I by IMD magazine - The family business issue by IbyIMD

#08 December 2022 20 CHF

REFRAMING HISTORY

THE NEW DIPLOMACY

FAMILY FORTITUDE

KLOPP’S GOALS SUCCESSION SUCCESS

END OF THE DYNASTY? AUTONOMOUS ENTERPRISE ibyimd.org

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[ Foreword ]

‘Tis the season to celebrate the family

ook around and it feels the speed of business – and of life in general – is ever-accelerating. It took the telephone 75 years to reach 100 million users, yet Facebook reached 10 times as many in only a 10th of the time – a billion users in less than eight years. Or consider email. The first email was sent in 1971, traffic in the US eclipsed physical mail in 2000 at 200 billion per year, and experts estimate that 2022 saw an average of 333 billion emails per day. The acceleration in business may not be similarly exponential, but it is notable. According to a recent McKinsey study, in the early 1980s, S&P 500 companies had been part of the index for about 35 years on average. Today, the figure is less than 20 years. Executive tenures are also getting shorter. In 2020, the average CEO tenure was 6.9 years, down 14% from just four years earlier, according to Korn Ferry.

llustration: Jörn Kaspuhl

Against this drumbeat of disruption, I suspect you will thoroughly enjoy reading about the long-lasting family businesses featured in this eighth edition of I by IMD. Many have been around for a century or longer, passing from one generation to the next. However, longevity is not the antithesis of innovation but rather its result. Whether it’s Firmenich or Ahlström, let alone the empires created by the Wallenbergs and Waltons, the willingness to adapt to both changing market conditions and evolving family priorities have been central features of their journeys. Family firms are the bedrock of most economies, constituting over two thirds of global enterprises and a similarly high percentage of employment, as my colleague Peter Vogel, who leads IMD’s Global Family Business Center, points out. The contribution of these firms goes far beyond the numbers, however. In recent years, influential voices from BlackRock’s Larry Fink to Klaus Schwab of the World Economic Forum have called for business to embrace stakeholder capitalism.

“Welcome to the Club!” is what I suspect the leaders of most family businesses must have thought upon hearing these calls. Indeed, as this issue demonstrates, due to their longterm orientation, deep roots, and the fact that the family name is commonly “on the door”, family businesses and the families that guide them tend to exhibit a societal commitment from which non-family firms can learn. As Maria Ahlström-Bondestam explains: “I was born into an old industrial family that had the power to contribute.” Similarly, the Wallenbergs’ commitment to their Swedish homeland is such that there is even a Swedish word for it – landsgagneliga, which translates as “for the benefit of the country”. As always, this issue is packed with practical insights – from leadership lessons by an inspiring Kenyan social entrepreneur and the world’s top football coaches, to an up-close examination of digital transformation at Bayer and the prospect of a “fully autonomous enterprise” enabled by technology, to the presentation of the new IMD-Hinrich Sustainable Trade Index. Personally, I am particularly excited about the thoughtful contribution by my colleague Mohamed Mahmoud Mohamedou of the Geneva Graduate Institute. Our two institutions are teaming up to advance principled leadership in global affairs across both business and government, something our troubled world is desperately crying out for. Finally, in true holiday spirit, my IMD faculty colleagues recommend some of their favorite books, which make for excellent presents. Or perhaps you give yourself a gift – grab one of them, switch off your phone with its pesky email and social media alerts, and slow down. We all need it at the end of this challenging year! ■

David Bach, Dean of Innovation at IMD December 2022 • I by IMD 1

[ CONTENTS ] 04 [ In good company ]

The pace of technological change and a “silver tsunami” of retirements threaten the future of the family dynasty, argues Jerry Davis.

06 [ Leadership ]

Elite football managers have a skillset far beyond looking after the players on the pitch. Simon Kuper explains what they can teach us about leadership and talent management.

#08 December 2022 20 CHF

[ FAMILY BUSINESS ]

What makes a family enterprise special? And is it really better equipped than its non-family equivalent to survive the current economic storm? Find out in our 38-page in-depth report and analysis.

KLOPP’S GOALS SUCCESSION SUCCESS

END OF THE DYNASTY? AUTONOMOUS ENTERPRISE ibyimd.org

IMD_2022_Edition_08_December_2022_COVER_Final.indd 7

05.12.22 10:11

Cover picture: Christina Gaw of Gaw Capital @ KARL STUDIO.

12 Family businesses are hard-wired for longevity and stewardship, but they must now adapt and evolve to survive, writes Peter Vogel.

28 Fictional family businesses on TV and in the movies may be over the top but they can offer interesting insights, explains Kimberly Eddleston.

38 Soren Toft, CEO of the shipping

16 Which are the biggest family-run companies and where are they based? Get the essential facts and figures in a specially commissioned visual guide.

30 To sell or merge a family business is difficult. Peter Vogel investigates how the long-established Swiss firm Firmenich are handling the transition.

41 Working to make a positive global

18 A legacy company is sometimes

confronted with uncomfortable truths about its past conduct. A company must find ways to reframe the narrative, explains Lindsay Krasnoff.

22 A certain type of family firm showed resil-

company MSC, suggests eight ways that a family outsider can successfully climb aboard without making waves.

impact on the lives of others has brought the Finnish-based Ahlström family closer together, write Malgorzata Smulowitz and Peter Vogel.

45 In times of transition it’s important

to let emotions into the room, explains regular columnist George Kohlrieser.

47 For 30 years, all family members of

ience at the height of the COVID-19 pandemic, according to a study by Alfredo De Massis and Ivan Miroshnychenko. Continuity, perseverance, and planning for the future were key.

family enterprise starts with answering the questions posed by the next generation, write Peter Jaskiewicz and Sabine Rau.

Colombian-based Carvajal SA have been given free or heavily subsidized access to education, healthcare and housing. This “social dividend” has aided family unity, says Cristina Carvajal.

25 Gaw Capital, a real estate investment

35 Abdallah Al-Obeikan, CEO of the

50 Marcus Wallenberg, chairman of a

firm, was set up by two brothers and a friend in 2005, but things really took off when they invited their sister Christina Gaw to join. 2 I by IMD • December 2022

32 Ensuring a smooth transition of a

Obeikan Investment Group, talks to Hischam El-Agamy about his mission to create a fully autonomous business.

Swedish-based investment empire, explains to Jean-François Manzoni why it is so important to support and develop his homeland.

Photos: ©UNICEF/UN0325666/Ralaivita, Cecil Sneha via UNspalsh, MSC

REFRAMING HISTORY

THE NEW DIPLOMACY

FAMILY FORTITUDE

52 [ CEO dialogue ]

Khadija Mohamed-Churchill is founder and CEO of Kwanza Tukule, a social enterprise that helps to ensure a supply of food for those in need. She discusses her ambitions and motivation with Jean-François Manzoni.

55 [ In my view ]

Hallelujah! The quest for purpose and meaning in the business world may mean more than just empty gestures, argues Michael Skapinker.

58 [ Digital transformation ]

Photos: elea Foundation for Ethics in Globalization, Wikipedia, Kevin Frayer/Getty Images, Boon Panthalany, David Lezcano via Unspalsh (2), Bayer, www.muellersaran.de

Bayer is using the latest technology to drive change. Training and developing a new breed of leader is the key to success, Sarena Lin, the company’s Chief Transformation and Talent Officer, tells Misiek Piskorski.

62 [ The I reader ]

IMD professors recommend a diverse selection of books to inspire, entertain and stimulate you during the long winter evenings.

64 [ Changing times ]

Ambassadors and heads of state no longer hold a monopoly on the channels of diplomacy. Mohamed Mahmoud Mohamedou outlines how business leaders can play their part.

66 [ Psychology ]

Leaders will get far more truthful responses if they learn the art of asking “clean” questions. Heather Cairns-Lee, James Lawley and Paul Tosey explain how to do it.

68 [ CEO dialogue ]

David Loew, CEO of Ipsen, tells Jean-François Manzoni how he dealt with a regulatory knockback and the pharmaceutical firm’s best-selling drug going off patent.

62 70 [ Sustainability ]

The Hinrich Foundation in partnership with IMD 's World Competitiveness Center has recently released a revamped Sustainable Trade Index. Chuin Wei Yap explains why New Zealand offers hope amid the gloom.

74 [ Crisis planning ]

Global conflict is not inevitable, but David Bach encourages the CEOs of multi-nationals to ask themselves: what if?

70 76 [ The forecaster ]

Howard Yu and his team focus on hard data in tech and pharma to analyze what it will take for an organization to weather the storm in 2023.

80 [ Preview ]

Join us in March when our experts will take an in-depth look at how business leaders can equip themselves to deal with a crisis “overload”. December 2022 • I by IMD 3

[ In good company ]

Does tech and the silver tsunami spell the end of the business dynasty? It’s too early to tell which of the current wave of successful enterprises will turn out to be built to last, but the creation of family-led giants in the mold of Tata or Ford seems unlikely in an ICT-driven business landscape, writes Jerry Davis

Family businesses are certainly pervasive. But what about family business dynasties − enterprises that are actively managed by the family for three or more generations, like the Tata family conglomerate? These are common in some places and rare in others. Why? And have the factors that support family business changed in ways that make business dynasties less likely in the future? This is an increasingly salient issue. Most small businesses in the US are owned by baby boomers who are at or beyond retirement age, and most owners have no succession plan in place. We are in the midst of a so-called “silver tsunami” of business transition. These companies are more likely to end up in the hands of private equity or corporate buyers (or, optimistically, their own employees) than to be handed off to heirs. Moreover, many tech-infused businesses today simply do not lend themselves to family succession. Perhaps the era of the business dynasty is at its twilight. Or perhaps it requires very specialized circumstances to maintain it. Where do business dynasties come from? Investopedia’s list of the 10 wealthiest families in the world includes some familiar names, and 4 I by IMD • December 2022

almost all are associated with a well-known multi-generational business: Walton (retail), Mars (candy and petfood), Koch (oil service), Hermes (luxury), Al Saud (oil), Ambani (oil), Wertheimer (fashion), Johnson (financial services), Thomson (media), and Boehringer (chemicals). Most are privately held, and most involve tangible businesses with tangible assets: stores, oil, chemicals, candy, clothing. In several cases second- and third-generation family members are still actively engaged in the management of the business. These are dynasties. Now consider the 10 wealthiest people in the world: Elon Musk (Tesla+), Bernard Arnault (LVMH), Gautam Adani (Adani Group), Jeff Bezos (Amazon), Bill Gates (Microsoft), Warren Buffett (Berkshire Hathaway), Larry Ellison (Oracle), Larry Page (Google), Mukesh Ambani (Ambani Group), Sergei Brin (Google). How likely is it that Elon Musk’s grandchildren will be holding down management jobs at Tesla, SpaceX and Twitter, or that Pages and Brins will be overseeing Alphabet’s successor in 2060? This comparison provides some clues for creating a dynasty. First, keep the ownership private (or, in the case of the Waltons, hang on to a commanding ownership position; the family still owns roughly half of Walmart’s shares). The biggest recent fortunes (Musk, Bezos, Gates, Page, and Brin) are based in stock ownership: a ballooning market capitalization bestows instant wealth on the founders who take their company public. But it is rare for a business to go public and stay in family hands, at least in the US. There are exceptions. Some families use devices such as dual-class voting shares to balance the benefits of going public with maintaining family control. When Ford Motor Company finally went

