Poor relations?

Scotland’s professional advisers are failing nearly half the nation’s economy through lack of understanding of what makes it tick.

This startling accusation, in which the legal profession is implicated as much as any, is levelled by the family business sector, which accounts for an estimated 45% of our GDP and employs 50% of the private sector workforce.

Now the sector’s own voice, the Scottish Family Business Association, is leading the charge to raise awareness of the particular needs of family firms and the perspectives advisers need to adopt if they are to identify and respond to the issues facing such clients.

The Association, founded in 2005 under its current chief executive Martin Stepek, held its first conference last month, with an agenda dedicated to the needs of the sector, and strategies for success.

One tends to think of family businesses as small businesses – and that is often true, as over half of Scotland’s family businesses are still controlled by the founding generation. But within our borders, household names such as D C Thomson, Baxters, William Grant & Sons and Tiso Group still fit the widely accepted definition (see panel, next page). UK-wide, the roll call includes the Sainsbury and Morrisons supermarket groups; and even global brands such as Mars, Peugeot, IKEA and Wal-Mart remain in family hands, as do 25% of the top 100 European businesses.

The family way

Where does the problem lie? Essentially in a failure by advisers – legal, accountancy and banking professionals are particularly in the Association’s sights – to take a holistic view and to see the enterprise in human as well as economic terms. As David Bone of solicitors Wright Johnston & Mackenzie, a panellist at the conference, put it: “Professional advisers need to understand the complex nature of their operations, and the tensions and even paralysis that can sometimes arise. You can’t take the family out of the family business.”

The SFBA’s complaint is that most professionals’ training and focus does just that, so they analyse problems purely in business terms. This is aggravated by the relentless trend towards specialisation, particularly in the legal sector. With such a mindset, the client’s needs are defined in terms of the adviser’s special expertise, on the (usually false) assumption that the sole purpose of a family business is to generate economic returns.

It isn’t that being profitable doesn’t matter; far from it. But the methods also matter, and can be crucial to the long term health of the business, as Stepek’s own story (panel, previous page) illustrates. The theme was taken up by conference keynote speaker Chris Tiso, of the outdoor equipment retailers, who told his audience he had taken into the business a principle learned on Arctic expeditions: “Best practice can make the difference between success and failure.”

Tiso, who took over as chief executive on the death of his father, who started the business – “I had no mentor, just when I needed one most” – added that best practice can mean different things to different people, something that itself provides a route to learning if you observe others around you. While remarking that family business people he knew were very “driven” – they recognise both their own skills and their own limitations, and pick colleagues and advisers to run the business while they focus on its development – he went on to claim that often there is also a moral or ethical dimension, an area “where non-executive family members can add a lot of value if made aware of how to communicate it effectively in the boardroom”.

How to succeed?

The biggest issue facing the sector, however, is that of handing on to the next generation. A few more figures illustrate the problem. According to the SFBA’s statistics, 73% of family businesses want to keep the business in family hands from one generation to another, yet only 33% make it to the second generation, and 9% to the third. How, for example, do you achieve a fair sharing of your business interests among the next generation, when some may be actively involved in the firm and others not at all; or secure business continuity when family members fall out? As 57% of family firms have no defined plan for succession although 39% expect the CEO to retire or leave within the coming years, the starting point should be clear enough.

But a particular feature, the conference heard, is that those running the business may themselves need help to identify the obstacles ahead. “Whatever the issue is, there is always something else behind it”, David Bone observed during the panel session. “Much handholding may be needed”, another speaker cautioned. Therein, it appears, lies part of the problem for the legal adviser, who may be more comfortable taking and acting on specific instructions than dealing with what might appear to be a many-headed client. SFBA director George Morris, a trained corporate lawyer and MBA graduate, said: “None of this prepared me for managing and running a family business.” Even now, he claims, having tried to explain to legal firms the special needs of SFBA members, he often finds them backing off from tackling the community of interests involved. “We do one to one”, is a familiar refrain.

Mutual support

Faced with these difficulties, family businesses are organising in different countries in order to support each other and raise awareness of their particular needs in the outside world. One well established resource is the international association the Family Firm Institute (www.ffi.org), whose executive director Judy Green, attending the Scottish conference, pointed to the wealth of books and online advice on the subject now available both to businesses and professional advisers.

