Family Business Audiocast | Episode 13 | Prof. Alfredo de Massis | The Free University of Bozen-Bolzano
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About Our Guest:
Prof. Alfredo de Massis serves as an editor for the influential journal Entrepreneurship Theory and Practice and is recognized as a leading academic in the field of family business, featured in the Family Capital list of the top 100 family business influencers. With over a decade of experience, he has established three international centers dedicated to family business research. Alfredo’s work focuses on entrepreneurial families, generational transitions, family business innovation, and the formation and governance of family offices. His work emphasizes the importance of balancing economic and non-economic goals in decision-making for family business leaders. Through his expertise and research, Alfredo continues to shape the conversation around family businesses globally.
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[Transcript]
R. Adam Smith: [Intro] Welcome to the Family Business Audiocast on LinkedIn. I am R. Adam Smith, creator of this audiocast series. As an entrepreneur, investor, founder, investment banker, and board leader the last 25 years, I am fortunate for my many experiences within the family firm industry.
A warm thank you to our live audience on LinkedIn today – and for those listening in the future.
A brief comment on why I created this broadcast: private companies are a passion of mine, having grown up in a family of entrepreneurs, and having engaged for two decades in deals, strategic transformations, investments, and boards, with an array of fascinating family enterprises, family firms, and family offices. I founded this series to offer a useful platform for listeners to hear from veterans, academics, and leaders in the vast family firm ecosystem. Whether you are a family business owner, building, running, or advising a family office, or just expanding your family office activities, I hope these conversations are useful and enlightening. [01:00] And now, it is time to turn our attention to our accomplished guest on today’s episode.
It's great to be here today with my friend, Alfredo De Massis. Alfredo, thanks for joining us today.
Alfredo De Massis: It's a pleasure. Thank you very much for inviting me, Adam.
R. Adam Smith: Of course. Where are you today?
Alfredo De Massis: Today, I'm in Italy at the end of a very busy teaching day.
R. Adam Smith: Wonderful. Of course; you keep very busy. So, we'll have about 25 minutes today and we'll talk of course a bit about yourself and your background and then some areas that you and I discussed about the family business and family office space. I'm looking forward to it, and it's great to have you as our last session for the year.
Tell us a bit about what you're teaching today in your academic institutions.
Alfredo De Massis: I was teaching something related to family business management. Basically in my education, I cover, actually, all the different issues and [02:00] challenges that characterize the life of a family in business. So, everything that goes from how to handle generational transitions to how to unlock the innovation potential of these firms, how to professionalize them, of course, also how to help them in making wealth management decisions such as the establishment of a family office, for instance, and so forth.
R. Adam Smith: Right. Well, it's a very, very large, vast space and growing, of course. As you know, I cover family offices and the deal business, but I've had a good amount of families as clients, and investors, and friends. So, it's a wonderful space and it's great to see the expansive experience you have.
I'm going to talk a bit about you and brag about you a bit here, briefly, covering your bio and then we'll dig into the questions.
Alfredo De Massis: Okay.
R. Adam Smith: So, Alfredo is one of the global leading family business academics in the world [03:00] [and is] included in the Family Capital list of top 100 family business influencers. He has over 10 years of experience in the family business arena and launched three international centers for family business research. He's also an editor of the influential journal Entrepreneurship Theory and Practice and in the Financial Times, ranking in the top 50.
Alfredo is focused on entrepreneurial families, generational transitions, family business innovation, and also family offices, the formation — as we know — and also family governance. Alongside this expertise, he's also been involved in research and has been cited for over 20,000 articles and helping to advance the understanding of how family business leaders can balance economic and also non-economic goals and decision-making.
It's really great to have you here today. We know you're very busy and look forward to our conversation. Let's get started.
Alfredo De Massis: Thank you.
R. Adam Smith: For sure. So, topic number one is having been involved in tens [04:00] of councils and advisory boards with family-related businesses, how has this engagement shaped your perspective on the business? And talk about some unique challenges and opportunities you observe in the family business arena.
