Reinventing the Family Firm - Chapter 1

Reinventing the Family Firm

A Guide to How Enterprising Family Business Owners Build a Portfolio

Dr. Dr. h.c. (mult.) Peter Lorange Chairman, S. Ugelstad Invest Chairman, Lorange Network Honorary President, IMD

DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

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Defining the Family Business Portfolio Firm

Introduction A family business can be defined as when a family owns a significant share and can influence important decisions, such as the selection of chairperson as well as the CEO, important business investment and/or exit decisions, debt policies, as well as decisions on dividends. Family firms are by far the most dominant form of corporation in the world. They are prevalent especially in countries where the law allows for private ownership. It is estimated that 70% to 90% of all firms worldwide are family firms (Zellweger, 2017, p. 24). The contribution of these firms to GNP is estimated to be as high as 60% in many advanced economies, including the United States and Switzerland (Astrachan & Shanker, 2006). The percentage of employment provided by family firms within national economies also tends to be high, more than 50%. Further, family firms represent more than 85% of the world’s companies. In the U.K. alone, more than half of those employed in the private sector (Clark, 2021) come from the family business sector. For the purposes of this book, the term “business families” is used for families of heritage firms, while families who own portfolio businesses are labeled “families in business.” According to John Davis a leading authority on family business, and with a doctorate from Harvard Business School, another term increasingly used for this latter category of owners is “enterprising families” (Davis & Lombard, 2019, p.27). There are at least two overriding challenges facing owning families who wish to maintain sustained business success:

♦ ♦

Achieving strong business performance and

Ensuring family harmony. There are many reasons for declining performance and business failure in family enterprises. These include family conflicts over matters such as roles,

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

salaries, and succession, and there may be fundamental differences of view over risk appetite and entrepreneurial endeavors. For example: How much might be reinvested in the established firm, and how much in new ventures? Establishing and maintaining strong family values is closely linked to these strategic decisions as they provide the underlying guide, while formal governance procedures are helpful to create the forums necessary for difficult decisions where there may be genuine and sincerely held differences of view. This is especially the case as the number of family owners grows and small informal decision-making groups become unrepresentative and inappropriate. Such formal entities include a family assembly, a family council, and so on. Family offices may be established to undertake some of the administrative chores as a family grows. Chapter 3 discusses governance for families in business. “Family-owned businesses: The backbone in many economies” The role of the family is always central, and the family may represent a resource for particular inputs. For example, there may be competences and/or industries where the family has particular expertise – manufacturing, finance, medical, shipping, real estate, and so on. In turn, the enterprises can create employment opportunities for family members, enhancing the links between the owning family and its businesses. In the case of a portfolio of businesses, there is typically a more diverse array of career options. The role of an owner is significant in its own right, and comes with many commitments and responsibilities. Family members may feel that they are custodians, which has a completely different scale and time horizon to being a salaried executive, or a stock-holder in a publicly listed firm, where the interests are more short term. Where a family or families hold ownership control over the company in question, the family decides on the composition of the firm’s board of directors, as well as the appointment of the firm’s management, including the CEO. The CEO, as well as other members of senior management, will typically come from the owning family. The owning family controls the firm’s strategy, including levels of investing as well as dividend payouts. It might be appropriate to state here that many of today’s so-called cutting-edge management practices in family businesses are very impressive (see, for instance, Baron & Lachenauer (2021) or May & Bartels (2017)). The field does indeed seem to have advanced dramatically from what was proposed by Poutziouris et al. (2006), for instance. As previously noted, Akhter has found that there seems to be a strong relationship between family-owned business portfolios and portfolio

