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Family Business at the heart of the Third Industrial Revolution

By Valérie Tandeau de Marsac, founder of the law firm VTM Conseil, FamilyBusinessLaw

Valérie Tandeau de Marsac is a French corporate lawyer who has chosen to serve family-owned and owner managed businesses.

A graduate from French top business school HEC in 1982, she became a lawyer in 1996 after a

substantial operational experience with industrial and public French groups. She spent 10 years at Arthur Andersen/Ernst&Young before creating her own law firm VTM Conseil, FamilyBusinessLaw, also a member of the center of expertise JeantetFamily which she created in 2010.

She is also the founder and President of voxfemina, a non profit association created in 2010 to promote the visibility of female experts in the media and thus fight gender stereotypes.

She serves as an independent Board Member of the Supervisory Board of Microcred, and an Associate Professor at

EDHEC Family Business Center.

It is unfortunate that family businesses are so often forgotten by the media, while they employ nearly half of French workers and account for 70% of the world’s GNP ... Especially unfortunate when the study of their characteristics and modes of operation are particularly rich of insight for all businesses.

Having completed writing my second book on family businesses, I am now more convinced than ever that they embody a model that could shape the future of a sustainable and socially responsible capitalism.

Family businesses, whose success cannot be denied, are at the heart of current changes, including the Third Industrial Revolution theorized by Rifkin.

Five success factors

In this second book, published with the help of EDHEC Family Business Center, we have identified five key success factors, which are presented through the findings of academic research on each item.

The five key success factors which are analyzed are conflicts, control of capital, long term, "familiness" and transmission.

1. Conflicts are paradoxically sometimes a source of progress

The subject of conflict is very little or never considered from an academic perspective, and more often reduced to the headlines of the media to stigmatize family businesses whenever a case arises in the news. However, the study of this issue is rich of lessons which are applicable to non-family businesses, and, why not, to families!

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2. The control of the capital and its corollary, the financial independence

Controlling the capital enables to make one’s own choices, without depending on the banks or the financial markets. Its necessary corollary is independence, combined with a low level of debt.

Beyond the financial aspect, the question of control is also a key governance issue, whose impact on the financial performance is recognized and documented

3. A long-term horizon at the service of sustainability and innovation

The long-term orientation of family businesses is unanimously identified and put forward as their main key to success, and often opposed to the "short-termism" of financial markets, stigmatized as one of the causes of the crisis the world has to face since 2008.

It is a fundamental characteristic which has an impact on the management of "Human Capital", on the relationships with the stakeholders, on the strategy and on the investment policies.

It also creates a favorable breeding ground for innovation, a skill which is reflected not only by technical excellence, but also by a specific ability to reinvent the business model to survive the passage of generations.

4. Family businesses benefit from a surplus of social capital, called "familiness"

The concept of "familiness" explains the better performance of family businesses by the additional capital resulting from both the interaction between the family social network, and that of the company, and a system of values more powerful and effective because it is embodied by the family members.

The typical profile of family businesses is that of the "hidden champions", i.e. international leaders in a niche market, with strong local roots which naturally lead to philanthropy and support of social entrepreneurship, in perfect harmony with the values held and embodied by familiness.

5. The duty to transmit to future generations builds the future

The issue of transmission to the next generation is a key factor in the sustainability of family businesses.

However, the transmission is little or belatedly anticipated in the majority of family businesses. Beyond the French legal framework, which remains expensive and complex, academic research focuses on the difficulty of financing the takeover by the heirs, which means that only the most profitable companies are passed to the next generation, and on the psychological factor, a crucial component in the transmission.

Nevertheless it is the prospect of transmission, deeply inscribed in the DNA of the family businesses, which contributes to install them permanently in the long term, thus preserving them from the excesses of a capitalism that many observers criticize today as "wild".

A model for all businesses

After this fascinating study, we acquired the conviction, shared by the 14 managers of family businesses we interviewed, that Family Business is a model for the future and for all businesses.

It is certain that today we need to reinvent capitalism to change a model which is out of breath. Western civilization is at a crossroads. The term "paradigm shift" flowers everywhere in the writings of the boldest thinkers of our time.

