The impact of COVID-19 on family business has been severe. Together with the health challenges, the mobility restrictions imposed by the lockdown are disrupting companies’ structures, business models, and relationships. In this article, we explore the impact of COVID-19, with both its challenges and opportunities, on the specific case of businesses.
For this purpose, we interviewed Josip Kotlar, Associate Professor of Strategy and Family Business at the School of Management of Politecnico di Milano.
Starting with some general facts about family owned-companies, we will then understand how three key elements of business, including trust, succession and governance, have been affected by the current COVID-19 crisis. We’ll also offer some actionable tips on how family businesses can transform these challenges into opportunities, and, in doing so, how can they navigate “the new normal.”
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Family business: an interview with A/Prof. Josip Kotlar
Family businesses are the backbone of most national economies. They represent a percentage ranging between 60-90% of worldwide private businesses, as well as a significant portion of large, publicly-traded firms. In Italy, in 2019 it was estimated that 65% of all businesses, with turnover higher than 20 million euros, are family firms. A recent study shows that about 25% of all the companies that went public in Europe in the last two decades, were owned by families
Family-owned company management has different characteristics when compared with other types of businesses. Family dynamics, relationships and bonds are strictly intertwined with the business models and financial side of management.
“Family business,” says Josip, “is a business model itself, with a specific ownership configuration, where the governance of the company is in the hands of the family.”
Together with this particular characteristic, family owned-companies have a history, a past that traces generations back and placed at the very core of the image and identity of the brand.
In Josip words, they have “an attachment to the past,” which consists of established practices, shaped by the family involvement and with high emotional components.
Because of these intrinsic characteristics, the restrictions imposed by COVID-19 are having a drastic impact on family business.
“Switching to a distant and digital way of working has been difficult.”
Social and physical distancing have disrupted core elements and processes of how family business work, survive and thrive. Josip Kotlar identified three of these core elements and explained in details how they have been affected:
1) trust;
2) succession;
3) governance.
Let’s start with trust.
Covid-19 impact on trust in family businesses
The physical distancing rules imposed by covid-19 are having a severe impact on family businesses and the type of relationships that forms them.
“Family businesses are defined by powerful and emotion-laden bonds, within the members, with the employees and with the external environment [stakeholders and other families].”
“And I think,” continues Josip Kotlar, “this is where the real crisis comes in.”
Together the economic shock and the related business problems that companies are going to face, the challenges posed by the spread of the coronavirus are attacking the very core strengths of family businesses: their strong bonds. In particular, they are characterised by three types of relationships: 1) family-to-family; 2) family-to-employees; 3) family-to-stakeholders (and other families). These three are all based on an informal, and often unspoken, system of trust.
Family-to-family relationships are suffering from social distancing
The relationships between family members, both at work and in everyday interactions, gives unity of action, clear vision and coherence in their strategic choices. The lines between relational and strategic dynamics blur, creating a strong, yet complex, system of bonds upon which the family business model and modus operandi are based.
This system of interactions is now at stake because of the lockdown and quarantine situation faced by many families.
“On one hand,” continues Josip Kotlar, “there are nuclear families that now are living together in the same households, constrained in the same spaces for over two months now. This might cause the erosion of some of those bonds, because of arising frustration and conflicts.”
“On the other hand, there are extended families, which instead are divided.”
In his consulting and research work, Josip has also noticed little use of digital technologies in family businesses compared to other work teams. Communications are often informal. The chat in the corridor, in the factory, while having a coffee, or around the dining table; these are all non-coded ways of communications within family members. It’s a business founded on intimacy, personal touch and face-to-face interactions.
Family conversations are the place where important decisions are made, for example regarding ownership, successions. It’s where the new generation is both trained and assessed.
“These are all very delicate topics that require deep conversations facilitated by face-to-face interactions. It’s very hard to have them online.”
Online conversations and interactions pose problems of privacy for family businesses and members. For example, online meetings require an invitation, and, since the physical presence does not matter, might also cause secrecy of the meeting. If a member is not invited, it does not know the meeting happened. This creates issues of exclusivity and competition, once more challenges that jeopardise family bonds.
“When a family is having a private face-to-face meeting, it might happen that they need to make a phone call and engage someone else to ameliorate the conversation, clarify points and make decisions. Online meetings lose this personal touch.”
They lose spontaneity.
Conversations are still happening now, via Zoom. However, the depth, the ability of engaging participants and understanding each other, of solving problems and resolving fights, are all very much compromised.
Family-to-employees: the loss of informal control
Family members and employees are used to everyday interactions. Small and medium family companies have an informal way of monitoring employees, based on day-to-day conversations, close communication and trust.
“Imagine family members walking around the factory, seeing how people work, act, behave and speak. They can notice things and correct behaviours on the spot, and understand potential problems and opportunities.
This makes family businesses thrive in three ways. First, the speed: noticing, correcting and acting happens fast. Second, there’s no need for spending in incentive control mechanisms and supervisors hierarchies. Indeed, family business is flat organisations, with few family members who directly manage employees. Third, this personal relationship between family and employees, makes the latter more loyal and engaged in the business.
“It’s rare to find an employee that does not share the value and that does not understand the purpose and vision of the family business.”
A family business is therefore built around an organisational efficiency that derives from these direct relationships between the family owners and managers, and the employees.
Leadership is at the core of these relationships: employees look for guidance and direction everyday.
“Now it’s difficult, if not impossible, to replace these informal and serendipitous interactions.”
“So,” continues Josip Kotlar, “on one hand there is the workforce, which is very confused: what’s the future? When will we be back to work? Will we be laid-off?”
The fear of being made redundant, or more drastically fired, is very common. However, as explained in a recent article on the New York Times, family businesses tend to look after all their employees. And it’s because of these strong relationships between the managers and the workforce.
