This article looks at what is meant by the "circular economy" and how the idea applies to building and protecting family wealth and business over the decades. The article, originally published by a business school linked to Cambridge University, is re-used here with permission.

The following commentaries come from a number of family wealth experts and were originally published on 27 January by the Cambridge Judge Business School at the UK’s Cambridge University. The authors are Dr Khaled Soufani, who is senior faculty (professor level) in  management practice, director of the circular economy centre, academic programme director of family business programmes, at the CJBS. Authors in the segment below Dr Soufani’s article are Iraj Ispahani, CEO of Ispahani Advisory, and Philip Marcovici, who is principal at the the Offices of Philip Marcovici. (Marcovici is a member of this news organisation’s editorial advisory board and has been a long-standing contributor to this news service.)

The editors of this news service are pleased to share this article; the usual editorial disclaimers apply and this publication does not necessarily endorse all views of outside contributors. To respond and enter debate, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Dr Khaled Soufani
The Circular Economy is a concept of vital importance to sustainability and tackling climate change, and family businesses should therefore play a key role in advancing pivotal circular economy goals of recovery, recycling and reuse.

The common factor that links a circular economy model and a family business is the desire and need to preserve wealth, resources, longevity and activities in a way that contribute to the business, community, and society at large. Family firms in particular need to incorporate the circular economy’s focus on optimisation and longevity in resource utilisation, to create intergenerational sustainability that enables a family firm to grow and continue to create wealth for future generations.

The long-term thinking of family firms is another reason why family businesses and the circular economy are a good match. Many family firms possess an essential dynamism and willingness to take business risks, and they provide opportunities for growth at times when larger companies may restructure, outsource, and downsize to meet short-term stock market expectations. Attaining long-term sustainability objectives are central to family business success, and such sustainability is enhanced through a multi-generational approach.

The circular economy concept is gaining increasing attention in academia, industry, finance and policymaking as the realities of environmental change become more apparent. Traditional “linear” growth models tend to exploit resources without constraint to achieve production goals and meet market demand, so redesigning this economic model is imperative if we are to meet meaningful sustainability targets.

The circular economy is a disruptive economic model that relates to multiple layers of government policy, businesses operations and strategies, while taking into account consumer taste and preferences. It is restorative and regenerative by design, structure, and objective: products, components, and materials should continuously add, recreate, and preserve value.

One way in which this is being done is to “servitise” all aspects of production and consumption across the entire chain in order to use as few resources as possible for as long as possible. One vivid example of this is how Netflix and Spotify are replacing the physical production of DVDs and CDs through streaming services.

It is important to note that the circular economy is not only about corporate social responsibility or green strategies. The circular model requires firms to come up with disruptive technologies and business models that are based on longevity, renewability, reuse, repair, upgrade and servitisation – and these fit in well with the goals of family firms.

It can be argued that traditional corporate finance literature largely ignores long-term firm survivability, as such studies focus on measures of performance and profitability linked to the return on capital. These factors are less prominent in family businesses, which focus instead on other factors pivotal to their survival and growth such as effective succession planning and engagement to ensure continuation for multiple generations.

Designing firms around sustainable objectives through a circular economy model increases the benefits to stakeholders and hence the aggregate benefit of the family firm. Such orientation towards sustainability can also increase productivity of the firm given the involvement of future generations in decision-making – as creating a more continuous relationship between the founder and future generations increases the probability of long-term success and sustainable wealth.

In summary: a circular economy model and family businesses both emphasise the extension of an asset’s life and the optimisation of resource use. They both embrace a multigenerational approach, be it to wealth management or the rejuvenation of factors of production. There is therefore big potential for family businesses to utilise the Circular Economy model to achieve profitability, wealth creation and sustainability to successfully pass the baton to future generations.
 

Part 2
Business owner, practitioner perspectives from Iraj Ispahani, and Philip Marcovici.

As founding advisors of the family business programmes at CJBS Executive Education, we are fortunate to have the opportunity to work with Dr Khaled Soufani, director of the School’s Circular Economy Centre. His research allows us to consider how family businesses can adapt to a changing world – not only in the short-term, but in both the long term maintenance of family harmony, and ongoing health of the family business and its ability to contribute to society.

