Family businesses must focus on family, not just business: David Smorgon
“You could say we’re maybe hitting the economic peak. Others will disagree and say the future’s rosier,” Mr Smorgon told The Australian on the sidelines of a Hamilton Wealth Management dinner in Melbourne.
“Family businesses, I would say, are selling and also imploding for family reasons and not just business reasons.”
He declined to be drawn on Westfield or 21st Century Fox (chaired by Rupert Murdoch, executive chairman of News Corp, publisher of The Australian), saying “time will tell” whether now is a good time for generational asset owners to sell.
“I don’t think it’s any surprise that those two major families have made deals that effectively exits the family from most of their activities as well as capitalising on the economy at the time. So there is an interconnection there,” he said.
“But I know there’s a lot of families that are thinking about it, not from, ‘is it the right time for the business?’ but because, ‘I’m worried about (the fact) there’s no family continuity’.”
Mr Smorgon was a former director at Smorgon Consolidated Industries, once Australia’s largest private company, which was broken up in the mid-1990s.
He was disappointed not to be able to offer his children the same opportunity to work in the business he had, and has since worked tirelessly to help other families keep their businesses together, including at Pointmade, PwC and earlier as the chairman of Family Business Australia.
He works with families where relationships have broken down so badly that members aren’t speaking to each other, or refuse to spend holidays like Christmas or Passover together. The disputes can stem from unresolved conflict, in some cases dating back to childhood, that has never been aired. He shares an example of a time when his brother received a better bike than he did — and it hurt.
Some of the biggest issues can include governance, succession and a tendency to avoid difficult conversations, he said.
In terms of strategies, he recommends putting family on the agenda and setting aside time to discuss what is keeping the others awake at night, making sure to listen to each other.
Without giving children everything they ask for, he advises learning to have a warm heart.
He suggests holding family meetings with an independent facilitator in a neutral location, not around the kitchen table.
Writing down a charter for the family business with details such as pay, structure, dividends, exit and recruitment guidelines is important, he said.
“If we can connect families, if we can break down the barriers between generations, between siblings, and reconnect them, it’s a wonderful feeling that you’ve achieved something,” he added. “You’ve made a huge difference to families.”
How to put the ‘family’ back in family business
Over the next two decades in Australia, $4.5 trillion will be passed from baby boomers to the next generation and this threatens to cause friction in some of the nation’s wealthiest families.
In a slight variation on the Anna Karenina Principle, Australia’s wealthiest happy families might be all alike but every unhappy wealthy family is unhappy in its own way, according to David Smorgon.
“That’s because they can’t clearly articulate as a group who they are, what they stand for and where they are going,” he told a recent roundtable exploring strategies for successful family business transition, produced by PwC and The Australian Financial Review. More than two-thirds of transitions of wealth or family businesses fail and the overwhelming reason is a breakdown of communication and trust in the family.
Smorgon says the second reason why these transitions fail is because families aren’t training, mentoring and coaching the next generation in business or investing.
Families need to hold regular and effective family meetings outside of the business, Smorgon advises.
He says the importance of having two meetings – one for the business and one for the family – can’t be emphasised enough. People forget that it’s the shared experiences where everyone comes together that are “the glue that keeps the family together”, not the business.
“The problem for many families is they spend 99 per cent of their time on the business and only 1 per cent on their families until something happens and, very often it’s too late. People need to remember the health of the family is not the balance sheet but the family relationships.
“Fundamentally, it’s the way we communicate with each other. Family businesses often see tension become conflict. It’s ‘I rather than we’ and that is the biggest issue with families around the nation – they are in conflict. They cannot have open, frank and trusted discussions in a friendly environment,” Mr Smorgon says.
Part of that problem is the nature of the modern blended family. Sometimes there are multiple spouses in play with in-laws in-tow plus there are the competing rivalries between siblings and cousins from the second and third generations of the business. Smorgon believes this is where families need to have a common agreement on what the future looks like.
For PwC’s Private Clients Head of Family, Business and Wealth, Stuart Morley, a solid family constitution is mandatory and it needs to clearly identify who’s included in the decision- making processes and specify how the family engages – covering everything from governance to family break-ups.
Doltone House Events Executive chairman Paul Signorelli says the constitution is the bible and the whole family as well as its lawyer and accountant were involved in the drafting process. At its heart is the need to engender respect for the family’s traditions and values.
While Signorelli says the family were involved in the drafting process, often the difficulty in drafting the constitution is deciding which members of the family should be involved. Just because a spouse or (in many cases) the family matriarch isn’t involved in the business, they’re still key influencers and understand the relationship nuances and personal traits of particular individuals better than most.
And when it comes to generational change, immediate relatives shouldn’t be guaranteed a place at the top table. Director of Brisbane-based property group, McAndrew, Scott McAndrew says the key for the second generation is “not just the dollars or the next dividend payment – you need to have a passion for the business and a passion to build the family business together for the family”.
Furthermore, his father and business principal, John McAndrew, believes the founder needs to give his family successors the necessary tools to succeed and independence to make their own decisions.
Denis Wagner, a director of Toowoomba-based construction materials and infrastructure company, Wagners, says he wasn’t overly concerned with generational change. His real desire is to provide his four sons with choices – the opportunity to either carry on the family business or pursue their own interests.
Alternatively, Tynan Motors marketing director, Madeline Tynan, said the family were always taught there was no right to be in the family business.
“When we did come into the business, we didn’t have a right to be there; we had to work hard and earn it.
Money not the only measure of family business success
All of us can learn from others. There are many inspiring stories within the BRW Rich Families list… stories of determination, hard work and luck as well as stories of overcoming adversity and failure.
But does the traditional definition of what defines rich (money) actually resonate with today’s definition of a richer life? Can we redefine wealth away from the balance sheet to a more balanced life, a healthier family dynamic?
The criteria used in the BRW list is determined by financial success, however we know there’s a new type of currency that’s just as significant, if not more important, to these successful families to create a richer life. We ask families to conduct a ‘health check’ which rates family businesses on a scale to indicate the health of the family, determined by family dynamics and family relationships.
Moreover, does the health of the family match their wealth? Sadly, experience indicates a huge gap between the wealth and the health of many families.
Family businesses are failing for family reasons, not for business reasons. There is too much emphasis on business matters at the expense of family issues. Ninety-nine percent of most families’ time is spent on the business.
This inevitably results in a lack of effective and regular communication between family members, which over time, leads to a breakdown in the trust and respect among family members – the two essentials for all successful families.
A culture of avoidance and deflection arises that reinforces the inability to sit down and have face to face family conversations, which leads to different expectations between generations. Their inability to talk ensures tensions and disagreements continue and potentially move into conflict – serious conflict, which becomes linked to anger, fear, envy and emotions – a volatile and potentially deadly mix in a family business.
According to a PwC 2014 Family Business Survey only 24 per cent of family businesses plan to pass the business on to the next generation, and with most family businesses failing by the third generation, multi-generational businesses and wealth are under threat. We believe that creating a strong family environment combined with the giving of freedom to individuals to express themselves, to show their passion and to have their own self-respect, is paramount to family continuity and family harmony.
A successful family business requires hard work, commitment, collaboration and understanding. It requires creating a process and infrastructure of open communication, governance and a family plan to provide the framework for family success. It requires understanding that there are options, there are systems and processes that can assist.
So is it time for Australian family business owners to re-evaluate what rich is, to rebalance their priorities and spend more time with their family, and give their children something that money can’t buy – direction, guidance, support and love. A different kind of rich – a richer life.
David Smorgon warns of Smorgon-like crisis for family business
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.”