12: The Natural Advantage of Family Businesses


Guest host Steve Legler speaks with FFI Fellow and family business consultant Ken McCracken about the importance of recognizing what our family business clients are doing right and avoiding jumping in with “best practices” and recommendations that don’t fit the family or the business.

Ken offers the idea of beginning any client intervention with “cautious observation” and then offers clients the benefit of those observations as a “reporter of sights” to the family. He then gives them some useful information that you, as an independent outsider, can reveal to them about their family and business systems. He also offers his views on family governance and whether or not everything needs to be formally documented for the family to succeed.

Let’s talk family enterprise explores global ideas, concepts and models that help family enterprise advisors better serve their family clients, brought to you by the family enterprise exchange.

Hello, and welcome to another episode of The let’s talk family enterprise podcast. My name is Steve Legler. And I’m excited to be your guest host once again. Today we’re going to be talking about the natural advantage of family businesses. Our guest today is Ken McCracken, who recently published a piece in the FFI practitioner with that title as you likely guessed when Ken introduces himself, he’s coming to us from the UK where he lives and works, and which happens to be where I first met Ken, as he was one of the key figures in organizing the 2018 FFI conference in London. We’ve got a lot of a lot of ground to cover today. So let’s say hi to Ken and kick this off Ken thanks for joining us today and welcome to the let’s talk family enterprise podcast.

Mandy. Thanks, Steve. It’s a pleasure to be speaking to you.

So let’s get into I wanted to first of all give you a little bit of context as our guest this is being done by FTX the family enterprise exchange. And this podcast is generally created for our listeners, our members who are people who have done the family enterprise advisor program over the last 10 years here in Canada, of which there are close to 400 of us now. And so most of what we’re going to be talking about is for advisors, although I’m sure there’ll be some family business people that will get something out of it as well. So as advisors, explain to me a little bit what you mean by that natural advantage of family businesses.

has remained Steve is that the way in which manufacturing enterprises are organized or if you prefer government is often described as being unconventional or idiosyncratic. And that’s seen as a weakness whereas I think, advisors to spend time with family enterprises will start to understand that this can often be a strength because it’s often overlooked in preference to promoting so called Best Practices. For example, I think we need to give the idea that the way in which family enterprises organize themselves, as I say naturally, needs to be given needs to be given a lot more prominence.

Okay, I get so so I think what you’re getting at is sometimes advisors who might be new and excited, might walk into a family and start looking for the problems but really, they might be overlooking some of the strengths and some of the things that obviously if the if the family business has been in existence for decades, they’re probably doing something right.

Yes, that is in a nutshell, we have to start from a position that if a family enterprise has been around for one, two or more generations, then yes, they must be doing something right. But what is it for the family that can be just so natural, it’s almost like part of the DNA. They may just describe it as how we do things around here, that it’s not clear, the conscious sense for the family. But if we’re going to work with families and maybe suggest there’s things that they could change to make it better, then I think as advisors we’re duty bound to begin by trying to understand why they have been successful in the first place. And the benefit of the doubt in that discussion has to be that the governance that they have, is perfectly functional.

I like that way you put that of the benefit of the doubt I own so so when when advisors come in often the temptation is, you know, to show how much we know and how we can be helpful. And we might rush in to try to be helpful by pointing out things that we see there that don’t necessarily look like what we thought we’ve seen elsewhere. And so we assume that that’s something to fix. And that isn’t necessarily the case.

