In order to transition their enterprises beyond generations, family businesses must embrace what is known as conscious ownership. To do this, they must move from being conscious operators to conscious owners. We explore how families can deliberately focus on ownership to future-proof their enterprises.
“Whenever one wakes up is his own morning”- An Igbo Proverb:
What is conscious ownership?
Conscious ownership refers to an awakened state in intergenerational business families on three levels:
- Their changing priorities over generations
- An awareness of the importance of being owners
- The scope of the ownership role.
It is often said that “consciousness is the new luxury”. In the context of business families, it refers to a deepened understanding of both the importance and scope of the ownership role.
In generation one, typically family businesses are at the, “controlling owner” stage, where the founder of the business is the wealth originator and dominates decision-making. Although the founder occupies multiple identities simultaneously (as a parent, business leader and owner of the enterprise), typically they are most conscious of their role as a business leader and thus focus on operations. As the family braces for a transition to generation two, the need to focus on its role as an owner becomes critical, as both the family and enterprise are facing greater levels of complexity. The family needs to shift from an operator to an owner because staying as an operator is detrimental to the successful transition of the enterprise.
Family businesses comprise three systems: family, business and ownership. The family business is likened to an organism with constituent interrelated systems. For example, a baby has underlying nervous, digestive and respiratory systems. The successful growth of the baby is determined by both the health of the individual systems and the ability of these systems to collaborate effectively with one another. Similarly, the successful growth of family businesses across generations is determined by both the health of the individual systems and the ability of these systems to collaborate in the same way.
Unfortunately, as many family businesses are transitioning beyond generation one, the health of the ownership system is neglected, and this is not without impact.
The reason why the ownership system is commonly neglected is that in generation one the family is typically unconscious of its ownership role. During this controlling founder stage, the founder juggles multiple identities as a family leader, business leader and owner. As the owner, they seek to ensure that returns on investments are maximised, by way of capital gains or dividends, and that investments are well-protected and well-directed. As the founder assumes these three identities simultaneously, they enjoy access to information from all systems, and performing the ownership role unconsciously, informally and intuitively.
On the other hand, the founder is highly conscious of their business leader role. The founder is likened to an operator of a machine: without the operator, the machine will not run smoothly. Similarly, without the founder, the family business will not run smoothly. Consequently, the business is typically very founder-centric as they make all the operational decisions.
The challenge is that as the family moves from generation one to generation two, the family gets exponentially larger in size. In addition, typically the business phases into a season of maturity, characterised by a slowdown in revenue, profitability and cash flow growth. Often times the family is growing at a faster pace than the business. To ensure that the “GDP per capita” of the family does not decline, the family typically starts looking into strategic initiatives to drive the growth of the enterprise. These may include expansion into new geographic markets, products or services, new investments and/or joint ventures. This leads to a more complex structure, whereby the family is now juggling multiple balls and has to perfect the art of scale. Maintaining an operator’s mindset which requires being bogged down in the detail would be a hindrance to the enterprise scaling sustainably. In addition, it exposes the enterprise to significant key-man risk. Therefore, to be able to transition successfully to the next generation, the focus would need to be placed on institutionalising and strategic thinking. The family needs to become conscious owners.
This is like a pilot taking off and flying an aeroplane into the sky. As the plane flies higher, the pilot does not focus on the details of what is on the ground. Rather they focus on the macro landscape in taking decisions on how to fly the plane. Similarly, as families scale their enterprises over generations, they need to also switch focus from the micro to the macro. This means shifting to having a strategic view of the enterprise, rather than seeking to know the minute details of operations. The ability to see key trends affecting the macro is critical, as now the family is juggling multiple businesses and wealth. As they soar to greater heights, they must perfect the art of strategy rather than operations. Staying deep in the detail at an operator level will drag them such that they don’t see the bigger picture and make poor decisions in a silo.
Another reason why it is critical that families become conscious owners is that, as they make a generational transition, the family becomes more complex.
The enterprise evolves from being founder-led to being governed under a “siblings-partnership”. It is at this point, where we see a greater divergence of the three circles of family, business and ownership. Typically there is a greater diversity of the roles various family members occupy. Some family members may own shares and work in the business (“on the frontlines”), whilst others may own shares and not work in the business (“on the sidelines”). Those on the frontlines have greater access to information on the business, like the founder, they are able to occupy their roles as unconscious owners. Whereas those on the sidelines, do not enjoy this access and may feel that those working in the business are being too richly rewarded as employees. Inversely, those on the battlefield may feel that more funds should be used to reinvest in the business rather than be paid out as dividends to owners.
This contributes to information asymmetry and can be a source of conflict within the family. For example, tensions over remuneration of employees and dividend policies may arise. Instead, if the family invests in becoming conscious owners, by understanding and enforcing their shareholder rights, issues surrounding information would reduce, as they move from informal to institutional.
Furthermore, over generations we tend to see greater geographic dispersion in the family and family members may live in different parts of the world. This dispersion means that the family becomes multi-cultural. Exposure to multiple cultures can contribute to a clash of individuals’ values. Western cultures such as North America and European countries tend to highly value individualism, independence and self-sufficiency, whereas Africa, Asia, the Middle East and South America tend to favour collectivism. In individualistic cultures, one is encouraged to be autonomous, think independently and challenge the status quo. In collectivist cultures, there’s a greater emphasis on interdependency, cooperation, respect for hierarchies and a premium on social standing. These differences in values can make it difficult for family members to align on their vision, purpose and mission. As a result, it is necessary that families deliberately evolve from an informal owners’ management to a formalised owners’ management, to bring about diversity of thought, rather than conflict.
Conscious ownership requires the family to have a heightened awareness of both its role as an owner and the totality of the resources it has at its disposal.
These resources are not just financial resources but also include social, intellectual and spiritual resources. The family is aware of directing all of its resources to meet its goal. In doing so, the family creates the necessary framework to scale its wealth efficiently across generations.
In addition, conscious owners focus on strategic decision-making, rather than operational matters. They become adept at driving the following areas:
- Investments: Knowing what to invest in, how to manage existing investments and what to divest of;
- People: Knowing how to pick people in critical roles in the enterprise;
- Governance for the enterprise: Family, business, family office and/or foundation; and
- Cultivating a culture of the family and enterprise.
Family enterprises are navigating multiple levels of change in their families, as well as in their businesses and industries. To successfully drive their enterprises into the future, they need to focus on shifting from being conscious operators to conscious owners. They need to gain an understanding of the length and breadth of the ownership role so that they can future-proof their enterprises.