2015 June

David Smorgon warns of Smorgon-like crisis for family business

08.06.2015 | BRW – Edited Excerpt

The Smorgon family business didn’t make it intact to a fourth generation, and David Smorgon wants others to learn from his experience.

Australian family businesses worth a combined $3.5 trillion will have to transfer ownership over the next two decades, and David Smorgon fears many will break up as his family’s did due to a lack of conflict resolution tools and succession planning.

The grandson of Moses Smorgon still smarts at the way the former Smorgon Consolidated Industries “faltered at the fourth generation”, breaking up in 1995 and dispersing among seven family branches.

“Myself and several of my cousins argued that we should all compromise and stay together, that the family had a 65-year track record of getting more right than wrong, that there was strength in unity,” he says.

Still disappointed that his three sons will never have the opportunity he and his two brothers had to join the family empire, Smorgon says the break-up made him want to help other family businesses learn from the mistakes his family made, and stay together.

In 2012, Smorgon set up a consultancy called Pointmade, which includes a family business practice that has seen him meet with “about 300 families” since.

Part of his work is to facilitate family meetings, and he’s constantly surprised how often opinions or grievances are aired in these forums for the first time.

“It’s amazing, I’ll say ‘okay Dad, you’ve had your turn, let’s hear what son or daughter thinks’, and there’ll be this outpouring of issues that have been kept in the too-hard basket. It’s clear that family businesses almost always fail for family reasons, not business reasons,” he says.

“In the Smorgon case we’d developed into a cousin consortium, with three generations aged from their 80s to their 20s all together under the one roof. It’s highly complex and emotional but we tended to focus on the business without talking about all the family factors – succession, conflict, non-working family members – until it was too late.”

Worldwide only 5 per cent of family businesses survive to a fourth generation, and Smorgon says there are lessons to be learnt from these examples.

How whisky maker William Grant & Sons keeps aging

William Grant & Sons, the maker of Glenfiddich whisky, is now in its 130th year and sixth-generation – but it may have gone the way of Smorgon Consolidated had a radical solution to its own ‘cousin consortium’ problem not been taken 30 years ago.

“We’d got to the point where we had 70 shareholders and it was becoming more difficult to keep everyone engaged,” says the company’s immediate past chairman and great-great-grandson of founder William Grant, Peter Gordon.

Peter Gordon (left) with William Grant & Sons master blender, Brian Kinsman.

“It was a period of relative calm for the business, so my father and his brother decided it was a good time to offer a share buyback, so family members could make that difficult decision without feeling any pressure.”

After the buyback, just nine shareholders represented more than 90 per cent of the capital, allowing a nimbleness of decision-making that Gordon believes has been vital to the company’s survival in an age of multinational competitors like Diageo.

“We can invest and try new things, and maybe there’ll be a short-term dip in performance but it doesn’t become a problem, because everyone knows what we’re planning for,” he says.

Gordon also credits his family business’s longevity to an “unwritten” rule that all family members should work outside the business for at least five years, before deciding whether they want to join it.

“They go out, and they bring great practice back,” he says. “Joining a family business should be an opportunity, never an obligation.”

David Smorgon lasted barely five months working for a law firm as a 22-year old before the lure of Smorgon Consolidated proved too great. He allows that a period of enforced external experience is a hallmark of many successful family businesses.

“But I’d argue that where you get the experience is less important than where you start. Just because your name’s on the door, you should never be parachuted straight into middle-management, you need to start at the bottom and learn the business inside-out,” says Smorgon, whose first job in the family business was on the gutting floor of its Melbourne meatworks.

A better family way

As their baby boomer patriarchs and matriarchs prepare for exit, it’s clear that Australian family businesses need help to survive.

A global family business conducted by PricewaterhouseCoopers last year included interviews with 90 Australian dynasties, and found that just 24 per cent planned to pass the business to the next generation – down from 38 per cent in the previous survey, two years before.

There were no procedures to resolve conflicts at 31 per cent of respondents, and 47 per cent had no succession plan for key senior roles.

However such formal structures are worthless if families aren’t communicating with each other and resolving conflicts before they grow out of control, says David Smorgon.

“Too often the ‘family’ side only gets focused on in a crisis, someone wants to leave or what have you. Conflict is natural in every family and you don’t deal with it by avoiding it.”

He recalls the Smorgons using several different consultants back in the mid-1990s in an effort to keep their business together.

“But 20 years ago, family business was just not a science. If you look at Europe and the US, it’s becoming one and it needs to happen in Australia too. Part of the solution is to get the families themselves talking publicly about their successes and failures.”