In this episode Senior Associate and venture member at TechStars, Francesco Frontani talks with Professor of Strategy Innovation and Family Business at Politecnico di Milano, Dr. Josip Kotlar. Francesco and Josip dispel the theory that family businesses resist innovation. On the contrary, family businesses, known for their enduring presence, undergo continuous evolution, fueled by the infusion of purpose driving innovation and entrepreneurial endeavors. But there is room for improvement. Family governance aims to tackle conflicts arising from business growth and diverse interests. However, this system can become overly rigid, potentially hindering the necessary diversification required to sustain the business amid evolving interests of future generations. Josip posits that embracing broader perspectives is crucial for enterprising families to keep younger generations in the family business and to keep Europe’s collective economy sustained and thriving.
Tune in for our discussion about how these businesses leverage history, legacy, purpose as dynamic forces to facilitate diversification, how they pass down core values, and how to keep family business (and global economy) alive and well.
(Italian Open) Ciao, Josip, grazie per essere qui con noi.
Ciao, Francesco, un gran piacere esserci. Partiamo?
Direi proprio di sì. We’re going to switch in English as we hope our listeners from all over the world will find this conversation insightful and useful.
So, Josip, within your years at Politecnico di Milano School of Management, you’ve been focusing your research on trying to understand how family businesses can innovate, so to establish a legacy that would stand the test of time across generations, right? Together today, we’re going to dig deeper into the role played by sharing a sense of purpose within the family and the business to help this process. But I was thinking, why don’t we take a step back and share more to our listeners about the relevance of this type of business today. Why are we talking about family businesses and why are they relevant for the economy?
Thank you, Francesco, it’s a pleasure to join this podcast. Family businesses are indeed a substantial portion of the world economy, from Italy to Europe to North America, but not to speak about emerging countries where family representation is even higher. Let me give you a few insights. For example, in Europe we know that there are around 14 million family-owned businesses which make basically 50% of private GDP in Europe. They give work to about 60 million people just in Europe, which means 40-50% of all the private sector.
Statistics range widely between country to country. We have countries like France, like Italy and Germany where the number and proportion of family firms is particularly relevant. We are talking about between 70 and 80% of all businesses. Reducing it a little bit down to 60-70% in the UK and similar figures apply to North America.
So, at BCG BrightHouse we’ve been working with several family businesses all over Europe, in France, in Germany and more recently in Italy where we opened our latest office a year ago. And we’ve been observing an ability of successful family businesses to carry along an authentic story across generations, one that is attached to the roots of the company, to the sector in which it operates, or to the geography in which it was established at its founding. However, we do also observe a risk in such a dynamic. Almost a misconception that since we as a family have been values-driven over the years, then our business will be implicitly purpose-driven, no matter what happens in the future, right? What are your thoughts on this, Josip, and how to address this risk?
You’re very right. Family businesses have an innate advantage in working with purpose. If you think about it, the founders of the business have a very strong imprinting effect on the businesses, and so the families. So, as long as the founder and the founding group of the family members are involved day to day in the business, of course you get that sense of intimacy, that colloquial approach to discussing, interpreting, living purpose every day. When a family business grows, when a family grows, when it is passed down from generation to generation, it is inevitable that, some of these foundational identitarian elements tend to be lost.
Another worrying effect is the growing intensity of family conflicts. As the family grows, multiple interests emerge. Different nuclear families have different goals, and it becomes more and more difficult to keep the family together. So ultimately, if those things are not tackled, the family business tends to lose its identity as a family-owned and family-influenced business. It’s very important to assess the relevance, the clarity of the purpose and make sure that the new generations embrace it.
So, what can family businesses do today, concretely speaking, following on your lines to make sure that they set the ground for the next generations to embrace that sense of purpose? Should they focus more on strategy and business direction or on culture and employee behaviors or is it more of a positioning and branding effort to be done?
So let me start from strategy. Family firms are well known for their longevity and we always celebrate longeve, multi-centenary family firms. But if you think about it, these companies must continuously balance continuity and change. They must continuously balance the past with the present and the future. And now the purpose of the family business can be very useful to do that because it gives meaning to the past of the family and it allows you to create meaning for the future of the company.
We see that purpose many times inspires entrepreneurial endeavors. It inspires family companies to diversify, to change industry, to move away from declining sectors into new sectors. Here in Italy, one of the largest banks, Banca Sella, owned by the family Sella since 14 generations. But if you look back into the history of this quite famous company here in Italy, it is that they changed the industry several times. They moved from textile, to manufacturing, and eventually, only in the last 120 years, they moved into the banking sector.
