How Family Enterprise Owners Can Prepare For Crisis

In our experience, lopsided focus [on crisis management rather than crisis governance] is quite common among executives, boards and even academics. However, preparing owners to govern effectively during periods of greater uncertainty poses a unique set of challenges. When one’s business model and legacy are both under threat, good governance becomes even more essential for survival and success.

As a result, enduring enterprises invest heavily in educating family shareholders about what they own, why they own it and how it’s governed. These are essential ingredients for building long-term commitment among a diverse community of family members. A client once observed that when owners inherit shares in a family enterprise, those shares don’t come with a “user manual.” These owners must be trained to understand what the business does, starting with the products and services it offers and how they are designed, produced and delivered. They must also be educated about the values, purpose, and vision that together make up the company’s ownership philosophy. In frontier economies, especially, it is critical for owners to understand the organization’s risk and crisis management protocols, and to trust the teams that will steward the enterprise through recurring cycles of feast and famine.

In many ways, family owners serve as the institutional memory of an enterprise. Sharing the origin stories of how the business was started and the trials that founders had to endure can inoculate later generations against hubris and complacency. The notion that even great wealth can be lost is a strong signal that the enterprise—and the family’s fortune— should never be taken for granted.

The distributed wisdom and experience of owners is particularly valuable in volatile environments, when strategic dilemmas and value trade-offs will challenge the skill and resolve of even the most effective decision-makers. A family’s deep purpose, shared vision and core values can provide stability and clarity during periods of rapid change.

Enduring enterprises embrace the ongoing education of their family owners as an integral component of their continuity strategy. They hold regular family meetings and organize structured conversations about the family’s past practices and current operations. They preview strategic plans and future scenarios that will shape the mission and performance of the organization in the years and decades to come. In short, they find ways to transfer a culture of effective leadership, stewardship and entrepreneurship across generations.

Particularly in recent years, this objective has required families to consider a more nuanced definition of engagement—one that goes beyond the preconceived expectation that children will follow their parents dutifully into the family business. There are, in fact, four distinct ways in which family owners can engage with their shared enterprise—but while three of these are highly valuable, one of them is not:

1. They can be operating owners—directly involved with the management of the enterprise. These owners guide strategy and lead operations with “boots on the ground” on a daily basis. This role has historically been the most common, and it can help to streamline decision-making, though it doesn’t always produce the best outcomes for individuals or the system. This is particularly true when there is a mismatch between the desires and skills of family members and the strategic needs of the enterprise.
   
   
2. They can be governing owners—actively involved in strategic planning and decision-making fora such as boards, family councils, family offices and family foundations, though only at a governance level. This role is an excellent way of tapping human capital for those who are either not interested in or not available for daily operational engagement, but who can still add considerable value to oversight and decision-making at the highest levels of the enterprise.
   
   
3. They can be engaged owners who are neither in governance nor management, but stay connected with the enterprise both emotionally and economically. They participate in all collective activities, answer emails and messages from the family and the business, arrive prepared for meetings, ask great questions of leaders and generally support the unity and commitment of the family.
   
   
4. Finally, they can also be investing owners—mostly focused on dividends and valuations, but otherwise emotionally detached from the enterprise. For those in this camp, the family business is just like any other asset in their portfolio, subject to the same raw calculus of risk and return. These owners often resist family engagement, and they are the ones most likely to agitate for selling their shares, particularly during crises when resources are most scarce.

Over time, as families and their businesses grow in complexity and diversity, there tends to be a gradual migration away from operating roles among family members. Governance roles become a natural way of keeping particularly talented owners engaged without requiring them to dedicate their entire careers to the family enterprise. Similarly, nurturing a diverse community of engaged owners through sustained investments in learning and socialization becomes a strategic imperative.

In short, as we enter the New Age of Uncertainty, keeping a sizable quorum of owners in the first three of these categories is essential, both for continuity and for resilience. If too many owners drift away from the enterprise and become mere investors, many of the strategic advantages of being a family company become diluted. Thriving across the ever-changing seasons is hard enough without structural misalignments among owners around long-term vision, core values, liquidity policies and so on.

Enduring enterprises also deploy adaptive governance structures to buttress their resilience. They frequently adjust their sense-making and decision-making to match their new circumstances—even if it feels awkward and unfamiliar at first. Some owners who aren’t forced to build a board—by regulators, partners or lenders—often dismiss or discount this strategic resource. But as we discovered during the 2020 pandemic, boards and their leadership teams become the nerve centers through which all critical business information and decision-making flows during a crisis— both downwardly into an organization, and upwardly to its owners.

During a crisis, leaders throughout the system need to huddle more closely and frequently to improve their speed and agility. Like penguins in the winter, governance systems often grow much closer during a crisis before expanding once again as conditions improve in the proverbial spring. To be clear, there is no permanent solution for effective decision-making.

As a business’s context evolves, so, too, must its decision-making systems. But in times of abundance, there’s much less pressure to change. Some families, particularly in advanced economies, can get a decade or more from their governance system before it begins to malfunction. Others aren’t so lucky, learning the hard way that good governance is a moving target. Large groups debating complex, abstract problems are tolerable when the world is stable. But as a situation slides down the Hierarchy of Stability, business leaders need to move decisively. This kind of response typically requires smaller, more nimble teams that can meet frequently and share information openly and rapidly.

Perhaps the most daunting question owners face during these moments is whether they have a shared commitment to continuity or are ready to exit the business altogether. After all, there’s no point adapting your governance if there is no shared commitment to a collaborative future. As we approach the largest generational wealth transfer in history, answers to this question will have systems-level implications for operating companies, investment portfolios and philanthropic foundations around the world for decades to come. They will also deeply impact the families themselves, because their lives and livelihoods are often inextricably linked to the fortunes of the business.

Excerpted from The Enduring Enterprise: How Family Businesses Thrive in Turbulent Conditions. Copyright © 2024 by Devin DeCiantis and Ivan Lansberg. Available from PublicAffairs, an imprint of Hachette Book Group, Inc.