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

entrepreneurs (Akhter, 2016a). In the following we highlight five aspects of the portfolio business–portfolio entrepreneur relationship: ♦ The portfolio entrepreneur is defined as a manager who has simultaneous ownership of multiple businesses. Wealth creation seems to be an essential driver for a portfolio entrepreneur, i.e. to develop profitable new businesses. A second driver might be to try out a new business concept, inspired by the creative impulse or intellectual curiosity. For instance, the author started the Lorange Institute and the Lorange Network primarily to test the viability of an alternative concept of a business school rather than to develop a new source for generating revenue per se. As it turned out, both the Lorange Institute and Lorange Network were commercially successful, but return on investment was not the prime objective. A third driver for a portfolio entrepreneur might be to contribute to “the good of society.” This was also a factor in the Lorange enterprises, as they involved attempts to offer a more affordable but still high-quality business school education as a societal goal. However, the societal impacts of Lorange Institute and Lorange Network are regrettably probably rather limited, which is perhaps not surprising given the inherent conservatism of the higher-education sector. We might also label a portfolio entrepreneur a “serial entrepreneur,” to underscore the fact that enduring entrepreneurship is the key, based on the three drivers discussed above (Carter & Ramm, 2003). As such, there are no differences between the various labels, “portfolio entrepreneur,” “serial entrepreneur,” or simply “entrepreneur.” ♦ A strategic commitment can result in the long-term building of family- owned portfolios over many years, even over generations. SUI, for instance, was founded in 1929 as a shipping company, and is now a portfolio, with the author representing the third generation of ownership. Maintaining the required level of entrepreneurship over the generations requires active commitment. A strong involvement in business activities in the portfolio seems key, including the ability to grow businesses, as well as diversify, wind businesses down, or exit certain sectors. New businesses might be developed using, at least in part, the “recycled” resources that are generated or released from exits or sales of other businesses. Entrepreneurial drive is thus key when it comes to a business portfolio’s evolution, and equally so when it comes to expansion, construction, and repeat actions/learning (Zellweger & Singer, 2012). ♦ The portfolio itself might be diverse. For instance, SUI’s portfolio consists of five different areas of business – stocks/bonds, real estate, shipping, education, and ventures. Geographic locations influence strategic decisions and provide focus to a portfolio. At SUI, for instance, at the time of writing there is a preference to expand the real estate business in Switzerland, and to further develop the stock business in Asia. Size differences between the various businesses might be an alternative way of

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

focusing a portfolio, for example if there is a strategic choice to go for scale. Choice of currencies (including Bitcoin) might be another and so on. ♦ Starting a portfolio may not only be driven by financial considerations, manifested as profits, cash flow, risk, and so on. There may be personal motives too, to do with career fulfillment. The founder of SUI, Captain Samuel Ugelstad, for instance, started out as a seafarer, and then became captain, before founding the firm, initially as a ship-owning entity. The author has an extensive background in the business educational sector that served as a guide to SUI’s entry into the education business. ♦ Let us now finally discuss “decline,” or the closing down of a portfolio. How does a business family manage a portfolio’s decline? How might the portfolio’s sustainability be enhanced? Akhter points out that this is not a linear process but that expansion and contractions typically occur at intervals (Akhter, 2016a). Freeing up resources for new investments when exiting a business might be seen as an entrepreneurial activity rather than a scaling back. Family offices may often be dealing with these issues. Raising more capital – say, for mergers or acquisitions – is also primarily a family concern. These decisions will likely impact the concentration of ownership: Is the owning family comfortable with the potential dilution created by such a move? Alternatively, acquisitions might be financed through taking on more debt, implying a higher degree of risk for the firm, with no dilution of ownership other than by “paying” with shares in the company held by the owning family. This is also an issue of control that affects much more than the decision about whether to merge/acquire or not. There might also be situations, of course, where the acquiring firm uses its cash reserves to make the purchase, which is in many ways an ideal situation, implying a relatively small increase in risk exposure and no dilution. Such situations tend to be rare, however. Family offices are again often central when it comes to these decisions. The business environment seems to be becoming more and more volatile, with increasingly rapidly changes. This is often described by the acronym VUCA, which stands for: Volatile, Uncertain, Complex, and Ambiguous (Davis & Lombard, 2019, p.124). Product life cycles are tending to become shorter, with increasingly rapid changes in customers’ preferences and with significant technological shifts as well. So, anticipating change and demonstrating great agility in pursuing new opportunities will be more important than ever: the ability to adapt, reinvent oneself and show strong resilience, vision, and responsibility. A common pattern tends to be for the family initially to have owned a particular business enterprise – such as a manufacturing plant, a store, a building, a fleet of ships. Let us label this the “heritage” or “legacy” business; and for the family to then diversify, in the light of an increasingly turbulent and unpredictable environment.

