectives and strategies are in harmony with the incentives and performance of both stakeholders within the company and members of the family.
Establishing a robust ownership framework serves to shield owner-managers from becoming embroiled in internal family disputes, particularly regarding sensitive matters like dividend distribution.
In many societies, there exists a strong inclination among parents to equitably distribute wealth among their children.
Furthermore, inheritance laws in numerous jurisdictions mandate equal division of assets among heirs, thereby necessitating alignment of incentives with the prevailing legal and tax landscapes of each country.
Apart from these legal considerations, business families must navigate a complex interplay of biological and social dynamics that tend to grow more intricate over time.
At its core, a business family contends with the dynamics of increasing numbers, as family members multiply across generations.
As the family expands, ownership stakes can become diluted through successive division and distribution of shares among new members.
Moreover, the allocation of shares to each family member often hinges on the distribution of children across family branches.
It is intriguing to observe the diverse ownership structures among enduring family enterprises and their impact on wealth accumulation.
Some firms feature a sole owner, while others have concentrated ownership shared among several family members, and yet others boast thousands of family stakeholders.
For instance, Cargill exemplifies concentrated ownership with approximately 10 primary family owners holding 90 percent of company shares, contrasting with the 375-year-old Wendel family business in France, where over 1,200 family members collectively own 38 percent of the publicly traded family firm.
Most long-standing family enterprises adjust their ownership frameworks every one or two generations to forestall excessive dilution as the family expands.
They craft dividend policies to reconcile divergent family interests with the firm’s growth imperatives while also ensuring that the ownership structure aligns incentives for both active management participants and passive shareholders.
4. Corporate Governance And Leadership
The essence lies in identifying individuals who contribute value and establishing robust support systems around them.
For many enduring family enterprises, the aspiration is to cultivate at least one value-adding family leader in each successive generation.
This individual is entrusted with guiding both the company and the family toward greater heights.
The ability to consistently produce capable family members with the requisite skills and talents is often the differentiating factor between growth and stagnation for a business family.
Surrounding these invaluable family leaders, long-standing family firms can construct governance frameworks designed to incentivize and leverage synergies.
Traditionally, such frameworks predominantly comprised family members.
However, there has been a recent shift towards the recruitment of non-family professionals for management roles and the appointment of independent directors to corporate boards by business families, reflecting a broader evolution in governance practices.
5. Innovation And Entrepreneurship
Establishing frameworks and offering incentives to navigate the challenges posed by digitization, disruption, and the advent of the Fourth Industrial Revolution.
The landscape of technologies, economies, and societies is undergoing rapid transformation.
Long-standing family enterprises recognize the imperative of innovation and the preservation of the entrepreneurial spirit inherited from their founders in the face of such changes.
At the vanguard of digitization, these enterprises are deeply engaged in integrating cutting-edge technology into their traditional production processes.
Take, for instance, the family-owned Fabbrica D’Armi Pietro Beretta S.p.A., which traces its origins back to 1526 when Bartolomeo Beretta supplied 185 arquebus barrels to the Republic of Venice.
Over nearly five centuries, Beretta has prioritized innovation, a fundamental element for survival in the arms industry.
Today, Beretta manufactures premium light-caliber firearms tailored for sports, hunting, and shooting competitions, alongside supplying military-grade weapons to armed forces and law enforcement agencies.
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6. Family Governance
Systems and procedures are designed to foster unity and active involvement within the family.
Family enterprises have developed innovative frameworks and processes for family governance to facilitate crucial decision-making, resolve conflicts, and safeguard family assets while steering the business toward long-term success.
These frameworks and processes need to be tailored to the cultural, institutional, and familial context of the enterprise.
While the concept of family governance is universal, its specific structures and mechanisms may vary widely.
Many business families establish a family charter, serving as a non-binding agreement among family members regarding their involvement in the family business.
Unlike a legally binding shareholders’ agreement, a family charter might outline the family business’s mission, strategy, and provisions for the next generation’s education.
Moreover, numerous longstanding families implement ownership redistribution mechanisms to manage the family’s composition gradually or through periodic adjustments.
Common strategies for ownership redesign include transitioning ownership to future generations, establishing an internal market for trading shares among family members, and facilitating buyouts of individuals or groups of family members.
Some family businesses adopt a two-board governance model comprising a family shareholder board and a corporate board.
This dual structure allows the corporate board to focus exclusively on business matters while the family board addresses broader family issues.
For family enterprises, the keys to enduring success are intertwined with the outcomes of these six components, which evolve over time in response to the challenges encountered by each succeeding generation.
However, the application of these components will manifest in diverse ways, influenced by factors such as the enterprise’s size, location, and historical trajectory.
Kongō Gumi’s remarkable endurance over 14 centuries and 40 generations of family stewardship largely stemmed from each new generation’s ability to replicate the business model of its predecessors, centered on designing, constructing, restoring, and maintaining temples and cultural landmarks across Japan.
However, as time progressed, the nature of the business evolved, leading Kongō Gumi to pursue high-risk investment ventures with detrimental outcomes in an attempt to avoid stagnation.
For newer family enterprises, surpassing the third generation, let alone reaching the 40th, presents a significant hurdle.
To overcome these challenges, defy the notion of ‘clogs to clogs in three generations,’ and ultimately achieve success, a concerted effort to align business and family dynamics is imperative.
In this regard, the six elements of longevity serve as a potent catalyst for future growth and resilience.
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