Thought Leadership

Family Businesses Must Focus on All Stakeholders in Times of Crisis — and Boards Must Guide Them

“Risk oversight is a primary board responsibility, and in the evolving business and risk landscape directors need to develop and continuously improve practices to establish a well-defined and effective oversight function,” according to Deloitte’s 2018 Audit Committee Resource Guide. In the best of times, business leaders must trade off various forms of risk against one another, financial risk often being chief among them. But in a time of crisis, leaders must often make difficult trade-offs between the multitude of risks presented.

According to Jennifer Pendergast, Kellogg’s John L. Ward Clinical Professor of Family Enterprise and Executive Director of the Center for Family Enterprises, “Managing the risks across stakeholder groups is particularly challenging in the realm of family-controlled enterprises. The rationale — family enterprises are not solely bottom-line focused. Hallmarks of family enterprise include a strong sense of responsibility to employees, customers and the communities where they reside. These stakeholders may often take priority over short-term financial gain. This prioritization can become challenging in a time of crisis.”

“Financial risk always has to be a priority from the standpoint of keeping the business viable,” said Pendergast, Academic Director of Kellogg Executive Education’s Family Enterprise suite of programs. “A family board chair lamenting the need to furlough employees in the wake of COVID-19 told me that he had to remember, ‘No money, no mission.’ In other words, if the business doesn’t survive, we won’t be able to employ anyone in the future. So a crisis may require business leaders to put money first. However, that will almost always be money required to keep the business afloat. Money paid to shareholders in dividends or distributions takes a back seat and is one of the first things cut. Because families are longer-term investors, they’re less worried about the short-term impact on shareholders. Their business is best served by having employees and customers who are cared for.”

Family businesses tend to be built to last, according to Pendergast. They view their employees as being an integral part of the business success, with some even thinking of them as part of an extended family. They invest more in training and development. They typically have longer-tenured employees, and employee risk will always be front and center.

Luckily, family businesses are typically aligned with that type of thinking already. However, their board members must be ready to provide guidance to help them through crises such as COVID-19. “There’s a challenging balance to being a board member in a crisis,” Pendergast said. “You want to be supportive. It can be uncomfortable to question management when the board knows they are dealing in uncertainty and giving their all. Social scientists contend that in a time of crisis, we want to pull together and support each other. However, boards also have a fiduciary responsibility in this environment. They have to assess risk, which has no higher level of oversight than that of the board.”

In her work with family-enterprise boards, Pendergast pointed out that in board self-evaluation surveys, nearly all board members rate themselves low in risk-assessment effectiveness. So what can members of family boards focus on to help them through? First and foremost, boards must remember their fiduciary responsibility, carefully weigh the contingency plans that management develops to address the crisis and ensure the thinking is sound.

But boards can also take a role in encouraging risk-taking. “Multi-generational families thrive because they have been flexible and are well-suited to pivot and adapt,” Pendergast said. “Older family businesses are most likely not in the same business they started out in, or they would no longer be around. If Ford had stuck with the black Model T, they’d be long gone, for example. So it’s the board’s responsibility to leverage that trait in a time of crisis. When things are stressful, companies may be tempted to lock down. Board members must encourage management to leverage their DNA, and give them the confidence to remember who they are.”

A crisis also represents an opportunity to invest, Pendergast noted. Acquisitions that might have been considered too expensive in a strong economy could look attractive now. “Some families have the cash but won’t spend it because the prices are too high. They tend to be conservative,” she said. “Now could be the time to take prudent risks, such as picking up real estate that might be distressed or investing in talent who are available in this market. The board could encourage that kind of risk-taking.”

Overall, Pendergast said, board members need to be both ally and gatekeeper for solid decision-making. “Boards have to figure out how to keep those things in balance,” she said. “In a family business, the owners and other stakeholders — the employees and the surrounding community — need to feel confident that someone’s overseeing management and helping them to make sound decisions.”

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Jennifer Pendergast, PhD, is the inaugural John L. Ward Clinical Professor of Family Enterprise and Faculty Director of the John L. Ward Center for Family Enterprises at Kellogg School of Management, Northwestern University. In this capacity, Jennifer guides the market-leading Executive Education and MBA programs and the research agenda for the John L. Ward Center for Family Enterprises. Previously, she served as the US leader of Egon Zehnder’s Family Business Advisory.

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