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

The heritage firm is what we typically might classify as a family’s traditional core business. In the author’s context this would be his ship-owning company, S. Ugelstad’s Rederi A/S. There is a huge variety of heritage firms. Just to give a few well-known examples: These include Victorinox, the Swiss-based maker of knives, suitcases, watches, and perfumes; AMAG, the Swiss-based importer and distributor of cars from the Volkswagen group (Audi, VW, Skoda, Seat, etc.); Norway’s largest tobacco firm, Tiedeman’s Tobakkfabrik; or Jotun, the large paint and coatings manufacturer. We will look at Jotun in more detail in Chapter 3 in the context of family governance. Often, we find that it is in such types of heritage firms where many business families start out, and thus where the bulk of their wealth was accumulated. This initial investment may at times be sold, with the family in some cases going on to make a series of investments, creating a family business portfolio. The author’s family firm, S. Ugelstad Invest (SUI), was solely a ship-owning company for some 80 years. Then the shipping company was sold and SUI in its present form was established. SUI maintains minority holdings in some shipping assets but is now active in five business areas, as described, actively managed by the owning family – the author and his two children. Developing a Portfolio Strategy When a business-owning family diversifies and creates a portfolio firm, typically proceeds from the sale of the legacy firm finance the investment for such a transformation (Widz & Leleux, 2019). Some families may sell their legacy businesses and, finding themselves with ample cash in hand, might fall into the trap of rushing into a number of new investments far too quickly, often with too great a financial commitment per investment. Due diligence may be lacking when reinvesting such a windfall. In addition, families in such a position may lack the competences necessary, and may struggle to manage their new portfolio business. On the other hand, it may also be that a portfolio opens up opportunities that suit a broader set of talents and interests from within the wider family. Managing a 100%-owned heritage firm typically requires specific skills and experience relating to a particular type of business. In contrast a portfolio business can offer a wider set of career options. Family members’ involvement might entail roles on subsidiaries’ boards and/or being advisors. These family members would typically have no specific line management responsibility, and little need for specialized functional skills. Therefore, it might be relatively easy for the next generation of family members to become involved in meaningful ways. A more realistic context for long-term family involvement might thereby have been created. Experience-building and learning seems to be particularly critical for family business portfolio firms. How can such a firm’s portfolio strategy be improved?

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

Below are five key pieces of advice, gleaned in particular from the portfolio strategy at SUI but also from other examples:

♦ Avoid becoming “trapped” in capital-intensive businesses. The very capital-intensive shipping business requires substantial investment in new ship assets. An excessively asset-heavy business will often call for larger investments in capital than the owning family might be comfortable with. When we owned the shipping company, for instance, there was little-to- no free cash flow. All our cash reserves had to be reinvested in new ships. Living comfortably in this kind of situation represents a key conundrum. While one’s assets in the firm might represent considerable value, the funds available to be spent by the owners could be very limited. ♦ Build on the specific competences of the members of the owning family. The author/chairman of SUI, for instance, has been active in academia for most of his career, having held professorships at MIT and Wharton, and having been the president/CEO of the Norwegian School of Business (BI) and IMD in Lausanne. Hence, it was natural to build on this experience and navigate SUI into the educational business sector. ♦ Diversify into a range of different fields and learn from early successes and mistakes. A very good example of the power of a well-diversified business portfolio can be found in the family firm FERD, controlled by Johan H. Andersen and his two children. This family business was initially engaged in banking, going on to become the owner of Norway’s largest tobacco firm, Tiedeman’s. Since exiting these heritage businesses, the company has developed an impressive diversified portfolio, with holdings in such fields as building materials, packaging, transportation, real estate, and multiple other ventures. The FERD group shows superb growth and financial returns and is also relatively open in its reporting on the group’s performance on an annual basis. Much of its success can be attributed to learning from earlier successes and mistakes. ♦ Invest in the development of family members’ education and skills. A key aspect of the reinvestment philosophy at SUI is to invest in the owning family members’ educational activities so as to develop the foundation of an even stronger cadre of well-educated family members. The next generation might then ultimately be able to do an even better job for SUI in one or more subsidiaries and/or at the holding company level. ♦ Learn from the best practice of venture firms. Family businesses should approach their ventures in a dynamic way, in a similar way to public venture firms. Viking Ventures, for instance, has been an inspiration for SUI, adding to its existing investments through acquisitions, then ultimately selling the now much larger firm within a specific time period, eventually going public. The accelerated growth that can be generated by making acquisitions in a timely manner can lead to substantial value

