Managing to keep the family happy

Outsiders in family firms

When Stuart Gates started working for the Weston family, he submitted to custom by dressing in pinstriped trousers and a black coat with long tails. He learned to walk at a stately pace. To anybody familiar with the works of PG Wodehouse, Mr Gates might have seemed strongly reminiscent of the immortal Jeeves, manservant to the accident-prone Bertie Wooster.

But Mr Gates is not a butler. He’s managing director of Fortnum & Mason, the London department store which the Westons have run successfully for several decades. Since his elevation from the food department, in 2000, Mr Gates has ceased to dress in the old-fashioned outfit affected by male staff on Fortnum’s shop floor. But he remains an employee of the Weston family – and for that reason could still be described, if only rather unkindly, as “hired help”.

That status, less than exalted, is shared by vast numbers of senior executives worldwide. In North America and Europe, for instance, more than 80 per cent of businesses are family owned. Most of them are tiny, but some 37 per cent of Fortune 500 companies are family owned and as many as 60 per cent of all public companies in the US are family controlled, according to the Boston-based Family Firm Institute. Nor could you safely characterise the sectors in which family businesses operate, because in truth they pop up everywhere.

For the outsiders charged with running them, family businesses have in recent months come to seem rather dangerous places to work. Consider what has happened to two of the best known examplars. Jac Nasser was pushed out of Ford, in November, and replaced as chief executive by Bill Ford, Henry Ford’s great-grandson. And last month Thomas Middelhoff, after less than four years in charge – and despite having recently negotiated a new five-year contract – relinquished control at Bertelsmann after losing the confidence of the Mohn family.

Each man’s downfall can be explained in different ways, not necessarily related to any personal failing. In Mr Nasser’s case, for instance, there was the awkward business of the faulty tyres, which had to be recalled at vast expense. Nor did the generally grim business climate help. But is it possible that the three men suffered as a direct consequence of their status as outsiders in a family business? If so, is there a lesson for others in similar positions? Should Fortnum & Mason’s Mr Gates flee the store on Piccadilly and start looking for some less hazardous position elsewhere?

Now could be as good a time as any. According to the Andersen Centre for Family Business, younger members of corporate dynasties tended, during the dotcom boom, to look elsewhere for opportunities. But nowadays the outside world looks less inviting. So they switch their attention back to the family business – and in turn increase the pressure on non-family managers.

The Stoy Centre for Family Businesses, in London, defines a family firm as one in which a single family controls more than 50 per cent of voting shares and supplies a significant proportion of senior management; more than one generation is involved; or, most importantly, one which the family regards as a family business. Beyond that, if there’s a single characteristic that applies to all family businesses, it is that they tend to take a long-term view. “The perspective of a family business is not just five years ahead,” says Joachim Schwass, professor of family business at IMD, the Swiss business School. “It’s two or three generations.” As Bill Ford has put it: “I wake up every morning concerned about what the future looks like. I do not feel as if I am working for myself but working for my grandchildren and great grandchildren.”

Inevitably, this leads to conflict with non-family managers, according to Prof Schwass. “Managers have only short window of opportunity to maximise their own revenues. They have to build things up, ideally by growing the business. Families want evolution, managers want revolution.

“Very often families don’t understand this at once. They are happy at first, but success builds success, and suddenly the manager says they need to borrow money to grow the business.”

And families don’t like to borrow money from outside because this can cost them control. At Bertelsmann, Mr Middelhoff’s enthusiasm for a stock-market listing was not shared by the Mohns. Nor did the consensus-orientated family shareholders did not appreciate Mr Middelhoff’s habit of announcing initiatives in the media, such as the so-called Bertelsmann Excellence Programme – designed to prepare for an initial public offering.

It is not only differences in strategy that can lead to problems, but also presentation. Mr Middelhoff incurred disapproval at Bertelsmann for his abrasive management style. So did the cost-cutting Mr Nasser at Ford, where his nickname was Jac the Knife. On the face of it, this is hard to fathom. After all, neither man was unfamiliar with the prevailing corporate culture: Mr Nasser worked at Ford for 33 years and Mr Middelhoff joined Bertelsmann straight after completing his PhD. But the very fact of taking control leads managers to display assume a hitherto concealed characteristic. They get pushy.

“There is some truth in the idea that outsiders [by their nature] want to introduce change,” says Tony Bogod, of the Stoy Centre for Family Business. “They’re unlikely to be more conservative than the family.”

If they’re wise, family owners will harness the manager’s radical instincts. Mr Bogod recalls dealing with a company where an outsider came in as managing director and announced that it must cease producing a product it had been making for 100 years. (“It just wasn’t making enough money,” explains Mr Bogod.) As an outsider, the manager was able to take that decision because his judgement was not clouded by sentiment. “The family said their grandfather would be turning in his grave, but they let him do it.”

Outsiders can make similarly tough decisions about personnel. “You often find people in family companies – the marketing director, or the finance director – who are just seeing out their time towards retirement and not doing a great job,” says Mr Bogod. And who could be better than an outsider to settle issues relating to the remuneration and promotion of family members? “These issues have to be handled in a non-emotional and non-threatening way,” says Mr Bogod. “You have to make sure that family members who work for the business are treated the same way as anybody else. You have to separate the idea of reward for working in the business and the reward for owning the business.”

All things considered, a vigorous outsider can be tremendously useful to a family business. And the benefits are not all one-way. Mr Bogod insists that executives’ salary levels are much the same as in companies, and that outsiders can attain a much valued status as a counsellor and mentor – particularly when the company is transferred from one generation to the next. But to attain that status, they must exercise their vigour with discretion.

“You have to understand the rules of the game,” says Mr Bogod. “If you go in and say you will change whatever you want, that won’t work. A clever chief executive will know how to get the family to buy in to what he wants. One manager I’m dealing with at the moment, he runs a business with a £300m turnover, and he said to me that the secret is to take the decisions but to allow the head of the family to feel he took the decisions himself.”

In short, though a frock coat is not strictly necessary, outsiders running family businesses who wish to avoid the fate of Mr Nasser and Mr Middelhoff might be wise to conduct themselves like the admirable Jeeves.