Illustration: Jörn Kaspuhl

round the world, “business” is almost synonymous with “family business”. The Tata family’s commercial empire in India has lasted generations and spans industries from cotton and steel to IT consulting and solar grids, and Tata family members are still active in managing the enterprise. My favorite local restaurant in Menlo Park, California, is also a family business, with a daughter waiting tables, a son in the kitchen, and a dad at the cash register taking phone-in orders.

public in 1956, led by the grandson of the founder, it created a special class of shares with 40% of the voting rights to be controlled by the Ford family in perpetuity. A Ford family member still serves as board chair to this day. But this kind of structure is uncommon in the US and rarely lasts for generations. And there are families that have stayed wealthy for generations on the basis of public corporations. The Rockefeller family fortune was built on Standard Oil, which spawned Exxon, Chevron, Marathon, BP, and other public companies. But later generation Rockefellers were more famous for politics and banking than oil — and the current generation of Rockefeller heirs has turned decisively against oil, as the family very publicly liquidated its fossil fuel holdings. The Rockefeller Foundation followed suit a few years later. Contrast this with Germany, where small- and medium-sized private companies make up the prized Mittelstand. This vast sector is described as the backbone of the German economy, employing 57% of the country’s workforce. Such enterprises typically stay in family hands for generations, creating a stable infrastructure for industries such as automobiles, machinery, and chemicals. Meanwhile, public corporations are the anomaly in Germany: according to the World Bank, Germany has a mere 438 public corporations. (Even Volkswagen, Germany’s largest public corporation, is ultimately controlled by descendants of Ferdinand Porsche, who designed the first Volkswagen.) Switzerland and Austria have similar systems. Switzerland has 236 public corporations; Austria, just 68. America’s financial market-centered economy and Germany’s family-friendly business climate might be described in terms of their “institutional terroir”. Just as the soil and climate of Cote D’Ivoire are much more amenable to growing cacao than those of Canada, the institutional terroir of Germany is more conducive to maintaining family business dynasties than the US. German founders seek a legacy; American founders aim for an exit strategy. So, is the era of family business dynasties coming to an end?

building a family dynasty. The word “legacy” gives a clue. In the world of family business, legacy is a term of honor. In technology, according to the website Techopedia, “a legacy system...refers to outdated computer systems, programming languages or application software” that “are no longer applicable to current contexts or content.” In an economy in which transactions are mediated by ICTs, almost every business is a software business, susceptible to being a “legacy” business. Diners in restaurants are greeted with QR codes instead of waiters; physician house calls take place over smartphones; babysitters and street performers accept payment via the “digital wallet” Venmo; household staples, medicines, and artisanal neckties arrive at the door from Amazon.

‘How likely is it that Elon Musk’s grandchildren will be holding down management jobs at Tesla, SpaceX and Twitter?’ Even the auto industry is not immune to ICT-driven transformation. When Henrik Fisker took his car company that carries his name public in 2020, he had no intention of building a bunch of factories — that was for “legacy” carmakers like Ford and Volkswagen. Instead, he contracted out production to Magna International, with plans for a future model produced by Foxconn. As he told Business Insider: “We don’t want to be a vertically integrated car company. We’re not going to do our own manufacturing. It would be stupid for any EV startup to make a brand-new factory.” Fisker looks more like Nike than Ford. In a world of pop-up enterprises snapped together like a Lego house, how likely is it that the Fisker clan will become a dynasty? ■

In previous columns I have argued that information and communication technologies (ICTs) are fundamentally altering access to the building blocks of business. How firms raise capital, recruit and manage labor, engage with suppliers, and distribute to customers are all very different now compared with a generation ago. A prospective founder today can incorporate in e-Estonia, raise capital on a crowdsourcing platform, engage labor by the task via online platforms, rent a supply chain on Alibaba.com, and distribute to customers through Fulfillment By Amazon. Enabled by ICT, the parts of a business are like Lego bricks waiting to be snapped together and scaled up (or not) on demand. Think of the digital revolution in business as institutional climate change. The traditional business terroir is in flux, and new invasive species are rising and falling rapidly. (Remember when Facebook was valued at $1 trillion, before being replaced by TikTok? Before Zara was replaced by Shein?) While it’s far too early to tell which species of enterprise will turn out to be built to last, this new world of ICT-based enterprise is not designed for

Jerry Davis is the Gilbert and Ruth Whitaker Professor of Business Administration and Professor of Sociology at the University of Michigan’s Ross School of Business. He has published widely on management, sociology and finance. His latest book, Taming Corporate Power in the 21st Century (Cambridge University Press, 2022), part of the Cambridge Elements Series on Reinventing Capitalism, has recently been published.

December 2022 • I by IMD 5

[ Leadership ]

Football’s elite and the tactics of talent management Successful managers at the top level need a wide range of skills to lead teams both on and off the field. Renowned football writer Simon Kuper presents his best XI tips (plus a substitute) for thinking like a champion

ike leadership jobs in regular businesses, the football manager’s role has grown more complex over time. Tenures have shortened, staffing levels have mushroomed, and footballers — like younger employees everywhere — have gained power. Over the decades I’ve interviewed many football managers, read extensively about them, and tried to understand how the best ones handle these constraints. Here, I’ve distilled some of those leadership lessons. Hire the best specialists and delegate

Until early this century, especially in Britain, the typical football manager was a solo leader. But since then, he has lost power. Today a manager might oversee dozens of staffers ranging from defensive coaches to physiotherapists to data analysts. Often a transfer committee handles recruitment. More and more, the manager’s job is to marshal a staff of specialists.

Klopp listens to Liverpool’s data analysts even when he doesn’t fully understand them. He hired and empowered the nutritionist Mona Wemmer. And in his early years at Liverpool he outsourced much (perhaps most) of training and match tactics to his Bosnian assistant, Željko Buvac. A club executive who worked closely with Klopp and Buvac said they were practically a single person. Klopp’s role, said this executive, is as a marketing genius. He’s the ideal face of any club. Yet Klopp deserves credit for his staff’s work because he is big enough to delegate to them. “That’s what leadership is,” Klopp has said. “Having strong people around you, with better knowledge than you in different departments … being ready to admit: ‘I have no clue at the moment.’” » 6 I by IMD • December 2022

Photo: Paul Cooper Photography

Perhaps the supreme delegator is Jürgen Klopp at Liverpool. The German isn’t one of those managers who goes around sulking about not having total control. Instead, he “deliberately chose to surround himself with people who knew far more than him in their chosen fields,” writes Rory Smith in his new book Expected Goals.

Liverpool manager Jürgen Klopp: a clever communicator and deft delegator

December 2022 • I by IMD 7

[ Leadership ]

Create a high-performance environment

People who have reached the top of their profession are almost by definition able to motivate themselves. When I asked Arsène Wenger, who managed Arsenal for 22 years, how much of the job was motivation, he replied: “It is overrated. If you have every week to motivate the players to be performing on Saturday, forget it. At that level, players want to achieve something, they want to be a star, and you are more there to help them. If they don’t like it, they don’t want it, leave them at home, you’ll waste your time.” Real Madrid’s manager Carlo Ancelotti concurs: “Our job is not to motivate the players. Our job is not to demotivate them by not providing the challenges and goals that their talents need.” If a player senses that his club’s management is second rate, he may decide to take his motivation elsewhere. Improve your best players

In football, as in most businesses, much of management time is spent on the worst employees. Think of a manager sitting up all night to rewrite an incompetent report. The good employee tends to get taken for granted, regarded as someone the manager doesn’t have to think about. But shrewd managers spend time improving their best performers, who are generally the ones who learn fastest. One day, early in Jose Mourinho’s first spell as Chelsea manager in 2004, midfielder Frank Lampard emerged naked from the showers after training. Suddenly Mourinho popped up and looked him meaningfully in the eye.

Pep Guardiola, Manchester City

Don’t seek to dominate your players

Authoritarian rule has faded out even faster in football than in most high-skilled workplaces. Since the mid-1990s, new regulations have made it easier for footballers to change clubs. That has shifted power from managers to players. In fact, player power is the standard lament at pre-match meals between directors of opposing clubs. An astute manager will accept player power, giving his leading players co-responsibility for decisions. For instance, when Lionel Messi indicated to Barcelona in 2009 that he didn’t like playing with Zlatan Ibrahimovic, Barça’s coach Pep Guardiola benched and soon sold the expensive Swede. Granting Messi his wish put the onus on him to prove the decision right. The player “owned” future results. By contrast, if Guardiola had ignored him, Messi would have had an excuse to shrug and say, “I only work here.” 8 I by IMD • December 2022

He was signaling to Lampard that they were starting a program of individual improvement — in business jargon: a project to go from good to great. It worked. Seek productivity, not loyalty

Almost no top-class footballer plays for the manager or the club. He typically has an ego-driven project: he wants to succeed for himself, his vocation and his career. It’s often assumed that ego is damaging to a team, and sometimes it is. But the egotistical drive of top-class players also helps them to succeed. The most egotistical players tend to be the best. Iran’s manager at the 2022 FIFA World Cup, the Portuguese Carlos Queiroz, said: “These top, top players have a profound awareness of their specialness, of their unique talent, that goes beyond arrogance – that just is.” A manager has to accept that his players are in it for themselves. Whether he likes it or not, their sense of group membership is weak, and like most

Photo: IMAGO / PA Images

‘People who say, ‘We’re all fighting together’, well, it looks good on a photo but in a changing room nobody believes it’

“All right, boss?” asked Lampard. “You are the best player in the world,” replied Mourinho. The naked footballer didn’t know what to say. “You,” continued Mourinho, “are the best player in the world. But now you need to prove it and win trophies. You understand?”

Putting it in the mixer: Liverpool players work with chefs on their baking skills at the club’s training ground. Klopp records the event on his smartphone, no doubt with the intention of analyzing the video to further develop their technique

young employees nowadays, they will probably eventually move on. The manager should also accept that they regard teammates as both partners and rivals. Guardiola always assumes the substitutes want the team to lose, because then they might be picked. He once remarked, “People who say, ‘We’re all fighting together!’, well, it looks good on a photo but in a changing room nobody believes it.”

Photo: Andrew Powell/Liverpool FC via Getty Images

Address players individually

Guardiola has learned this. Before the Barcelona-Manchester United Champions League final in 2009 in his first season as coach, he played his team a Gladiator-style motivational video of their biggest moments. He was then still addressing them as a collective. But later he tried to understand each of his player’s individual communication needs. At Bayern Munich, his winger Franck Ribéry wasn’t cerebral enough to take in long explanations. By contrast, Bastian Schweinsteiger loved talking football detail at enormous length, while Philipp Lahm would grasp any instruction in an instant. Don’t claim credit for success

I once discussed Johan Cruyff and Louis van Gaal with a group of Dutch players who had played under both managers at Ajax Amsterdam. They

said both men were brilliant, both wanted things done their way, and both would argue dissenters into the ground. Where the two differed, the players said, was in how they handled victory. Van Gaal — now coaching the Netherlands at the World Cup — would tell the post-match press conference that the team had won largely thanks to his leadership. Cruyff, by contrast, melted away the moment the trophy was won. He was happy to let his players take the credit. No prizes for guessing which approach the players preferred. Moreover, Cruyff knew that in victory he would be given credit anyway. And if you don’t push your way to the front when credit is being handed out, others won’t push you to the front when it’s time for dishing the blame. Take political concerns seriously

Footballers are members of their generation, and today’s players are the most educated and activist ever. When English footballers began “taking the knee” in solidarity with the Black Lives Matter movement, England’s manager Gareth Southgate, a middle-aged white guy, did his best to understand their worldview. When some fans and politicians attacked the players for taking the knee, Southgate stood by his men. Before last year’s delayed Euro 2020 » December 2022 • I by IMD 9

[ Leadership ]

Work with difficult people if they are gifted

Gifted employees know that they can break rules that bind ordinary mortals. For instance, if the most brilliant designer in the company suddenly disappears on holiday without warning, she probably won’t be sacked. Gifted footballers are the same. And gifted managers can work with even the most difficult people. Perhaps Ferguson’s biggest achievement in his 27 years managing Manchester United was keeping Cantona on board and performing from 1992 through 1997. Before the Frenchman joined United, he had left most of his first seven clubs in bad odor. If you only want to manage obedient soldiers, and get rid of anyone who breaks your rules, you will make your life simpler, but you will have to forego difficult talents like Cantona. That’s why Wenger says: “If you want an easy week [in training with the players] then expect a hard weekend [in the game]. If you want an easy weekend, then prepare for a hard week.” Gather information everywhere and from everyone

Ferguson used to spend much of his working day on the phone to other managers, hoovering up information: What do you think of that player? That club? That physio? Years after players left Manchester United, they would still get calls from Ferguson. He cultivated his contacts unto death: it was said that perhaps nobody in football attended more funerals. Whereas Ferguson was usually seeking information, Guardiola describes himself as an “ideas thief”, explains Martí Perarnau in his insider’s account, Pep Confidential. Guardiola will stop and listen to a random person on the street if that person has an interesting thought about football.