David Bone’s partner Ken McCracken, who also heads the consultants Family Business Solutions, believes that business families are very entrepreneurial and willing to adapt to meet inevitably changing market conditions – as illustrated by the trend to create internal venture funds for younger family members to explore new business sectors. In his view, “To create an advisory business that truly meets the needs of a family business requires a significant change of mindset and a significant investment in research and education.”

Three-prong approach

Now the SFBA is about to take the initiative by embarking on an awareness-raising campaign with professional bodies including the Law Society of Scotland, in the effort to secure a recognition of the needs of the sector in both pre- and post-qualifying training. With lawyers, Stepek wants to see this happen at three levels – as part of corporate law modules in the LLB and Diploma; through CPD events, perhaps run in conjunction with the Family Firm Institute; and through engagement with those already practising or intending to practise as corporate lawyers: “We want to encourage them to take such modules, or they won’t see the full picture for a large percentage of their clients.”

While he recognises that change will not come about overnight, Stepek urges everyone involved to try and get a qualification in giving family business advice. “There’s an obvious market advantage, and you have the comfort of knowing you’ve given the best advice.”

Perhaps the last word should go to SFBA chairman George Stevenson, who wound up the conference with the thought: if people were dying because it was discovered that doctors were missing out on a part of their training, there would be an outcry. Why should businesses fail because professionals haven’t been trained to advise them?

What sort of problem?

Martin Stepek, CEO of the Scottish Family Business Association, has personal experience of the problems that can be caused by well-intentioned but misdirected legal advice. One of 10 siblings whose parents founded electrical retail business J Stepek Ltd after the Second World War, he joined the management team in 1987, by which time the company had 22 outlets across west central Scotland.

Stepek’s parents wanted their children to inherit the business equally. They also had a policy that profits not reinvested in the business went into a pension fund rather than being paid out as dividends. Professional advice in the 70s and 80s had been to maximise tax savings by passing on shares, but with the children coming of age at different times, ownership of the company became “skewed”, as Stepek puts it.

Similarly with the pension arrangements: since there were different levels of involvement and lengths of service in the business, and pension funds were only held in the names of certain individuals, the family also ended up with enormous disparities due to a focus on tax saving and investment rather than keeping in mind the Stepek parents’ overriding objectives.

By the time the children were all of an age to take stock for themselves, Stepek relates, their own family commitments and interests emerged as an obstacle to rebalancing the situation.

“It was a very difficult emotional thing to deal with”, he adds. “It meant we had less enthusiasm for the business and took our eye off the ball.”

Just at that point an economic slowdown, coupled with a hike in insurance premium tax which hit the company’s rental business, sent it into the red. “We didn’t have the energy or the will to make it work, and the company went into administration.”

Though his family is admittedly a large one, Stepek has seen the scenario repeat itself even where there are only two or three siblings. “Share ownership, and passing on shares, is a very complex matter. For example in farming families, there’s an emotional attachment to the land but you can’t go on subdividing it. Hard decisions have to be made.”

The risk, he adds, is not just of bad advice but of “bad process” – failing to involve all the family interests properly at the outset. Even where families are in the habit of leaving the business decisions to one individual, a mechanism must be found to engage fully and openly with the whole family, a situation which calls for mediating or facilitating skills from the adviser.

Stepek, who himself graduated LLB, DipLP, fully recognises the difficulties for lawyers working within the conflict of interest rules, but equally maintains that it would be divisive and impractical to have formal negotiations with every member separately represented.

A more inclusive approach was advocated by Ken McCracken in a previous feature (“Who is the family business client?”, Journal, January 2004, 14): client service, he argued, could extend to helping the entire family explore the structures of organised accountability among sibling owners that have been developed by many successful companies. This can include designing into the governance structure mediation processes to cope with the inevitability of conflict.

McCracken’s firm, Wright Johnston & Mackenzie, which has developed multi-discipline services to the sector since the 1990s, deploys client teams to avoid the danger of individual advisers looking at too narrow an area.

“If the lawyer and the client (in the wider sense) agree that the engagement is to help the system cope with a fundamental transition in ownership and leadership of the business and in the roles of individual family members,” he asks, “and everyone who is participating in the project is advised that they can at any time take independent professional advice, is there a problem of conflict of interest?”

Scottish Family Business Association: www.sfba.co.ukk