The Family Business Reality at the Onslaught of COVID19

The 10th Global Family Business Survey of PwC endeavored to discover these realities among families in business at the height of the COVID19 storm. In collaboration with the Family Business Network International, PwC was able to survey 2,801 family businesses in 87 territories. The PwC Family Business Survey 2021 report was conducted from October through early December of 2020. It presented significant information and insights on the family business in crisis.

The participants of the recent Asian Family Enterprise Excellence last June (AFEEC 2021) had the privilege to learn the findings of the PwC study. Atty. Alexander B. Cabrera, Chairman and Senior Partner, PwC Philippines, shared and presented: Family Business Report -Trust to Impact.

Here is a synthesis of the 2021 PwC Survey. Let us review some interesting facts, data and insights from the global report on families in business at the onset of the COVID19 pandemic crisis. We will draw additional significant reflections in the process.

The health and safety of their people remained top of mind for family businesses as they reconfigured their operations to combat shrinking economies and an uncertain future. Yet optimism remains high for growth in 2022, despite the fact that the majority of the 2,801 family business leaders who took the survey did so before news of the vaccines.

The survey and report have four sections:

First: The financial resilience in family businesses and shows how they are prepared to lead the post-COVID recovery.

Key findings:

• Economic resilience is high: 79% say they needed no additional capital in 2020, and only one-third (34%) are cutting dividends during the crisis. Only 21% of family businesses say they required additional capital in 2020. 64% expect to grow in 2021. 86% of surveyed businesses are expecting to grow in 2022.
• Family businesses have proven robust and adaptable—and as we have come to expect, they are taking a people-first approach, prioritizing the well-being of their employees and supporting their local communities throughout the crisis. Eighty percent are enabling staff to work from home, and 25% are repurposing their production to meet pandemic related demand.

Second: Highlights the need to prioritize the Environmental, Social and corporate Governance (ESG) agenda and rethink how family businesses contribute to reducing climate change, to sustainable business practices, and to society.

Key findings:

• There’s a real desire to lead on sustainability, but action has been slow. 55% say there is an opportunity for them to lead the way on sustainable business practices, but only 37%, on average, have a sustainability strategy in place.
• The pressure on all businesses to contribute to a cleaner environment and fairer society is increasing, so actions around a sustainability agenda—not just commitments—will take on a new urgency. In 2017, PwC identified five urgent challenges facing the world: wealth disparity, technological disruption, demographic pressures, polarization of opinion and declining trust. COVID-19 has only served to accelerate and intensify these.
• Family businesses say that diversification (55%) and improving digital capabilities (52%), not sustainability, are their top priorities
• Yet, they think about the total impact of their business on society, they prioritize the well-being of their employees, and they believe in supporting their communities and society. More than 80% engage in some form of social responsibility activities, including 42% that say they engage in philanthropy.
• The Top Long-Term Priorities of Family Business by rank:

1. Protect the business as the most important family asset (82%)
2. Ensure the business stays in the family (65%)
3. Create a legacy (64%)
4. Create dividends for family members (63%)
5. Create employment for other family members (23%)

Third: Evaluates the state of technological transformation in family business. The pandemic has proved the vital importance of strong digital capabilities for businesses.

Key findings:

• Progress on digital transformation is slow. 38% say their digital capabilities are strong. In the 2018 Family Business Survey, 80% were worried about innovation and technology, and 57% said they would invest in it.
• The pandemic demolished any lingering doubts about the benefits of digital transformation. Digitalized services became the norm overnight, and businesses with established digital capabilities fared better than those that had to scramble to keep up. This was true for family businesses, as well. Those with strong digital capabilities and access to good data performed better than others.
• But these businesses are the minority. Although four out of five (80%) say that initiatives related to digitalization, innovation and technology are a top priority, progress in these areas has been slow. Only 19% say that their digital journey is complete, and 62% believe they have a long way to go.
• Strong digital capabilities translate into strong business performance:

1. 60% of family businesses with strong digital capabilities saw growth pre-COVID (vs. 51% for other family businesses)
2. 86% of family businesses with strong digital capabilities have access to reliable and timely information/data that feeds into the decision-making (vs. 54% for other family businesses)
3. 60% of family businesses with strong digital capabilities ensure sustainability is at the heart of everything they do (vs. 42% for other family businesses)
4. 73% of family businesses with strong digital capabilities say information is shared in a transparent and timely way between family members (vs. 58% for other family businesses)

Fourth: Focuses on family dynamics. The very relationships that make a family business strong can also hold it back. It’s a difficult subject for many, but introducing a more professionalized approach to governance takes emotion out of the equation and correlates with business success.

