Perspectives from ISB

Economist Joseph Schumpeter famously identified owner-entrepreneurs as key enablers of economic development. But, once entrepreneurial companies evolve into family firms, can they maintain that positive role in society? Family-owned businesses are often portrayed as the engine of the private sector—pointing at advantages such as faster decision making, a more integrated management style, long-term mindset or a win-win approach toward business partnerships.

However, while combining family and business can be a winning strategy, it also comes with limitations, particularly when family businesses become more complicated.

So, how can business families successfully mix family and business?

Business complexity: If the entrepreneurial founder succeeds, the business will grow and become more mature. As a result, running it will be an increasingly sophisticated task requiring more advanced managerial talent.

Family complexity: Most firms are started by a single entrepreneur, sometimes complemented by other family members. At some stage, the next generations may enter the firm, creating a sudden jolt of additional complexity. This typically requires a major adjustment. This process then repeats itself even more forcefully in the third generation, often with greater numbers of younger family members involved. At this stage, it is uncommon for everyone in the family to join the firm management.

This creates another layer of complexity in the form of the distinction between “active” and “passive” family owners, something many family firms are unprepared for.

Knowing what to do: Family firms can remain dynamic drivers of economic growth if they can address the right problems at the right time. Those with greater business complexity need to focus on business governance–including defining the roles of boards and management, setting guidelines for decision-making and building a capable leadership team.

Those with complex business families need to pay greater attention to family governance: setting the rules (often a constitution), creating proper structures such as family boards or a family office and thinking through the roles and powers of those leading them.

Family firms where both types of complexity are pertinent need to pay attention to both simultaneously.

Most family firms cannot survive past the third generation. However, that does not mean it is impossible. Those firms that anticipate the challenges of greater complexity in family and business stand a better chance to remain dynamic creators of wealth, employment, and economic progress.

Source: Dieleman, Marleen, March 12, 2018;