‘Our job is not to motivate the players. Our job is not to demotivate them by not providing the challenges and goals that their talents need.’ Carlo Ancelotti, Real Madrid

tournament, he said, “You have to put yourself in the shoes of an England player about to represent his country … some of the experiences they have been through in their lives. Some people decide to boo. I think those people should put themselves in the shoes of those young players and how that must feel…. how would they feel about their kids being in that sort of situation? The most important thing for our players is to know we are totally united on it.” His players will have remembered that.

Always remain unsatisfied

“The sweetest moment for me,” Ferguson often told interviewers, “is the last minute of a victory. After that it drains away quickly. The memory’s gone in half an hour. It’s like a drug, really. I need to reenact it again and again to get that last-minute feeling, when you’re shouting at the referee, ‘Blow that bloody whistle’.” Ferguson knew that satisfaction was fatal. Every triumph was just a notch towards a target he never wanted to meet. ■

Give your people total trust and backing, and they will give it back to you. Behind closed doors, you can scream at them, but in public you must always “protect them from outside judgments”, however accurate, wrote Manchester United’s longtime manager Alex Ferguson in his 2013 autobiography. This, he said, was “the one constant principle of my time as a manager”. The case study was his public defense of Eric Cantona after the Frenchman karate-kicked a fan in 1995. 10 I by IMD • December 2022

Simon Kuper is a Financial Times columnist. His books include Chums: How a Tiny Caste of Oxford Tories Took Over the UK, The Barcelona Complex, Soccernomics (with Stefan Szymanski) and Football Against the Enemy. Born in Kampala, Uganda in 1969, a British-French dual citizen, he lives in Paris with his family.

Photo: IMAGO / Jan Huebner

Criticize in private, not in public

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Gain more insights that matter at

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[ Family business ]

In turbulent times, family enterprises must reinvent and renew to survive

The Japanese company Kongo Gumi blossomed for 1,400 years, but was ultimately unable to adapt to declining revenues in its temple-building business

Family businesses have been traditionally hard-wired for longevity and stewardship, seeking to preserve and grow wealth across generations. This patient approach offers transferable lessons for all organizations navigating uncertain times. But family enterprises must also now adapt and evolve to survive, writes Peter Vogel 12 I by IMD • December 2022

n the late sixth century, carpenter Shigemitsu Kongo moved to Japan from Korea to help construct a Buddhist temple in Osaka. Kongo Gumi, the family firm that ensued, continued to operate independently until 2006, when it became a subsidiary of the Takamatsu Construction Group. Across 1,400 years and 40 generations and believed to be one of the oldest companies in the world, Kongo Gumi illustrates the incredible resilience of the family enterprise model, surviving centuries of good and bad times. However, there are unprecedented threats to this model of longevity. In a post COVID-19 world riven with geopolitical, economic uncertainty and market disruption, family businesses are faced with complex problems,

made more challenging by the unique dynamics of family relationships and governance. In a global marketplace, where companies can rise and fall suddenly and new competitors can transform industries in the space of a few years, families can no longer rely on the traditional approaches that have proven so successful for some across previous generations and centuries. The most prosperous family enterprises have shown that striking the right balance between resilience and adaptability could provide a meaningful answer to today’s challenges. This means maintaining and evolving the core business with a long-term view, financial prudence, and strong governance while relentlessly fostering the capabilities necessary to innovate and expand into new markets. One of the greatest challenges facing family businesses is the question of succession. They must become better at engaging, onboarding, developing, and empowering next generation talent to avoid an over-reliance on patriarch or matriarch founders and to pave the way for smooth successions that can inspire reinvention and renewal. Too many family businesses fail because they struggle with “dinner table” politics or a stubborn founder who cannot see past his or her own successful model. . Finally, there is a need for a change in mindset. Families need to see their business within the context of an enterprise ecosystem, not just as a standalone vehicle — part of a living, breathing community of stakeholders and assets that must be managed and nurtured as a whole to withstand the pressures of the modern global economy. We believe this four-pronged approach is now a vital prerequisite for the intergenerational prosperity and wellbeing of the family enterprise ecosystem, so that families can achieve their long-term aims as a collective and individuals. The case of Kongo Gumi underlines this need to tick all these boxes. Despite pioneering the use of computer-aided design and the combination of concrete and wood to construct temples, as well as adopting a flexible, business-oriented approach to succession and a responsible, caring way of doing business through the centuries, the firm was ultimately unable to adapt to declining revenues in its temple business, the expectations of the modern construction industry, and the impact of the Japanese real estate bubble in the 1990s. An excellent example of the willingness and ability to pivot, by contrast, is the Carvajal family in Colombia (and winner of the 2022 IMD Global Family Business Award). Originally a printing firm and producer of the Yellow Pages in Colombia, Carvajal is now onboarding its sixth generation of family members as a holding company with a broad Latin American footprint in sustainable paper and packaging solutions, technology, and real estate (See page 47 to find out more). The family business as a prototype for others

Before we explore how family businesses can evolve for the future, it

is worth outlining some of the valuable, transferable insights that non-family enterprises can take from the experiences of prosperous and lasting family enterprises. For example, a focus on navigating a long and patient journey across the ocean, as opposed to adjusting course every time a big wave appears, can lay the foundations for sustainable growth and a greater sense of organizational purpose. Managing a business as a shared, long-term cooperative between diverse stakeholders, rather than a solely profit-driven venture for investors and executives, resonates in the post-pandemic era, in which society expects companies to be responsible stewards of capital rather than chasing the often-doomed dream of constant, short-term profit gains. As an extension of this, family-run companies can act as role models for the idea of shared value and in reinventing the role of businesses in society. We have seen remarkable examples of family businesses based in Ukraine this year, paying salaries despite having to close their doors, or keeping vital operations going at a loss in the toughest of circumstances. Similar examples exist from the early phase of the pandemic, where family businesses not only rapidly adjusted their production, supported their suppliers and customers to ensure long-term success of their supply chain, or engaged in philanthropic efforts to help their communities.

‘A focus on navigating a long and patient journey across the ocean, as opposed to adjusting course every time a big wave appears, can lay the foundations for sustainable growth and a greater sense of organizational purpose’

Preparing for the future

While family businesses can act as role models for others, in an era of unprecedented and rapid change, an evolution in the management of family enterprise ecosystems is vital for intergenerational success and family wellbeing. Why does this matter? Family businesses are the backbone of the global economy, estimated to contribute more than two thirds of the world’s businesses, making them essential sources of employment and prosperity across the world. Affluent families are also becoming increasingly influential as investors across a broadening range of asset classes. In turbulent times, we need family businesses and the families that own them to continue to do well. The question is how they can continue to do well into the future, and how they can serve the needs of society at the same time. We believe more family businesses could survive and » December 2022 • I by IMD 13

[ Family business ]

grow through that difficult transition of power by adopting a more holistic and cohesive approach. This starts with better succession planning. From founder to next generation

All family businesses begin with the drive and ambition of a founder – an entrepreneur who has sweated blood and tears to build a thriving enterprise from the ground up, and to give their family a brighter future. This is the foundation of future family wealth and, inevitably, the family’s identity and values. Family businesses cannot prosper forever on the dream and achievements of one patriarch or matriarch. The big challenge is to evolve the business over time, so that future generations can take up the reins and develop their own vision, while preserving the elements of success and fundamental values carved out by the founder. This presents a two-way dilemma. On the one hand, founders must understand that the future will be different and that steps must be taken to adapt, primarily by paving the way to hand over power in a structured manner. On the other hand, next generation family members need to find their own way in the business while also being mindful of and sensitive to the emotions and sense of ownership of the older generation. Onboarding could be as simple as understanding the interests of younger family members, ensuring their education meets those needs, and then integrating them into the business at a junior level to allow them to learn the business as they mature. Another path to ensure long-term engagement of the next generation is to support their entrepreneurial endeavors, which gives a greater sense of purpose and empowerment while also creating a platform for innovation that could secure the future of the company. The five stones of family business

Beyond effective succession planning, there is a need for families to rethink how they do business and how they function within their ecosystem. We see five areas of health and wellbeing that must be nurtured with equal importance to compete in today’s environment. 1 PERSONAL HEALTH AND WELLBEING. Individual family members must look after their physical and mental health to contribute to the ecosystem in a meaningful way, but also ensure good levels of education among their family members. Many families hire health and wellbeing advisors. Health is all the more important in family businesses, which can often rely on a hands-on family CEO who may have led the business to success and continues to control many of the big decisions. The business could be at risk if that individual falls ill. Indeed, “If you aren’t well on the inside then you can’t be a good leader,” John Elkann, Chief Executive of Exor, the holding company for Ferrari, CNH Industrial and other companies, once said. 2 A HEALTHY FAMILY UNIT. Depicted in the TV series Succession, family empires can be spectacularly vulnerable to the quality and health of the relationships between relatives. There have been famous examples of 14 I by IMD • December 2022

What is the family enterprise ecosystem? We refer to the family enterprise ecosystem as all of the stakeholders, relationships and assets within the sphere of influence of the family and its various activities. This includes, but is not restricted to, family members, from core to distant relatives, employees, the board, investors, suppliers, customers, policymakers, NGOs, and local communities. It also refers to the family’s tangible business activities and assets, investments, real estate, philanthropic interests, and family governance structures. In short, the ecosystem represents “total family wealth” – every aspect of a family’s financial, human, and social capital. Many families do not fully understand the breadth and depth of this ecosystem and, therefore, can tend to make sub-optimal decisions. Decision making through the ecosystem lens, on the other hand, can harmonize the family and its stakeholders, spark collaboration, engagement and innovation, and lead to better outcomes for the family and its wider network. An appreciation of the ecosystem also inspires a greater sense of responsibility and stewardship, both internally and externally, which in turn better equips family enterprises for tomorrow’s world. We believe this perspective is a useful one for other organizations to adopt, especially those seeking to build more sustainable and purposeful businesses. Without envisioning and understanding the reach, nuances and needs of their whole ecosystem, companies cannot develop future-minded strategies that will deliver the desired impact for all stakeholders and create the shared value that the world economy requires for future prosperity and survival. In fact, we see this “ecosystem” mentality as the bedrock of success for the businesses of the future, family-owned or otherwise.