And I’ve learned through making mistakes. And you’ve just described one of my mistakes, which in the early days of doing this work in the 90s going to a family who had been successful for just over 100 years. And there was many things going on. And one of the things I suggested was that they should have more board meetings. Well, how could that be controversial? Well, this families can run the business by family members staying out of each other’s way. And they didn’t like having board meetings. So they find my suggestion completely impractical, and unattractive. So this suggests they asked me Well, why would we do that? And never having thought about it and just having accepted that that must be what every business does. I just say something stupid like or Well, it’s best practice. And they were kind enough to say to me in response, well, if that’s all you’ve got to offer, that’s not very helpful. Is there anything more you can do to help? So they were generous in putting up with my arrogance, and I thought I could tell them how to run the business when they’d be running it successfully for 100 years. So turning the tables round. The challenge to me as an advisor was to try to understand how they’d be doing this. And then find out if there was any way that that could be replicated going forward. And then and only then, if they finally accepted that their natural way of doing things had run its course it could not be replicated, then the possibility of change would be acceptable to them. But me just going in and saying well, I know best these things are irrefutable. I just thought that was really arrogant and very patronizing.

Well, you you said that they were generous with you to put up with that. And I will say you’ll be you’re being generous with us and sharing an error that you made so that we can learn from it because I always say, you know, smart people learn from their mistakes, but if you can learn from other people’s mistakes here even further ahead. I want to get into one of the things you talk about in this piece about the boundary between family and business and how different families look at this different ways. And so the boundary can be in different places and I guess that’s one of the plate one of the things that we have to recognize when we come from the outside into these family and business systems to recognize how the family sees where these boundaries are and how they might be different from another family we were dealing with a couple of weeks ago.

Yeah, that’s that’s that’s very true and boundary theory helps. In our understanding of this. And broadly, the two strategies that can be adopted in relation to boundaries, and when applied to found the enterprises. You can see that there are some families who prefer to segregate the domains of family and business and they don’t like for example, having business discussions during family time and they wouldn’t have a family discussion in the boardroom. And the quite, you know, quite capable of keeping keeping those distinct areas separate. Other families integrate those to those areas of life. The business dominates family discussions and only values are manifest in the business and I think there’s there’s different mindsets in relation to that I would never want to claim one is better than the other but in trying to understand how families organize themselves naturally it’s kind of useful to puzzle out where did they set the boundaries and and boundaries exist in many facets of the family business like the the answer to the question, Who is family for the purpose of ownership tells you for the for the ownership boundary, whose family for the purpose of getting a job in the family business, that could be a different boundary because well maybe in laws are okay for working in the family business that would not be admitted to ownership. So write those questions you can use them to try to understand for the family set these boundaries, because any intervention in this system that we all enjoy working with is potentially going to reshape those boundaries and introduce different practices. So surely, the right place to start is by trying to clarify in our own minds and for the benefit of the family, where they put their their boundaries which are based on their attitudes, their traditions and their values, rather than us trying to think as advisors we know where those boundaries ought to

be placed. So I want to touch on something you mentioned a couple of minutes ago about how an advisor comes in and starts to work with a family and sees how they do things. And we may realize that the family does things in a certain way, but don’t necessarily recognize that it’s anything special or that it’s unique to them, but it seems to be working for them. And so I guess the first thing is for us to recognize what’s there and then to maybe point out to them, how it’s different to see if they think that maybe some changes might be better or or even just to help them recognize some of the ways they are doing things. Because as we continue to work with them, maybe we will be getting into some boundary questions and if we can show them that we’ve recognized what kind of a playing field we’re walking into. They’ll be more likely to listen to us as we suggest ways they modify what they’re doing, than if we just walk in there and start telling them they need to do this or they need to do that.

I agree with that wholeheartedly, and so almost a basic courtesy extended to the family that we prepared to make the effort and cautious observation is the phrase I would use in order to describe this to try and understand how they do things around here. And for example, if they ever it would appear a clear boundary that says only bloodline family members can own shares, then yes, we will respect that. But in order to be helpful, then we can report and the other side of that. That debate is point out the benefits so extending ownership beyond that group and that helps the founders to think through their choices that are inherent in their natural governance system and how they might want to reshape and develop for the future.

