A vast number offamily companies in Australia will have new owners or managers within a decade, This article is based on a recent study, The Australia Family and Private Business Survey 1997, conducted by myself and Claudio Romano, a fellow Director at the AXA Family Business Research Unit. Our research, which included a sample size of 1500 family firms, found that the family business sector has concerns for the future, is not planning effectively and is heading for a period of unprecedented change – namely changes in the ownership and control of family held corporations.
Wealth of Australian family business
Family businesses have generated more than half of Australia's employment growth, account for about 40% of Australia's private sector output, and are a seed bed for innovation and the formation of large corporations (Renfrew, Sheehan, & Dunlop, 1984; National Investment Council & Marsden Jacob Associates, 1995).
In 1997 we estimated the overall wealth of Australian family businesses to be A$1. 2 trillion. The wealth estimate is A$690 billion for first generation businesses, A$293 billion for second generation, and A$170 billion for third and subsequent generations. The overall value of family business in Australia is approximately three times the market capitalisation of companies listed on the Australian Stock Exchange.
Concerns for the future
Family business owners are facing two major problems: concerns for the future of the business in an increasingly competitive environment and lack of a suitable successor. More than half the family business owners indicate that they have real concerns for the future and want more training specifically aimed at their sector.
This sector is definitely in a state of transition. The competitive environment of the 1990s is very different from postsecond world war, and the traditional education for the business successor – pushing a broom around the factory floor before climbing the rungs – is no longer feasible. There will be very few people who move from storeman to CEO. It is a grooming process. International competition means successors must now have a high standard of education and experience. Children must have the education and they must want to take over the business.
Another major concern of family business owners expressed in the study is family turmoil. Family businesses are different because owners have loyalties to the family as well as the business. This can lead to conflict. Yet our study shows that nearly 80% don't have a process for handling any conflict.
Evidently many of these businesses are relying on selling their business within 5–10 years to fund their superannuation. However, many have not taken out appropriate superannuation policies and other safeguards for the future. Owners would rather say 'if'I die, rather than 'when'I die.
Family business owners do not plan
The report shows that nearly 60% of CEOs expect to retire in the next 10 years but very few have made retirement plans. In spite of proposed fundamental changes taking place in the business, around 73% of companies have not yet identified their next CEO. It also appears that there is a reluctance to record any plans formally, since only 12% had a documented succession plan outlining the future, and management or ownership of the business.
Almost 40% of first-generation owners report that their retirement is dependent on the use of business assets and 25% say it is contingent on realising funds from the sale of their business. In contrast, 40% of third and fourth-generation businesses indicate that retirement is dependent on the continuity of family ownership of the business. This follows closely with their aim of becoming market leaders in their respective industries. Multigenerational firms tend to view the enterprise as an heirloom or coat-ofarms that is to be inherited by subsequent generations. Consequently, wealth generation through product innovations and developing global markets is paramount for ensuring continuation of the firm.
A study of the differences amongst first, second, third and fourth-generation companies reveals fascinating trends. The adage that the first generation establishes, the second develops and the third destroys the business simply does not hold true today.
Surprisingly, almost half the first-generation businesses are set up with the intention of selling them. The aim of many of these companies is to grow quickly, accumulate wealth, improve the lifestyle and then sell. Politicians need to be aware of how family businesses operate because the first generations are growing quickly and selling, and this could have cyclical effects on the economy.
The paucity of prior family business research means that it is not possible to know whether this is a new trend. It is becoming increasingly tough to run a business and since it may be harder to sustain the effort, owners decide to run their businesses for a shorter time and then exit.
On the other hand, once a business is passed on to the next generation, the objectives of the business owners change and become more family oriented. More second-generation business owners want to increase the value of business assets rather than accumulate personal wealth. Meanwhile, third and fourth-generation businesses aim to achieve growth through acquisitions and joint ventures and to become market leaders in their industry. Once the business is established as a family business, and the second generation takes over, values often change. Honour of the family and its history then become very important.
The apparent lack of formal planning is nevertheless alarming. The survey found that 40% of firms do not have documented business plans, 35% do not have business plans in place, and that 45% have no longterm plan. Research in other parts of the world has shown that successful successions rely less on formal plans and more on healthy, respectful family dynamics and especially on the ability of the outgoing and incoming leaders to communicate openly and honestly with each other. The planning process itself is the main vehicle for encouraging people to talk about the future of the family and the future of their business. It is worrying that the figures suggest, families in business are not planning, and the kind of straight talking that is needed in successions may not be taking place.
There is also a lack of formal management structures. The study shows that many first-generation businesses report not having their management structure and job specifications for the management team in writing. Non-family employees may not be able to tolerate uncertainty in their career path, and may be tempted to move to firms where career development and the route to the top is more explicit. Family companies may have functioned very well without adequate planning and management structures – but only up to a certain point in their development. With international competition, many of these companies will struggle to survive without formal planning and formal management structures.