‘Family businesses are the backbone of the global economy, estimated to contribute more than two thirds of the world’s businesses, making them essential sources of employment and prosperity across the world’ feuds taking their toll on not just families, but their businesses too. Frank Stronach, the billionaire founder of Magna, sued his daughter Belinda, his handpicked successor, as well as her children and others, for $520 million for alleged misappropriation of company funds and locking him out of the family’s horse racing and betting empire. The Koch brothers, owners of Koch Industries, were some years ago locked in a long-running

How family businesses responded to the COVID-19 crisis Many family businesses were proactive during the pandemic. Ford and Dyson, for example, adjusted production to produce ventilators, while LVMH and Ralph Lauren among others manufactured masks and gowns. Patagonia, the outdoor clothing company, paid salaries even when stores were forced to close, and Walmart increased employees’ wages to help them through the crisis. Around 80% of the largest family enterprises are philanthropic, LVMH and Agnelli among them, and their generosity continued despite the economic downturn.

empowered to innovate as responsible future owners with a sense of duty, privilege and pride. A long-term, patient and big picture approach is also pivotal, rather than focusing on short-term achievements. Kongo Gumi developed a “creed” that resonated through the centuries with tenets such as “listen to what the customer says”, “never fight with others”, and “communicate with respect”. 4 ORGANIZATIONAL PERFORMANCE. Family businesses must have world class leadership and governance structures in place. Where there is too much dependence on a founder or the founding businesses, family businesses have to manage competing in an increasingly demanding marketplace, while also striking the right balance between family and business needs, and also evolving their offering and planning to keep the next generation engaged. Alongside clear roles and responsibilities between the ownership, board and top management, family businesses have to find the right mix of family and non-family talent to ensure they embrace the correct professional competencies and appropriate level of family engagement. 5 SOCIETAL AND ENVIRONMENTAL IMPACT. In a world in which organizations are seeking to become better stewards of capital and the planet while embedding sustainability and purpose at the heart of strategy, family businesses offer valuable lessons. Their long-term view and deep ties to employees, suppliers and communities can create a sense of stewardship and responsibility, bolstered by diverse philanthropic activities that many affluent families engage in. Next generation family members also tend to act as a force for change within family enterprise ecosystems, nudging older generations and the family business towards more purpose-driven models. This can lead to tension between older and younger family members, but ultimately the future health of any family business rests in the vision and passion of its future owners.

Luxury and philanthropy: a Louis Vuitton store in Zurich

Photo: Claudio Schwarz via Unsplash

feud in the US. How can families avoid these catastrophic schisms? We advise families to implement clear governance, decision-making and succession processes, as well as an agreed family vision, to protect the business from the ups and downs of family life. Without these structures in place, longevity and the preservation of intergenerational wealth can become impossible. 3 HEALTHY FAMILY ENTERPRISE OWNERSHIP. One of the key transferable insights for non-family organizations is the way in which families perceive their role as “owners”, often considering themselves rather as long-term stewards of their enterprises, employees, customers, communities, and other stakeholders – their ecosystems. This requires a unified, connected, and well-informed ownership group that is capable of open exchange and collaboration. Healthy ownership is based on a strong family vision, values and business strategy. It means onboarding the next generation to find their place in the legacy business and feeling

The most successful family businesses have shown tremendous resilience and adaptability through the ages, but against a backdrop of heightened uncertainty and rapid disruption and changing social expectations we believe families must adopt an “ecosystem” mindset that embraces a holistic, cohesive approach based on the “five stones” of wellbeing, supported by innovative succession planning. This approach could also reap rewards for non-family enterprises as companies move away from purely profit-driven models and seek out effective strategies built upon purpose, shared value, and sustainability. ■

Peter Vogel is Professor of Family Business and Entrepreneurship. An expert on family enterprises, he leads IMD’s work in this field as Director of the IMD Global Family Business Center and holder of the Debiopharm Chair of Family Philanthropy. He was named by Poets&Quants as one of the world’s best business school professors under the age of 40 in 2022 and included in Family Capital’s Top 100 Family Business Influencers list in both 2020 and 2022.

December 2022 • I by IMD 15

Families in business North America

Europe

Asia-Pacific

Top 20 family-owned businesses globally 1. WAL-MART

Central and Latin America

Top 5 family-owned businesses by region

2021 revenue: $559.1bn

Consumer retail

2. BERKSHIRE HATHAWAY

$245.5bn

3. EXOR

$145.3bn

North America Company

Rank

2021 revenue

Wal-Mart

$559.1 bn

United States

Berkshire Hathaway

$245.5 bn

United States

Ford Motor Company

$127.1 bn

United States

Koch Industries

$115 bn

United States

Cargill

$114.6 bn

United States

Financial services

4. SCHWARZ GROUP

$140bn

Consumer

5. FORD MOTOR COMPANY

$127.1bn

6. BMW

$122.2bn

Automotive

Diversified industrial conglomerate

$115bn

8. CARGILL

$114.6bn

9. COMCAST

$103.6bn

10. DELL TECHNOLOGIES

$94.2bn

Commodities & agribusiness

Telecom, media & technology

Technology & IT

11. ROBERT BOSCH

$87bn

Mobility, industrial, consumer & energy

12. RELIANCE INDUSTRIES

$79.5bn

Energy

13. SK CORP

$73.9bn

14. COUNTRY GARDEN HOLDINGS

$71.1bn

Diversified conglomerate

Company

Rank

2021 revenue

EXOR

$145.3 bn

Italy

Schwarz Group

$140 bn

Germany

20. ADITYA BIRLA GROUP

16 I by IMD • December 2022

INA-Holding Schaeffler

$70.5 bn

Germany

Country

Asia-Pacific Rank

2021 revenue

Reliance Industries

Company

$79.5 bn

India

SK Corp

$73.9 bn

South Korea

Country Garden Holdings

$71.1 bn

China

LG Corporation

$58.1 bn

South Korea

Aditya Birla Group

$53.5 bn

India

Central and Latin America

$70.5bn

America Movil

$51 bn

Mexico

Antarchile

$18.3 bn

Chile

$68.5bn

Techint Group

$17.4 bn

Argentina

Alfa

$16.5 bn

Mexico

Company

Rank

2021 revenue

Country

Majid Al Futtaim Holding

186

$8.9 bn

UAE

Mansour Group

220

$7.5 bn

Egypt

EMKE LuLu Group

221

$7.4 bn

UAE

Pick N Pay Stores

253

$6.6 bn

South Africa

Cevital

415

$4 bn

Algeria

$54.8bn

Advanced manufacturing & mobility

Germany

Brazil

18. LVMH MOET HENNESSY LOUIS VUITTON

Food, pharmaceuticals & property

Germany

$87 bn

$52.2 bn

$58.1bn

19. GEORGE WESTON

$122.2 bn

2021 revenue

17. LG CORPORATION

Luxury consumer

6 11

Pharmaceuticals & healthcare

Telecom, media & technology

BMW Robert Bosch

Rank

Advanced manufacturing & mobility

16. ROCHE GROUP

Country

JBS

Property development

15. INA-HOLDING SCHAEFFLER

Country

Europe

Automotive

7. KOCH INDUSTRIES

Middle East and Africa

$54.7 bn $53.5bn

Company

Country

Middle East and Africa

Founding decade of top 500 family-owned companies by region The data also includes 13 companies formed between 1610 (Japan’s Takenaka Corporation) and 1829. North America

Europe

Asia-Pacific

Central and Latin America Middle East and Africa

Top 10 family-owned companies run by non-family members Company

Rank

2021 revenue

Founding family

CEO (or equivalent)

Country

Wal-Mart

$559.1bn

Walton

Doug McMillon

United States

Schwarz Group

$140bn

Schwarz

Gerd Chrzanowski

Germany

Ford Motor Company

$127.1bn

Ford

James Farley Jr

United States

BMW

$122.2bn

Quandt

Oliver Zipse

Germany

Cargill

$114.6bn

Cargill-Macmillan

David MacLennan

United States

Robert Bosch

$87bn

Bosch

Stefan Hartung

Germany

SK Corp

$73.9bn

Chey

Jang Dong Hyun and Park Sung Ha

South Korea

Country Garden Holdings

$71.1bn

Yang Guoqiang

Yeung Kwok Keung

China

INA-Holding Schaeffler

$70.5bn

Schaeffler

Klaus Rosenfeld

Germany

Roche Group

$68.5bn

Hoffman and Oeri

Severin Schwan

Switzerland

Women running family-owned businesses

Source and methodology

Percentages of top 500 family-owned companies globally and by region

University of St. Gallen and EY Family Business Index 2021 (https://familybusinessindex.com/).

Global 5.4% North America 9% Europe 5.5% Asia-Pacific 2.2% Central and Latin America 0% Middle East and Africa 0%

A company qualifies if a family, its foundation or trust has substantial ownership and decision-making authority including members on the board of directors and/or executive leadership team and ownership of at least 32% of the voting rights if publicly listed and at least 50% if private. Only one company per family is included, either its holding company or the largest that qualifies. A new version of the Family Business Index will be published in early 2023.

Explore national data on family-owned businesses for 24 jurisdictions at iby.imd.org

December 2022 • I by IMD 17

[ Family business ]

To shape your future, own your history ... however uncomfortable After the controversy surrounding rap star Ye’s anti-Semitic comments, the sportswear giant adidas found itself under the spotlight for historical links to the Nazi regime. Lindsay Krasnoff explains how a legacy company can reframe the narrative

he anti-Semitic remarks in October by Ye, the Grammy-award winning artist once known as Kanye West, had a multidimensional ripple effect that placed the history of one of his business partners, adidas, in the spotlight. In its delayed response to Ye, the German sportswear giant, a family business, allowed space for its past links to the Nazi regime to be placed anew under public scrutiny. The predicament of adidas is not unique. According to an August 2020 study conducted by The History Factory, a brand heritage and archive company, 76% of C-suite leaders know that some of their businesses’ practices of earlier eras would be considered problematic by 21st century values and principles. Yet the adidas example provides a teachable moment, not just for family businesses but for heritage brands and companies of all shapes and sizes. It emphasizes the importance of having, and using, a business history and the benefits it can bring, as well as the caveats about not properly thinking through the complexities that such institutional knowledge presents, both internally and externally. What is a family business history?

