Developing better wealth owners

The metrics defining “success” for businesses and investors have changed significantly in recent decades. Profit is no longer the sole objective; investors have been challenged to count the environmental, societal, and financial costs of their actions, and question their role within wider society. This is driven by regulation, the UN’s Sustainable Development Goals, and ever clearer data showing that long-term profit stems from a functioning and sustainable ecosystem.

The challenge extends to family business owners. Their influence can be out-of-scale, due to having a high level of control over their business, and a crucial role within the global economy – both through their businesses² and their private assets³. Differing levels of competence will materially impact value creation and sustainability, and play a determining role in the actual impact achieved. But little attention has been afforded to making business owners better.

New research, however, offers a more analytical understanding of ownership competence and how it can be improved. In a 2020 paper published in the Strategic Management Journal, Foss et. al. have defined  owner competence as “the skill with which the ownership is used as an instrument to create value”.  The components they identify are: what to own (“matching competence”); when to own (“timing competence”); and how to own (“governance competence”).

Matching competence is about purpose, showing foresight and creativity in managing resources, and being ready to take reasonable risks. Timing competence is about making the right call on when to enter or exit the market, and judging undervalued or overvalued resources – being able to spot hidden value, draw it out over time, and reduce risk. But – and crucially to family businesses – when to own is also about having the self-awareness to evaluate if the incumbent is still the right owner, and to proactively plan for handing over the reins. Last, governance competence is about balancing value creation against maintaining control. Good governance defines how business representatives act, own, and hold themselves accountable, in any situation.

Governance is the vital enabler in the omnipresent Environmental, Social and Governance (ESG) formulation, underpinning the delivery of the environmental and social elements. Responsible investing and the application of ESG has become the new normal, giving governance competence an increasing relevance. It also has specific bearing on family businesses. Some of the most enduring businesses are family-owned and, with good governance, the family factor can be a tremendous advantage. But poor governance can lead to dysfunction and even collapse. In addressing governance competence, family businesses can look to focus attention in three key areas.

The first is to train the owners to be engaged, attentive and understand the business. Skills in business management, corporate governance and financial management need to be united in a solid understanding of ESG and the new investing environment. The second is to develop a family governance framework. Family businesses face the challenge of integrating future owners – and this is tied to both governance and timing competence. Building consensus and shared common purpose between generations is essential. A sensible family governance framework can provide invaluable support, giving a voice to both sides, and can help with training future owners – providing useful opportunities to cut their teeth away from public scrutiny. Finally, families need to find cohesive forces that go beyond material gain. Philanthropy and impact investing can both be excellent vehicles for this.

Further exploration into ownership competence should be welcomed and supported by investors and managers alike. Developing better owners will improve outcomes for businesses and families, as well as for the wider world. In the meantime, investors are increasingly seeing the value of “doing good” alongside “doing well”.