Richard Narva Divorces Family Entrepreneurship Stereotypes
Richard Narva spoke on the role of family-controlled businesses in international entrepreneurship at the Fletcher School on November 15, 2006, at a meeting co-sponsored by the International Business Program and Tufts Entrepreneurial Leadership Program. Narva, a partner with the Roseview Group, has consulted for over 200 family business clients in a career of more than two decades.
Narva argued that family businesses are able to “leverage relationship capital which doesn’t show up on the balance sheet but is an extraordinarily important asset,” but cautioned that the structure and impact of family ownership is complex.
While many people are familiar with the concept of businesses linked to families, Narva argued that there are many misconceptions about them, starting with their names. He argued that the term “family business” is not an analytically useful term. Instead, he prefers “family-controlled enterprise,” which indicates family control of capital through ownership, governance, and management.
Narva gave the audience a quiz intended to test conceptions of family businesses, with True-False questions to ask if certain companies and foundations were family businesses or not. Narva said he has utilized the quiz on many occasions to show how there is “an absence of vocabulary to understand what it means to deal with a family business.”
Family business, Narva said, is actually the dominant form of business formation in most of the industrialized world. Yet defining a family business can be problematic since notions of what constitutes a family differ by culture and society.
A sampling of answers from Narva’s quiz indicates that the distinction between family businesses and non-family businesses may be hard to ascertain and naming may confuse the matter. Bill Gates’ Microsoft is a founder-controlled, not a family-controlled, business, while The Gates Foundation, the largest social enterprise in the world, is a family-controlled enterprise because it is presided over by a husband and wife.
Narva explained that the development of Microsoft illustrates the importance of family connections in helping to grow businesses. Bill Gates’ first major foray into the business world was through a contract at IBM; he made this connection to IBM because his mother was on a non-profit board with the regional director of IBM.
Narva pointed to how the Ford Motor Company and Ford Foundation exhibit different patterns than Microsoft and the Gates Foundation. Ford Motor Company is a family-controlled enterprise despite the fact that only three Ford family members sit on the Board and the Ford family owns only 6% of the company’s stock. Because that 6% of stock has special voting rights, the family actually controls 40% of the company. In contrast, the Ford Foundation is not family-controlled and merely retains the Ford name.
To further illustrate the complexities of looking at family-controlled companies, Narva discussed the Forbes list, which rates the world’s richest individuals. Interestingly, the wealth of five of the top ten people on the list is due to large shareholdings of the family-controlled enterprise, Walmart.
Narva said that the list does not make much sense in many parts of the world, where determining the financially most successful families is a more valid question than ranking individuals. In Sweden, the Wallenberg family controls 15% of the capitalization of Stockholm stock exchange. In the United States, Narva said that “family-controlled publicly traded companies are a significant cohort” of businesses. In Brazil and Germany, for example, virtually all companies are family-controlled and few are publicly-traded.
Narva sought to dispel myths about family-controlled enterprise, for instance that they are “amateurishly managed” and that they vastly underperform the market.
Narva told the audience that the primary motivator of family-controlled enterprises is pain because “when [the business is] sweet, it’s great; when it’s excruciating, it’s pain.” Family-controlled enterprises have to take into consideration “broader constituencies than shareholders,” including family and local communities. A common element among family-controlled enterprises is quality, as Narva illustrated with an anecdote about family-controlled factories that he has toured, which are immaculately clean because they are viewed as extensions of the family’s living room.
To analyze his family business clients, Narva developed a two by two matrix which plots businesses based on two criteria: whether the family is a “constraint or propulsion” for the company’s growth and whether the family creates challenges for performance or enhances performance.
Narva said that family-controlled enterprises strive for three concurrent objectives: family control, economic growth and family harmony. While Narva says that most business owners are satisfied with achieving two out of three of these goals, those with long-term company growth in mind work towards fulfilling all three. He also highlighted other factors affecting performance unique to family-controlled enterprises, such as whether a family is open or closed and how the family and organizational systems interact with each other.
Narva cited the work of Dr. Ramona Heck, a professor at Baruch College, whose research focuses on family entrepreneurship, which has been a particularly under-studied field of business. Narva explained that Heck’s work is important because it seeks to explore the crucial contribution that families make to entrepreneur’s endeavors through providing education, imparting values, passing on their experience, and supplying financial and human resources. Narva paraphrased Heck’s work, which says that families are a source of oxygen for the fire of entrepreneurship.
