The Keys to Long-Term Resilience

by Josh Baron and Rob Lachenauer
Originally published by Family Wealth Report on 23 October 2013

Resilience imageThere was good news for family business owners not long ago. In a comparative study, conducted over two business cycles, family businesses turn out to “far outshine” publicly-traded ones when the economy slumps. Why? “The simple conclusion is that family businesses focus on resilience more than performance.”

The Harvard Business Review article does an excellent job of identifying what family businesses can do as businesses (for example, low debt, frugality, diversification) to be resilient in down times. But we must also understand how business families contribute to finding the upside during a downturn.

It sounds axiomatic, but the foundation of family businesses is the family. Executives in even the best-run family firms cannot manage for resiliency in their business unless there is a resilient family. Family tensions are inevitable, and a business downturn can exacerbate them. But the most resilient families provide stability to their business in times of trouble.

How do these families provide stability? How do they stay united during hard times? In short, what makes them survive and thrive and be resilient? A colleague of ours, Diane Coutu, has written a thought-provoking HBR article on how resilience works in business, which we believe helps to define the resilient business family.

Coutu argues that in order to cultivate resilience, organizations must follow three practices. They must: face down reality, develop strong values, and continually improvise. Let’s see how these three practices factor into the resilience of successful business families.

In our experience, the single most important thing a family can do to face down reality is to develop a strong but honest family narrative. Data that support our experience come from Marshall Duke, who is a psychologist at Emory University who, with his colleague Robyn Fivush, studied children in the aftermath of September 11 and discovered that children who had more information about their family’s stories turned out to be “more resilient, meaning they could moderate the effects of stress.”

Duke talks in particular about the efficacy of the “oscillating” family narrative – a realistic account of the past that includes both the ups and downs in the family. The resilient business family learns from difficult times rather than glossing its troubles over. There are few examples more powerful for the next generation than having the leaders of a highly successful business talk about their struggles, about the times when they almost lost it all, but kept it together because they stayed together as a family.

In earlier generations, this narrative develops naturally by swapping stories around the dinner table. As the family gets larger, however, the narrative needs to be more explicitly created and instilled. One excellent way of doing this is through a family history project, where the younger generations are actively engaging in learning about, and capturing, their shared history – both the good times and the bad.

The second practice that creates the resilient business family comes from their ability to generate values that help people find meaning in difficult times. For family businesses, the willingness to sacrifice for the good of the business is intimately connected to the family. The importance of the business is about more than wealth; it is about the identity of the family itself. We often hear family members say: “We are special because we’re a business family. We’d just be another family without the business.”

Moreover, family businesses think generationally rather than quarterly or annually. Present and future identities are all wrapped into one. As one family member told us: “Anything we do in our lifetimes dies with us, but what we do for our children lives on.” There is no better motivation for self-sacrifice than concern for the well-being of the next generation. Bringing this biological imperative over to the business creates a powerful rallying point that helps family businesses weather severe storms, such as economic downturns.

As with the family narrative, values tend to develop naturally in the early stages of a family business. When families get larger and more dispersed, it becomes increasingly important to define and reinforce the family’s values.

Finally, the resilient business family is extremely skilled at improvising. One way they do this is by setting reasonable – even low – expectations for what family members will receive from the business. In economic downturns, when money is tight, this provides the business leaders with the flexibility they need. These expectations must be carefully managed as the shareholder group grows. The consequences of failing to do so are huge: We know of one family business that had to borrow money to pay dividends to keep the shareholders happy. This family gave its executives no leeway at all, limiting their options to no reinvestment in the business – or a massive layoff.

The resilient business family also tends to be good at improvising because it is able to adapt and act decisively. Strikingly, many of our clients who run large family businesses have only rudimentary organization charts. This practice goes against everything they teach you at Harvard Business School. But when problems hit, the leaders are able to come together wherever they need to and are able to make good decisions very fast.

The depth and complexity of the relationships that family members have with each other is the foundation for this flexibility. A lifetime of solving problems together enables family leaders to improvise. Their corporate peers know only the highways, but The Resilient Business Family also knows all the back roads. What appears at first blush to be unrestrained creativity, even anarchy, reflects tacit rules and processes that are deeply embedded in the business family.

Hard evidence shows that family businesses fare better in a downswing, and the resilience of the business family helps explains why. In a tough economy, families can ensure that their businesses can stare down reality, find meaning in life, and improvise solutions. These are the building blocks of resilience, and it is the resilient business family that will help your business survive during turbulent times.