A family business history, like any institutional history, serves a multitude of functions and is a vital piece of knowledge. It is constructed from 18 I by IMD • December 2022

archives, including print and digital documents, internal publications, and oral histories as well as external communications assets that capture the decision-making processes, the evolution of policies, practices, and branding, periods of change, and more. Typically, business histories are compiled and written by a trained historian. Independent historians are well positioned to synthesize and analyze materials to produce a neutral, unbiased account. But some businesses employ an in-house historian to continuously archive material and add to the historical record, which brings with it the benefit of understanding the family and internal dynamics. While family business histories produce a wide range of outputs from internal publications to externally facing books, timelines, digital histories, storytelling, and more, their importance and relevance as useful tools remains constant. More than meets the eye

Most people recognize the allure of using family business histories in marketing, branding, and external storytelling, but their most impactful uses aren’t always as immediately obvious. Jason Dressel, The History Factory’s Chief Executive, notes how such organizational memory can benefit decision makers. “They use it as a resource to help inform strategic thinking, to learn from mistakes, and to use as a communications tool,” he said. “There are lots of unique nuances for an organization that is family-run and how they think about that history and what it means to the organization.” But they can also be used to help guide an organization through a period of change, too. “They come to us because they are going through periods of tremendous change and they want to use history and heritage either as a source of continuity or as a source of inspiration,” Dressel explained. This is especially the case when companies launch new purpose initiatives. According to Dressel, using a business history to look inward can validate the decision to focus on specific issues. It helps to “make sure that they’re staying tethered to fundamentally who they are,” he said. Organizational memory can help leadership plan succession and legacy management to set up the next generation for success. Through inward retrospection, decision makers can build better balances between stewardship and strengthening the organization, between celebrating legacy while leaving space for the next generation to leave a mark. Family business histories can also serve as a strategic tool to help bind the family together, Dressel says, particularly for large organizations that are several generations deep into family ownership. “Not everyone has that sort of direct connection to the first couple of generations that were building the enterprise,” he explained. “The history can be a powerful tool to keep the family together.” Yet, Dressel notes, most successful family business histories do not place too much emphasis on the family itself. “Making sure that you are really

Adi Dassler, co-founder of adidas, in the company workshop in the 1930s. His Nazi links have been highlighted in the wake of the Ye controversy

‘Instead of having a printed book or a static display mounted on the wall, Next Gen leaders tend to think creatively about how to tell and retell their family business stories’ Gretchen Krueger

balancing the role of the family in that enterprise with the broader kind of context of the organization is key,” he said. Another best practice is to keep proportionality in how different characters in the family business story are portrayed. “From an internal perspective, it may be tough for employees to be able to identify with a family member, particularly a family member who may have essentially been born into a position of tremendous influence and power,” he pointed out.

Photo: imago/PR

Next Gen leadership

Family business histories are not new phenomena, nor is there a sudden spike in compiling such documentary histories. But what has changed is how they are being used and why. First, there’s an evolution in the stories used to inform the larger history. According to Dr Gretchen Krueger, Senior Historian for Wells Fargo’s Wealth and Culture Services, it’s a gradual evolution, but one increasingly influenced and mirrored by the broader changes within societies.

“I’ve noticed a shift in the voices included in family business histories,” she said. “This new generation of histories and historians often rely not only on executive leaders within a business but also employees across diverse roles who contribute to the story in different ways.” In her experience, this can mean integration of factory floor worker or delivery route driver stories to better acknowledge and recognize a more inclusive alternative to C-suite-centered narrative. Moreover, Next Gen leadership is shaking up how family business histories are captured. “I’m energized by Next Gen leaders’ use of multimedia to capture and share family business histories,” Krueger said. “Instead of, or in addition to, having a printed book or a static display mounted on the wall at corporate headquarters, Next Gen leaders tend to think creatively about how to tell and retell their family business stories.” They do so by mixing up the ways the business histories are used in different types of storytelling, making use of the flexibility that digital platforms, multimedia, and interactive tools provide to empower storytellers. According to Krueger, this allows both clients and consumers to better interact with and learn from interest-specific angles of the business. Businesses are no longer relying solely on internal employees to help relay the story. “Some also invite a variety of storytellers, authors and editors into the process to help create and curate their stories,” she said. This has the value-added benefit of collaboration and teamwork, cultivating new perspectives on the family business and its history while fostering » December 2022 • I by IMD 19

[ Family business ]

The Baltimore Sun says sorry A front-page apology issued in February by the board of the 185-year-old Baltimore Sun newspaper read in part: "Instead of using its platforms, which at times included both a morning and evening newspaper, to question and strike down racism, The Baltimore Sun frequently employed prejudice as a tool of the times. "It fed the fear and anxiety of white readers with stereotypes and caricatures that reinforced their erroneous beliefs about Black Americans. "Through its news coverage and editorial opinions, The Sun sharpened, preserved and furthered the structural racism that still subjugates Black Marylanders in our communities today. African Americans systematically have been denied equal opportunity and access in every sector of life — including healthcare, employment, education, housing, personal wealth, the justice system and civic participation. They have been refused the freedom to simply be, without the weight of oppression on their backs. For this, we are deeply ashamed and profoundly sorry."

new networks. But, in Krueger’s experience, Next Gen leaders are further shaking up how family business histories are used and thought about. “[They] also tend to challenge the idea that history is only about the more distant past, from founding to the naming of the current leader or last significant product launch,” she said. “Specifically, they see history being made today and recognize the story as an asset — as one that needs to be continued to be told. It is an ongoing opportunity and one with evergreen purpose, rather than a task done to mark a milestone anniversary.” Surmounting the challenges of past practices

But what happens if, as the news recently reminded the world about adidas, the family business engaged in practices that would be considered unethical or problematic by 21st century standards? Of the 76% of C-suite executives who understood their company had to confront this challenge, as per The History Factory study, just over a quarter of responders indicated that they felt well prepared to tackle and navigate those issues. It’s an understandable concern, and one that Dr Sarah Federman, an expert on corporate atonement for historical transgressions, and an Associate Professor at the University of San Diego's Kroc School of Peace Studies, encounters regularly. 20 I by IMD • December 2022

“The older you are, the more skeletons you have, in part because the tenor of the times has shifted and what people expect has changed,” she said of family businesses and heritage brands alike. But it is vital that organizations fully come to terms with and figure out how to address their pasts. Those that do not may have difficulty convincing the world, both internally and externally, that their ethos has shifted to better reflect current business standards and practices. “If you had kind of nefarious origins and you want to be something else, the leadership really needs to say that and then take actions and create that

‘The older you are, the more skeletons you have, in part because the tenor of the times has shifted and what people expect has changed ’ Sarah Federman

atmosphere in the organization,” Federman explained. Family businesses in some parts of the world have greater experience navigating coming to terms with past practices. Those based in Europe, for example, have a longer history with corporate reckonings for transgressions and roles in

Adidas ends Ye deal Adidas issued the following statement in October ending its deal with the controversial rap artist and businessman Ye (better known as Kanye West, pictured). “Adidas does not tolerate antisemitism and any other sort of hate speech. Ye’s recent comments and actions have been unacceptable, hateful and dangerous, and they violate the company’s values of diversity and inclusion, mutual respect and fairness. “After a thorough review, the company has taken the decision to terminate the partnership with Ye immediately, end production of Yeezy branded products and stop all payments to Ye and his companies. "Adidas will stop the adidas Yeezy business with immediate effect. This is expected to have a shortterm negative impact of up to €250 million on the company’s net income in 2022 given the high seasonality of the fourth quarter.”

the Second World War than entities based in North America. “Having to deal with slavery in the United States is new,” Federman pointed out. It’s a more recent coming to terms with history, whereas in Europe societies and businesses have had to come to terms with the Holocaust and their roles therein. “In Europe, there’s more experience culturally with these processes,” she observed. That’s why companies must first address their more complex pasts internally. Doing so can model that the business ethos has changed to better align with present day values and mores. It can also help foster stronger internal culture. Then, once the internal decisions have been made as to how to reckon with such history, an organization can begin to do so externally, to own their decision and to design a means to acknowledge their pasts in ways in which they are not perceived as a perpetrator.

Photo: Wikipedia

One good example of how to do so, according to Federman, is the Baltimore Sun. The newspaper of record in Baltimore since its 1837 founding addressed its past complicity in slavery, Jim Crow segregation, and redlining in a written apology. “You could see they did the work to say, ‘here are all the places, and this is what we’re doing today,’” she said of the full-page apology. “It was so powerful and so detailed, I thought it modeled really well how it can be

done with integrity. Now, as a newspaper, they are expected to expose the truth and investigate, so they have certain commitments that not all businesses share.” The challenge, Federman points out, is for family businesses to be transparent about their pasts but also to follow such recognition with actions that are congruent with their mission. Doing so demonstrates intergenerational resilience as well as contributes to developing trust, both B2B and B2C. “The idea that [a company] has lasted so long suggests that they have good business principles, that they’ve weathered different economic storms, that they haven’t followed trends to their destructive end,” Federman noted. “It shows a certain amount of business wisdom and temperance.” ■

Lindsay Sarah Krasnoff is a historian, writer, speaker, and consultant working at the intersection of global sports, communications, and diplomacy. She is author of The Making of Les Bleus: Sport in France, 1958-2010 (Lexington, 2013), Basketball Empire: France and the Making of a Global NBA and WNBA (Bloomsbury, forthcoming Sept 2023). She lectures on sports diplomacy at New York University's Tisch Institute for Global Sport.

December 2022 • I by IMD 21

[ Family business ]

Futurity, continuity and perseverance: the key assets in surviving adversity A certain type of family firm showed resilience in the worst months of the COVID-19 pandemic, according to a study by Alfredo De Massis and Ivan Miroshnychenko. Here they explain their findings, which they hope will contribute to the debate about how to deal with any future crisis

22 I by IMD • December 2022

amily firms may receive less attention, particularly in the financial media, than their non-family counterparts. But that doesn’t mean that they are any less important or impactful. On the contrary, the heft of family firms in the global economy can be seen in the fact that they account for two thirds of all businesses worldwide and employ around 60% of the global workforce. Moreover, family firms have a well-deserved reputation for having generally survived tough economic times and for doing well over very long periods. Much of this can be attributed to the long-term orientation of family firms, rooted in their commitment to maintaining the business across generations. This is what has led many studies to show that family firms are more resilient than their non-family counterparts in normal economic times. But the question of whether a family firm’s superior ability to deal with adversity holds when facing something as challenging as a global health crisis has remained largely unexplored, except for a few single-country studies. This makes it even more interesting to look at family firms when it comes to examining their ability to respond to and recover from environmental shocks like the COVID-19 pandemic.

Financial resilience

To that end, we conducted a global study of 3,351 publicly listed family and non-family firms in 10 industrial sectors from 2018 to 2021 and came to a few significant findings. Chief among them was that the share prices of publicly listed family firms led by descendants of the founding family were not as significantly affected as those of publicly listed, non-family firms during the pandemic. Specifically, the share prices of the descendant-led publicly listed family firms outperformed those of their non-family publicly listed counterparts by an average of 8.7% in the first six months of the pandemic. In addition, there was some evidence that firms with strong family involvement either in management or in both management and ownership on average demonstrated better resilience, as measured by the performance of their share prices, during the COVID-19 crisis than non-family firms.

Illustration: Jörn Kaspuhl

This indicated that certain publicly listed family firms were better equipped to respond to and recover from the shocks caused by the pandemic than non-family firms, and that a long-term orientation can indeed help to absorb environmental shocks.

the pandemic. It also highlights the importance of businesses having a concentrated ownership structure with long-term goals. Three key characteristics

The long-term orientation of family firms can be seen as being founded on three characteristics or concepts: futurity, continuity, and perseverance. These allow family firms to prioritize long-term business goals and means they are better equipped to face business adversity. Together, they offer insights into how family firms can navigate big external shocks. Let’s take each in turn. Futurity has to do with a firm’s ability to forecast and anticipate the consequences of business decisions in the long term. A family’s tendency to view the business across generations is a clear example of futurity, since it is bound up with the family’s desire to pass the business on to the next generation, which in turn means the family maintains long-term involvement. Another example of futurity in family business is the presence of a strong family vision, centered on the idea of generating a better future for the family, and which the controlling family develops and renews over time. This is rooted in a vision that the business will continue to operate, growing at a rate the family expects, and generating the desired financial outcomes. Continuity reflects the firm’s preservation and durability over time. The tendency of family firms to have close ties with the communities and local markets in which they were founded — in contrast to non-family firms, which easily can and do shift their operations from one market to another — can be a source of competitive advantage for family firms.