One family's solution
The Smorgon family story is an example of the ways in which one family dealt with the typical multiple-generation family issues that emerge as the family, their ownership interests and their business all become more diverse over the years.
In 1926 Naum (Norman) Smorgon, an erstwhile butcher from the Ukraine, together with his brothers Abram and Moses and their families, said goodbye to Stalinist Russia. After travelling steerage class on an old, converted cattle ship, they arrived in Melbourne, Victoria, in March 1927.
Each branch of the family established their own small business. It did not take long for the Smorgons to realise that unity is strength, that they must pool their resources in order to survive. Norman, with his entrepreneurial spirit, found the niche he was looking for. Melbourne, with a Jewish community of 15, 000 people, had only two kosher butchers, one of whom was Christian.
The Rabbinical Court was paying the Watkins family £1000 a year to ensure that there would be enough kosher meat supplies in Melbourne. Norman saw his opportunity. The Smorgons bought a butcher's shop in a predominantly Jewish area in the city centre.
The family pulled together and the business prospered. Everyone was expected to work. When Norman's son, Victor, left school at the end of 1927 his father sent him to the Workingman's College to learn commercial skills, such as bookkeeping. But he was still expected to be at the butcher's shop at 6am to sweep floors and help with preparing the shop.
Soon there were four Smorgon butcher shops and the business diversified. The family opened an abattoir and began meat processing when they realised there was a huge market for tinned meat, as a result of the outbreak of World War 2. Then they moved into fruit canning, metal recycling, forestry, paper and plastics.
The Smorgon clan today numbers about 150, from first to fifth cousins, and it has underpinned Australia's manufacturing sector for decades. This huge success may be explained by the Smorgon family culture, which is characterised by their willingness to take the risks necessary for success. They fought against the large and established industries. They took on APM (The Australian Paper Mills, now Amcor), SPC (Shepparton Preserving Company), and became the second largest steel producer in the country, in opposition to their arch rival BHP (now BHP Billiton).
David Smorgon, now the Chairman of Family Business Australia, outlined the advantages of family business. "I think family businesses offer a degree of private ownership that is different from public ownership. It is the ability to make quick decisions. It is the ability to talk to your shareholders, get support from your shareholders, and move on in comparison to public companies that can only really do that once year, or at extraordinary general meetings. I think it's the ability to move quicker in business that is so important today. "
The Smorgon family ethic stresses consensus. Suzi Carp, great-granddaughter of Naum (Norman) who arrived in Australia in 1927, recalled her childhood memories of work involving the packing of offal in the meat works and of being included in family business discussions. She explained, "At lunchtime we would all go to the family boardroom. There might be 20 of us; my dad, my uncles and all us kids, sitting around a big table. We would listen to the business discussions and arguments. Nothing was kept from us. The lunches might last from 45 minutes to three hours. There was a belief that no matter how young we were we could learn from being involved. It was just taken for granted that we all worked".
She remembered how her grandmother, Annia Castan (nee Smorgon), compared the family to the brooms used in the Ukrainian village of her birth. "Everyone used brooms made of branches of the white birches. The brooms were tied with rope and used for many purposes. When the branches were together it served a good purpose. But the minute the branches wore out or were untied, the broom was useless. I see my family like a broom, tied together with similar interests, sharing knowledge, appreciating each other's abilities and giving love, affection and time for the common good. "
Part of the reason for the Smorgon move into steel production in the early 1980s was to foster business opportunities for the younger generation. A new industry would provide jobs for the new members of the family who were growing up, and allow the family to develop further. The Smorgons' initial steel investment was only A$60 million, although over the years it increased to A$700 million. By 1999 the family had made a 20-fold profit on its original investment.
In the mid 1990s the Smorgons decided to break up their empire and sell a large percentage of their assets. Many of the younger members of the family were disappointed with this family decision.
Ted Hummerston, an advisor to the family before and during the divestment explained, "Most of us thought it would be best for the family, and everybody else, if the business remained a single entity. But some senior family members were driving the process of breaking it up and they decided otherwise. "
It was as an intensely emotional time. The Smorgon clan held its cards close to the chest, and very little of any internal discussions or disputes were reported to the outside world. David Smorgon noted that, "There are also some inherent problems in the running of family businesses, where less than 10% get to the third generation. Perhaps one of the key issues with family businesses is the delicate, sensitive issue of succession. The ability of the current leadership of the family business to face the reality that one day he or she is not going to be there to lead the business, and how they deal with the issue of succession is probably the most critical thing. "
In this regard it is interesting to see how the Smorgon family business, like so many other family enterprises, did not survive beyond the third generation in its original form.
David Smorgon summed up by saying, "The Smorgon clan was a large family business that had been involved in businesses together for more than 60 years. But a couple of years ago, we sat around and decided the best course of action was to take a different route. We decided as a family group that our interests lay in going our own separate ways. We were keen to keep some investments together but, in terms of operating the businesses, we decided to go our own separate ways".
