John A Davis of MIT Sloan School of Management: Five Things You Need To Be A Highly Effective Leader During Uncertain & Turbulent Times
The fact that the world is unpredictable does not absolve a leader of his/her responsibility to set a course for the organization. To do this in these times requires more careful scanning of the environment for forces and trends that will influence our future direction; scenario planning and risk planning; and the courage to take a stand on where things are going and how you will move. More than ever, we need family business leaders who observe and listen well and aren’t afraid to be wrong.
As part of our series about the “Five Things You Need To Be A Highly Effective Leader During Turbulent Times”, we had the pleasure of interviewing John A. Davis.
John A. Davis is a Senior Lecturer in the Family Enterprise Executive Programs at the MIT Sloan School of Management. He is a globally recognized pioneer and authority on issues related to the family enterprise, family wealth, and the family office. Since the 1970s, he has been a leading researcher, professor, author, advisor, and speaker on family enterprise, and is the creator of some of the field’s most impactful conceptual frameworks. His insights help to develop leaders, strengthen families, professionalize businesses and family offices, grow shareholder value, and pass sustainable enterprises to the next generation.
Thank you so much for your time! I know that you are a very busy person. Our readers would love to “get to know you.” Can you tell us about your ‘backstory’, how you pioneered the family business field and went on to become the world’s leading authority on family enterprise and a professor of family business at MIT?
Since the focus of our interview is to speak to the founders of family businesses, I am responding to these questions from the lens of my work with founders of family businesses, even though I also work with multigenerational family enterprises beyond the first generation too.
I invite readers to learn more about my work with founders at MIT’s Founder to Family program: https://executive.mit.edu/ftf
What are some of the mistakes you find founders of family businesses make often? Can you tell us what lessons or ‘take aways’ they can learn from them?
The biggest mistake that founders of family businesses make is believing that the organization that they’ve built, and typically have gotten very attached to, is what needs to be preserved and passed on to the next generation. The most important legacy that a founder of a family business can pass to the next generation and future generations is the drive that inspired them to do something different that is valued in the marketplace and to build relationships that can endure over years and decades. Successful founders are ultimately opportunity-seekers, problem-solvers, and relationship-builders. The drive to pass on that spirit is what they should be focused on instilling in and passing to future generations.
Extensive research suggests that “purpose driven businesses” are more successful in many areas. How would you advise founders of family businesses on defining their company’s vision and purpose?
The lesson of long-term success is that companies create value according to their values. In any generation, this is ultimately what successful companies are doing. Most vision and mission statements reflect a variation of this statement. Family companies are particularly mission oriented. They are more likely to do this over generations, because it is in the DNA of families to have a long-term perspective, long-term relationships, a compelling reason for staying together in business (purpose), and to reflect their values inside their companies.
The founder and future owners need to define for their company their mission (what the company is here to do), vision (what they want their company to be in the future), and core values (the standards by which they will do business). But they should not stop there; they also need to define these for their family. What is the family’s mission (what the family is here to do), the family’s vision for itself (what they want their family to be in the future), and the family’s core values (the standards by which they live and own their business). This helps the family remain united and committed over the long-term.
Thank you for all that. Let’s now turn to the main focus of our discussion. Can you share with our readers a story, from your experience/student’s experience, about family business resilience through uncertain times?
Family-owned businesses have been superior performers historically, mostly because they have focused on operational excellence. They keep their competitive edge by emphasizing quality and excellence, reinvesting aggressively to grow within their industry, building great loyalty with customers/employees/suppliers, having long-term time horizons that allow them to make patient investments, and having the benefit of family talent that contributes its reputation, professionalism, values, and sense of duty. This approach to management has paid off for generations.
During times of uncertainty and fast-paced change, the most important benefit of a family business is the stability that family ownership provides. This ownership foundation allows family companies the security to take risks, innovate, make long-term bets, and persist to overcome volatility, all with the oversight of family owners who are stewards of their company. Family companies also tend to have strong balance sheets, allowing them to not only maintain operations in bad times, but take advantage of opportunities when they come up.