Alfredo De Massis: Thank you. Yes, I mean, I think that this experience, serving on these international advisory boards and councils, has been very, very important for me because it has shaped a lot [of] my research, first of all, but also what I teach and my advisory activities. Indeed, I consider myself an engaged scholar and I strongly believe in the importance of combining academic rigor with impact on practice, with relevance; rigor without relevance is nothing and relevance without rigor is nothing. And if I have to reflect what I see in different countries like Switzerland, Italy, UK, Asia, I would say that right now, [05:00] if I have to summarize the main unique challenges that are characterizing entrepreneurial families in different countries, I would group them into four main categories.
The first one is related to the category of what I call patrimony administration or estate and wealth management, basically. So what I want to say here is that we are living in a specific chrono-context, in a specific era, time, where for a long time, the family business field has been dominated by management and governance perspectives because we as scholars, but also consultants, have always been interested in trying to build up new knowledge, creating new knowledge, that could help this type of organization to be better managed and/or better governed, assuming that family capital is a form of patient capital.
So, I think that most of the experts [06:00] and academics in the field have somehow overlooked asset liquidity issues. Instead, right now, many families I’m working with are facing very difficult and uncertain times in this era of polycrisis as the European Commission calls it. So economic downturns, cash challenge, new types of risks have increased a lot the salience of asset and liquidity issues for families in business, and so a very important concern that many families are facing is how can we as a family make sure that at this difficult time, we are not really destroying our wealth? Our financial wealth first but also our intangible wealth, the wealth related with the many other possible types of assets, like family values, beliefs, family cultures, that entrepreneurial families need to be competitive. [07:00] So this is one point.
Another challenge is the challenge of succession because again, succession has been mostly considered as a long process that needs to be methodically planned and executed and most family business leaders have been thinking about succession only in relation to the succession of the family into a management role. So they've all mainly been looking at the business engagement of family members. Now what happened is that the more I work with different families across different countries, the more I observe that instead, different families are understanding that actually, the role of the family in the business is much more variegated than just the role of being engaged in the business.
And so, for instance, family members can be involved in the ownership, just being owner, but in anything shared doesn't make, per se, a good owner. To become a responsible owner, you have to be taught, you have to learn how to [08:00] do that role. The family can be involved in governance, you know, serving on a board. Again, you can do it in a more professional or less professional way and there is knowledge that can be useful to sharpen your capabilities and serving on a board.
Another thing is the involvement as an entrepreneur, for instance, which is way different from being involved as a manager. And then you have the involvement in the different possible family roles. So, for instance, the family members who serve on the family council or who hacked as social entrepreneurs that try to help the family to advance some specific social or philanthropic topics on their agenda. All these are examples of the much more variegated worlds and so I think an important challenge is to let families in business understand that succession, [09:00] when you reason or run succession, you really need to have a broader view than just looking at the engagement in the business.
R. Adam Smith: Right.
Alfredo De Massis: Another important challenge is the challenge of goals and socioemotional wealth. There is a huge literature study published by myself and other colleagues [which] shows that when you have a family in business, an entrepreneurial family, typically this family has a behavior that is driven by family-centered and non-economic goals. And this literature shows that when a family pushes these types of goals, [they] accumulate a socioemotional wealth, a wealth that is non-financial wealth, and that has to do with the portions of discourse.
Now, what's happened is that I think that the previous pandemic, also the current situation in terms of the wars, in terms of energy prices, etc., have increased the sensitivity of families to [10:00] society-centered goals. What I’m saying is that the negative emotions and the physical and emotional vulnerabilities that many family business actors have been feeling are leading to an increasing importance of society-centered goals, which means that in the mindset of family business owners, the things that trade off become much more complicated because you will have to have trade-off between family-centered non-economic utilities, society-centered utilities.
