John L. Ward Clinical Professor in Family Enterprise; Executive Director of the John L. Ward Center for Family Enterprises
With family businesses accounting for almost 60 percent of the private sector workforce, you may, at some point, find yourself working or partnering with one. But family enterprises aren’t always like other businesses.
“They significantly outperform their nonfamily counterparts, in terms of returns to investors,” says Jennifer Pendergast, a clinical professor at Kellogg and the Executive Director of the John L. Ward Center for family Enterprises.
At the same time, “families are less likely to let go of underperforming business assets,” Pendergast says.
In this episode of The Insightful Leader, Pendergast explains how to assess whether working for a family business is the right fit for you.
Jess LOVE: When you hear the words “family business,” what comes to mind? Maybe it’s the local daycare center where the owners’ children taught your kids how to play Double Dutch. Or the regional chain of pharmacies you rely on when you come down with a cough. Or if you’re a fan of HBO, it might be something a little less picturesque...
CLIP from Succession: Logan Roy: “Thank you all for making it. We’re going to be the number one media conglomerate in the world. The key here is to act like a happy family. We’re the Osmonds and I’m Daddy ******* Warbucks, okay?” Roman Roy: “Good. Fine. Nobody here has any glaring substance-abuse issues that almost brought down the company, right?”
LOVE: If you’re not familiar, that was a clip from the network’s hit series Succession, which is about a media conglomerate run by the dysfunctional Roy family. For better or for worse, the high-stakes conflict at the Roys’ multibillion-dollar media empire has captured the attention of millions of viewers and left its mark on—at least the image of—family enterprise. And that’s because, unsurprisingly, the prestige drama tends to lean into the impression that family businesses are, well, dramatic.
Jennifer PENDERGAST: No one showcases the potential complications of family business better than the recent HBO hit Succession.
LOVE: That’s Jennifer Pendergast, a clinical professor of Family Enterprise and Director of the John L. Ward Center for Family Enterprise here at Kellogg. Happily for family businesses and anyone considering working with them, she says that the TV-friendly drama at the heart of the show is actually not very common in this sector. In fact, according to Pendergast, working with a family business is often a satisfying experience.
PENDERGAST: One of the most enjoyable parts of my job is sharing the story of what’s unique about family business and why it can be both lucrative and rewarding to be involved with a family business, either as an owner, as an employee, or even as a business partner. So, as with anything, there’s some truth and some “not so true” out there, right?
LOVE: You’re listening to The Insightful Leader. I’m your host, Jess Love. And today we’ll be exploring the myths and the realities of working for a family business with professor Pendergast, who spoke with us for our Insightful Leader Live event last June.
Maybe you’re considering working for a family business as an employee, or maybe you’re thinking about partnering with one, maybe by jointly owning some kind of asset together. Either way, this episode is for you. We’ll guide you through what to look out for when you’re weighing this decision, the strengths and weaknesses of family businesses, and how to put this information to use before you make the leap, one way or another.
LOVE: Let’s start with the basics. It turns out that family businesses account for almost 60 percent of the private-sector workforce, representing over 83 million jobs. And they account for more than half of the private-sector GDP, wielding a multitrillion-dollar impact on the larger economy. Those are bigger numbers than I was expecting.
PENDERGAST: Family businesses matter here; they’re relevant, they’re significant players and someone to really consider from the standpoint of where you might want to build a career.
LOVE: A family business is, of course, a business owned and operated by one or more members of a family who often hold key decision-making roles. But in practice, this type of business has a lot more variation than you might expect.
PENDERGAST: Just because businesses are owned by a family, doesn’t mean that all family businesses are alike, but there are some commonalities that we’ll talk about today. And they’re driven by the fact that family businesses typically have a concentrated group of owners—so a small group of owners who often have a deep connection to the business.
LOVE: Consider the example of Pella Windows. If you live in the United States, there’s a good chance you’ve encountered Pella Windows in your home. Or at the office. Or at the coffee shop, the gym, the post office—you get the idea. I actually had a Pella salesperson in my home a few weeks ago.
Since it was started in 1926 by Pete and Lucille Kuyper, Pella has grown to become one of the largest and most well-established window brands in existence, employing about 8,000 people.
PENDERGAST: What people may not know is that Pella wasn’t founded by a set of people who had a great interest in building the greatest window. In fact, windows were really a means to an end. Their purpose was to bring jobs to their small, rural community. So the screens were a means to an end. They looked for a business to help bring jobs to their community.
LOVE: Pendergast says this is a great example of how family businesses can leverage that deep connection with a place to have a meaningful impact. This is one reason they can be pretty fulfilling places to work.
Family businesses also tend to be more trusted than nonfamily businesses, according to Eldeman’s yearly “Trust Barometer” survey.
PENDERGAST: Edelman states that they believe trust is the ultimate currency in a relationship that all institutions build with their stakeholders. For businesses, lasting trust can be strong assurance against competitive disruption an antidote to customer indifference, and the best path they believe to continued growth. And without trust, credibility can be lost and a reputation can be threatened. In short, trust matters. And the good news for family businesses is that they are trusted.
LOVE: Family businesses are also perceived to have higher-quality products and better customer service than nonfamily businesses. And they’re perceived as treating their employees better and being more values driven.