“I have a number of families I need to take care of” is what family business owners would usually say. And they’re talking about the families of the employees.
For example, Fiat Chrysler top executives have cut off their salaries until the end of 2020, in order to be able to help employees that weren’t able to continue working.
“This is an example from a very large company, but I’m seeing the same attitude in medium-small family businesses.”
That’s right. The first concern of the owners here is to preserve the sense of community, and to make sure that the families of the employees don’t go into financial distress.
Family-to-other families: community solidarity in the ecosystem
For family companies the ecosystem in which they operate, including other families and stakeholder, is a central component of their business model.
“They [family businesses] are mostly small and medium businesses, which don’t directly reach the final client. For this reason, they work as a value chain. And, what happens to one family business, directly affects another. And so on.”
These relationships, or alliances, between families, are built on a similar system of informal trust that we explained in the previous paragraphs.
“Spontaneous and face-to-face meetings among families create alliances, and alliances create opportunities.”
With the loss of spontaneity due the lockdown measures, opportunities might be hindered.
However, explains Josip Kotlar, the strong bonds between families made them coming together, even if at distance, with forms of community solidarity.
Actionable tips
Informal and spontaneous interactions are the foundation stones of every family business. These happen among the family members, between family and employees, and family with other families and stakeholders.
The lockdown restrictions imposed by covid-19 have a direct impact on family business and the nature of these relationships.
The only way forward is to find closeness in the digital.
“One of the families I’m working with,” explains Josip, “started to have a 30 minutes Zoom call every morning.”
These are not formal meetings, but the owners and employees having coffee together, without ties, shirts, or other formality.
This helps to preserve some of the spontaneity proper of family business relationships.
“Another tip,” continues Josip Kotlar, “is to empower middle-line managers.”
Usually family businesses have a flat structure, with the owners directly interacting with employees. Because of the current situation this approach needs to slightly change. Trained middle-managers are important to keep interactions happening, even if just digitally.
Covid-19 impact on family succession systems
Having hardly affected older generations, covid-19 is having a severe impact on family business succession systems.
Together with dynamics of trust, succession systems are another key characteristic of family business. The ownership is passed from generation to generation, through a process that usually happens slowly and organically.
However, now, this process is dramatically affected.
“We all have heard about this. The average age of the victims of covid-19 [in Italy] is 80 years old. And the average age of the typical family business founder or CEO, is very similar, varying from 70-72.”
So, this is an unprecedented crisis for family companies, which no one was prepared for.
However, this is also an opportunity for family businesses to realise that the young generation needs to step up earlier.
“With an old generation more exposed to the risks of covid-19, the young generation is best equipped to face the new scenario.”
For example, younger family members are more used to digital and remote interactions, key to nourish relationships, express leadership and foster trust dynamics.
“It’s smoother for them to step online, if not seamless.”
Inevitably, this situation is accelerating the succession process, while usually the old generation shows resistance in passing the leadership to the next.
“A succession sometimes takes ten years of planning before actual action is taken.”
Because of the current crisis, this needs to change.
Actionable tips
Successions systems for family businesses are usually composed of two phases: the planning process and the actual action, the succession, when a younger member of the family takes the lead.
The planning phase can last years, even a decade, and it usually includes periods of co-leadership. The younger generation receives training and gets assessed, following a slow process of turn over.
The urgency, at times tragic, of the situation posed by covid-19 requires a rethinking of the succession process.
It needs to be flipped around: first the action, then the planning.
The younger generation needs to take leadership first, while the legal and training elements of the situation will have to happen after.
Times of crisis demand for strong leadership, hence there’s no more room for extensive periods of planning. Adopting this strategy also after covid-19 will help the younger generation to step up and will avoid resistance from the older generation, which usually translates into long, too long, planning phases.
Family business governance needs to adapt to the online world
Governance is the third and last characteristic of family businesses that we have discussed with Josip Kotlar, Associate Professor of Strategy and Family Business at the School of Management of Politecnico di Milano.
Family companies, explains Josip, have two elements of governance. The first, it’s the usual governance of the business, with the board of directors, the top management team and so on.
Secondly, there is the dimension of family governance, which usually includes a family counselor, or just a form of meetings.
This second dimension is based on highly informal dynamics. For example, the family council meeting. This is usually a complicated meeting to schedule, because it has to fit in everyone’s agenda. Moreover, it requires high management and facilitating skills.
“Today, this meeting has become even harder to schedule and manage, because members need to use digital communication channels. Also, new structures have to be implemented to ensure continuous communication.”
In a face-to-face family meeting there usually is a communication champion or leader, who takes care of listening to the family members.
Now, this classic structure has been disrupted after years of establishing best practices.
However, as for the succession processes, this is a challenge that discloses an opportunity: to embrace digital communication in managing the family.
“This is an opportunity of redesigning and rethinking family governance in a more efficient way, even in the most simplest actions, like sharing documents.”
Actionable tips
The restrictions posed by covid-19 are asking for the digitalisation of family governance. The tip Josip gave here is “not to treat this as a contingency plan.”
That’s right, the digitalisation of meetings, of documents and other business activities should not be treated as an exception for special times. Instead, it should become the norm.
This requires a thorough long-term digital strategy. This is where the help of a digital agency could come handy.
Conclusions
Covid-19 is having a drastic impact on family business, because lockdown and quarantine measures are directly impacting the informal and face-to-face systems of trust and relationships that characterised them.
More specifically, informal trust and relationships, systems of succession, and structure of family governance have been disrupted.
This crisis calls for a redesign and rethinking of these systems and dynamics, which require a digitalisation of processes and a younger leadership. In fact, despite the challenges, this is also an opportunity for the younger generation to step up, help the company navigate this ‘new normal,’ and sail the business towards calmer waters.