I like that expression cautious observation. It’s it’s sort of like walking in there and being careful where you tread and consciously taking the time to observe to really see what’s going on before offering too much of our opinion on what we think would be beneficial. Yeah,

it’s a phrase I’ve I’ve used a bit just recently, in fact, but it’s, I think it’s important in the role of an advisor, that that is our first duty of care. To observe and understand we can never make any pretense of being entirely free as an observer but we can at least try to into the system. There’s our own stuff to one side, and just challenge ourselves to understand using tools and concepts and ideas, how things work. And then when it comes to the facilitation of discussions then our job is to be a reporter of sites to help the family by acknowledging their innate tendencies and views dependents, and then giving the benefit of the other side of that argument. And this idea that we can make exclusive claims that are universally applicable to every family business. I think it’s just implausible. So being cautious of Zephyr under the portrait of sites, I feel is a reasonable description of some of the things that we try to do as family business advisors.

I love it and I’m going to steal it as your expression cautious observation and invite our listeners to do the same. And one of the trainings that I did talked about revealing the system to itself, and how much we can offer to a group of people by coming and observing for a time and then revealing what we’ve seen to the people who are there like the fish in the water who don’t necessarily realize they’re in the water but when someone points it out to them that can offer some useful opportunities to discuss boundaries and and other things that are that are going on. And acknowledging that the family and the business are already doing something well and helping them to do things better, as opposed to focusing on where the you know, where they’re doing things that aren’t what my one might call best practices and trying to shove our square peg into their round hole as consultants.

Yeah. I think I think those most judgments of better or to be understood from the clients perspective, what is the idea of better? It’s not a normative standard that sits outside that you can point to and see that is the best to become better you have to become more like the best. I think it’s in the incredible variety of these types of businesses and founder cultures and values. You their idea of what is best is very much got to be based on their traditions and then understanding that’s why I’m very resistant to this idea that somehow we can refer families to an external standard against which they could measure themselves. And then this by doing it that way they would be better. So for example, my my own nuclear error about having a board now I’m sure there’s people who will say they must have a board, they must have a functional board and all of that all I can tell them in responses that this business was a global business that operated without a board. So the question for the family was can you keep doing that in the next generation? Not why you ought to have one because somebody outside of your model says that that’s a good thing. It’s a very different approach.

So so that’s a wonderful segue into where I wanted to go. I wanted to go back to this story that you mentioned and which is also highlighted in this article we mentioned off the top. And I’m just gonna read a sentence for for example, some siblings and other family groups run successful businesses by operating in silos. And so this is your story where you’re talking about these people when they were in silos. They were fine, but when they were brought together in a board meeting, for example, that’s where I guess maybe the sparks would fly. And my question to you is it if you if you encourage them to continue to do this, are you not in a way just buying time for them? Because eventually there will come? circumstances that necessitate them coming together?

And I’m not sure I agree with that. I would hesitate to make that judgment and pull back from it and say, Luke, clearly this works with the family operating different parts of the business with significant autonomy from each other, that has to do with the quality of the relationships and has to do with the talent that they have. So if we then move forward a generation, other family members with the talent to match the needs of the business going forward, and just the quality of their relationship, I came to their ancestors, where they prefer to do this without any kind of emotional closeness. Now if that’s possible, or the family can find a way to make it possible, then supporting them to do that with a better understanding of what they’re doing and the risks associated with it is quite helpful. Rather than saying, Well, yeah, eventually you’re going to have to have a functioning divorce so we may as well get there quicker. I think they tend to the view that we can help families to be better at what they’re doing already. And for them that works in the totality of their lives. That’s quite helpful to judge them against this other standard and find them to be a failure is is quite kind of rather strange is meant to listen to him or making them feel bad about themselves and bear in mind the other ones I’ve been running the business.

And so I guess I have to agree that sometimes a relationship, let’s say between brothers might be a difficult one for all kinds of reasons that go back to when they were growing up together. And perhaps their respective children, the cousins will get along much better and that these kinds of board meetings and getting together will be a lot easier in a few years where different players are sitting around the table.