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

creation. This process of “dressing up” a firm to add to its value is an important lesson for family business portfolios. Viking Ventures seem to be practicing so-called Blitzscaling as a way to induce rapid growth in the various entities it holds – to be discussed later (Hoffman & Yeh, 2018). For many family business portfolios, including that of SUI, having a value- based culture is therefore key. Values directly influence investment strategy, for example. Perhaps the most important aspect of this is that as large a proportion as possible of the funds generated from the various entities within the firm’s portfolio should be reinvested by the firm, with only a relatively small fraction of the firm’s economic result being paid out as dividends. Dennis Jaffe, in his research on successful family firms, has identified the importance of stewardship, i.e. such firms reinvesting the bulk of what is being earned (Jaffe, 2020), this being perhaps the most critical success factor for family businesses in the long run. It should be pointed out, however, that Jaffe’s research did not seem to make a distinction between various types of family firms, i.e. between those focused on one or a few typically related entities (heritage businesses) versus family business portfolios. What is unique about a family business portfolio in this context, however, is that while some parts of a portfolio might be relatively easily “milked,” generate reliable cash flows, others might be more suited for reinvestment. The owning family thereby has a much greater degree of flexibility when it comes to the withdrawal of cash from the business portfolio type of firm. Family businesses tend to do well in crises, as has been seen during the recent pandemic. They also tend to have lower insolvency rates than their counterparts. Their longer-term focus and greater resilience work in their favor. They also tend to be more frugal and less inclined to undertake “flashy” acquisitions. They are often more community-minded and more innovative, with more patents and new products per dollar spent on R&D than their public counterparts (Clark, 2021). Configuring a Portfolio As noted at the start of this chapter, SUI has defined its portfolio as falling into the following five business areas:

♦ ♦ ♦ ♦ ♦

Stocks/bonds

Shipping Real estate

Ventures/private equity

Education One way of viewing a portfolio might be according to its degree of risk. Baron &

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

Lachenauer (2021, p.206) have, for instance, suggested that a portfolio might consist of the following four parts:

♦ Moonshot – very risky investments, typically found in start-ups, and with significant payoffs when successful ♦ Core wealth creation – family-owned and actively managed businesses ♦ Steady income generation – to support a family’s living expenses, say, through rental incomes from real estate ♦ Hurricane – to support family members in case of a crisis, say, by holding gold (physical rather than certificates) in various locations. Holding Bitcoin may represent another way to achieve this. Another way to look at the configuration of one’s portfolio might be geographic: say, investments in the Americas versus Europe versus Asia. If in the Americas, how much is invested and where? If in Europe, how much in the Germanic part versus the Latin part? How much in Scandinavia? How much in Switzerland? In the case of Asia, how much is invested in China? Ensuring that businesses are located in sufficiently high-growth as well as politically safe areas is paramount. A portfolio might also be assessed according to which currencies the portfolio investments are exposed to: such as, for instance, USD, GBP, EUR, CHF, NOK, etc. Still other “cuts” might focus on the service sector versus manufacturing, on subscription businesses versus not, and so on. A final way of looking at what might be a good portfolio for a family firm is through the lens of the particular human competences in the firm. A business portfolio might be built based on the core capabilities that exist in a company. This is in contrast to an often industry-based portfolio delineation or a geography-based portfolio delineation. What is key for the leader, then, is to empower the people in their organization to actually take advantage of what they seem to know best, in a bottom-up process. The leader’s willingness to listen is key in such an approach (Koch, 2020). So, we can see that a portfolio can be viewed through several lenses. It is important to undertake these various assessments of one’s portfolio to come up with what one might consider a good mix when it comes to risk exposure relative to return. Thus it is important to operationally manage a portfolio in such a way that it allows for investment decisions to be made by drawing on accumulated know-how in each of the areas of the portfolio. The management of SUI, for instance, calls for considerable knowledge within each of the five areas in its portfolio. And periodically assessing the quality of this portfolio according to currency mix, geographic focus, and so on, is also critical.

