Family Business Audiocast | Episode 8 | Dr. Mathew Hughes | University of Leicester
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About Our Guest:
Dr. Mathew Hughes is a distinguished professor specializing in entrepreneurship and innovation at the University of Leicester School of Business in the UK. He plays a pivotal role in academic publishing as an Associate Editor of the Journal of Family Business Strategy and a Senior Editor for familybusiness.org. Additionally, he is on the Editorial Review Boards of several notable journals, including the Journal of Management Studies and the Journal of Business Venturing. His expertise encompasses the strategy, organization, and management of entrepreneurship in firms of various sizes and contexts.
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[Transcript]
R. Adam Smith
Welcome to the Family Business audio cast on LinkedIn. I'm R. Adam Smith, creator this audio cast series. I've been an entrepreneur, investment banker and board leader for 25 years. Thank you for the registrants for this event today. The episode will be recorded and released in the coming weeks.
R. Adam Smith
Family business is a passion of mine. Having grown up in a family of entrepreneurs and engage in a wide range of dialogues and businesses with fascinating family enterprises around the globe. For two decades. I founded the Family Business Audiocast to provide a valuable platform for listeners to hear from veterans, academics and leaders and family on enterprises and family offices. Whether you're a seasoned family business leader or billionaire or building a family office. These conversations are meant to be enlightening.
R. Adam Smith
Today we have a special episode focusing on the family office and the family firm with a trickle emphasis on the entreal elements of the family company and some of the academic help structures and governance and the operational mechanisms to make a family firm successful. Family business is a subject close to my heart and I'm excited to delve into these topics with our steam guest today. Today we welcome Professor Mat Hughes. Mat, thank you for joining us today.
Mat Hughes
Thank you very much, Adam. But it's a real pleasure to be joining you on this audio cast.
R. Adam Smith
So a bit about Mat. You can find Mat on LinkedIn as well as at the niversity of Leicester in UK. He's a Schultz Distinguished Professor of Family Business and a professor of innovation and entrepreneurship at the university. His expertise lies in the strategy management of entrepreneurship and innovation with a special focus on family firms. Mat is an award winning teacher, researcher, practitioner and doctoral supervisor. He also host the per Professor Mathews podcast, successful podcast series in its own right. And he's worked as an advisor to many businesses and organizations globally, large and small over 20 years. He's also the associate editor of the journal of Family Business Strategy and also the senior editor of the leading family business information website, family business.org. We're thrilled to have him here today. Mat, let's dive into the conversation. First of all, tell us about you and your professor role at university.
Mat Hughes
Great. Thank you very much, Adam. It's been really interesting journey for me. My family have kind of background of being entrepreneurs and having family businesses. And to be honest, to the whole, the classic story of my father being made redundant and then taking their redundancy money and starting his own business, really changed everything for our family. And through in my mom who is doing all the accounts and things. And my dad was a construction Wi with an interest in artisan building. And we had historical construction, I think. And they kind of drew in me and my twin brother. But at the same time, we always told this, don't go into the family business, not because of any stresses, but more because of the physical all that construction takes. So I did the next best thing and decided I would like to study entrepreneurship. And over time, this took me into, yes, into family business. And so my role as things stand is I'm professor of innovation and entrepreneurship.
Mat Hughes
But for the last 10 years, so I've been really dive deep diving into my passion for family businesses and trying to understand how they function, how they survive, how, how they're so resilient and and innovative over time, despite a body of research suggesting to us that they're perhaps quite conservative interactions and therefore, trying to understand that kind of paradox between how do they manage the legacy and the history and what makes diminiative and so powerful. Go eh, going forward.
R. Adam Smith
That's wonderful. In some of the previous audio casts, we've spoken with some leaders that. That really hone in on the sustainability of, of the organization and to find a way to continue that legacy. But at the same time, there are some challenges in these private companies in terms of operational excellence and compensation and governance and the, and succession planning also. You're editor at the journal of Family Business Strategy. What is that about?