Now, not every perception is so flattering to family business. There is also a commonly held belief that family businesses have lower returns. But Pendergast says that the evidence doesn’t back this up.
PENDERGAST: They significantly outperform their nonfamily counterparts in terms of returns to investors. Another important factor to consider, in terms of the financial returns of family businesses, is that they tend to be more stable over time.
LOVE: On the other hand, some negative perceptions of this sector do hold water.
PENDERGAST: One thing that’s not just a perception, but we actually know from research to be true, is that families are less likely to let go of underperforming business assets. So this connection to our legacy could be a negative from the standpoint of not being willing to let go of something that’s underperforming.
LOVE: Then again, this same tendency to wanting to hold onto things can also work to your advantage if you, too, value loyalty and consistency.
She also offered a few other benefits to family businesses—ones you may not even have considered:
PENDERGAST: There’s less bureaucracy in family businesses. So there may be more flexibility in job design or career path for you. And oftentimes families have a flatter hierarchy. So it may be a potential for a quicker path to a senior role.
LOVE: But then again, less bureaucracy and a flatter hierarchy could just be chaos. Pendergast recommends that anyone considering working for a family-owned business, or otherwise partnering with them, really do their homework. It’s helpful to understand where the business falls on the spectrum of “business-first” to “family-first.”
Business-first companies operate much more like nonfamily companies, whereas family-first ones tend to prioritize hiring family members and may treat the business like an heirloom with strict adherence to tradition.
PENDERGAST: The businesses that are most successful are the ones that are able to do both. They focus on making sure that their family members are proud of being owners, that they’re committed to being owners for the long term, so that I have the advantage of leveraging the capital that they’ve invested in this business, but that they also commit to strong business practices in running their business, so that it’s a place where they can attract strong nonfamily talent. The sweet spot in the middle of this balanced approach is not just the highest probability of maintaining family ownership and continuity over time, but also strong family performance.
LOVE: Understanding where the business you’re evaluating falls on this spectrum can help you understand what is really on offer.
Pendergast also advises that you ask some basic questions about the specific company you may be considering joining before signing on the dotted line.
PENDERGAST: Understand who are these key stakeholders in the family, in the ownership group, and what’s their influence or involvement in the business? Is the family itself well governed? Forget the business being well governed.
LOVE: One thing you may want to look out for is an independent board of directors. When decision-makers often all come from the same family unit, this can lend itself to homogeneity and groupthink. A strong, independent board can act as a counterbalance to that.
PENDERGAST: We have another colleague at Kellogg who described to me that innovation and radical transformation doesn’t come from the people within an industry, typically. He calls it the phenomena of a prophet from another land. It takes a prophet from another land coming in to prophesy what’s actually going to happen, right? Very few prophets from another land in a family business, typically, so the board can be those people to help you see around the corners, to make sure that you’re being objective and reasonable.
LOVE: Pendergast says in addition to providing fresh perspective, independent directors on boards can check some of the power of owners and management and even offer some accountability.
PENDERGAST: We actually find that the value of family businesses increases when there are independent directors in place, because it’s a signal to the world that people are willing to listen to that outside input.
LOVE: Pendergast also suggests asking how the business manages hiring and growth opportunities for relatives and nonrelatives.
PENDERGAST: I’d want to know, is there what is often called a family employment policy? Are family members who work in the business subject to similar qualifications and requirements to enter the business as nonfamily members? That would help me understand if the people in the business are qualified to be there. I’d want to take a look at what the family’s history is for bringing in people from the outside. Have they brought in people that they haven’t raised from the ground up, if you’re coming in at a more senior level? Have they been successful in recruiting people from the outside? Who have been the people that have stuck and why have they stuck?
LOVE: And of course, ask about compensation options!
PENDERGAST: Oftentimes, families are hesitant to provide stock- or option-related compensation to employees. So are they willing to, or have they structured an incentive system/compensation system in such a way that you do get some upside for the performance you achieve, even if that’s in more of a bonus structure.
LOVE: But you’ll probably want to be pretty diplomatic when seeking this information.
PENDERGAST: I do think carefully worded questions can actually demonstrate that you care a lot about the business and the job. So coming in and saying, “Hey, I think it’s really cool that you’re family owned, and it’s exciting to think that your family’s committed to this. Tell me a little bit more about how the family gets engaged with the business and how I might see their presence as having an impact in my role.” That could be a really diplomatic way to ask a question that shows that you actually care that you really understand the situation, but you’re not coming in and saying, “Hey, are you people operating like Succession? Are you going to throw stuff at each other when I come in the door?”
LOVE: In the end, evaluating a family company is a lot like evaluating any company. Potential employees and partners should attempt to get a clear picture of the organization’s values, culture, and operations before deciding if that company is a good fit for them. If, during the course of this investigation, you start to feel like you’re on prestige television, it might be best to just walk away.
Laura PAVIN: This episode of The Insightful Leader was produced by Jessica Love, Emily Stone, Fred Schmalz, Maja Kos, Laura Pavin, and Isabel Carter. It was written and mixed by Isabel Carter. Special thanks to Jennifer Pendergast. As a reminder, you can find us on iTunes, Spotify, or our website. If you like this show, please leave us a review or rating. That helps new listeners find us. And visit us at insight.kellogg.northwestern.edu. We’ll be back in a couple weeks with another episode of The Insightful Leader podcast.