A good example of family business resilience is a company I know in the shopping mall industry. This was a particularly challenging business to be in during the Covid pandemic. This family did a number of things right to get through the worst of the pandemic:
Years prior, the family had done risk-management planning and knew their risk of being highly concentrated in shopping malls, so they diversified into adjacent industries and developed a substantial liquid asset portfolio. This diversification strategy was essential to get through the pandemic, because their non-mall assets and companies were cashflowing while their mall assets were not.
The family did not carry much debt (a common trait of family companies). This conservative financial strategy allowed them to sustain the downsides, because they did not have large debt payments due.
The family had spent years communicating with family shareholders about economic cycles, and preparing them for the inevitable day when there would be a downturn. The shareholders had agreed, during good times, that when difficult times arrived, they would reduce their dividend in order to support the company. During the pandemic, there was no debate about whether to reduce the dividend. The dividend was paused for one year, and then was reinstated at a low amount. Most family members had been saving and investing on their own so they were less reliant on the dividends from the company for their lifestyle.
I’m an author and I believe that books have the power to change lives. Is there an impactful or inspiring book you would recommend to executives of family businesses?
Any of Jim Collins’ books are at the top of my list. I especially recommend Good to Great.
What would you say is the most critical role of a founder of a family business during challenging times?
Keep people focused on the ultimate mission (purpose), and reassure them that they have the strength and resilience to make it through this period.
What is the best way to communicate difficult news to one’s team and customers?
First, difficult news about the performance of the company, about personal performance at work, or bad financial reports — under most circumstances — should not come as a surprise. I cannot overstate the importance of reducing bad surprises to family members.
Second, the news — whatever it is — needs to be the result of a fair process where various points of view have been considered and fairly integrated into the decision.
Third, and perhaps most important, unless the person has done something really egregious that deserves calling out or even punishment, the family member needs to feel respected and able to maintain their dignity after receiving the bad news.
Finally, when delivering difficult news to one’s family, remember that your job is to speak the truth with care and kindness.
How can a family business founder make plans when the future is so unpredictable?
The fact that the world is unpredictable does not absolve a leader of his/her responsibility to set a course for the organization. To do this in these times requires more careful scanning of the environment for forces and trends that will influence our future direction; scenario planning and risk planning; and the courage to take a stand on where things are going and how you will move. More than ever, we need family business leaders who observe and listen well and aren’t afraid to be wrong.
Can you share 3 or 4 of the most common mistakes you have seen executives of family businesses make during difficult times? What should one keep in mind to avoid that?
The big mistake that I see is that in difficult times, family business leaders don’t communicate enough with key constituencies to let them know what they’re doing to address the challenges. Leaders should over-communicate to keep people informed and engaged.
Another mistake I see is not asking shareholders (the family owners) to be prepared to sacrifice dividends in order to get through a tough time. The owners are responsible for maintaining the long-term stability of the company. You don’t want to surprise owners with this request, so leaders should remind the owners — even in good times — that there are cycles, and dividends at some point may need to be reduced or paused.
A third mistake I see leaders make is not taking the time to stay well aligned internally in the company and with the owners. Achieving alignment in difficult times can slow things down a bit, but ultimately helps the organization move ahead in a much more coordinated way, and reduces the number of surprises that people feel.
A fourth mistake is not using the difficult moment to reaffirm your values as a company. In tough times, you might feel it is necessary or easier to compromise your core values, but you shouldn’t. You really know an organization’s values in tough times.
Here is the primary question of our discussion. Based on your experience, what are the five most important things a family business leader should do to lead effectively during uncertain and turbulent times? Please share a story or an example for each.
This has been asked in different ways above, so I’ll recap the lessons shared already in the interview:
Stay focused on your mission.
Give people hope that you will get through this period.
Overly communicate. Do not surprise people.
Remind the owners of their responsibility to maintain long-term stability.
Align internally before pressing ahead.
Reaffirm your values.
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
If you’re not setting your direction, others will set it for you. This is applicable to a company, an ownership group, a family, or an individual.
How can our readers further follow your work?
For a single resource about my work, visit johndavis.com
More specific ways to find me are here:
MIT’s family enterprise programs: executive.mit.edu/family
My advisory firm that works with families worldwide: CFEG.com
Twitter: https://twitter.com/ProfJohnDavis
LinkedIn: https://www.linkedin.com/in/john-davis-61aab322/
Thank you so much for sharing these important insights. We wish you continued success and good health!