Mat Hughes
Well, a journal Family Business Structure is one of the premier journals dedicated family business research. We take great pride in not just providing the late system groundbreaking research, but also making sure that that research is very applicable to family owners, family advisors, family managers. And the journal itself is hosted by Elsevier and the editor in chief is Toston Piper from university of North Carolina, Charlotte. And this is a good team, the of associate editors and I'm one of them. And we make sure that we try to draw in the best research, make sure that it's rigorous and well thought through and by the same time has real meaning, a real practical relevance to the community.
R. Adam Smith
It's wonderful. I've been reading some of that, those articles last couple of years. It's a, it's a quite a terrific journal. So moving on to the family firm ecosystem, maybe everybody knows the family office market is expanding and that there are thousands of family own firms. But perhaps given your focus on innovation and entrepreneurship, maybe start talking about the importance of the corporate ownership and governance and stewardship of the firm. And then we'll move into the next gen element of, of that.
Mat Hughes
Absolutely. Thanks for that. I, I am, it's something I've been researching actively in the re in recent years. They actually started with a study that we did for the institutional family business in the UK, where they were very interested in understanding the relationship between corporate governance and the entrepreneurship and innovation of the family business. In the, in our study in the UK is a bit different because we also not only have family offices and family councils, but we also have family trusts that are allowed into the legal structure. Sure. But what is interesting is how important it is to have that kind of a mixture of both family and external oversight check on the core family management team, especially in terms of heading office.
Mat Hughes
Some of it is a natural tendencies to pull in a particular trajectory. For instance, in one of our studies where we looked at the relationship between corporate governance and innovation strategy, what we tended to find is that family businesses would put most of their, an emphasis on operational excellence or what is can be broadly described as an exploitative innovation strategy. Not exploitative in a negative sense, more in terms of exploiting the existing capabilities, competencies, projects and services of the of the business. So it's relatively low risk, the safety and the returns of it that fairly well established, but it does become past dependent. And so that explains a lot about how, why we've didn't, we've Learned over the years that family firms don't necessarily innovate even though they've got the resources and the capabilities to do. And this brings us to this challenge of willingness and ability. So the family firm often has the ability to innovate but not necessarily the willingness there and this is where corporate governance can specifically come in because it can start to change the thought processes amongst new managers of among family owners and managers and help therefore unlock more exploitative innovation, strategies they're especially needed if the business needs to change costs on these sales overcome legacy of in the performance for instance, and and move in a ticket trajectory as it happens in our research one the most critical factors that we found for enabling that switch and innovation strategy because of corporate governance happened by involving the next generation family members in the business's decision making and strategizing, because that led new ideas to fold into the strategy process and helps that kick start that change. Right.
R. Adam Smith
Well, the next generation can be G2,G3,G4. And as we've seen from the research from Camden and people, experts like Ron Diamond and Christina Wing that we've had on the audio cast, there is a diminishing return of continuity as you go through the generations. Sometimes there's change that is premeditated to retain the business. Let's say in the case of LVMH is a good example, or in the US, we have the Prisker family, we have dog food. There's lots of businesses that's, that continue through the second or third generation. But back to this point about next gen and tr founder transitions, you and I are talking about the importance of experience and not just desire to remain in the family business for welfare or, or ego purposes. So maybe talk a bit about the experience of the family members and how you've seen success for evolutions from the G1.
Mat Hughes
Absolutely. And I think one of the points I'll just quickly pick up on there is the concept of diminishing and elements over time in terms of both the willingness and desire of net of next generation members to continue to be involved. But equally one of the things that we've come across now very recent research and is the idea that not each generation, in fact, contributes equally valuable new resources that are beneficial to the family business. For instance, in one of our studies among Chinese family businesses, one of the things that we found is that this, the most valuable new resources come in the first and then second generation. But as we enter the third generation, they offer fewer valuable resources in terms of helping for, for example, the family business capitalize on innovation ideas and being able to turn that into wealth.