A typical example is the trade-off between health and wealth, just to give an example. Between life and livelihood, between the family utility or the business utility, or maybe the society utility. And so, understanding how these society-centered priorities really [11:00] are shaping the decisions that especially the next generation in family businesses are making, it's another very important thing.
The very last unique challenge is, in my view, the fact that again, as a consequence of the current situation, like the negative future outlook, the increasing uncertainty, etc., all these things have led family businesses to become more and more backward-looking. More and more backward-looking because in uncertain times we all tend to look with very positive eyes to the golden age of the past. This means that tradition, the heritage of a family, the traditional values, become more and more important because they can serve as a sort of compass to orient the behavior of the different stakeholders, internal or external, to an organization. And so this means that the big challenge is for families to understand how they can consider and treat this past heritage, this tradition, [12:00] as a strategic resource to compete.
So this is another important challenge in my view.
R. Adam Smith: Great, those are five very strong pillars around the challenges of family business and planning and the evolution of the operating company — the single operating company often having the consolidation of wealth for the family, right? — and involving that into the family office.
Alfredo De Massis: Correct.
R. Adam Smith: And then the family office evolving into either multi-family office or into some form of multi-generational legacy that goes beyond the financial world.
Alfredo De Massis: Exactly.
R. Adam Smith: So we've had some conversations with some M&A and governance and practitioner experts, as you know, the last couple of months, including conversations around the evolution of the family business [13:00] with Christina Wing and Angela Robles and Ron Diamond and Martin Roll and recently with Matt Hughes with familybusiness.org, so those have all been quite interesting.
Alfredo De Massis: Yes.
R. Adam Smith: Let's talk a bit about innovation. You're talking about the evolution of succession, but also moving from financial goals to non-financial goals. You've written a great deal of publications around innovation. Talk a bit about innovation for unlocking value and growth for the family business and your thoughts on that either operationally but also at the governance level intellectually.
Alfredo De Massis: Yes, thank you. Yes, innovation is very important, right? For every business, for everyone within a business environment innovation is important because we know that without innovation, [14:00] there is no sustainable competitive advantage. Now, if we look at entrepreneurial families, what my studies, my research, my activities, also my advisory work shows is that very often, family businesses are stigmatized, have been stigmatized, for being a type of business that doesn't innovate, or that has very big issues at innovating. But what the reality, in the end, of facts shows is that this is not true.
What is definitely true is that they innovate and they make innovation decision in a very different and unique way. And in particular, they struggle with innovation very often due to what in some of my published studies I call the family business innovation paradox[1] .
What does it mean? It means that for a number of theoretical reasons, family firms are characterized as compared to their non-family counterparts by a higher ability to innovate. So if you look at the ability of family owners, their discretion to direct, [15:00] to allocate, to dispose of firm’s resources, they have typically higher ability. Why? Because typically family members speak the same language, because they have the power to act, etc. Yet at the same time, they have typically a low willingness to innovate. Willingness refers to things like the disposition of these family owners to engage in idiosyncratic behaviors. So it’s something related to their goals, their intentions, their motivation.
And so, what we have to realize is that they have a higher ability to innovate yet a lower willingness to do so, which means that they too often get stuck. The implication of this is that the (speaks Italian), as experts call our family business thinkers, consultants who want to help family firms to unlock their innovation performance, their innovation potential, we have to work especially on the willingness side. This is the first thing.
And in some of my [16:00] studies, I illustrate some possible ways to do so. One of the possible strategies is what in a study published in California Management Review I call family-driven innovation, which is a way of basically creating or making a set of strategic decisions that allow a family firm to resolve this paradox by creating a consistency between the type of governance that you have at place in a family firm and the type of innovation decisions that you are attempting to make, because both the governance of family firms and the innovation decisions they make are veritable genus if you consider different types of family firms.
So in the end, if you really want to help a family business to unlock its own innovation performance, you have to really pay attention and work very carefully at this feat between the governance and the innovative decision that they make.
And of course, [17:00] I've published the different studies examining different innovative behavior, and all these studies, all this body of knowledge, is quite consistent in very strongly showing that family-centered non-economic goals again play a key role in shaping the way family firms innovate.