Yeah, I mean, I would agree with that, too. It’s just the I don’t have an idea, in my mind have a model version of this that you can say to families, everything you do should approximate to this model. What we’re seeing is what you do seems to be working in a net Matera moment users is functional, and works. It’s functional. Can you keep doing it that way? And if you can, then we don’t need to change things. But let’s be careful just how much change that you can cope with. And the types of interventions that you can build off the back of that and so with the client support is a taste of their capacity for change. Men have tried to bigger change processes with families before and failed. So I’ve become going back to the term cautious. Let’s just enable them to go forward and incremental baby steps to make the change over a period of time. And radical change in these families is something most people find too difficult. So unless they’ve left things for so long, that they have no options. So adaptive, incremental change is really for I find myself myself spending a lot of time with clients

trying to oversell incremental change, evolutionary change, as opposed to wholesale changes and revolutionary changes. And I guess, when when, when companies are going well, the incremental tweaks make a lot of sense. Occasionally, if you’re called into a situation where the stuff has hit the proverbial fan, maybe some more revolutionary changes are required. But that brings us right back to the first question of when we walk in we need to do an assessment we need to observe and see what where we are that family and where that business is on this scale from from requiring revolutionary big changes to what can we do as a resource to them to help them get even better from what they’re already doing? Well I think this whole subject of the evolutionary versus revolutionary and where, where we recognize a family and a business might be in terms of whether they just need tweaks or whether they need some revolutionary things is fascinating, and I think most advisors would do well as you suggest to be do some more cautious observation before jumping into any recommendations because of that.

Yeah, I think so. I’ve tried it both ways. That’s all I can say is, I tried to kind of imperious advice based on best practice and knowledge and all that good stuff. And it’s specific struggles and I feel much more comfortable being companion to the clients and trying to do less understand what’s going on here. Let’s figure out what needs to change and then figure out what’s the best way to implement that change.

You use the word natural governance and you say that, you know the the rules or whatever the protocols that the family has been following may or may not be written down. And I know a lot of people like to talk about you know, creating a family constitution and things like that. And so my simple, simplest question around this is, so when do you write things down?

I think it’s a matter of choice. And you can do that from the get go if you think that’s helpful. And we have to remember the constitutional arrangements come in different shapes and sizes that are countries that have for example, United Kingdom and unwritten, unwritten constitution, based in customer practice and convention as much as it is on law. We have countries like the USA with with a with a written document. And you have many families who have constitutional arrangements, part of which was written and part of which is customary practice. So I think we have to be quite broad minded about what is covered by the constitutional arrangements of a family. And I think being able to describe them to the family, so they understand them better is really helpful. And I’ve not sure that I feel it’s essential to have a written constitution. Many families will have a family constitution. It’s just the unwritten version. And it’s based on understandings and assumptions and customs and practices which over the years have developed and become part of the foreclosure of that family as a perfectly functional constitutional arrangement. The fact that it’s written down matters most of it

as long as one when they go from one generation to the next, that all that historical institutional knowledge passes on. And I think that’s where I’ve heard stories of like a patriarch, deciding that you know what, as long as I’m still able, I’m gonna write all these things down so that they’ll be preserved and I guess that’s fine as as far as it goes, but not necessarily something that we would be recommending to to every family business to do.

Yeah and unwritten constitutions have an innate advantage of flexibility. They can develop and adapt across the generations as each takes on the challenge of owning and running their family enterprise. Those Fisher established a written down and can be constraints and people and the next generation can feel they’re living the life that their ancestors wanted for them rather than the life they want for themselves. And they’re running the business in a way that I served as dictated rather than the immediate second should be run now. So the, the written version can be a straightjacket. I know people will say well, they can be flexible and all that kind of stuff that’s a bit more difficult I think to flex and change a written document that comes with the imprimatur of your ancestors. So the unwritten constitution is quite flexible and adaptable, but it doesn’t need to be talked about it needs to be, you know, strongly embedded in the folklore of a family so that they understand us and assumptions upon which is spaced are reasonably clear, because otherwise, you’ve gotten in a real risk of there being mistaken assumptions and misunderstandings, and that will probably probably lead to conflict.