Mat Hughes
So I think that is another interesting element there is to what extent does the family ask itself, well, who is best place to take on and lead the business? In fact, as we literally speaking in, in the UK, there's a very famous family business in the area, unless the, when I would live in work, Wilkinson. Steve recently gone into administration and it looks like it's going to, the results in the closure of 400 out to their 450 retail stores. And it has been really interesting watching that, how the family seems to become disassociated from the running of the business and disassociated from the maintaining and sustaining that business. In fact, they've been almost silent in the, the process, this administration. And that is, the business is now 90 years old and then I think in its third generation, as far as I can remember. But it does signal to the fact about the desire of, of the next generation, but also thinking more appropriately about what resources do they bring in terms of knowledge, networks, capacity and ideas that will actually be beneficial to the family business, or should that be traded against professionalization, for instance?
R. Adam Smith
So, no, there's not, there's also the personal interest of the owners, right, that there's a, often there's not a correlation or consistency between the continuity of the company and the actual personal interest of the successful generation. So there can be a difference of a opinion there. But where do you think the next generations get their most experience? Is it a combination of business schools or is it outside boards or, or going to say a Mackenzie or something like that or how do you look at the attribution of entrepreneurship knowledge and value add within the organization in terms of internal versus external knowledge.
Mat Hughes
From from oh, at least from an educate my viewpoints. One of the things that I've realized over the years I've headed up postgraduate programs in entrepreneurship and innovation and they consistently draw a high, number of students that come from family business backgrounds and more often than not, it's part of a deliberate strategy of educational upscaling to certain extent in terms of in increasing their educational attainment against perhaps what was not available or not an option to some of the previous generations of the business.
Mat Hughes
In some ways that is one in case of expanding that human capital, expanding the world to view almost because that, especially if they, I travel abroad for education, which in the case of the students that I thought that was very much the case. There was a mixture of both the education and also the overseas experience. Part of it was strategic because the family businesses in question had some ideas of expand, landing internationally. For example, some of my students were from Indian family businesses that ran either textile businesses or refrigeration businesses or white goods businesses. And they were on the one hand getting education, but also on the other hand and, and experiencing and understanding the markets they were considering to expand into.
Mat Hughes
The other aspect of this that I would like to flag up is, and I, this is a subject that came up in an interview I did recently with Mira Blooman back, she's a professor in the Netherlands but has kind of with her family business for generations. And what was interesting in speaking to her was how even at a very early age, the parenting style of parents can in fact directly affect whether or not a successor from the next generation is even plausible. For instance, in mirrors case here and her brother were discuss this as part of the next generation succession, but it was never really intended to hunt over to mirror for instance. It was not much more of to the son or to the brother. So that has a direct effect because it started to reshape her thinking about what does she wanted to stay in the family business. And so there is a PA, there is a biasing risk and some very recent articles we have in Family business.org talks about helicopter parenting and how that access level ability sites in fact works against the founder's desire to keep the business within family control because they can start to change the preferences and ambitions of. The next generation.
R. Adam Smith
Now there's always a tug of war between cash today and cash tomorrow, right? Yes, looks okay.
Mat Hughes
Absolutely. So within if actually if we pick up on that points, it's 1 one of the key areas of the research around family business is being around the idea of social emotional wealth. It's that concept that the family business doesn't just value them, the wealth and the financial wealth of the business creates, but in fact value is very deeply the opportunities the family business creates for maintaining control and legacy, maintaining family ties and family bonds and being able to pass the business on to the next generation. When those conditions become destabilized, the fear that comes along with that can again change behavior in terms of activating innovation behavior, for example, or activating more profound search for a successor be that within the, the family will be honest the family. So these are other I would say critical elements based on the address really stems from the dynamic between the, the current generation of the next generation and where they 6 they, where they see that the transition of the business going right.
R. Adam Smith
The emotional connection to the business to these family firms that allow the further, continuity as opposed to selling the business like in my case, very often working on acquiring or selling these private companies. That impetus comes from usually a not a consensus point of view, but really the decision making decision makers, the f G1 or the G2 sometimes looking to sell and the next generation doesn't want to sell. Or the reverse, where the next generation doesn't want to run the business and maintain a legacy and really pushes the family to let the business go and move on for a monetization event. But what what do you think about philanthropy as an important element of integrating into these businesses to, to maybe make the social fabric more sticky for the, the. Yes. The later generations?
