Q&A with the director of the Bailey Program for Family Enterprise
Kim Schneider Malek has lived in the family enterprise space for more than 25 years, so she uses all the family business terms with ease. It might not come as easy for the rest of us. So, we sat down with the director of the Bailey Program for Family Enterprise to quiz her on the language of family business.
Q: What is a family enterprise?
A: Family enterprise used to be a term reserved for the multi-entity family-owned and family-controlled high-net-worth-implying businesses. Today, it is an overarching term referencing the following: family business, family office, family foundations, family governance structures such as boards and family councils, and, more importantly, the enterprising family itself.
Q: What is a family business?
A: Family business, in the broadest sense, is an operating business that is owned and controlled by a family who also participates actively in setting strategic direction and often has members who hold management responsibility for implementing the owners’ plan. Family business is the oldest and most common form of economic organization around enterprise.
Family businesses range from small shops to large complex conglomerates. Some are founder controlled, some multigenerational entities controlled by a sibling partnership or a cousins’ consortium of owners, and some have transitioned to the next generation of ownership and leadership, if not also control.
All family businesses have an origin story dating back to an entrepreneurial founder who had an idea to do something better, faster, cheaper, safer, more efficiently or less confining. That origin story along with family values drive the pursuit of enterprise now and in the future and leave the emotional influence of legacy from the past.
Q: Are family businesses rare or common?
A: According to the U.S. census bureau, 80 to 90% of businesses are family controlled. There are 5.5 million family businesses in the U.S. (FEUSA, 2011). Family-owned businesses contribute 57% of the U.S. gross domestic product and employ 63% of the workforce (FEUSA, 2011), and are responsible for 78% of all new job creation. (Astrachan & Shanker, 2003)
Thirty-five percent of Fortune 500 companies are family-controlled (Businessweek.com, 2006). Family-controlled firms now make up 19% of the companies in the Fortune Global 500, which tracks the world’s largest firms by sales. That is up from 15% in 2005. (McKinsey 2014) A majority of the world’s wealth is created by family-owned businesses. Eighty-five percent of startups worldwide are established with family money (FFI Global Data Points).
Q: What is a family office?
A: When enterprising families accumulate great wealth from realizing financial returns from ownership, investments and significant liquidity events such as selling the family business, they might decide to more formally structure and organize around the management of the family wealth and the needs of the wealth-holding family members. This legal and regulated entity is called a family office.
The purpose of the family office is to manage and grow the family’s wealth and welfare, primarily. Many family offices also provide services and support to the family members relative to decision support, lifestyle, development, education and communication. According to the Family Office Exchange (FOX), the Family Wealth Report estimated that there were about 6,000 family offices and Campden Wealth puts the figure at 7,300.
There are single family offices exclusively dedicated to descendants of one ultra-high net worth family. There are multi-family offices providing investment, wealth management and enterprising family services to a variety of unrelated high net worth families pooling resources together for more impactful and sizable investing. For many family enterprises, these family office functions are informally embedded in the operating businesses.
Q: What is a family foundation?
A: Families, regardless of their level wealth capacity, often engage in philanthropic activities that reflect their values and appreciation for the opportunity afforded to them. Some enterprising families share their resources of family time, talent and treasure independent of organization and structure and some create formal commitments through compliance-controlled organizations such as family foundations or via donor advised funds.
There were 873,228 donor-advised fund accounts in 2019, according to the National Philanthropic Trust – Donor Advised Fund Report 2020. Americans gave $449.64 billion in 2019. Foundation giving in 2019 increased to $75.69 billion—a 2.5% increase from 2018.
Q: What is an enterprising family?
A: Regardless of the type of family entity structure that defines a family enterprise, the common denominator is the perpetuation of the health, welfare and connection within the ownership family, a systemic organization that places it human, intellectual, financial, social and time resources in service to a purpose brought to life by shared decision making regarding mutually-owned assets. This organization is formally called the enterprising family and strives to ensure its members unite around shared values, inclusive purpose and common goals.
When enterprising ownership families seek to grow, transition, and compete with the future in mind, they often utilize governance structures to help them retain control and align shareholder vision (the owners’ plan) with management’s strategic use of resources. Structures for family enterprise governance include a fiduciary board of directors, a non-fiduciary advisory board and an ethics and values-binding governing structure called a family council. Family governance helps families achieve continuity and succession of ownership, control, management and family unity. Ninety percent of the world’s largest family businesses surveyed in the Ernst and Young (EY) and Kennesaw State University report entitled “Staying Power: How Do Family Businesses Create Lasting Success?” stated that they have a board of directors.
For more information, visit the Bailey Program website.