So things don’t necessarily all have to be written down but they do have to be generally understood. And I suppose that family meetings where these things are discussed, so that people understand and they all have a common understanding of what things are. The more common and genuinely known the understanding is the less there is a need to write it down.

Exactly. So the the social intercourse between generations becomes very important, you know, people spend time with each other, or other and go when Zipcar really understand that person now. Yeah, we would already wrote it all down, but you do have a stronger relationship and a stronger, stronger understanding of what drives them. Their value systems. So yeah, I think these things are. I think, in reality, this is what happens in a lot of family businesses. I think we should acknowledge that for some writing it down is incredibly helpful. Having it in a ceremonial document is very nice for some families. I think, however, we need to stop short today. See, every family ought to have one because they don’t and a lot we prefer not to.

Fantastic, Ken, this has been great. We’re getting towards the end of our time together. So I’ve got a couple of final requests for you before we wrap things up. And so the first one and we like to now and all of these podcasts in the same way with the two questions. And the first one is a book recommendation. Hopefully something you’ve read that really helps you somewhere in your career of working with families, and then there’ll be a question about one piece of advice that you would have from an advisor to other advisors. So can we start with with a book?

Sure. Crazy difficult, but what springs to mind would be Edgar Shane’s work on process, consulting, and process consulting revisited, coming from the law, which is my profession of origin we were used to help processes is a very effective way to help systems to change. So I was able to read that book early on in my career, and I just found utterly fascinating. Over time too many times, David, heartily recommend it. To anyone who wants to work with family enterprises.

I love that out of the blue recommendation, Ken because I’m a big fan of Edgar Schein and and, and what I liked about his books is that he had written a book way back when and then redid released another book more recently that talked about how he’s thinking of it had all evolved. And so Edgar Schein and I’ll put a link to it to his books on on the show notes page as well.

Well, that’s That’s great, isn’t it? Very interesting books to read. I think piece of advice. When based on what we’ve been discussing, here, Steve, what is front of mind and five probably said, in some way is to avoid best practice. I just don’t think this is a helpful way to approach family businesses by telling them that there’s something out there that somebody I don’t know who or someone has decided as best and by measuring against them, we find that they are somehow short of best. I just find that very uncomfortable in many levels. I don’t see who can determine what is best and to approach clients in the spirit of being helpful. The first thing you do is tell them they’re inadequate. We measure to the standard as best as we just get off on the wrong foot. And the businesses are utterly fascinating in many ways, the tools and ideas concepts that we have to take to this world. We have to be able to understand these clients as we find them embedded in their culture and their traditions and their history. And so we can then work with them to try to improve their lives as they see that and understand it. And none of that involves telling them well, there’s a best way of doing this or a better way of doing that. So I’m anti best practice. Never say to advisers try to avoid your approach very carefully. It seems to me that a lot of generalizations that are reducing family businesses to facile slogans that have been presented as universal laws and I just don’t think that is the best way that the I say that to approach family businesses.

So we really when we walk into a family in a business system, we really need to take the time to understand where they are, meet them where they are, take the time to do the cautious observation. Don’t come in there with a need to fix and a need to help but to really, you know, walk in there and then make sure we understand what we’re dealing with. Before we start offering. Oh, this is what normally people do and anything called Best Practices. Wonderful. This this time flew by as it typically does. Ken, thanks again so much for joining us and sharing your expertise with our audience. listeners. If you haven’t already subscribed, please do so make sure you never miss any of these monthly episodes. Thanks again for joining us. I’m Steve Legler and we’ll see you next time

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