‘Our findings challenge a view argued elsewhere that family businesses have tended to stagnate in the face of challenges caused by the global health crisis. It turns out that their long-term outlook, among other attributes, is a boon when times are bad’

Our findings also challenge a view argued elsewhere that family businesses have tended to stagnate in the face of challenges caused by the global health crisis. It turns out that their long-term outlook, among other attributes, is a boon when times are bad.

Firms like these tend to keep investing in the future of the business, strengthening relations with employees by providing generous training programs and by building lasting links with external stakeholders. This can help family firms develop a distinct and durable brand that includes not only family members but external stakeholders, such as workers, financers, suppliers, and customers.

To our knowledge, this is one of the first studies to show that some family firms are better able to withstand the financial hardships caused by

In addition, family firms tend to expend enormous financial resources on business renewal through things like new products and expanding » December 2022 • I by IMD 23

[ Family business ]

Methodology

• We used a longitudinal sample of 2,597,534 firm-day observations for 3,351 listed firms in 33 countries and 10 industrial sectors over the period from 11 September 2018 to 9 September 2021.

• We used publicly available data (annual reports, firm presentations,

SEC filings, and press releases) collected by NRG Metrics’ Family Firms dataset, as well as financial and accounting data from Thomson Reuters Eikon, which we collected. COVID-19 data derives from the COVID-19 Data Repository of the Center for Systems Science and Engineering at Johns Hopkins University.

• The largest share of publicly traded firms is from the US, UK, Australia and Canada (47%), European (38%), and Asian countries (12%).

develop and implement pandemic-related financial support programs for businesses, they need to consider that the programs most suitable for family and non-family firms vary, due to the differing ability of both types of firms to be financially resilient in a time of crisis. Family-owned firms (where the family holds more than 5% of equity) are likely to require more financial support, while family-managed firms (where the family holds less than 5% of equity and the CEO is a family member) and family-owned-managed firms (where the family holds more than 5% of equity and the CEO is a family member) need less, because family-owned firms demonstrated less resilience (as measured by the performance of their share prices) than family-managed and family-owned-managed firms. Consequently, our findings show that family-owned firms need more financial support than others.

• Sectors: industrial (around 27%), consumer services (15%), consumer

We have shown, through a rich body of evidence collected from around the world, that certain family firms are more resilient than their non-family counterparts when facing environmental shocks.

into new markets. Family firms typically invest in long-term innovation projects, favoring the potential economic benefits associated with attractive growth opportunities. The combination of futurity and continuity appears to enable family firms to adapt to times of adversity, allowing them to take advantage of business opportunities and cope with uncertainty.

We identified in our research variations across different types of family firms, countries, and industries. Family involvement can bring value to the firm in adverse economic times, but this effect depends on the type of family involvement in the firm.

goods (14%), basic materials (10%), and technology (9%).

Perseverance comes from family firms’ exceptional emotional and financial commitment to the business, very much as a shared family concern. It also helps them develop strong responsibility toward the local community by creating robust, environmentally friendly, employee-friendly, and socially friendly policies and business practices. This high level of commitment in turn helps family firms to break into new markets and generate higher profit margins by moving into areas where consumers are willing to pay extra for responsible products and services. The fact that family firms are often perceived as trustworthy, and driven by quality considerations, is a big advantage. The conclusion that family firms exhibit perseverance over time is also likely to guarantee them better access to financing which is an additional factor that may explain why many overcame financial difficulties during the pandemic.

We hope we have provided fresh understanding of the resilience dynamics across different types of family businesses and set an agenda for future research on the drivers of resilience of family-managed firms to environmental shocks worldwide. We also hope our study may contribute to debate in regulatory, business, and academic communities about policy responses to the pandemic. By identifying the impact of family involvement on financial performance during the pandemic, as well as the most resilient types of family business, we intend to provide important new evidence for policymakers, assisting the implementation of fiscal and economic policies for COVID-19 recovery worldwide, particularly for firms with different ownership and management structures. ■ The authors would like to acknowledge the contributions to the study of Giorgio Vocalelli and Stefano Grassi, University of Rome Tor Vergata, and Francesco Ravazzolo, BI Norwegian Business School.

The practical implications

It follows from all this that non-family firms should reflect on these findings, and act. Owners, managers, and advisors should consider strengthening the resilience pillar of their corporate strategies to keep up with competitors and ensure long-term sustainability. Investors, too, must pay attention to a firm’s ownership and management structure in evaluating its resilience — or otherwise — to future crises.

Alfredo De Massis is ranked as the most influential and productive author in the family business research field in the last decade in a recent bibliometric study published in the European Journal of Family Business. As a world-renowned Professor of Entrepreneurship and Family Business, he provides intellectual contributions to IMD by working on collaboration and scientific advisory activities at the Wild Chair in Family Business.

Moreover, our results warrant caution in relying on the presence of the founder, or founders, on the company board as being more beneficial for performance as compared with the presence of heirs. Indeed, we find that this is not the case. The presence of both is equally good for financial performance in economically challenging times. There are even implications for policymakers, too. Our results suggest that when governments

Ivan Miroshnychenko is Research Fellow and Term Research Professor at IMD, and Affiliate Research Fellow at Sant’Anna School of Advanced Studies (Italy). He carries out research on the economics and management of family business and sustainability, which has been published in several top academic journals.

24 I by IMD • December 2022

[ Family business ]

A passionate investment

Photo: KARL STUDIO

Gaw Capital, a real estate investment firm, was set up by two brothers and a friend from university in 2005. Three years later, their banker sister Christina Gaw accepted an offer to join them. She explains how she used her expertise to raise capital and structure the business, which now has $34bn of assets under management

December 2022 • I by IMD 25

[ Family business ]

y family’s a business family. My father Anthony Gaw was born in Burma and educated in the US. In the late 1960s and early 1970s he set up and ran a textile business in Thailand and Indonesia before moving to Hong Kong to start Pioneer Global, a real estate investment firm. He died in 1999, but that business, which has a Hong Kong Stock Exchange listing, is still run by my mother Rosanna. My two elder brothers, Goodwin and Kenneth, along with Humbert Pang, a friend of Goodwin’s from high school, started Gaw Capital, a real estate investment firm, in 2005. Humbert was appointed as advisory consultant to Gaw Capital Partners in July 2005 and joined as Managing Principal and Head of China in 2006. That was Goodwin’s second venture. Earlier, in the mid-1990s, he had set up his first real estate business in the US straight after graduating from university. Returning to Hong Kong in the early 2000s, he launched Gaw Capital with Kenneth and Humbert to take advantage of the collapse in property prices that followed the Asian financial crisis. I was slower entering the business. After graduating from the University of San Francisco with a degree in business administration in 1993, I spent 15 years working in investment banking, first for nine years at Goldman Sachs, then for six years at UBS. That career took me first to New York, then to Hong Kong and Singapore.

‘Usually, the founders of a business generation have shared goals, which is certainly true in our case. But passing the business down to our children isn’t one of them’

something, he knows exactly what should be changed to improve it. He loves doing deals and finding the right people to work with us. That’s where Kenneth comes in. He also works on the deal side, but he’s far more than a day-to-day guy. One of his strengths is numbers. Another is having the eye for detail for going through contract terms. Humbert is our China-based partner taking care of relationships and on-the-ground management of our China teams from Shanghai. Alongside capital raising, my first job at Gaw was adding structure to the firm. When I first came in, it was very much run as a startup, with everyone running around doing deals and finding new business in order to grow its assets under management. For the next three years, I spent my time making our vetting and approval processes more rigorous, strengthening our risk and compliance procedures, and putting in place all the other mechanisms we needed to expand our investor base from family offices and high-net-worth individuals to include institutional investors such as sovereign wealth and pension funds. At the same time, I had to make sure we didn’t lose the many benefits of being flexible, nimble, and creative that had enabled the firm to get off the ground in the first place and would allow it to snap up major deals faster than those bigger fund managers that we were now competing with. To do this, I set to work strengthening the firm’s DNA. After working in two institutions with hugely powerful cultures – very American in Goldman Sachs’s case, very European at UBS – I knew that culture was key to making people proud to be associated with a firm, in turn making it easier to help us find, train, and retain the talent we needed. After a process that also took around three years, we evolved a set of values defined around three words: passion, responsibility, and creativity. Passion – that belief in the importance of what it was we were doing – was the easiest of the three. We take on every project with enthusiasm because it is our firm belief that exceptional work can only come from a passionate heart. After all, it had been passion that launched the firm.

One of the reasons Goodwin and Kenneth launched Gaw was to see whether they could grow faster by getting third-party capital instead of relying principally on family funds. Their first vehicle was put together with $200 million. In real estate, however, that doesn’t go far, and they soon found themselves having to raise money again.

Responsibility reflected how we wanted to be a firm that always left its assets in better a condition than when we had acquired them. And creativity was about how always from day one, we had done everything with an entrepreneurial spirit – looking for new projects, new ways of doing things and new areas to venture into.

At that point, knowing that they were mainly deal guys, my brothers decided that they needed to bring in someone to handle capital-raising – the trade their sister was in. They first approached me in 2007. The following year, as financial markets collapsed around the world, I decided to join them.

Family constraints

The four of us are very different. Goodwin is very much the entrepreneur, through-and-through. He’s an out-of-the-box thinker who likes traveling, hanging out with other entrepreneurs and creating new projects. He’s always had an intuitive understanding of real estate. When he sees 26 I by IMD • December 2022

Gaw Capital wasn’t a business that was handed down to us. For sure, we used family capital to start investing in real estate, but from the start we never wanted to define it as a family business. Instead, we’ve always insisted that the goal was to make the firm as sustainable as possible for the long term. Usually, the founders of a business generation have shared goals, which is certainly true in our case. But passing the business down to our children isn’t one of them. Now, we have more than 400 people working for

Close colleagues: (from the left) Goodwin Gaw, Humbert Pang and Kenny Gaw

Photos: KARL STUDIO (3)

‘Knowing that they were mainly deal guys, my brothers decided that they needed to bring in someone to handle capital-raising – the trade their sister was in’

Gaw Capital, and apart from the four of us, all our senior management team are non-family members. These are people hired from investment banks or other similar institutions. Now, we want all of them to grow with us and eventually be candidates to succeed us.

scalable with a primary focus on Asia. We have been embracing proptech investment by not only deploying capital, but also offering our indepth expertise in management and global presence to help these real estate technology companies grow and thrive.

Our assets are still a fraction of those managed by some of the bigger investment firms. But we have studied how the best of those partnerships operate and put in place systems like theirs where if you do something valuable then you can go up the ladder. So far, those institutionalizing measures have worked well. It’s because of them that we’ve managed to take the firm from being Greater China focused when it launched to being a global business with highly diversified Asia-Pacific operations today. Our first phase – what we now refer to as Gaw 1.0 – was centered largely on single-asset deals. In Gaw 2.0, starting around 10 years ago, we moved into thematic platform investing, first developing retail outlet malls and entertainment complexes with a European partner, then adding logistics developments, internet and data centers, hospitality, and other commercial real-estate related developments.

This has opened the way for us to develop and run businesses such as renewable energy battery storage facilities and to supplement our real estate expertise with prop-tech businesses that extend our reach into new economy property investment, management and marketing platforms.