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

A note on risk-taking may be appropriate here. Taking risks is crucial. The proviso must, of course, be made that prudence be shown when it comes to risk-taking: both when it comes to not taking excessive risks (family firms are typically rather conservative) and to not taking higher risks than necessary (i.e. when seen as a “technical” issue). Still, it seems to be the case that the lack of some risk-taking tends to correlate with periods of stagnation of organizations, rather than development. As Merkelback says, “a company’s success at risk is … to stop taking risks” (Merkelback, 2020, p.27). As a manager of a family business portfolio, the following question might be raised when considering a new investment: “Am I … risking enough for this project?” (Merkelback, 2020, p.28). And risk is not only financial but also reputational. The manager’s job might even be at stake. As noted, ship owning was S. Ugelstad’s legacy business for around 80 years. The author was the sole owner of S. Ugelstad Rederi A/S. The firm then specialized in offshore supply ships (so-called platform ships), with a fleet totaling seven ships at the time of the sale of the company. The positive liquidity effect from this sale formed the initial basis for SUI’s current investment portfolio. Selling one’s legacy business is not easy, however. Jaffe, among others, has researched and discussed this in great detail and has provided many relevant insights (Jaffe, 2020, pp. 99–112). The specific circumstances around the decision to sell S. Ugelstad’s ship-owning business, its legacy, are perhaps worth noting. The author had for a long time worked with the senior broker at one of the leading Norwegian ship brokerage firms, Per Engeset in R.S. Platou, shipbrokers. Per Engeset advised that the business cycle for the value of platform supply ships was approaching an all-time high. Also, during that same time, the author was monitoring the number of new-build orders relative to ships actually sailing, and noted that this ratio was shooting up. Oversupply, with a potential collapse of the relevant market price, was at serious risk of becoming a reality. Hence, the author decided to sell. This decision was not universally well received at the time, however, particularly among members of the firm’s own organization. The author was even characterized as rather backward by some competitors and fund managers. A general lesson from this suggests that a decision to sell requires a robust mind. A decision-maker should be mentally prepared to be more or less “alone” when it comes to making such decisions. To outperform the market, one should be willing to think independently, with all that this entails, including receiving blunt preliminary criticism from many. From Family Business to Family Business Portfolio

