Recap: Family Business Expert Joe Astrachan Offers Resources and Tips

Joe AstrachanCox Family Enterprise Center Executive Director Joe Astrachan, recognized around the world for his expertise in family business, visited with Family Business Radio host Meredith Moore on Thursday, June 21, 2012, to talk about the Cox Family Business Enterprise Center programs and offer tips for family businesses.

Emergence of Cox Family Enterprise Center

Faculty at Kennesaw State University (KSU) began working in the field of entrepreneurship about 30 years ago. Mike Mescon, former dean of Georgia State University’ business school, helped start an entrepreneurship chair on the campus. A few years later, Craig Aronoff was appointed to that chair. When the he asked entrepreneurs about their businesses, they often found that family issues—intergenerational communication, for example—were among the major problems in business. In about 1983, the first real research was done on family businesses, and for the first time a special issue of an academic journal was devoted to the topic. Only three institutions have family business programs that pre-date KSU’s, and only two of those were conducting research in the field at the time. Some independent researchers were working on family business topics as well.

Then, in 1987, Kennesaw State University (KSU) began hosting quarterly family business forums. As a relatively new college, KSU had an entrepreneurial spirit, and professors and staff members were freer to try new things than they might be in more established programs. The day-long forums started with breakfast, followed by a talk from a visiting expert. A family business owner would present, as would one of the day’s sponsors. The Family Business Forum model was copied by over 110 business schools around the country and came to be known as the K Model.

KSU’s family business program expanded from the quarterly forums also to include six breakfast meetings and one two-day, off-site retreat per year. The school also started the Georgia Family Business of the Year awards program to honor family businesses that have demonstrated commitment to families, employees and the communities. The awards go to multiple-generation families in small, medium and large categories as well as 100-year-old family businesses.

As the forums and meetings became more content rich, a change came about in the world of family businesses. Accounting firms, law firms and banks that had formerly ignored family business began targeting them with seminars of their own. Though the new offerings may not have been as neutral in content as KSU’s programs, they appealed to family business owners because they were free, whereas KSU’s family business participation required a membership fee.

The program continued to grow anyway. Joe came to KSU in 1992. In the mid 1990s, the relationship with the Cox family began to emerge. The Cox family owns a business that started in Ohio more than 100 years ago and has since moved to Atlanta. It is one of the largest family-owned businesses in the country. About 20 percent of the gifts from the Cox family and other donors fund ongoing programs at the Center, and the remaining gifts provide growth capital for new projects and research.

Executive MBA in Family Business Program

One of the projects was the establishment of the Executive MBA for Families in Business. Launched in 2009, the program began because researchers found that family businesses that were managed like non-family businesses experienced problems. Family businesses have unique issues that should be addressed and unique strengths upon which they can capitalize. The Executive MBA for Families in Business has now run four complete classes, each open to about 15 students who are family members in a business. Occasionally, if a family member has been through a course, the program allows a non-family member executive in the company to participate.

Though limited in size, the program welcomes students from all over the world. Every other month, class members travel to the businesses of other class members for one week of classes. One day is devoted to the host company, with tours, case studies and talks with family members or non-family member executives in that company.

In the future, Joe hopes to extend the Executive MBA for Families in Business offerings to non-family owners and professionals at the KSU campus, then to offer the curriculum at no charge to other business schools.

Meanwhile, he points to success stories coming out of the program. More than half of the participants have used their experience to help their companies make strategic decisions at high and integrated levels. He refers to Level 5 thinking, where businesses determine the optimal mix of activities to make the most money, given the demand for services or products and the restraints on resources. He says it’s similar to lean thinking, though KSU professor Dr. George Manners says it is “what lean thinking will be when it grows up.”

Other tangible results include more and better family meetings in participating companies. Joe says that relationship problems can’t be solved with structural solutions, such as regular family meetings. However, in families with good relationships, family meetings help ensure the participants are in continual conversation to educate and make decisions. He says families could easily meet once a month, but he’s happy if they even meet once a year. They should try to meet at least four or five times per year to continue conversations, some related to business and some related to the family itself.

Joe Astrachan’s Family Business Story

Joe himself grew up as part of a family business, Seatrain Lines. His father didn’t work directly for the company, but it was very much a part of his life. Publicly traded on the New York Stock Exchange, the company had in 1976 a market capitalization of more than $1 billion. It had 200 offices in the United States, several coal mines and owned the Brooklyn Navy Yards, where it built ships.

Joe says when he was an undergraduate at Yale and decided not to become a physician, he went back to his dream of being part of the family business. Yale did not have a business degree at the time, so he created his own major in family business, focusing on a combination of business and psychology courses.

During that time, the primary officer of the family business was Joe’s great uncle. In the 1970s, many things occurred to hurt the shipping industry. President Gerald Ford made changes in the flagging rules, and the Arab Oil Embargo was instituted. The company had already been harmed by the Cuban embargo and other international events before the end of the Vietnam War.

Then, about 1980, Joe’s great uncle had a heart attack and passed away. After six months, the family was still unable to choose a new leader. The company had about $300 million in debt, which was not a large amount for a company of its size. However, the bank called the debt in. The company’s shares started at $35 each one morning and fell to 19 cents by the end of the day.