R. Adam Smith: Harder, though, within an insular context without external shareholders or without formal governance or without the impetus to create the innovation. So in your coaching and advice on creating innovation, which then can create shareholder value or can create a stronger pillar for legacy, what are the most important ways to share that innovation? [18:00] Perhaps one way would–
Alfredo De Massis: Yes, I think–
R. Adam Smith: –be the operating company — create scale through acquisitions — but also could be bringing in expertise at the governance level in terms of continuing education.
Alfredo De Massis: Of course education. Since at the end of the day innovation is about either creating or acquiring new knowledge and applying this knowledge to some sort of commercial ends, at the end of the day, this position of family members, especially the younger generation ones, to develop this new knowledge is very, very important. So increasing the culture is very, very important.
At the same time, we have also considered that innovation very often in a family firm is stuck because, between the senior generation and the next generation, there are tensions. Tensions due to the fact that very often you have that the senior generation is a generation of those who want to somehow preserve what they have created so far whereas the [19:00] next generation is the generation of those that, even for demographic reasons, are very much used and familiar with innovating, bringing change, etc. Right? They typically speak multiple languages, they’re frequent travelers, [they] are used to master digital technologies if you think, for example, about the millennials, etc.
And so there are some tensions and there are gaps, also motivational gaps, knowledge gaps, but also cultural gaps, but also motivational ones, because even from a motivational viewpoint, one thing is starting up a family business, is founding it, and a different thing is inheriting it. So, you know, we have to acknowledge the presence of these tensions, and these tensions, if we don't want to jeopardize innovation dynamics within a family enterprise, these tensions must somehow be managed and this is one way.
Another thing is that you have to be aware if you want to make innovation work in a family business that many of the best practices [20:00] that you can read in an innovation management handbook that would work in a non-family business would actually not be working in a family firm. This is also something that my studies really strongly demonstrate. So for instance, a very basic message that many innovation management handbooks give to the readers is that if you want to make the way for the new, you have to forget about the old, about the past. Well, you know, this is not always the best possible thing to do in a family firm.
R. Adam Smith: Because the family has pride. There’s a lot of pride in the legacy and you can't disconnect the past with the future.
Alfredo De Massis: Exactly. And also because, yes, in a family business, the past is so much visible. It's so much important that dismissing it would be a mistake and would lead these [21:00] families to incur what I call a recency bias where you only look at the most recent thing, but you forget about where you come from. Instead, a better strategy is probably to try to realize what some family businesses are very good at doing, which is what I call innovation through tradition.
R. Adam Smith: Okay. Okay, good. That makes sense. It's quite complicated. I know you have some articles that you've written about that. The listeners can find more about his research on Alfredo's website, but also at the Lancaster University Management School, by the way, and some of the other institutions he--
Alfredo De Massis: Yes.
R. Adam Smith: –he consults with. Alfredo is involved in the Family Business Review and also the Institute for Family Business Research Foundation and also the Family Owned Business Institute. I notice you've also written for the Harvard Business Review and I've read some of those articles. [22:00] Maybe tell us a couple of your favorite articles and some of the topics you've written about over the years. That would be great.
Alfredo De Massis: Okay, so I mean, you know, one topic that has very much attracted my attention in a more recent time is the topic of what I call establishing the entrepreneurial family galaxy. I'm writing a new book that will be out at the beginning of 2024. I'm delivering this month the last chapter of this book and basically, in this book, what they say is that most of the actors in the family business space have been focusing just on the family business. What I say in this book instead is that the way entrepreneurial families create and preserve and also increase value across generations is actually by setting up, during their evolution, a number [23:00] of many different organizations where some of them are, of course, family firms, might be family firms, but then they set up other organizations, could be the family office, could be the family foundation, could be the family business foundation, could be the family museum, the family library, the family incubator, the family academy.