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

“From family-owned heritage businesses to family- owned portfolios – from family business to family in business” There are also several other relevant factors when it comes to a decision to sell one’s legacy business: ♦ The predominant philosophy within many family firms seems to be that they should be set up to run forever, i.e. as if the ideal time horizon of their existence might be “for eternity.” However, the actual managerial time horizon tends to be much shorter. A particular generation of owners/managers, for instance, might only be in charge for a relatively short time period, say, for 15–20 years. The ability to assess the extent to which members of the next generation are suited to successfully running a specialized firm, in the case of SUI an integrated shipping company, becomes an important consideration. In the long run, it might be more appropriate for the next generation to manage a more diversified portfolio of activities. ♦ Having “all one’s eggs in one basket” might not be desirable for an owning family, especially when the value of their assets concentrated in one sector might fluctuate wildly – for example, owing to developments in the freight markets facing shipping firms. As discussed, having all the family’s assets tied up in one highly capital-intensive business creates difficulties: The bulk of the free cash flow needs to be continually reinvested in the legacy business, with little or no free capital to be used at the discretion of family members. There might be little-to-no discretion for the owners when it comes to the payout of dividends, causing frustration even though family owners might not necessarily be inclined to be reliant on dividend income. Such restrictions might be reinforced by clauses to limit the distribution of dividends, typically imposed by financial institutions as a condition for having provided loan financing. In many cases, it would be unlikely that a family could come up with all the capital needed to make the reinvestments required to keep a capital-intensive legacy business going. ♦ There might also be emerging industry trends that call for exiting a particular business. The emission of CO2 in our atmosphere resulting from the burning of oil and other fossil fuels, for instance, has led to a significant scaling down of offshore oil exploration. Therefore, the offshore supply ship business has become much less attractive. The health considerations and governmental regulations regarding cigarette smoking have had a similar effect on the attractiveness of tobacco firms and so on. It should be noted that the author did not foresee the negative development in the offshore supply ship segment due to increasing concerns regarding CO2 emissions from oil. In general, it can be hard to pinpoint such negative factors in many industries’ attractiveness.

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

SUI As already alluded to, selling one’s legacy family business, which is frequently an emotionally difficult process, might be made somewhat easier by considering the following three-step sequence: ♦ Step 1: Sell the “hardware,” such as one’s fleet of ships or factory. ♦ Step 2: Sell the “software,” i.e. the organization, including operating procedures and files, as well as organizing job transfers for the people employed by the firm. It is particularly critical that all, or at least most, of the key managers agree to continue in their positions after the sale. However, many key managers may have developed particular loyalties to the owning family on the seller side, and therefore might prefer to leave. In these circumstances, it can be difficult to sell an organization with most of its key people in place, allowing the organization to continue to function in a practical way. ♦ Step 3: Sell the legacy company’s name – which, by the way, might often incorporate the name of the owning family, making this a particularly emotional step! In the case of the sale of S. Ugelstad’s legacy ship-owning assets, we sold the “hardware” and the “software” (steps 1 and 2) but not the name (step 3). This facilitated the repositioning of the firm to eventually become the family business portfolio firm SUI. SUI in its current format was established following the sale of the heritage ship- owning business. The “portfolio” of SUI consisted of the combination of three types of ownership, varying in risk profile, in various national settings, and held in SUI versus by the owner personally. This pattern seems to be quite a typical situation for many family business portfolios: in particular, that an over-reaching logical unifying legal ownership structure is lacking. As noted, SUI is active within five business areas (stocks/bonds, real estate, shipping, ventures, education), with ownership at present in some 35 business entities. There were perhaps as many as nine important considerations that played a role when it came to the decisions that eventually led to the present portfolio structure: ♦ A desire to spread the risk has been key. In consultation with the family, the decision was taken to retain approximately half the assets as “next generation money,” i.e. at relatively low risk. This part of the assets would thus be more easily preserved for generations to come.

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

♦ A need to secure a positive cash flow, so as to be able to more easily support the author and his family’s personal needs, has also been a priority. It was seen as vital always to have some free cash available in order to be able to capitalize on emerging investment opportunities, particularly in family businesses where the original owners of a prospective investment might be short of cash.

Exhibit 1.1: Objectives in a family business Source: Tagiuri & Davis, 1978

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

Exhibit 1.2: Earliest known drawing of the three-cycle model by Tagiuri in 1978. Source: Tagiuri & Davis, 1978; reprinted in Davis & Lombard, 2019 p.54

