Doing the right thing is not always seen as a route to business success. But for the family businesses surveyed in a new report from Ernst & Young, in collaboration with the Family Business Network, it is what has made the difference between success and failure at a time of economic crisis.
“A family business will typically use a time of crisis to focus on its customers and core competencies,” says Peter Englisch, global leader at Ernst & Young Family Business Centre of Excellence. “It is not looking for short-term success and so there’s nothing surprising in the sector’s resilience.”
Resilient it certainly is. With 60 per cent of companies surveyed reporting revenue growth of 5 per cent or more and almost 20 per cent seeing growth of 15 per cent or more in the 12 months to June 2012, it’s hard to see the current financial crisis reflected in the family business sector.
Adnams, a 125-year-old brewer based in Suffolk, demonstrates the values inherent in family businesses. Financial crisis and the recession “have made people very cynical about business”, according to Andy Wood, chief executive. “Trust has been eroded greatly in business. But they [people] are not cynical about businesses where there is provenance and a story to match,” he says.
The family brewer has spent the past decade preparing for change, developing from the “small, slow-moving, top-down autocracy” it was at the turn of the century into an innovative firm where nearly 25 per cent of its beer volume sales comes from new products, compared to just 4 per cent in 2009. Part of that change was the introduction of a cultural values programme.
“We wanted our values to be real and tangible,” says Mr Wood. “We are a heritage brand, but we are a modern company.”
A drive towards sustainability prompted the company to take a new look at its waste management and now ullage, a by-product of the brewing process that previously cost the business for disposal, is used to feed an anaerobic digester that also takes food waste from the local community. Doing the right thing has strengthened local ties, cut costs and “greened” the business.
It’s hard to see the current financial crisis reflected in the family business sector
Ethical issues are a key aspect of sustainability and Ernst & Young found that, at 40 per cent of the surveyed firms, the environment was the focus of a sustainability strategy. Some 30 per cent said they had introduced green technologies in the past three years, while 20 per cent had reduced their carbon footprint. In addition, 30 per cent are focused on social issues, and 40 per cent have reviewed their supply chain for sustainability and humane practices.
Chris Oglesby runs Bruntwood, which provides office space in regional cities, including Birmingham, Manchester and Leeds. The company’s growth was checked sharply by the 2008 downturn, though it is now back to pre-2008 levels, and directors thought seriously about reining in the commitments it has made to local communities; staff are involved with 60 civic and charitable organisations.
“Each time we chose not to,” says Mr Oglesby. “The way we do business means we have to be true to our values through the difficult times. If anything, this is even more important. We are in it for the long term.”
And that pretty much sums up why the family business sector is thriving: a focus on the long term that was singled out by more than 50 per cent of companies surveyed by Ernst & Young as the most important factor to the ongoing success of their business.
More than 60 per cent said they planned to keep control of the business in the family for the next generation – that figure rose to 75 per cent of companies in emerging economies. But, though ownership and sustainability run hand in hand, but it can be hard to convince others of that.
“Family businesses, when they are good, are one of the best forms of ownership,” says Mr Oglesby. “However, finding equity finance that is matched and aligned to our family values is difficult.”
Bruntwood has primarily used bank financing up until now, but has just agreed a £130-million debt facility from a life fund. “The main change in the market is that annuity funds are entering it and they are long-term lenders. The fact that we are a long-term family business gives us a good position in that market.”
Funding topped the list of problems for businesses; 30 per cent said it was more difficult to find finance than before. But again, the tie up between ownership and management can help here; retained earnings was the preferred financing option for the firms surveyed.
“Financial risk is going to become more important in the next two years – many family businesses underestimate the impact of Basel III [the global regulatory standard for bank capital adequacy that is due to be implemented within the next five years],” warns Mr Englisch.
“The key to survival is the ability to invest effectively in innovation and efficiency, and family businesses will need more access to the capital markets. You need to be building the story now and taking the necessary steps to be able to present to the capital markets if you need an additional pillar of finance.”
Additional material from M Institute report, Sustainable Value Creation, by Jyoti Banerjee, supported by the IFB Research Foundation and FBN International, October 2012.
BUSINESS ETHICS
‘Bringing the outside in’
You might not think there was much similarity between Michael Phelps, the most decorated Olympian of all time, and the average family business.
But for Andy Rubin, chief executive at Pentland Brands, a clothing and footwear business that owns brands such as Berghaus, Red or Dead and Speedo, (sponsor of both Phelps and bronze medal winner Rebecca Adlington), watching the swimmer take his 19th medal at the London 2012 Olympics proved instructive.
“One of the themes that came across for many of the athletes was how strong a family team there is behind them,” he says. “There’s so much family support, often for many years, taking the young athletes to training or giving up weekends to watch them compete. When Phelps comes out on to the pool deck, the first thing he does is look up at the stands to see where his family are.”
Raising an Olympic athlete requires the kind of long-term planning that Mr Rubin sees as a key strength of a family business. He is uniquely qualified to judge; Pentland, which was founded by his grandparents in the 1930s as a Liverpool shoe business, was floated in 1964 and spent 35 years as a public limited company (plc) before the family took it private again in 1999.
“That meant a change in behaviour – as a family board we could talk about investment with a much longer-term horizon,” he says. “As a plc, we had to deliver against short-term goals.”
Such a mindset is critical in times of recession, he believes. “We can decide, as a family, to take a little less now and continue to invest; during this recession we have maintained our marketing, training and development budgets, and I think we can gain market share in the tough times as a result.”
Long-term investments include global development, as the company now sells its products in more than 190 countries, and a state-of-the-art world HQ in Finchley, which boasts a creche, restaurant, gym, pool and five-a-side football pitch. It’s a place where staff will be “relaxed and happy and so more engaged with the business; somewhere exciting, creative and innovative”. That kind of investment led to Pentland being placed 16th in the 2012 Great Place to Work survey of large employers.
“We’re very proud of that because it’s an external endorsement,” says Mr Rubin. “We have a very high staff retention rate and unbelievable loyalty. One of our core values is how we treat people, treating them with respect – like a family.”
Those values are laid out in the company’s corporate responsibility policies, which have been tied to compensation packages, to ensure ethical standards run throughout Pentland – and on to any companies with which it has dealings.
“Developing into a global business has been an incredible journey, and many of our suppliers and distributors are also family businesses, which means a real sense of shared values,” says Mr Rubin.
But sustainability also requires the company to take ideas from the world around it. “I have a favourite phrase that we should bring the outside in,” he says. “Getting exposure to the outside world is also very important and we try very hard not to be insular.”
