Family businesses are central to both Irelands and Europe’s economic future.
The outlook for family owned enterprises is the focus of a just published KPMG European Family Business Barometer survey of 1,100 European family business owners including from Ireland writes Ryan McCarthy, Partner with KPMG Private Enterprise.
The findings show that while increased competition and a decline in profitability continue to present a challenging operating environment, a significant majority (71%) of those surveyed are either ‘confident’ or ‘very confident’ about their family business’ economic prospects for the next 12 months. Such positivity is underpinned by the fact that many plan to increase staffing levels over the coming year, a welcome signal that family businesses will play a key role in reducing falling unemployment rates across the EU, currently standing at 9%.
However, some of the concerns identified may cause some pause for thought. Family business owners across Europe have named the ‘war for talent’ in recruiting skilled staff as their number one challenge. These concerns are on the rise - with the war for talent as an issue for 33% in 2015, rising to 37% in 2016 and now cited by 43% of respondents in 2017 as their main concern - well ahead of issues such as changes in regulation (28%) or access to finance (7%).
So why is the issue of talent causing such concern? Whilst those surveyed recognise for example the importance of financial literacy amongst family members, there is also an increasing trend for family businesses to fill senior skills gaps with non-family members. In Ireland we see this as being an issue amongst an increasing number of family businesses.
In the survey, over three quarters (77%) of respondents agreed that non-family members bring a level of expertise and benefits to a family business. The triggers for this approach include obvious factors such as business growth and complexity whereby the business simply doesn’t have the skills required to bring the company to the next level. Issues such as export growth can be a trigger for new sales talent for example. Meanwhile, relatively newer topics such as technology and the related challenge of cyber security can heighten the need for external capabilities.
From an Irish perspective, the great unknown of Brexit should be focussing businesses on whether they have the right expertise in house or do they need external assistance. From research and innovation to identifying new export markets and accompanying language skills - the list of potential considerations is significant. Furthermore, many of these attributes are not necessarily hereditary by nature, so there is often a need to look outside the family.
Political uncertainty also ranks as a major concern for almost one in three (30%) of respondents across Europe. In Ireland, this is most likely Brexit related as family businesses may face issues such as cheaper imports from the UK and the risk of more complex cross-border and cross-channel trade exacerbated by the risk of a ‘Hard Brexit.’ It’s a well-worn mantra at this stage, but planning for such an outcome remains sound advice, regardless of what Irish business may hope for. In our view Irish businesses are not yet focussed enough on the potential impacts of Brexit.
Amongst other concerns highlighted by our research is how to balance the interests of the family and the business. 87% of respondents ranked this as important or very important – growing sharply in significance since 2014, when 59% found it very important or important.
Conflicts in this area can often be avoided if families can separate personal concerns from the operation of the business. Indeed many leading family owned companies have established clear, formal rules for what family members can expect from the business and what the business can expect from them. Inevitably there is no one size fits all solution to how to manage these issues. However we do see more interest in governance structures driven by a recognition that good governance is a success factor in growing a family business. In short it helps protect families and their businesses from each other.
Across Europe, our research also shows that family businesses appear to be adopting a more formal approach to various governance mechanisms including a formal board of directors (70%) and formal advisory boards (20%). Meanwhile 33% of those surveyed indicated that they have adopted a family council. Understanding the distinctions between these structures is important. For example, whilst the board manages the business, the role of the family council is to resolve and regulate family issues by creating a common set of rules. These can cover issues such as the conditions for entering family ownership, governing bodies and operational positions within the company.
In Ireland, we see the use of non-executive directors as very valuable in implementing better governance structures. There can be huge value in selecting the right non-exec for smaller businesses and typically this can be achieved at modest cost. For smaller companies such considerations may seem unnecessarily complex. However if growth ambitions are realised, having agreed rules and protocols in place before they are needed can prove their value in resolving potential pitfalls before they become problematic. As part of their governance agenda and in recognition of the role of external talent, almost a third (31%) of those surveyed also have a formal policy for the selection, remuneration and promotion of non-family members.
Unsurprisingly succession planning is also a major topic of concern. Amongst the potential issues for founders are those related to the next generation being reluctant to get involved. They may for various reasons resist stepping into leadership roles and may also seek careers elsewhere. Thus it is interesting that communication between generations was a notable feature of this year’s research and shows an increase from prior years. According to the survey, over half (52%) of respondents ranked communication between generations as very important their business. This number has grown steadily year on year since 2013 when 29% found it important. Inevitably this is linked to the belief amongst 84% of respondents that preparing and training a successor is important or very important to their business.
More than 50% of respondents also indicated that they have a member of the next generation in a management role to allow them to prepare earlier for succession planning. Thus issues such as clarity of ownership and the role for non-bloodline family members such as spouses should also be significant priorities for family businesses. Over a third (34%) of this year’s respondents state that they will face these issues in the next year as they prepare to pass management or business ownership to the next generation. External talent, governance and succession planning are key factors in the longevity of many of our best run family enterprises and they deserve the attention of all ambitious family businesses.
This article originally appeared in the Sunday Business Post and is reproduced here with their kind permission.