The flexible packaging producer has already been bucking the odds for more than a century, considering that only 30 percent of businesses make it to the second generation, 12 percent to the third generation and 3 percent to the fourth.
“That's a widely distributed number and it's fairly accurate. Generally, about a third of all businesses make it to the next generation at each point,” said Daniel Van Der Vliet, executive director of the Smith Family Business Initiative at Cornell University.
Started in 2014, the program prepares students for starting, scaling up and managing family businesses, which are the most common type of business in the world, especially in developing countries. Even so, of the estimated 4,000 business courses in the U.S., Van Der Vliet said less than 100 deal with family business.
“All the emphasis is put on starting and maybe growing a business,” he said. “That's really sexy but the wrinkle to a family business is how do you continue it. There's no emphasis on perpetuating a business.”
The family business initiative aims to change that through college classes for undergraduates and grad students, educational seminars open to a wider audience, research support and networking.
By most estimates, 70 to 90 percent of U.S. businesses have some sort of family component to them. Van Der Vliet said the term “family owned” generally implies the family has strategic decision-making authority and at least one member is actively engaged in the business.
“This includes business like Wal-Mart and Ford. Even though they are publicly traded, the family still owns a controlling interest,” he said. “It's tough to get an exact number on them all. The definition is broad and there's no industry code. Nowhere do family businesses self identify.”
A study released last year by the Center for Family Business at the University of St. Gallen in Switzerland quantified the economic impact of 500 of the world's largest family-owned companies. These businesses account for $6.5 trillion in yearly sales — enough to be the third-largest economy in the world behind the United States and China — and employ 21 million people.
One of the most widely recognized firms, Lego A/S, comes in at No. 348 on the Global Family Business Index with $4 billion in sales and 13,869 employees. Established in 1932 and based in Denmark, the Kristiansen family retains 75 percent ownership of the company that makes building bricks of ABS and is poised to overtake Mattel as the world's largest toymaker.
On April 27, Lego announced 37-year-old Thomas Kirk Kristiansen was essentially swapping roles with his father. He became deputy chairman of the board while his father, Kjeld Kirk Kristiansen, 68, became an ordinary board member. The handover was in the works for years, guided by a structured process that calls for each generation to elect one person to be the “most active owner” and represent the whole family.
The most active owner will “be close” to the Lego Group, the Lego Foundation and Kirkbi, the family's investment company, Kjeld Kristiansen said in a news release.
“We in the family have agreed that Thomas should assume this role in the fourth generation,” he said. “Thomas has built up an in-depth knowledge of the companies, and he enjoys the backing of the whole family.”
Thomas Kirk Kristiansen said he has been preparing for the job since joining the board as an “observer” in 2004 and then an appointee in 2007, collaborating both with his father and Jorgen Vig Knudstorp, CEO of the Lego Group.
However, the new deputy chairman said Lego is more than just a company to him; it is a family tradition.
“We have a very clear purpose with our family enterprises, which is about the importance of play to the development and wellbeing of children,” Thomas Kirk Kristiansen said. “The passion for play and learning has always been a driving force in my family, and it is important for me to carry on this heritage.”
To many worldwide, Lego is the best toy ever invented, redefining play and inspiring tomorrow's builders and innovators. The owning family looks after the company “as people do with their own child,” according to Lego CEO Knudstorp.
“In my eyes, that makes family ownership something special,” he said.
A lot of founding owners and successors can empathize. They feel attached to the business concept they conceived, nurtured and watched grow. The thought of disowning it because of challenges or lost interest or poor performance is hard to swallow.
“In some cases, the business becomes a member of the family and as such to sell it it off would be akin to selling off a family member,” Van Der Vliet said.
Plan to perpetuate
Keeping a business in the family takes honesty and planning — sometimes years of planning. There are several best practices followed by families that have succeeded at passing the baton to younger relatives or new management. Van Der Vliet said communication, identifying the next leader, and separating business issues from family issues are three of the most important.
Open dialogue is needed, particularly within a system of governance, such as a board of directors or advisers. However, succession issues can be raised at simpler gatherings like an annual family retreat or weekly management meetings.