Over time, despite the efforts of Joe’s father and grandmother to keep the family together, the family devolved. Without the core of the business they no longer communicated.

All of this happened while Joe was an undergraduate. As he talked to his advisors about what to do next, they recommended he pursue a doctorate. He was accepted into the program, where he continued studying family business.

Common Features in Successful Family Businesses

Joe says that the elements successful family businesses share depend on how success is defined, whether it is considered from the family dynamics side or simply from the business side. For example, to a family, a business that lasts multiple generations may be the most successful.

Joe says that those businesses that do survive have a different culture from other families, businesses or even from their local societies. In his travels, he has discovered that in virtually every culture, children are reluctant to disagree with their parents, and families don’t talk openly because they don’t want to risk conflict. Yet open communication is required in stable, long-term relationships. In successful family businesses, family members are willing to delve deeper into problems and to have difficult conversations. They have what Joe calls “pleasant confrontation.”

Another common factor of long-term family businesses is a willingness to put family interests before individual interests. In families where the parents have always put the happiness of their children first by giving them the things they want, children are not likely to learn to put others first and to cooperate. Yet in businesses and organizations, those skills are necessary. At some point, the parents have to step back and allow the child (or young adult) to take care of problems for him- or herself.

On the business side, successful family businesses must learn not to spend more than they make. If all family members receive a dividend from the business, then the business will have to grow fast enough to fund the rate of growth in the family. Joe says if a family is growing by two to three children per child, per generation, the profit growth rate must be 6 to 7 percent, before inflation to maintain a constant dollar level of payout per child. That means an overall growth rate of 10 to 12 percent after inflation.

Such a high growth rate can be hard to maintain. Joe says that in a mature industry, a company’s growth rate will mirror the population’s growth rate, which is about 3 percent worldwide. Yet if you need 12 percent growth, your company will have to make up that 9 percent difference. One way to deal with this is to scale back on the dividends family members receive. Joe says it’s important to have discussions about changes in dividend rates early rather than later in family life.

Joe says that only 30 percent of family owned businesses make it to the next generation, and the difference for those is in the family dynamics. If someone likes working with family, they will continue doing so as long as possible, even if the business is failing. If a family hates working together, they will leave the company, and likely the family, even if it is making money. Most family members can’t separate the emotion from the business.

Family Businesses Around the World

Joe says that the challenges of family businesses are similar across cultures. For example, one perception is that family businesses in Europe survive longer, but Joe says there is no data to support that. He points out, however, that the U.S. is a younger country, so businesses that started here will naturally be newer than some that have withstood centuries in other parts of the world.

As far as industries that seem to have more family-owned businesses, Joe says there aren’t really any where family ownership is more prevalent. Worldwide, almost every industry starts as family-owned businesses, though government regulation may change family involvement. For example, in the U.S., power generation companies are generally not family-owned businesses, but they are in other countries. Overall, the vast majority of businesses worldwide – 70 to 90 percent – have family involvement.

Bringing in the Next Generation

When only 30 percent of family businesses survive a generational change, it’s important to prepare next generation family members carefully. This is one purpose of family meetings. Family members need to figure out how they will treat each other, for example, and those guidelines may change as each generation matures. For example, cousins in their teens and 20s need to know how to handle boyfriends or girlfriends brought to the group, while parents in their 30s may need to discuss how to interact with or even discipline each others’ children. Families should also begin teaching new generations relatively early about how money is earned and managed. Family members should begin to understand important business concepts, such as balance sheets, equity and depreciation, in their teens and 20s. Joe says learning business is like learning a language; it’s easier to acquire when the student is younger.

Joe says no research has ever been done to determine whether it’s beneficial for a young family member to work outside the business before coming on board. While he says he doesn’t see a problem with allowing people to work elsewhere first, it’s unclear whether it’s better for the family, business or individual.

And when two family members simply don’t like each other? Joe says families must look at the underlying reasons, probably turning to a family therapist or psychologist before looking for business solutions. Often, such conflicts occur when each family member is putting personal needs or desires before the good of the family.

Joe Astrachan’s Three Tips for Family Businesses

Joe calls the following three items the “diet, exercise and don’t smoke” of family business—three things that businesses may not want to do and may not do all at once, but that are vital for healthy businesses.

  1. Regular family meetings.
  2. A functioning board of directors. Research is inconclusive on whether for privately owned companies the board should be made of family members only or include outsiders, but researchers have found that boards are most effective when they meet three to six times a year. The board should make sure the CEO and top management are doing what they say, when they say they will and with the expected results. The board members should not feel like they’re working for the business, but should remain neutral so they can make difficult decisions when needed.
  3. Strategic planning. Family members should have an ongoing conversation about where the business is going, why it’s going there, and how it will get there. Strategic planning allows family members, management and employees greater autonomy. If all know where the company is headed, all can make decisions that support the goals.

Contact Our Guest:

Dr. Joe H. Astrachan
Executive Director of the Cox Family Enterprise Center
Wachovia Eminent Scholar Chair of Family Business
Kennesaw State University
Phone: 770.423.6045
Email: jastrach@kennesaw.edu
Website: http://coles.kennesaw.edu/centers/cox-family-enterprise/index.htm

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