So what I’m trying to say is that the more evoluted enterprising families are really good at creating the sort of galaxy where you have at the center the family, and then all these entities that refer to each of these organizations that they call family bonded organizations because they are an interface between the family and its assets.
And so, in this book, drawing on my research, what I do is basically providing a sort of road map for families to understand how to master the galaxy. So if you look at the role of a family at the galaxy level, [24:00] it’s clear that the role of the family is not anymore just the role of one entrepreneur in one single firm who has to scout the potential opportunity and exploit it, or a family that has to control and manage a specific business, but the role becomes more the role of a sort of family creator.
The family works more as an architect of this galaxy, looking at these different organizations and understanding, for instance, now we need a family office. How can this family office be integrated, in terms of governance, within the whole galaxy? How should we as a family decide what type of governance to have with this family office? Should it be very much under our control? Should it be only to a lower degree under our control? Which members should be involved? And this also for the other organizations. And I think there is really very much to learn from [25:00] those entrepreneurial families that have been able to create a galaxy like that. So it’s more about learning this role of family creator, of family architect, within the galaxy.
This is something in my view very much overlooked unfortunately, and very, very important because we are in an era where capitalism is really not anymore just about scouting opportunities for a business and exploiting them, but especially for entrepreneurial families means really working with a different higher-level logic. So this is one thing.
Another important topic in my view that unfortunately, despite being so fundamental of the behavior of a family firm, still didn't receive much attention and response so far is the one of understanding how psychological foundations of management, of family firms. What does it mean? It means understanding how the different personal traits like narcissism, [26:00] the different biases, heuristics, memories of family actors and also non-family actors really play a role in shaping the behaviors of these organizations.
This also means looking at the emotions. We know that one of the very fascinating things about enterprising families is that their decisions, their behaviors, are not always economically rational or following a rationale, (speaks Italian), because there are emotions at work. And yet, I think we are still quite far from fully understanding how these emotions play a role in how family members can manage or handle such emotional behaviors in order to make the decisions that are better for them. So, these things of understanding emotions and the [27:00] psychological foundations of families is also very, very important.
A third thing that I'm currently working on with some special issue is the topic of the family social impact. So, how families can have a social impact, which is much more than just donating money for sanctuaries, etc., but it's really about how I can define a family social impact strategy. So what should be the logic? What should be the dynamics there? How can I have, for instance, engage in philanthropic initiatives that really have an impact? And I think the starting point of this would be to reflect and develop new knowledge about what does it mean for a family to be impactful, which means defining new metrics, defining new measures of impact — or just measures because there are not so many measures of impact — [28:00] and understanding that given the prominence of these non-economic goals in family firms very often at least most, if not all, of the families have been working with, when you speak with them and they keep telling you having a strong impact on society is very, very, very important.
So, you know, I think this is another area which is very promising both for scholars and for practitioners.
R. Adam Smith: Absolutely. Thank you. That's fascinating. We have some guests on the live event today, including Andrea and Steven and I see Monica, that are involved in family business advisory and succession and governance and also the academic side. So that's very helpful. We can have a whole other session on social impact, of course.
Alfredo De Massis: With much--
R. Adam Smith: Yes. Maybe we dig a bit more for our last topic into the transition of the family business [29:00] into a larger company or a sale for an end event. You certainly are seeing more and more family businesses merge or sell at the end of the private legacy if you will. Can you share a bit on how the family business can preserve their legacy, or at least their values, in the event of an acquisition or sale?
Alfredo De Massis: Thank you. This is a very important family question. Well, one very important thing is actually making sure that you have a legacy-oriented mindset, that you have been able to stimulate within your family business some sort of legacy thinking, as sometimes they call it. What does it mean? It means that, for instance, you have to be sure that the [30:00] entrepreneurial family has been able to consider what they have, their whole galaxy — to come back to the previous terminology — as something for which they serve as custodians or stewards that they just take care of and then they have to leave for the next generation. So establishing this legacy mindset, in my view, is a very complex thing, of course, but it's a very important thing and something that the most illuminated families are doing when they nurture and grow their next generation.