Key findings:

• There’s resistance to change and professionalization. 51% have a documented vision and written purpose statement, 30% have succession plans, and 29% say there is a resistance to change.
• Perhaps it is not surprising that during the pandemic, and despite stalling progress on instigating formal governance procedures, the number of respondents who have formalized succession planning has doubled to 30% (from 15% in 2018).
• Almost seven out of ten survey respondents (68%) say that family members who are not on the board trust the family members who are on the board, but the evidence hints at underlying discord: only 58% say that all family members share similar views about the company’s direction.
• Two-thirds (66%) of respondents report that family members communicate regularly about the business, but one-fifth (21%) say they have no formal mechanisms in place to deal with potential areas of disagreement.
• Only 12% have used an external third-party resolution service.
• Family values matter, but only half have put them in writing, and less than half have codified governance policies.
• Family businesses with values in a written form are also better prepared for succession and are more communicative and transparent. And they performed better than their peers during the pandemic, too. Though 70% of businesses say the family has a clear set of values, only 44% have written them down.
• Written values correlate strongly with success:

1. 58% of family businesses with values in a written form saw growth pre-COVID (vs. 52% for other family businesses)
2. 77% of family businesses with values in a written form say information is shared in a transparent and timely way between family members (vs. 54% for other family businesses)
3. 77% say family members regularly communicate about the business (vs. 57%) and were more communicative during the pandemic (62% vs. 46%)
4. 69% say family members have similar views/priorities about company’s direction (vs. 49%)
5. 54% of family businesses with values in a written form provided emotional/mental health support to staff (vs. 39% for other family businesses)
6. 46% took action to support their local community (vs. 34%)
7. 41% of family businesses with values in a written form have a robust, documented and communicated succession plan in place (vs. 20% for other family businesses)

With these four sections of the survey, let’s ponder on some salient insights from the PwC report:

1. The COVID19 pandemic crisis has proven and reinforced the reputation of family businesses to be more trustworthy and highly resilient.
2. There is an undeniable blind spot when it comes to translating family core values into concrete actions that demonstrate their commitment to ESG. They regard closing that gap as critical, not only to create new opportunities, but to secure the long-term future of the business. ESG should go from a nice feature for a company to have to an imperative for success.
3. The next generation’s (NextGen’s) interest in sustainability is important not only in encouraging family businesses to embrace ESG, but in attracting younger family members into the business. Purpose and meaning are vital to this generation, and ESG can provide both.
4. Digital transformation and agility go hand in hand. Digital technology helped firms pivot their operations quickly. The pandemic was a good stage to showcase the digital transformation advantage. Family businesses with more advance digital transformation was in a better position to adapt to the crisis, recover and pivot. Digital transformation was given a boost in priority among the majority of family businesses as they struggled to cope up with the nature of the pandemic crisis.
5. Many families want to keep discussion of sensitive issues among themselves, but they agree that they often need professional support and moderation to address them properly. Finding such support can help professionalize the business and encourage families to reconsider the role, responsibilities, and composition of the board and management. Having a professional governance structure and a clear process for conflict resolution, preferably involving an independent party, makes business sense, particularly for family businesses. A professional approach strips emotion and personal bias, common stumbling blocks for families, out of decisions.
6. Families in business with better governance structures and mechanisms were in a better position to manage crisis. The pandemic stimulated more family businesses to have written and codified governance policies that will include succession planning.
7. Write values down. A written accounting of a family business’s values helps with communications and transitions.
8. Allow external help. Conflict and differences of opinion are inevitable—we’re only human. But the emotions involved in family discussions can be difficult to resolve internally. Family business leaders see the benefit of involving a neutral, outside perspective.

In conclusion, families in business can recognize and appreciate better their esteemed power and influence in society, even amidst the pandemic havoc. The trust in them is well-deserved, especially when a crisis strikes. Their high resiliency is their inherent strength. Families in business should cherish and preserve well their role and legacy in building up the world to be a better place.

In the quest for longevity, sustainability goals can be integrated in the family business growth and development vision. Professionalizing governance and formalizing succession plans are critical components for long-term aspirations. These are difficult and sensitive matters that will benefit much from the help and assistance of a third-party professional. The pandemic has vividly and emphatically directed all of us that the only way to recover is for all of us to rise together. Helping each other and maximizing each other’s strength is the best move forward to surpass any crisis.