“I'd pick communication as the big best practice and that occurs through places like a family business council, a family meeting or a family constitution,” Van Der Vliet said. “It's a scary prospect for some because families often are very reluctant to formalize conversations or processes. Families are all about informality and a lot of unwritten rules but once you layer business and family over each other, you have to have a mechanism to separate the two.”
Such forums, he added, allow families to understand the business, identify paths it can take, set policies, and provide a safe place for difficult conversations.
Picking the next leader is often one of those difficult and delayed meeting topics, sometimes because owners don't want to choose between their children even if they know one is best for the job.
“That's a hard decision but if you are able to say, look this is the next leader and this is how it will happen and this is the timeframe, that takes a lot of uncertainty out of it both for the family as well as the employees,” Van Der Vliet said.
Then, there is the possibility no one in the next generation is interested in or capable of running the family business. That's one of the important times to separate business needs from family emotions and look at selling the company, or, at least, exit from running it and consider just being an owner. The latter turned out to be the best choice for John and Dyan Smith, who donated $10 million to launch the Smith Family Business Initiative.
“The family still retains ownership. However, they have professional management in place and it perpetuates as a family business even though there aren't really any family members actively working in the business,” Van Der Vliet said. “They are actively engaged in governance of the business on the board level.”
All in the family
For the families actively working side by side, business is rewarding and challenging with the founders often risking their own funds to start and grow the operation.
Phillip Ramos took out a $25,000 loan on his house to launch Field Lining Systems Inc. in 1983 with a plan to move beyond the rubber containment liners of the day and get into plastics. High density polyethylene liners are the bigger seller nowadays for the business worth hundreds of times that initial investment.
Family owners also tend to tighten their own belts to get their businesses through tough times. Glenn and Lydia Hertzler, the president and treasurer of Hawk Mold and Die Supply Inc., refinanced both of their homes and went without a salary for 18 months to pay suppliers during the Great Recession.
Then, there's the pressure of relatives depending on the same source of income — 14 for Field Lining Services — as well as firing relatives and disappointing relatives wanting a certain position.
To help keep work and family in balance, Minneapolis-based Dynamic Group Inc. has a policy against relatives directly reporting to each other. And, before CEO Joe McGillivray advanced in the company founded by his father and a partner, he and the other second-generation owners were evaluated by a psychologist specializing in business leader development and potential.
“They received encouraging results,” McGillivray said.
Family owners also have to work at striking a balance between members' different tolerances for debt and plans for direction. Those kinds of issues can make for some heated moments, said John Denney, director of growth and development for J.D. Products Inc., an injection molder based in Vadnais Heights, Minn.
“The family dynamic can make for contentious meetings because the Denney family is not afraid to tell each other how they feel,” John Denney said. “Emotions can run high on occasion, but we are all thick-skinned and understand that we all have the company's best interest in mind.”
The advantages of working with family outweigh the drawbacks for most owners of plastics companies.
Denney puts the ability to say exactly what one means without fear of professional repercussion as well as the sense of complete trust in the plus column for nimble and quick problem solving.
Other benefits for families and their employees alike typically include ownership stability, flexible hours, strong work cultures and support of community projects.
“It isn't and never will be just about a paycheck,” said Brianne Carroll, commercial manager of CPX Inc., a high-volume injection molder based in Kentland, Ind. “We love our company and jobs, and live to do them.”
In addition, on a long-term basis, families don't have to worry about quarterly results and profit margins like publicly traded companies.
“Private businesses still have those same metrics; however, we don't have external investors to satisfy,” said Philip Katen of Micro Mold. “We can make a decision that may reduce the company profit in one year; however, the three to five year strategy will yield positive results.”
The need to understand the role of family enterprises as a businesses strategy in emerging markets like China, Latin America and India also is important. In India, for example, Van Der Vliet said about 98 percent of businesses are family owned.
U.S. companies that want to sell their goods in emerging markets or manufacture for those businesses or buy from them should know about the far-reaching power and influence family businesses have, Van Der Vliet added.
“The businesses tend to be almost more important than government in those places because you can trust them and because they are the pathways to economic prosperity much more than government would be,” he said.
“What we see is that even though there might be wars going on, environmental degradation and financial turmoil, families and families in business tend to persist somehow. The skills they bring to market, their ability to adapt to change, and their relentless pursuit of success make family relationships more than anything else an incredible determinant of success.”