And then again, 20 years ago, there was a major shift in the position of the bank, moving from a regional traditional bank to one of the leaders in the fintech sector. In the meantime, the company has grown massively. Today, it counts more than 5,000 employees. It is one of the most healthy companies in the financial sector in Italy nowadays. If you speak with the family members, the family leaders, what they will emphasize is their values, their purpose, their foundation, and the need to constantly evolve the purpose to spur new entrepreneurial initiatives.
Yeah, Banca Sella is such a great example of a player in a sector that is being urged to innovate, but also in a geography that is so close to us, right, Italy. So, we spoke about strategy, business direction, but also positioning. Is there anything else to mention about governance? How can governance levers be pulled in order to embrace purpose-driven change in a family business?
So let me focus on the family governance even more than the business governance. So most often this governance is very informal. It doesn’t exist, it’s not written anywhere. The most vivid example of a family council, for example, is the kitchen table, where in the dinner time, you know, the family reunites and discusses business matters and the relationship between the family and the business.
Now, is purpose relevant? Yes, of course it is because governance means setting a clear policy to govern, the architecture to govern the relationship between the family and the business. Maybe this is the most delicate aspect of a family firm. So, we have many examples of business families and family businesses, businesses who failed, unfortunately, because conflict at the level of the family penetrated the business with obviously negative effects. Those families who are able to embed purpose into their family governance are those who eventually are better able to manage conflict.
Let me give you an example. A family here in Italy that was particularly large at a certain point, the seventh generation. It moved from being a family in business to becoming a family office. And at that point, the decision making became much more complex. Where do we invest our money? How to deal with philanthropy? And so on. The different nuclear families, which comprise the family group, it’s almost 50 members, they eventually had divergent views. What should we do? What should we not do?
Having a family charter that clearly expresses the purpose, the values, the culture that the family wants to maintain was substantially important in order to reconcile any conflict. So, whenever the family is in disagreement, they take some time, read again the family charter and that really inspires them. And once they read the document, the charter with the purpose statement, typically conflict disappears.
So as long-lasting businesses that were born many years ago in most cases, and in which different individuals from several generations work or collaborate with each other, family businesses are somehow and wrongly so perceived as less innovative than any other form of business. What are your thoughts on this misconception, Josip, and what links do you see between innovation and family businesses in your research?
You are very right, Francesco. There is this common perception that family firms are less innovative than non-family firms, but this is actually not true. In reality, if you look at the rankings of the most innovative companies, you will often see family firms ranking very high. And the reason is that family firms innovate differently. Family firms do not just look for the frontier technologies, for introducing new products and services that respond to new needs, they are actually able to delve back into their past. They are able to recover elements from the past and re-boost those elements. Some family companies are able to take that past, reinterpret it and relaunch it towards the future. And this is very much of a sense making and sense giving effort which revolves around knowing what your purpose is and the willingness to use your purpose to create something new.
A recent research showed that less than 5% of the offspring of entrepreneurial families have a clear intention to join their family business. If you look back just 20 years ago, that was about 50%. Which means that families need to change. They need to move to a broader view which is not limited to the family business, to the original legacy family business. They need to be able to broaden the scope of their activities and welcome new ideas from the next generation. So, that the activity of enterprising families moves from a core business into a diversified portfolio of businesses.
Mm, and the question probably becomes how to embrace change without compromising on our family values, right?
How to shape the meaning of those families.
And do you have an example of a family business that was able to enter an uncharted territory and prove itself to be successful in doing so without compromising or trading off with its founding values or vision.
There are several examples of families who are able to completely renew their competitive advantage and positioning over time, sometimes just moving from one business to the other. Let’s think about one of the main families in Italy, Falck, who moved from steel production to renewable energies and most recently it became a family office.
Think about the Stevanato family, started from textile and then expanded the portfolio of brands including brands like Valentino and many others that are now put under a broad portfolio of luxury brands. So many families actually over time, they change, their gravitational point and extend significantly their activity. Sometimes it’s just a serial sequence of different businesses where the family invests, grows and then maybe sells in order to move to the next adventure, maybe often with a new generation. Sometimes instead it’s more about portfolio building. So, every generation adds new businesses, and new areas of operation, and so new opportunities.
Josip, thank you so much for being here with us. It was a pleasure and we hope to have you on our podcast again very soon.