Lombard Odier & Cie, in conjunction with IMD, carried out an in-depth study on family businesses in Switzerland during Spring 2001 because we became aware that little is known about such businesses, even though they are the key threads of the Swiss social and economic fabric. Therefore, we tried to better understand the ties between these families and their companies, to become aware of their concerns relating to the continuity and passing on of those businesses and to define the relevant issues more efficiently.
MIS Trend in Lausanne carried out the survey and compiled the results. Our original study concentrated on some 3, 200 companies with 50-499 employees and which we found through the OFS (Federal Statistics Office). First, MIS Trend rang the companies to ensure that they were indeed family businesses. It also obtained the names of the relevant respondents for our survey. In the end, the survey included 1, 264 companies, of which 14. 2% responded. This article is not a brief overview of the results of the survey, but rather an analysis of some points that we felt were particularly important, namely how a family business operates, the difficulties concerning succession, corporate governance and finally, how the family itself operates.
Long term focus
First, we noticed that family businesses believe they are more focused on the long-term than large listed companies. That belief stems from their ability to take on projects that may stretch out over several generations and the fact that they are not subject to constant pressure from the financial markets. They also have a fierce desire for independence, with 87% of respondents stating that they believe the company will still be in family hands in 5 years' time, while 66% believed that would be the case in 25 years'time!
That desire for independence seems to be driven by emotional factors. An entrepreneurial spirit, the ability of the owners – but also of the executives and employees – to identify with the company, the independence and speed of the decision-making process (considerably simpler when operating 'in the family') are all major advantages that respondents highlighted in the survey. It seems obvious that family businesses would have relationship strategies based largely on loyalty, which means that they listen more attentively to their clients and know their suppliers better, and their employees have a more comprehensive knowledge of the internal workings of the company.
However, every coin has two sides, and issues regarding succession seem to be a major obstacle to those companies ensuring their (very) long-term survival. Almost one out of two respondents mentioned more problems arising from family issues than company ones in the case of succession. Those family issues stem from two things: choosing a successor and passing on the capital. As regards choosing a successor, we noticed that the heads of Swiss family businesses, often the directors/owners, do not address this issue until very late. That is probably because doing so is an emotional burden for them, and the mound of every-day work can easily be used as a pretext to postpone dealing with the issue. However, thinking about it earlier would enable them to deal with the unavoidable emotional consequences, to prepare and motivate potential successors and to cope with the pitfalls that inevitably spring up. There are several tools available to help them with this but they are not used properly at present, eg education programmes designed specifically for family businesses – including programmes to train successors. In addition, the fact that it is known from a very young age that some family members are potential successors means that they can be motivated and their capabilities tested. Finally, setting up a Family Council enables budding talent to be identified and encouraged, mainly by giving Council responsibilities to the younger generation.
Corporate assets and governance
As for passing on corporate assets, the survey showed that a third of Swiss family businesses have rules in place, against only 15% in Germany and 25% in US companies. Those who have provided for succession have generally adhered to the principle of favouring family members who play an active role in the company. The main legal methods used are a will, a conveyance agreement, the sale of the company to the heirs and an advancement on the estate. International research in this area indicates that a conveyance agreement is the best way to pass on corporate assets from generation to generation. A conveyance agreement is a formal document by which the head of the company has contractual arrangements with the legal heirs or third parties with regard to his/her future succession. However, that tool still does not seem to be used very frequently in Switzerland.
Finally, when it is not possible to pass on the company within the family, selling it to a third party is the most likely course to be taken, followed by selling it to executives and employees, when the company is large enough to do so. In such a case, it has been noticed that, in addition to selling the company, the entrepreneur tries to find a solution whereby his/her corporate values are upheld. Those values include loyalty to communities and business partners, job security for employees, continued operation in the region and the upkeep of the company image and name, etc.
One weakness that our study revealed was poor corporate governance in family businesses. Although almost 99% of respondents said that they rate the company above, or at least on a par with, the family, the aims differ between shareholders. Those shareholders who play an active role in the company favour continuity and growth, whereas dividends are a key issue for those who have a passive role.
The problems arising from those diverging interests are often resolved by the Board of Directors. However, our study shows that on average only one member of the Board hails from outside the family and that that person is often directly involved with the company's operations, eg accountant, lawyer or employee.
It is possible that people from different walks of life who are able to assess all aspects of the company will be more capable of giving an objective opinion on its operations and structure, and bringing a different perspective to its long-term strategy. According to IMD studies, ideally 40% of a Board of Directors should be non-family members. Therefore, the Board should not be set up solely to fulfill legal obligations, but rather should also be perceived as a tool for assessing and defining the company's strategy in as broad a context as possible. Incidentally, Swiss family businesses seem to have an interesting attitude: if all the capital is owned by the family, directors who are independent of the family are sought; if, the capital is also owned by third parties, family members are always favoured.
Finally, the study revealed that only 18% of respondents have a Family Council. In contrast, 94% of those deemed it useful, even very useful. Those ambiguous results may be explained by an ignorance in Switzerland of such councils and their uses, but also the fact that in small-sized companies, families feel that they are in the driver's seat and do not regard Councils as useful.
Nevertheless, a Family Council promotes each family member's personal commitment, encourages better communication within the family, and helps to deal with inevitable conflicts.
Moreover, it gives the opportunity to discuss subjects not directly related to the company, as well as reassessing strategy outside of day-to-day business. Family meetings can take different forms:
- informal family meetings, appropriate for small companies in particular;
- formal family meetings, useful when several family members are shareholders though may not necessarily all play an active role in the company; or
- a Family Council, which is made up of several entities, such as an executive board and various working groups – more appropriate for large families and companies.
In summary, Swiss family businesses seem to rate well internationally in terms of the questions asked in our survey. In contrast, they do not make enough use of the tools available to them to improve relations between the family and the company or of networks such as the Family Business Network. Finland, Sweden and Spain are much more open in that respect. Finally, by way of conclusion, we quote a proverb from Sun Tzu, a Chinese military strategist who lived in the early 4th century BC – "The most difficult things in the world must be done while they are still easy".