At a time when there is a lot of commentary in wealth management circles about business transition, succession and corporate culture, a study from the French institution examines differences between family-backed firms at different stages of life.
A European business school’s study of family-owned firms unearths a sharp contrast between first and second generation “ascendant” businesses and more mature “champion” organisations, with the latter being more successful in how they govern corporate affairs and are led.
The 45-page study from France-based INSEAD examined 121 family businesses and interviewed private equity firms for its report, The Institutionalisation of Family Firms. The report was issued by the school’s Wendel International Centre For Family Enterprise.
Family-backed firms account for 70-80 per cent of all businesses in Europe, and their owners often, in countries such as Germany, go on to build family offices and need services from private banks and other institutions serving high net worth and ultra-HNW clients.
The report draws a clear distinction between first- and second-generation “Ascendants”, and third- and fourth-generation “Champions” family owners, with the former proving less successful in addressing issues relating to intangible family assets, corporate governance and leadership, and organisational design.
The study looks at how “institutionalisation” can help family-owned businesses secure long-term sustainability, unlock growth, and face challenges such as family ownership and succession planning, as well as access to capital.
“Understanding how family businesses have continued to adapt over generations to the fast-changing business realities on the ground and sharing their lessons with those entrepreneurs and families at the beginning of this journey, will continue to drive our research agenda in the coming years,” Claudia Zeisberger, senior affiliate Professor of Entrepreneurship & Family Enterprise at INSEAD, said.
For the purposes of this study, “institutionalisation” is the degree to which process-driven decision-making and core family values are incorporated into a firm’s governance and day-to-day operations, can help a family firm achieve sustainable growth.
Mind the gap
The research found that the most significant increase in institutionalisation score, termed “the proficiency gap”, is between firms led by third-generation family members and those in their third generation and beyond. According to this, the study categorised companies in two distinct groups: “Ascendants” (first- or second-generation family firms) and “Champions” (firms in the third or fourth generation or older).
The older “Champions” outperformed “Ascendants” on five out of the six measures of institutionalisation assessed in the study. The three greatest challenges that led to greater proficiency gaps were shown to be issues relating to intangible family assets, corporate governance and leadership, and organisational design. However, Champions underperformed Ascendants in terms of “Family Ownership & Succession”.