Those schemes laid the foundations for Gaw 3.0 – taking thematic platform-building a step further to set up businesses which combine a real estate arm with another business that owns and operates revenue-generating businesses within the industry – so-called “operating company/ property company (opco/propco)” deals. In 2021, Gaw Capital completed the final close of our first commingled growth equity fund, Gaw Growth Equity Fund I, which targets investing in prop-tech (property technology) and real-estate operating companies that are high growth and highly

We’ve changed a lot over the years. We started off looking for investors asset by asset as we discovered one real estate opportunity after another. Now we’re always looking for ways of assembling collections of assets that can always be further expanded as new investors come on board. Of course, we still like to take advantage of single asset opportunities when we spot them, but we focus a lot more of our senior management time on how we should be building these thematic platforms because of their huge scalability potential. This approach seems to be working. Institutionalizing our business allowed us to increase our assets under management to $12 billion five years ago. The steps we’ve taken since then have seen that total rise to more than $34 billion now. Looking ahead

Now, the challenge is maintaining and growing our position in what looks certain to be a tougher business environment in the coming few » December 2022 • I by IMD 27

[ Family business ]

years. On Hong Kong, our home, we are optimists. It’s survived hard times in the past – the riots of 1967, the immigration wave in the late 1980s ahead of the 1997 handover – and today investors are concerned about the direction China is taking. But we think China will continue to maintain Hong Kong’s separate position under the “One Country, Two Systems” principle. From everything we hear, Hong Kong will retain its position as China’s main window to the rest of the world up to and beyond 2047, the year when Beijing will have to decide whether to renew the current system under which Hong Kong is run. In China, residential real estate is heading towards more government control. But there are many other property sectors where capital will be needed to help growth – data centers, for example, or environmentally sustainable projects. Identifying such opportunities, along with exit strategies that the government will favor, will be a major focus of ours. As for the rest of the world, everywhere has issues. But from our perspective, Asia continues to have intrinsically strong fundamentals. We’re already seeing some interesting buying opportunities in the region. The weakness of the Korean won and the Japanese yen, for example, makes investing in those countries super-attractive. In the longer run, we expect to find further opportunities across the region. For sure, geopolitics and war are creating a tougher business environment ahead. But we’re confident we can handle things. Goodwin’s travels and conversations give us a macro-overview of how countries are faring and what sectors we should be looking at. Kenneth and Humbert, who are on the ground managing our assets every day, are in touch with local markets. And with my access to the global investors’ viewpoint, I keep track of where capital’s being allocated. It’s a great team. ■

Christina Gaw has been the Managing Principal, Global Head of Capital Markets of Gaw Capital Partners since 2008. She holds a Bachelor of Science degree in Business Administration from the University of San Francisco. Before joining Gaw Capital Partners, she worked in investment banking at Goldman Sachs and UBS for 15 years.

28 I by IMD • December 2022

What fictional family dramas can teach us about real life Family businesses seem to be made for the movies and television. They have everything: success, power and riches, as well as dysfunction and drama. Most are a caricature of reality, but nonetheless some useful themes emerge. Kimberly Eddleston, a professor who specializes in family business and teaches a course entitled ‘Examining Family Business Through Film’, shares some key takeaways 1. Succession

This Emmy award-winning TV series is a classic one for talking about the succession issue, of course. Often we talk in family business circles about successors feeling entitled to the CEO position, but we also see in the first episode that the founder feels entitled to stay on. Logan Roy, the lead character, is 80 years old, and he's thinking, “I can do what I want since I built this business.” Furthermore, he uses his power and wealth to manipulate his children. In my teaching I do an exercise after watching the episode where Logan appears to be on his deathbed. Students are asked to portray several key family members in the show and to create speeches to Logan. We then discuss them and how Logan would likely react. 2. The Godfather

The classic Mafia movie starring Marlon Brando contains so much that’s relevant to succession too, in particular in relation to the pernicious effects of primogeniture. Sonny Corleone takes over from his father as the eldest child but given what happens (he’s killed and the youngest son, Michael, reluctantly assumes the role) you

[ Familiy business ]

are left with good material for discussing the historical assumption that it’s always the first-born son who should take over. It's always fun talking about what would have happened if Sonny had become the successor. He was hot headed and impulsive, and wanted to take the business in directions that went against the family’s values. We also talk about gender roles in the film, and the “Fredo Effect” – a term used to describe the middle son who was an impediment to the business. My students also learn much about non-family members through the character of Tom Hagen, the lawyer. They easily identify what he brings to the business, and how critical he is to its success.

5. Empire

Managing crisis is another big topic for family businesses. In Empire, a TV drama series that revolves around a family fighting for control of an entertainment business in New York, I wanted to see how my students would deal with a crisis. There's an episode where everything comes to a head and there are four crises the business and the family have to deal with all at once. Some are family related (the family discovers an illegitimate son at one point and it becomes public) and some are business related (a business scandal involving the selling of customer data). Different teams in my class are assigned to the different crises and have to come up with a press release as if they were the family.

3. Six Feet Under

What happens when a family is faced with an unplanned succession? When a parent suddenly dies, and no-one knows the succession plan until the reading of the will. A sudden death in the family business can really take its toll: 70% of family businesses are sold or liquidated after a sudden death. It’s quite traumatic to the surviving family members who are grieving while also being forced to take over and lead the business. To teach this, I use an episode of Six Feet Under, the television drama series about a funeral home business, in which a father gets hit by a bus. It’s an event that’s outside the natural order of a family’s life cycle. The episode shows the importance of family dynamics to the future of a family business: healthy family, healthy business. 4. Bob’s Burgers

This one, an animated American sitcom, allows for an interesting examination of the formalization and clarity of roles. It centers on the Belcher family, who run a burger joint in a seaside community. In an episode I use in my teaching, the mom leaves the business because she feels under-appreciated. She feels she can help the family meet its financial needs by taking a job at a grocery store. While she’s away the husband finally realizes the value of everything she brought to the business. It shows how family members are often undervalued, and how the family takes for granted the family aspect of the business. It’s a fun episode for having a good discussion about how we can better communicate our appreciation of family members and the need for job descriptions and formalization to codify what people do.

6. Dynasty

I use the new incarnation of the classic soap opera Dynasty to deal with the whole innovation versus tradition dilemma that you sometimes get with family businesses, some of which often expose generational divides. I illustrate this by focusing on how the next generation wants to branch out from oil and gas and is pushing environmental issues — cleaner fuel, renewable energy — and social issues. They see things differently from the older generation but don’t have the decision-making authority to easily change things. 7. The Descendants

Upholding a family legacy — something bigger than you as an individual — can be very important. In the film The Descendants, George Clooney plays a character who is the sole trustee in protective charge of a vast tract of pristine land in Hawaii. His family are Hawaiian royalty. He ends up giving a speech to his cousins where he changes his mind about selling the land. I have my students write the speech. What would he say to get his cousins to agree with his decision not to sell out? It has a really strong family message, but the most important one is legacy and the importance of your community in business decisions. ■ Kimberly Eddleston is the Schulze Distinguished Professor of Entrepreneurship at Northeastern University, based in Boston. She specializes in family business and teaches a course entitled Examining Family Business Through Film. December 2022 • I by IMD 29

[ Family business ]

The anatomy of a merger

How to ensure the long-term future of a family firm

amily enterprises are among the oldest and most important organizations in the world, and they play a crucial role in the world economy and society. They are however confronted with unique challenges, many of which are more pronounced in today’s fastpaced, uncertain, and highly volatile environment, with industry dynamics becoming increasingly competitive, requiring families to rethink some of their core principles and beliefs. To ensure multi-generational unity and success, enterprising families need to successfully navigate these turbulent times by building on their core strengths – a solid financial foundation, strong values, multi-stakeholder decision making, loyalty and a long-term perspective. At the same time, they need to embrace the new world and think about ways to challenge the status quo and think about the most adequate setup for future success.

Described as a “merger of equals”, the joint entity will see DSM shareholders holding 65.5% of the new company and Firmenich 34.5%. The agreement will also generate a cash payout of €3.5 billion for Firmenich shareholders. The deal is still subject to customary conditions, including obtaining relevant regulatory clearances and completing relevant employee consultation procedures. DSM has said it expected the merger to be finalized by the end of the first quarter of 2023. So, what led the Firmenich family to consider this transaction, and what enabled the two parties to get to the point of agreeing that a combination of the businesses was the best way forward? A few weeks ago, I had the opportunity to speak with four members of the family about this important decision – what led to it, how it came about and what is coming next for the family – deriving some important insights for other privately held businesses. A forward-looking and strategic move

Let’s take a step back and examine the industries each company is in. The flavors and fragrances industry is undergoing a period of transfor30 I by IMD • December 2022

Photos: Elena Leya, Cecil Sneha, Edgar Castrejon, Aaina Sharma via Unspalsh (4)

To sell, merge, list or delist is a difficult decision that many business-owning families face at some point. Peter Vogel reflects on just such a turning point in the history of Firmenich, a 127-year-old Swiss family business which earlier this year announced its decision to merge with publicly listed ingredients and bioscience group DSM

This was the situation that the Firmenich family was facing, and ultimately led to the announcement in May 2022 that Firmenich had entered into an agreement with publicly listed Dutch group DSM, to merge the two businesses and create DSM-Firmenich. The new entity is “uniquely positioned to anticipate and address evolving consumer needs”, according to a joint statement by the two companies at the time. DSM-Firmenich is set to be an industry leader in nutrition, beauty and wellbeing.

mation driven by shifts in customer needs and the blurring of lines with adjacent industries. This has led to a cycle of consolidation and the entrance of new players in this industry. Despite being the solid industry leader, Firmenich was not unaware of the disruptive forces at play and naturally considered various strategic options to not only maintain their leading position but to actually lay the foundation for an even brighter future. Moreover, the Firmenich family and as a consequence the number of shareholders has grown over the decades – from 15 in 1990 to more than 40 today. Decision making in a growing shareholder group isn’t always easy and certainly does not get any easier in future generations. However, because of their “business first” mentality the family came to an agreement on this merger to ensure future competitiveness. The family had been talking for some time about the best way forward and had been considering a number of strategic options, including a merger as well as an initial public offering (IPO). Through this multi-year process the family gained expertise and confidence, which served it well when the right offer came along. The DSM opportunity proved to be well-timed, presenting the company with the kind of positive synergies the family was looking for — something an IPO or a merger with a direct competitor would not have offered. After several months of discussions with DSM, the decision was taken that this was the best way forward for the company and for the family. By merging with DSM the two companies believe that they will leverage world-class science and complementary capabilities in fragrance, taste, texture and nutrition and will be able to boost innovation in new highgrowth segments. ‘Business first’ from the beginning

As in all large families there are different opinions. While some members of the family believed that it would be better to remain private rather than to merge or list, there was no doubt that the interests of the company and the people whose lives depend on it should come first. Having a solid governance model in place, such as the Firmenich family does, helps to reach decisions effectively. There was a deep understanding among shareholders that they had a responsibility to ensure the longevity of the business, especially for the sake of the company’s 11,000 employees. While family members admit that there were some difficult discussions over the need to merge with DSM, these always remained constructive, with a policy of open communication in responding to the needs and concerns of all shareholders. Managing the transition

DSM’s joint CEOs, Geraldine Matchett and Dimitri de Vreeze will be co-CEOs of the combined firm. The board will be led by DSM chairman Thomas Leysen, while Firmenich chairman Patrick Firmenich will serve as

vice-chairman of the new entity. DSM-Firmenich will have its corporate principal headquarters and exclusive tax residence in Switzerland. The fact that Firmenich has had decades-long commitment to good governance – including highly professionalized board and leadership – has been an important cornerstone in facilitating the transaction and is likely to help make the transition smoother than it may be for other firms that may not adhere to the same levels of transparency and professionalism. The firm has had external members on its board for more than 30 years, and had its first external chairman in 2000, which was a big change for Firmenich. In 2014, it took a further step forward in terms of governance best practice, appointing Gilbert Ghostine as a non-family CEO. To ensure Gilbert would have the freedom to operate independently, the shareholders appointed Yves Boisdron as a non-family chairman. Patrick Firmenich took the role of vice-chairman in what effectively was a “cooling-off” period. Upon the retirement of Boisdron, Patrick Firmenich was elected chairman and the family retrieved what it believes is optimal governance for a family company: a family chairman and a non-family CEO. What next for the Firmenich family?