Mat Hughes
Absolutely. I think that's a really interesting point. I think the point about philanthropy, I believe, is also related to the issue of emotions and the concept of emotional attachment. Because the more emotionally attached the family members are to the family business, then the more that they will identify that themselves as individuals directly with the business. And therefore, it becomes highly aligned in that sense.
Mat Hughes
Some on the one hand, we have that emotional connection, but in terms of philanthropy, I think that is extremely important because what we're, one of the trends that we are very much seeing in not just in research now, but also as we look at family businesses over time and as they start entity succession moments, is that there are differences not in between generations in terms of between baby boomers and millennials and Generation X and on and so forth. And each of them have a different set of values. They've been brought up in a different type of society with a different type of education system, with a different type of world that emphasizes different types of messages to them, right? And as a direct consequence of that, what we see is that these different generations have a very different how can I save mindset as to what they consider to be important. So I think philanthropic efforts, for example, absolutely very important for, for modern day generations who will be perhaps the next in line to inherit the family business. For instance, just for the sake of example, if I just think of my own son, and she's currently in high school, there has been a direct education, for example, on things like climate change. So because of that, he is already highly sensitized to that and it's affecting his behavior, his values. And so there, when this occurs in the family business, we see these clash of generations and this can cause tension in between whether or not there is an alignments between the current generation and future generation and what that may mean for the business.
R. Adam Smith
Got it. So maybe give us some examples of the best philanthropic structures you've seen for these larger family firms. Are they. Setting up a but charitable structure for the whole company or is maybe, is there a separate arm or are there. Or their specific personal interest, maybe passion interests that are set up by the next generation. What are the, what a charitable, philanthropic initiatives that seem to be the most effective?
Mat Hughes
From what I've seen it, it's very much a mix. Some family businesses, for instance, philanthropic arm speak to the family business which then goes and makes investments in, it might be in the local community, for instance, or in the region or even in courses. But whatever it is that the family businesses secretly passionate about, increasingly, I think the, especially those run by more recently established family businesses or the ones that I have at a very much current generation control, then I think again, what we see is an alignment between what are the causes that they're interested in and how those align with the values of that the business wants to espouse going forward. So on the one hand, it it's a direct consequence and the pressure of ESG environmental, social and governance goals that are being placed on firms. This can obviously come from outsides stakeholders. But in the UK for instance, there is a clear trajectory to for businesses to a soft ESG audit environmental audits and sustainability audits where they're going to have the evidence, how they meet certain environmental sustainability and social goals. So I think that's one element. The other element I have seen is where family businesses decide okay, we're now step think back from a trading enterprise to become more of an investment driven business. So again, this is where the family offices will certainly be involved, but that can both involve a corporate investment type arm as well as a philanthropic investment type arm. So I would say that isn't a set solution to this, but rather it depends on whether or not the business sees itself as well the family sees itself as wanting to be a growing concern, or to move away from its current businesses are more specifically into investing on philanthropy.
R. Adam Smith
Okay, great. So back to scale. There's a significant expansion of especially last couple of years in the aggregation of wealth into multi family offices, especially looking at the, the, some of the bigger names like BDT is been quite successful with Byron Trot and merging with other businesses. And then we see some aggregations going on within the family business and some of our clients and friends. So it'd be interesting. We've seen lots of data and concern from some of the research from Harvard and also Ron Diamond and, and others about compensation. So when you think about the scalability of the bigger family firms, it seems like there's opportunity to really scale some of these firms combined and to take a more, a more modern approach to compensation. What are you seeing on that front happening now?
Mat Hughes
Absolutely. The, I think there are, there's one distinction that I feel that is important to make. One is the distinction between the ownership and the legals, the legal structure of the family business. So that is whether or not it's a publicly listed family business or whether it's an entirely privately owned family business. And mainly because the market itself will impose certain level of professionalization on the publicly listed family business, even though it has a recall room on main maintaining family control. In the private family owns business, family business, that's a different story because the owners and managers have much more direct control and therefore that create more variability in professionalization.
