How to nurture the family tree

Successful businesses need healthy relationships between owners and managers, but is blood always thicker than water? By

When James Murdoch was recently appointed chief executive of BSkyB, a company controlled by his father Rupert, he faced vocal opposition from shareholders concerned that his appointment had more to do with family ties than with commercial nous.

To become a director of a blue-chip company by the age of 30, at an age when most of us are still struggling to get a grip on the greasy pole of corporate success, is no mean feat. Only two other current FTSE 100 directors can claim such success: Viscount Rothermere at the Daily Mail and General Trust and Simon Wolfson at Next - both with illustrious family connections to the company concerned.

James is the third generation of Murdoch to work in the family business, although it is a business that his grandfather - who headed Australia's first nationwide media group, The Herald & Weekly Times - would barely recognise. The furore over James's appointment is a glimpse into one of the main challenges that face family businesses - the issue of succession.

Only about 30 per cent of family controlled companies ever make it to the second generation. When it comes to the third generation, the figure drops to around 15 per cent. The cliché is that they go from clogs to clogs in three generations: the first generation creates the company, the second builds it up and the third fritters it away. That relatively few survive past the third generation is undeniable, but the reasons why are more complex than the cliché suggests.

Often stereotyped as commercially naive dens of nepotism, family businesses actually account for over 50 per cent of private sector GDP and between 40 and 50 per cent of private sector employment. Two-thirds of all companies in the UK are family businesses, around 1.5 million of which employ more than one person. In the USA, one-third of Fortune 500 companies still have a substantial family interest, including names such as Wal-Mart and Ford.

"At some stage, virtually every business has been a family business; that's why they are such an interesting engine of growth in an economy. But maintaining and developing a family business means tackling a whole series of issues that just don't come up in multi-owner businesses," says Nigel Nicholson, professor in organisational behaviour at London Business School.

Most multi-owner businesses have a two-circle structure - owners and managers, which creates three distinct groups: owners that aren't managers; managers that don't own; and owners that are also managers. With family business, the additional family element creates a third circle, which in turn generates a new set of variables.

"The picture gets a lot more complicated," explains John Tucker, head of UK family business services at Grant Thornton and visiting fellow in family business at the University of Gloucester. "There may be family members that on the surface have nothing to do with either ownership or management, but in reality have huge influence on what goes on; there could be family members that work in the business but have no ownership; or there are family members with ownership but who don't work."

The first-to-second-generation succession is generally the most straightforward, passing the business, usually still relatively small, from the founder to one or more children. It tends to focus on the capabilities, motivation and availability of the second generation to assume control. By the time it gets to the second-to-third-generation succession however, the picture is often clouded by ownership being divided between cousins and different branches of the family.

The shopping and pools-giant Littlewoods was famously brought to its knees by fighting between the managment and various branches of the Moores family, which finally sold the company out for £760m to another family business, the multi-millionaire Barclay Brothers, in 2002.

Clarks Shoes, which was recently awarded the JP Morgan Private Bank's family governance honour, was almost torn apart in the early Nineties by feuding between the 100-plus members of the family that has owned the business since its foundation 178 years ago.

Chairman Roger Pedder, who married into the family, managed to bring the company back from the brink by clearly defining the roles and boundaries between family and management.

"It's the same issues with the third generation, but it is usually complicated by the size of the family. If different branches can't get their act together, the business falls apart, not because the inheritance is squandered in some reckless manner, but because the family can't agree on the direction in which to take the business. Different groupings want to look after their own interests, perhaps by selling or by focusing on dividends rather than business growth," says Nigel Nicholson.

Separating the management of the company from its ownership is a tough but sensible decision, bringing in independent senior management to drive the company forward, free from the shackles of family loyalties and conflicts. But the transition from family ownership and management, through family ownership and part-management, to family ownership and professional management is itself a considerable challenge, one which many fail.

Merely bringing in external management can be seen as a sign of failure, a sign that the family can't cope with its own inheritance. If non-family management is brought in, it also creates an obvious tension point between management and family, the aims of which may not always coincide.

"There's a natural fear about losing control on both sides," says Grant Gordon, director of the Institute of Family Business. "It's a question of decision-making - who is in charge. If either party feels unempowered or uninvolved, it very quickly leads to disillusionment and disaffection, something which is never good for business," he says.

But a positive decision to change direction at the right time can put a business on the right track.

Eddie Stobart for example, owner of the eponymous road haulage company, sold the £110m-turnover business originally founded by his father to a property development company part-owned by his brother, William, in October 2003.

And despite the unique challenges they face in securing their future, when it comes to the qualities often regarded as prerequisites for commercial success and aspired to by growing businesses - strong relationships, loyalty, motivation, belonging - what better model than the family?

'We're caretakers for the next generation'

The Wigan-based boiled sweet manufacturer, William Santus & Company Ltd, was founded in 1898. Today, it employs 30 people and has a turnover of £1m

Brothers John and Antony Winnard (right) are the fourth generation of their family to run boiled sweet manufacturer William Santus & Company. Best known for Uncle Joe's Mintballs, recently voted one of the North-west's leading brands, the company traces its origins back to the market stalls of John and Antony's great-great-uncle William Santus and his sweet-making wife in the late 19th century.

The brothers, joint managing directors, spent their formative years gaining experience outside the family firm. John says that it has given them a wider business perspective that enables them to manage the company much more effectively.

"As a family, we've got the same goals for the company and the same worries. We are just caretakers of the company, looking after it for the next generation. Because it's a family business, we can think long term rather than focusing on short term profits. We wouldn't be happy bringing in an external high-flyer who didn't have the same understanding of the business. There'd be pressure to expand, to take on more financial liabilities to fund growth. We're chasing growth, but only organically."

'It's like having a stately home to pass on'

Folkes Holdings engineering group based in Lye in the West Midlands was founded in 1697. Today, it employs 300 people and has a turnover of £20m

One of the youngest members of the Tercentenarians Club, an exclusive club of businesses that are over 300 years old, Folkes Holdings was until recently Britain's oldest listed company. In the 17th century the company made chain mail and swords. It now specialises in the less romantic but more profitable business of crank shaft forging and heat treatment.

It was taken back into wholly private hands by eighth-generation chairman Constantine Folkes (above) in 2002, after 50 years as a listed company. When he assumed the chairmanship in 1981 aged 28, he took control of a sprawling company comprising 39 separate businesses. He was also the youngest chairman of a UK public company.

After the group recorded its first overall losses in 1981, Constantine Folkes returned it to profit within a year.

"I always wanted to join the family company from as far back as I can remember. I think it is largely because my father talked to me about it from a very young age and it became ingrained in my psyche. It is a responsibility and it drives you forward to continue the success of what your forefathers have created. It's a little bit like having a stately home where you inherit it and hope to pass it on in a better state than when you took it on," he says.