One other important thing is when a family does some sort of business restructuring; could it be an exit, like a liquidity event — and we know that in this particular time there are so many liquidity events that are happening these days — but also an M&A or whatever, an exit, whatever. One very important thing to consider is that very often the involvement of the family in the [31:00] business has to change, right? Of course, the exit, the complete exit, is the most extreme case, but what I'm trying to say is that if you, as a family, want to really master in a very good way these restructuring initiatives, you need to understand that as the family and the business systems evolve over time, also the role of the family very often has to change.
So at the very beginning, the family is maybe involved in the management, in the governance, and in the ownership of the organization. Then at some point the family must understand that in order for the new business to grow and to expand, you need to have a step back and maybe you need to instead professionalize the business and maybe make a step back from the management. Then at some point you might decide also to [32:00] step back from the governance and retain all the position in the ownership, etc.
Yesterday, I was having two brothers from a quite well-known entrepreneurial family in Italy who have recently sold their family business. And they were — I invited them for lunch — and they were exactly telling me the many challenges that they were having in kind of understanding how to make a step back in order to make three steps forward in the development of the business and therefore in the creation of prosperity. And making a step back for a family is very difficult because we know that within enterprising families there is something that is called family altruism that makes these families very much emotionally attached to what they do. Some scholars even talk about a syndrome to epitomize the socioemotional attachment.
So I think it’s very [33:00] difficult, but understanding this evolution of family involvement and the need to make it concrete is something very, very important for the long-term prosperity of any business. Another important point is whatever the business restructuring initiative [is] that you’re considering — in any case, you know that there is socioemotional wealth within a family business — we know that any family business will try to avoid any decision that will threaten the socioemotional wealth of the family.
So sometimes you might have a very financially appealing acquisition, but then the family decides not to do [it]. It’s that threat to family socioemotional wealth. I was working with another family business in the coffee industry that was assessing the opportunity to make a very important decision and [34:00] the counterpart had asked the family to just relinquish 5% of their shares. In the end, the family decided not to do so in spite of the fact that it would have been very important from a financial viewpoint because they said, “Come on, Professor, for us, it's so difficult to just renounce 5% of the shares because we feel that we would have some outsiders that might want to have a say.”
So, socioemotional wealth is a reality and a tendency of family firms to protect the socioemotional wealth is there. So we have to consider this also when family firms do M&A, when they do buyouts, when they do spin-off, or whatever.
Another thing, finally, to conclude is also the fact that sometimes you need, during this operation of restructuring, you need to buy out some family members, you need to do what is called [35:00] the family tree pruning, because this is needed in order to streamline some situations. And again, this is very difficult, emotionally speaking, but sometimes it's needed and you have to do so. Outside members, non-family members, can be often a very useful type of actor within the family business to embrace, to make, to execute these sort of decisions because they are less emotionally attached to the business as compared to their family members. And so, having an open attitude towards outside members is also some other things that I strongly would encourage, actually.
R. Adam Smith: Thank you. We see some of that in your writings as well around governance and best practices to create a board of advisors, but also the mission and the charter to have outside input for the family to help with the succession planning. But also the exit is [36:00] quite tricky, so I'm glad that we had a chance to talk about that today.
So, we'll wrap up now. I'd like to thank all the attendees today at the Family Business Audiocast and our esteemed guest here, Alfredo De Massis, the family business leader specializing in entrepreneurial families, decision-making governance, and many other areas. Your insights on these transitions and innovation, Alfredo, have been fascinating and it's very helpful for people to understand these unique challenges and opportunities within the family office context.
Thank you so much for joining today.
Alfredo De Massis: Thank you. Thank you, Adam, and thanks also to all the attendees for your interest. Thanks.
R. Adam Smith: This is R. Adam Smith. Thank you for joining us. Stay tuned for our next episode of the Family Business Audiocast on LinkedIn.
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