So if we take that down to the issue of compensation, then for me really it's the alignment of interest between family members and non family employees that for me is this probably the most critical compensation question because for in the most recent years we've heard this terminology called the bifurcation bias, the tendency that family businesses will whether deliberately are in conscious will tend to treat their family members different from their non family employees. And that affects all manner of things from organizational justice to decision rights to reward. STRA she's the one thing I would say with compensation frameworks is that they typically achieve two things or at least that intended to achieve two things. One is reward behavior in a past sense in terms of reward behavior of the past Sec 12, but also is to incentivize forward looking behavior. And compensation frameworks really have a third layer, which is signaling in a sense that whatever is compensated whatever is measured is ultimately what is deemed important to the employee. That's it's going to be the ultimate measure. And so for that reason, compensation frameworks carrying significant signaling effects both to employees and into subsequent markets, not just the labor market.
And so for in a family business data to more direct them perhaps more acute implication precisely because of this distinguishment that we tend to, see between the way that family and non family employees are often treated.
R. Adam Smith
Interesting. I think perhaps in a separate conversation and there's a obviously observers on the call that are in aesops or accounting or consulting, family businesses or lawyers. So the, this, the ECU equity structures and the compensation structures are very interesting, not just from a governance perspective, but also in terms of incentives and fairness and the ability for the, the family firm to survive and not just sell out in a any, a week moment.
And it's in and that there's a, there's some correlation you found of firms that are, I guess, set up operationally properly as an entrepreneurial firm, whether it be culture or operational structures, that if a firm is not set up with this entrepreneur fabric, that it will, we'll have a very hard time pivoting into becoming an entrepreneurship firm. You call that operational entropy and you did a paper on that. Tell us about that.
Mat Hughes
Thank you. Since a paper published in the SE Sage and Entrepreneurship Theory practice. And it's a really interesting bit of research really, because we tracked a large number of US publicly listed firms over a nearly 20 year period, if I remember correctly, and using data from copy step and what we were interested in discovering is that how how beneficial is it to be entrepreneurial. And by entrepreneurial I mean really entrepreneurial so really investing in how breakthrough innovation, experimenting this focusing on discovering for channeling the activities of the business that are making breakthroughs.
Mat Hughes
And this speaks to the idea of the company being highly entrepreneurially oriented and for the longest time we've been of a pretty strong belief in the field that the more entrepreneurially oriented the business is the more likely it is to succeed is going to be highly high of, high performing and highly profitable the problem is that a lot of our research suffers from survivor bias in the sense that we only measure those firms that are still succeeding and still doing well. We forget about those that have failed. There is a cross sectional tenant bias to most studies.
So what we looked at in this paper was we suddenly ask ourselves, what does the highly entrepreneurial oriented business actually look like? And what we to ideate, I guess, was the idea that the the UN, the highly entrepreneurized firm is just unencumbered. It's focused on breakthrough innovation, not operational excellence. It's focused on making new discoveries, not defining what is already, let's say the revenue streams and the revenue sources of the food. And because of this, it can get trapped in failure trends where the failure to make one breakthrough that will then bring in the revenue to fund this other breakthrough innovation activities can create this cycle in which the business exhausts its resources quickly and aggressively.
And this is the phenomenon that we described as entrepreneurial entropy. So a a concept neatly borrowed from physics. I should say that if it wasn't for my physics teacher, I would not have gone to university and I wouldn't be speaking with you today. So I owe a lot to my physics teacher, but he made me super passionate about how we can learn from physics.
This is precisely with the papers. But so the highly entrepreneurial firm will exhaust resources quite aggressively, which increases the risk of firm failure. So as you were saying, that means we have to counter balance this, but making it sure that we have good strategic processes, good management processes in place to handle our and entrepreneurial and efforts and our entrepreneur tendencies and make sure, for instance, if I will, by way quick example, that bad entrepreneurial initiatives are quickly discarded and don't, aren't allowed to faster and develop and therefore waste even more resources.