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The Third Industrial Revolution according to Rifkin

According to Jeremy Rifkin, we are at the dawn of the third industrial revolution, in which Lateral Power will triumph and replace the traditional hierarchical power. This is a change in dimension, which may also be characterized by passing from a vertical dimension, wherein the dominant concepts are authority, faith in one single scientific truth, and fierce competition, to a horizontal dimension, based on cooperation, sharing and collaborative entrepreneurship.

In this new civilization that Rifkin is calling for, the effects of the "wild" globalization are counterweighed by the virtues of "continentalization" which gives preference to local anchorage, like these family businesses which are characterized by strong territorial roots, an important component of the familiness.

More interestingly, another distinctive feature of the Third Industrial Revolution is the rise in power of the theory of social capital, which is now considered an essential component of any policy for sustainable growth.

This increasing importance given to the social capital is inseparable from both the trigger and the accelerator of the third industrial revolution: networking. In the first stage of the Third Industrial Revolution, it is information that became produced, distributed and received by all, thanks to the internet. This is the first part of this revolution. The second one, which is gathering pace before our eyes, is the transition from a centralized mode of production and distribution of limited fossil sources of energy, to a bi-directional mode, thanks to renewable energies and smart grids. Tomorrow, everybody will be both consumer and producer of electricity. Vertical control over the supply and the distribution of electricity will gradually give way to a horizontal network, operating in a nodal manner and based on millions of people, similar to how the internet has revolutionized information and the production and dissemination of knowledge...

A striking parallel with the characteristics of family businesses

A Third Industrial Revolution characterized by a high level of social capital, local roots combined with global deployment and a mode of operation based on networks: the parallel with familiness is striking!

These three elements indeed exactly match the definition of the central "familiness" concept that characterizes family businesses, to which researchers attribute their better financial performance and resilience in the crisis.

Family businesses would thus present embedded in their DNA the characteristics which are precisely those features of the world of tomorrow!

A central role for familiness?

This is precisely why I am convinced that family businesses are expected to play a central role in the era which opens today. Simply because they already embody the future in the way that is theirs, in line with what they have always been and will continue to be. A link between a past they do not deny, but which allows and legitimates their deep local roots, and focused on the values and operating modes of tomorrow's world.

Therefore, would it not be fair to assume that the "familiness" is the central element, the key to truly understand and characterize family businesses more than all their other properties, highlighted by the literature and the academic research, because basically, it contains them all?

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Familiness includes long term perspective and local rooting

Indeed:

- The surplus of social capital cannot exist without a long-term perspective, since it is precisely the pursuit of short-term profit that contributes to its destruction, as is attested by daily relocation decisions taken by large groups with dispersed financial capital in the hands of institutional investors operating in increasingly demanding and volatile stock markets,

- The local roots disappear if the transmission is not well prepared and successful in the hands of a shareholder that preserves the essential characteristics of the Family Business, i.e. a family shareholding, even if the management can be entrusted to non-family (which, according to research, is also often a good thing for the financial performance of the company),

- Innovation, another feature of these hidden champions that family businesses are often, works best if the business is organized as a network, which is confirmed both by the analysis of the academic literature and the managers companies we interviewed.

Can we not legitimately believe that family businesses are required to maintain a special place in this more horizontal, more connected, more collaborative world, which emerges in The Third Industrial Revolution? After all, these modes of functioning are their natural, precisely because they are also the ones of the family.

The impact of social networks

Wouldn’t it be interesting for research to focus on how the other ongoing revolution, that of the social networks, impacts familiness in all its components?

If familiness can be defined as a surplus of social capital, which itself is primarily defined by reference to the concept of network (the family’s network, the firm’s network and their interaction), isn’t it interesting to seek to understand how familiness may be impacted by the increasingly overwhelming presence of new technologies and the nodal and collaborative operating mode which they impose each day a little more, not only to companies but also to the families?

How this new lateral and collaborative operating process, so characteristic of social networks, is likely to impact familiness and, consequently, family businesses?

Are they in essence better equipped and prepared than other companies to take advantage of this evolution, or do obstacles exist which need to be identified and dealt with to see their performance tenfold?

Wouldn’t it be interesting to seek to measure their ability to integrate this new collaborative process to determine whether the degree of integration influences their performance?