At the end of the first fifth of the 21st century. it is clear that business and wealth-owning families face increasing uncertainties and challenges. Navigating the changing political and regulatory landscape is becoming difficult. For those leading family businesses or family offices, even identifying the right questions to ask can be a problem. Much traditional thinking about family offices, family wealth and family businesses needs to be revisited if they are to survive and thrive in this century.

Income and wealth inequality is driving change on the political and tax landscape globally. Brexit uncertainty, Hong Kong protests, political divisions in the US and many other developments are worrying families who think in generations rather than in years or decades. We now have the knowledge and tools to build an economy that is fit for the 21st Century but our thinking and behaviours need to adapt to this changing operating environment.

The linkage between business and society needs to be reinvigorated. Profit maximisation needs to be balanced with a corporate purpose; with businesses actively considering the needs of their wider stakeholders and not just their shareholders. Trust needs to be restored.  With significant ownership of many listed entities now held through funds and passive vehicles, the ability of shareholders to influence the corporate agenda change will be an important feature of this evolving landscape.  

While a heightened focus on sustainability by businesses is necessary, it raises many questions. Some of the changes that have taken place early in this century are positive and essential to our societies. Some of the changes are, and will be, destructive to family businesses and wealth. Disruption is likely to increase, partly driven by technological advances. Positive reputations for families and their businesses in this fast-evolving environment are likely to be more difficult to maintain.

Family businesses and sustainability: applying circular economy thinking to family business and wealth
A circular economy model is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems. In the context of family businesses and wealth, the purpose of keeping the family together is also of increasing importance. Without circular model approaches, whatever resources are used in the production process are eventually exhausted. Impact investing and an ESG (environmental, social and governance) focus are only part of what makes up a circular economy approach to planning.  Circularity involves retaining value in the lifecycle of materials, resources and products. Waste is transformed into something useful.

Key benefits of a circular economy model
There are many ways in which a family business or other family enterprise can benefit from a circular perspective. Adding value and jobs, developing a sustainable purpose and extending the lifecycle of resources are only part of the picture. In many family businesses, value is destroyed rather than created when succession takes place - a focus on a circular model can manage this and ensure that a growing family translates into a growing business. Avoiding waste is a critical component, as is using capital sparingly, a key issue for families and family businesses.

Can the ideas of the circular economy extend from the business to family wealth, governance and how families engage?

The concept of minimising waste and ensuring that production is organised in cycles rather than on a linear basis can be extended to family governance and how families deal with issues including succession, the ageing process, and interaction with governments.

Capital that needs purpose and sparing use includes natural, financial and cultural capital, and not just resources used in the production of goods. Minimising waste also means minimising the waste of useful resources within a family, such as the inadequate use and motivation of family members who may not be involved directly in the family business, but who have a direct or indirect stake in that business. Families that are wealth- rather than business-owners may waste human resources within their family through an over-reliance on external asset managers and under-preparation of family members as wealth owners. Also, what of the older generation, and the need to ensure that the valuable resource of their experience is not wasted? Reducing the “use” of materials and resources, in the family context, may mean ensuring that there is more focus on appropriate life-work balances; creating a more effective, cohesive and sustainable family construct.

The Executive Education division of Cambridge Judge Business School is building up what it offers in terms of education for family wealth and business owners, all with a unique Cambridge perspective. A second cohort of families will be in Cambridge for a 3.5 day programme oriented to wealth and business owning families to be held on 1 to 5 June 2020. See this link for more information, including a video on some of the issues to be covered: Cambridge Judge 21st Century Family Business Programme

The authors are also leading a programme in April 2020 for senior members of single family offices and for family members working with or involved with their family offices. The programme, which has been developed in collaboration with a small group of global family offices, is strictly for single family office staff and for the families they serve – the idea is to ensure that there is every encouragement for open dialogue and sharing without the distraction of being “sold to.”  See this link for more information:  Cambridge Judge Family Office Programme

Both programmes will have the circular economy as a theme.