There are a number of disadvantages associated with family businesses. As David Smorgon explained, "The disadvantages come back to the succession issue that must be tackled; the conflicts of interests that different shareholders may bring, and the very strong individual characters involved in family businesses, sometimes to the detriment of fellow shareholders.
"There has been a lot of speculation about why the Smorgon formula worked, but surprisingly little discussion on what went wrong and what changed. Some people have suggested that the older generation lacked confidence in the younger generation. But that ignores the fact that the younger generation had been effectively running the various businesses for the previous ten years.
We have always been a very open family and our management style was also very consultative. Ten, 20 and 30 years ago, it was quite informal. But as the business became more complex and physically diverse, we were forced to develop more formal practices. We found that different businesses called for different methods, not just in communication, but of management style. For example, the original meat and paper businesses that we built up virtually from scratch were different to the public companies that we took over, such as Humes ARC. In this instance we had to come to terms with a relatively bureaucratic, formal structure and needed to develop appropriate management systems.
"By the late 1980s, the two core businesses, meat and paper, were being run the old Smorgon way, while our new ventures in glass, plastics, steel, totalisator equipment and so on, were operated as public companies. We were trying to 'Smorgonise' the public companies, but it couldn't happen overnight and we needed to find a way of meshing the two styles. The members of the older generation tended to assume that the methods that worked for them could still be applied in the newer businesses. But technology had moved on and people's needs had to be taken into account.
The 1980s saw the Smorgon business grow by 700% in value. Increasing complexity brought with it the demand for management with a greater degree of technical competence. While the family still met around the table it was no longer practicable to discuss more than a few major issues.
Universities began to study business management. The MBA graduate appeared, and the idea of a formal business plan was propagated. There were, by now, 22 family members directly concerned with the business. But the older members had little time to train and mentor the younger generation. In 1989 a family meeting resolved to engage outside help in the form of a management consultancy firm.
The Smorgons learned that they would need a more formal management and decision-making structure. They quickly realised that the adoption of a more professional management team must mean the employment of outsiders. Family members were no longer able to choose which area they would work in; they would have to compete with outsiders for their place.
The structure of the Smorgon businesses became more conventional, with a style similar to that of a public company. By 1994 it was clear that the business had completely changed and that the family culture was extraneous to it. Family members came to feel more like employees.
Denis Tracey, former CEO of Family Business Australia, explained, "The forces for reform became irresistible. In 1990 the consulting firm prepared a report stating that while the world and the Smorgon businesses had changed, the Smorgons themselves and their operational style had not. They needed to become more professional and rely less on the instinctive genius of the older generation. To the older generation, this was not welcome news. They knew it would mean ending the traditional Smorgon system which had been so successful. "
Early in 1995 the family board discussed divestment. The Smorgons decided to realise and distribute assets to the seven branches of the family. Buyers for businesses that employed 4, 000 people and had an annual turnover of A$1. 5 billion were approached.
The Smorgons retained the Smorgon Steel group. The family agreed to keep a single voting block controlling 67% of the company. Following their 18 months standstill agreement there are now seven separate entities of the Smorgon family.
Graham Smorgon still chairs the Smorgon Steel Group. The family members are going their own ways in business.
The Smorgons are still a force to be reckoned with in the business world. They have proved themselves to be skilled entrepreneurs, and are well-known in Australia for their patronage of the arts and their philanthropy.
What does the dismantling of the Smorgon empire mean for family business in Australia?
My experience of working with family businesses and from conducting research on them provides ample evidence to allow generalisations on certain parts of information provided by family, members of the management team, and advisors. This case study suggests two possibilities. When ownership is diverse and complex, inter-branch rivalries on future family ownership and leadership opportunities can create rifts. Also, professional service providers can often be unprepared for dealing with the real help, support, and advice that family businesses need. This is because they are not accustomed to the emotional intensity that is natural when family business systems have to face profound structural change.
Family business members who enjoy a strong sense of family commitment to their enterprise, but who are in the middle of complex generational transitions, can often feel pessimistic about their enterprise which has come so far, but may end up lost. For the Smorgons, their system of governance may not have been robust enough for the conglomerate they had created. Ultimately, selling appears to have been their preferred decision. On the positive side, this option created new possibilities for family members while preserving part of the conglomerate they created.
So what could other family businesses do (especially those who have complex family structures or dynamics to contend with) to find out whether there really are more options available to them, before considering the sell option?
This is where appropriate governance processes are essential to help guide and manage the family, owners and the business through the process of changing ownership and leadership. The challenge for each family in business is to identify the right governance architecture for their family business. This means the creation of formal structures where the interests of the family, the owners and the business are taken into account before decisions are approved. It is a systemic, broader concept of organisation than the more conventional approach to corporate governance that generally starts and stops with the board. In family business governance, the family's enterprise becomes the focus of continuity.
Done well, both the family and the business can benefit from having the right governance architecture in place: the business gets a strong, committed shareholder group often with capital to underpin the business, and the family gets its pride and commitment to the business recognised, with family members able to feel that they are part of an entity that contributes to the economy and society.