♦ A decision not to borrow against the assets in the portfolio, again to limit SUI’s risk exposure. ♦ A desire to try to build as much as possible on the author’s own competences and networks, as previously discussed, as well as on the core skills of other members of the family (entrepreneurship, finance, etc.). ♦ A desire to immerse the author as well as his son and son-in-law in the latest thinking in investment theory, and to attempt to implement this in praxis. ♦ A decision to use scenario planning as a central tool when developing SUI’s investment strategy. ♦ A desire to continuously reassess investment processes and investor psychology to try to continuously improve our capabilities as investors; to learn more about this new craft or art. ♦ A drive to make use of the latest available technology when possible. A key objective here would be to try to take advantage of scalable opportunities. ♦ A preference for backing managers in the various business entities of the portfolio who showed strong commercial capabilities. Our philosophy has been to emphasize a desire for continuity and stability, and not to create disruption when not strictly necessary. Further, we felt that to become too heavily involved in the management of operating businesses might be seen as undesirable and could easily “burn up” too much of our time. Consequently, it was preferable to invest in well-managed funds rather than investing directly in new ventures. There are, of course, exceptions to this rule. Investing in search funds is seen as a particularly attractive way to save time. Time is the scarcest resource for the author and other family members when it comes to managing SUI.

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

It should be pointed out that one of the most influential conceptual models for managing a family business is the so-called three-circle model proposed by Tagiuri and Davis (1996). The gist of this model is that the family business (circle 1) will be impacted by the owning family and its priorities (circle 2), as well as by the objectives of management (from the owning family and/or professional) (circle 3). In this book, we shall focus primarily on circle 1, which relates to the businesses in which SUI is involved. Nonetheless, the owners-cum-family members clearly also impact decision-making, particularly when it comes to imposing their individual views on risk. This is also the case when it comes to management’s objectives, of course. So, the shaded area in the middle of Exhibit 1.1 will be the key focus of this book. Renato Tagiuri together with John Davis created the famous three-cycle model of the family business system in 1978. Davis has recently written about how this came about (Davis & Lombard, 2019, pp 51–68). This includes the earliest known drawing of the three-cycle model by Tagiuri in 1978, reproduced in Exhibit 1.2. Flexibility One final consideration needs to be raised when it comes to arriving at a good strategy for a family portfolio firm. An important determinant for continuing business success is the ability to be flexible. What is the key to such flexibility? While there may be many important factors, the author believes that the concept of “listening posts” is particularly relevant for family firms. Although strategy means choice for most large established commercial firms, relatively small family firms might actually benefit from not following this dictum. Instead, investing in a relatively large number of listening posts might allow them to better identify what seems to work. This can best be done through investing in well-managed funds, which allows the firm greater flexibility in its approach: By testing out a relatively large set of options, they can exit quickly when things do not turn out as hoped. More substantial follow-on investments might then be relatively easier to make in that they might have been able to try things out at a lower level of investment initially. This flexibility, through trial-and-error and gradual, incremental levels of commitment, could be seen as the DNA of many family business portfolios.

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DEFINING THE FAMILY BUSINESS PORTFOLIO FIRM

Family Offices Family offices have been established at a high rate in the past few decades in order to strengthen the management of family-owned portfolios. These tend to be of two types: ♦ Single-family office, which manages the assets of a single family. ♦ Multi-family office, which manages the assets of several families. This type of organization might be seen as quite similar to the way in which many venture funds are organized. A multi-family office will typically have more resources at its disposal, and thus also be able to employ a larger cadre of professionals than the typical single-family office. Family offices are typically seen in the instances where families have disposed of their legacy business and moved toward portfolio diversification. But there are exceptions. Some families may set up a family office while continuing to own and run their heritage business. In some of these cases, they might also have a considerable number of additional diversified assets. The primary focus of the present book is one of outlining and discussing the key managerial tasks facing the various types of family offices, especially in the context of the portfolio business. Conclusion This chapter has set the context for this book: namely, how to develop and manage a successful family business portfolio. As we have seen, it is often difficult for firms to evolve from a position as a single-business legacy entity to that of a multi-investment portfolio firm. However, overcoming the potential difficulties is critical as it is perhaps the most realistic way for families to protect and further add to their asset bases in the long run, i.e. with a stewardship focus. In Chapter 2, we discuss the strengths and weaknesses of family business portfolio firms.

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