The catch though, and I think this is one of the key takeaways I'd like to make, is that, and this is very salient, family businesses, is that those companies that try to make a fast switch from being conservative, being cautious to being much more entrepreneurial suffer the most. They were at a considerably higher rate of risk of failure than the other businesses that we studied in our sample. So this is a cautionary note, really to your family businesses that in making a switch for, let's say, an aggressive switch from being more traditional, more operationally excellence focused, being considerably entrepreneurial and innovative, without achieving that balance is going to tear out the fabric of the firm and increase risk of failure.
R. Adam Smith
That's important to note. And just brief on that before we wrap up soon. The catalyst for a firm to change course can come from different areas. I'm not sure if you studied that in terms of the data, but you've got the internal motive, internal motivations of let's say the board or the ownership wanting to really pivot because they need to. So there's there's a drive from in internal, perhaps there's operational performance issues. And then you have, let's say the younger generation coming in from their business school or from their their millennial perspectives and really forcing change from within the family, the next generation. And then you typical, you also have like these larger firms, they would go higher, let's say Alvarez Marcel or Bane or Mckinsey or something, and they'd have or family else consulting firm, they would have a findings. So just briefly, where does that where do those aggressive pivots come from?
Mat Hughes
Sure. Well, as mentioned, aggressive purpose can often come from the fact that next generation members pick but by virtual being family, typically have decision rights and therefore can act with their own idiosyncratic criteria for what they see as a good opportunity for the business.
So this is where resistance is none. None never a bad thing in and of itself. If RES if resistance is simply there to prevent progress and prevent meaningful change, then it's bad. But when resistance acts as a balance to verify whether or not the innovative and entrepreneurial opportunities and ideas, for example, introduced by the next generation actually sit well with the business. The one thing I would like to couch that is there can be a tendency, for example, for the existing generation members to re, to pushback against new technological breakthroughs, new innovations. But that, in some recent research, we find that what that does is, yes, it creates conflict, but that conflict can be constructive if it engages in a, in meaningful conversation about the future direction of the family business and how, again, acting as a balance, these things can be, can be balanced out. The issue, though, and around that is whether or not the resistance becomes one of a genuine belief that the business is doing better than it really is.
One of our most recent papers that we're, we're, studies that we're currently finishing up, one of the things that we've discovered is that those family businesses that have characterized by high emotional attachment, so that is where the family members are deeply emotionally attached to the family business, we found that they often perceive their financial performance to be far greater than it actually truly is when you look at the objective data, you look at the actual financial numbers. So in other words, the more emotionally attached the family members are, the more they believe the business is doing financially better off than it might actually be doing in real life. This is what may create the risk that the family falls into underperformance. And typically when that happens, that activates the lesson from my other study and entropy, what we found is that those firms that underperforming that make a large swing towards being entrepreneurial, innovative and at enormous risk of failure because they haven't got the advantages of success and they have in bills, liabilities that they may not even be aware of. And so I think that's the two things I would really like to connect together here that are meaningful for family businesses. Thank you.
R. Adam Smith
Thank you for that. What's been a pleasure today. There's many topics we should address in some other conversations around entreship within the firm and governance and compensation and Succession Planning. And organizational behavior. There's lots, but I encourage the listeners to look up Professor Mat Hughes at his university. At the university of Lester and also on his LinkedIn. And there's also a Google Scholar page for his papers that are, you could spend many hours reading. So it's a, you produce a good amount of material. So that brings us to the end of today's episode.
I would like to express my gratitude to the listeners for joining. We will be editing and releasing this in the future, in the coming weeks here as well as of, through Mat as well. And we send a special thank you, professor, for joining us and sharing your expertise and wisdom here.
Mat Hughes
Thank you so much. It's been absolutely pleasure being part of your audio cast. And I wish you every success for the series. And thank you for but having me. Thank you again. Thank you to all the listeners and for taking part.
R. Adam Smith
That's been terrific. This is R. Adam Smith signing off. Stay tuned for the next episode of the Family Business audio cast on LinkedIn. Have a great day.
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