With a large shareholder base, it is normal that there are different aspirations. While some will wish to stay together in this new adventure, ensuring that the legacy of the company carries on proudly into the future, others might want to go forward as independents, while those remaining will grab this opportunity to build a new story. Naturally, family members have some reservations about the future of the family and the company in this new structure with the consensus being that they hope that the culture, values and sense of belonging of the employees will remain. However, the family knows that in reality their influence will decrease over time and there is an understanding that this is something they will have to accept. Sustainability has always been one of Firmenich’s strengths and an expression of family values and this is something that we can expect the family shareholders to continue to champion in the new merged entity. ■ Firmenich is the 2011 winner of the IMD Global Family Business Award as well as the 2019 winner of the IMD Sustainability in Family Business Award.

December 2022 • I by IMD 31

[ Family business ]

How to win the generation game and avoid a succession of problems

Ensuring a smooth transition of a family enterprise starts with answering the questions of the next in line, write Peter Jaskiewicz and Sabine Rau

hen are you planning to retire? That might not be a question you can easily drop into conversation around the dinner table of a business-owning family. Yet it is one of the 35 most pressing questions weighing on the minds of the next generation, or Next Gens, according to our interviews with more than 100 enterprising families around the world. As researchers into family businesses, we recognized that there was a lot of support and advice for the senior generation but less awareness about the needs and concerns of the Next Gens. Yet, within the next decade, 60% of enterprises will see a change of ownership. And two out of three family offices will be passed on by 2033. This means Next Gens are set to inherit about $2,000bn in financial wealth, marking one of the largest transfers of wealth in human history. Hailing from business-owning families ourselves, we were aware of how misunderstandings can seep into relationships between senior and younger members, in turn complicating – or even jeopardizing – the transition from one generation to the next. To try to give families the means to start communicating, we asked Next Gens for their views and concerns regarding their involvement in their family’s business.

the questions into four areas – family, ownership, business and wealth – with responses from leading academics and enterprising families to each. What is clear is that there is no one-size-fits-all answer. For example, whether you can leave the family firm and strike out on your own will depend on culture as well as family dynamics. While it might be frowned upon to turn your back on a family business in India, in the US the next generation might be encouraged to be entrepreneurial and set up their own ventures. There are, however, certain lessons that can help ensure a smoother transition from one generation to the next and enable families to move from division to understanding. Family dynamics will drive the fate of the business

There is nearly no family business that fails solely on account of the business itself. Anyone who has seen HBO’s award-winning TV show Succession will recognize that at the heart of the fighting over who gets to control the entertainment and media conglomerate is a family of lost souls, scrambling for acknowledgment and affection.

Over several years, we interviewed senior and next generation members of more than 100 family businesses around the world, and then asked a further 70 Next Gen members for feedback. The result was our book Enabling Next Generation Legacies: 35 Questions that Next Generation Members in Enterprising Families Ask.

Families need to spend as much time strengthening their bonds as they do "building their business". The underlying dynamics within a family – such as sibling rivalry – remain consistent across geography and time. Sibling rivalry arises when family members feel they weren’t given an equal share of love and attention. When it comes to handling a transition, you can’t right a wrong that started 30 years ago.

The book is designed to start conversations on a range of topics that might otherwise remain unaddressed. Questions include: Who is considered part of a family? How to exit the business gracefully? And when should we set up a family office to organize wealth? We categorized

Many Next Gens also fret about whether they may be good enough to take over the helm or worry if their talents will match the achievements of the senior generation. One of the questions that frequently came up was: Do I deserve the business and/or wealth I will inherit?

32 I by IMD • December 2022

The families that have the least difficulties in transitioning wealth and responsibility across generations are those that have woven the enterprise into the fabric and soul of the family. Take the case of Arial Ben Zaken, chairman of Israeli family-owned Domaine du Castel winery, who unlike many other Next Gens does not feel guilty about inheriting wealth. The reason? His parents, who founded a restaurant after emigrating to Israel, put the business at the heart of the family. Ben Zaken would head there after school and spend hours in the kitchen inventing recipes. By instilling a responsibility to contribute to the shared livelihood, Ben Zaken’s parents created a solid legacy to pass onto the next generation. In contrast, we also spoke to several prominent families who had issues engaging the next generation because the children had grown up unaware of the father’s work, the products he made, and the impact the business had on the community. If you want to involve the Next Gens in the enterprise’s future, it’s important to start socializing them into assuming roles in the company by making it part of the family’s shared memory. Soft skills play a role in smoothing the succession

Photo: Ahikam Seri/Bloomberg via Getty Images

While many family business owners might be great at running a company, this doesn’t mean that they will be good at passing it on, especially since a succession event is often done once in a lifetime with no prior experience. Many members of the senior generation may have had little choice

‘While it might be frowned upon to turn your back on a family business in India, in the US the next generation might be encouraged to be entrepreneurial and set up their own ventures’ over whether they took over the family firm and will have been thrown into the deep end with a “sink or swim” attitude. To set the Next Gens up for success, it is helpful to prepare, and even train them for the task. For example, surveys reveal that more than half of designated heirs lack the necessary education and experience to understand the work of a family office. This does not bode well for the future of families and their wealth. The questions in the book reveal that many Next Gens would like to know more about the enterprise as they seek to figure out their path and role in its future. The prevailing view for past generations of family business leaders, however, was that one scion should run the business while the rest of the family should be kept uniformed. Nowadays, even those family members who haven’t been crowned successors will want to have their voice heard. Even if they aren’t involved in the day-to-day »

Arial Ben Zaken, chairman of Domaine du Castel winery, worked in the family business as a schoolboy

December 2022 • I by IMD 33

[ Family business ]

business, they can still play a role on the board, in the family council, the family foundation, or perhaps by working in the family office. Whether in the boardroom, at the family meeting, or on the shop floor, it is important that family members feel that their opinion will be heard. We believe that asking questions is a good starting point. But it is important to frame the questions well, otherwise you won’t come up with a good answer. Next Gens should also ask these questions in a respectful way so that they don’t push away their families. This involves approaching with empathy and compassion the difficulties that the senior generation may have in letting go. For the younger generation, it can be hard to under-

‘Many Next Gens fret about whether they may be good enough to take over the helm or worry if their talents will match the achievements of the senior generation’ stand the grief their parents might feel when contemplating retirement and detaching themselves from a business they have built. It’s important to be proactive in starting a conversation around succession but, equally, younger family members should realize that these discussions may need to happen slowly and respectfully over a long period of time. A family is like a big container ship. It doesn’t change course quickly. One difference between succession in a publicly listed company and family-owned enterprises is that the age gap between the current leaders and their heirs is likely to be bigger. Those preparing to take over businesses in the next decade have come of age during a volatile, complex and ambiguous world. They are technologically savvy, at home globally, and eager to make an impact through their activities beyond just creating wealth. Indeed, financial wealth is a poor glue with which to keep families united and happy. A purpose can also help family members identify with their investment and its cause; for example, by building a portfolio of biotech investments to treat cancer. Family members are also more likely to feel inspired rather than burdened by their family’s wealth. At the same time, it is important not to neglect non-financial wealth such as networks (social capital), knowledge and competencies (human capital), and the intellect, education credentials and communication style (cultural capital) of the Next Gens. These will determine whether a family is able to deal with its own challenges and make a difference to their enterprises and society. Unfortunately, too much attention is paid to the transfer of financial wealth – stocks, bonds, private equity and real estate – at the expense of nurturing non-financial wealth. Next Gens who have had the chance to pursue their own vocation outside of the firm and become self-sufficient may also be better equipped 34 I by IMD • December 2022

Arial Ben Zaken with his father Eli, who founded the business after running a restaurant

to use their family’s wealth to make a difference, whether that be by engaging in philanthropy, impact investing or setting up their own venture. Start the conversation around the kitchen table

Next Gens are often stigmatized as a burden. But our research shows that many of them are aware of the responsibility that faces them and have pressing questions about how to navigate the next stage of their family’s enterprise. Family businesses have a board room and a kitchen table. It’s important that critical conversations happen around both. ■ Peter Jaskiewicz is a full professor of family business at the Telfer School of Management in Ottawa, where he holds a University Research Chair and is the Academic Director of the Family Enterprise Legacy Institute. In his research and practice, he focuses on preparing the next generation of enterprising families for success. Sabine Rau is well known for moderating succession processes and co-creating family protocols in Germany and beyond. She holds visiting professorships at the Telfer School of Management (University of Ottawa) and at the European School of Management and Technology (ESMT) in Berlin and teaches at the Université de Luxembourg.

Photo: Facebook

Wealth should be viewed as agency, not an end in itself

[ Family business ]

Self-drive cars and unmanned aircraft are a reality, so why not autonomous enterprises? Innovation and the pursuit of excellence are driving the success of Saudi family enterprise Obeikan Investment Group (OIG). Chief Executive Abdallah Al-Obeikan talks to Hischam El-Agamy about the company’s digital transformation journey and his mission to create a fully autonomous business

e live in a world of rapid transformation, a world where digital disruption and megatrends are affecting all industries. Successful family businesses are those that are willing to move away from traditional opportunities and react quickly and decisively to change.

The story of Obeikan’s success began in 1982 with a single commercial print shop in Riyadh. Over the past 40 years, OIG has diversified into new industries and markets and now has a diverse set of operations in manufacturing, packaging, education and healthcare. It is one of the leading business groups in the Middle East and North Africa and one of Saudi Arabia’s top 100 largest companies, serving more than 80 markets globally. Since 2017, the company has increased its focus on digital transformation, and is supported by more than 3,000 staff whose ways of working have been transformed by a digital environment and the solutions that the group has adopted.

A business imperative

Al-Obeikan, who has been at the helm of the business since 2002, was quick to take advantage of the digital opportunities he saw evolving in the world around him. “For me, harnessing the power of digital was not a choice, it was a business imperative. Since our inception, a strategic enabler of this business has been to constantly seek out opportunities to drive growth and improve productivity,” he said. Early on, he recognized the role that technology could play in creating more productive, precise and responsive manufacturing operations. “I was inspired by what I saw in the emerging B2C companies of the late 2000s, the likes of Uber and Airbnb. These are companies that have completely changed the world and I saw the potential that digital technologies could unlock in the B2B space,” explained Al-Obeikan. He notes that B2B companies face similar problems to those that innovative B2C companies set out to solve, such as waste, redundancy or poor customer experience. “With cost and competition increasing, I realized that digitization was not just a tool but a competitive advantage.” Al-Obeikan realized that a strategic focus on digitization was about more than improving productivity; it was also about meeting the growing expectations of OIG’s customers and employees. He realized that they were experiencing a far more personalized and accessible experience as consumers and knew that they would come to expect this in their working lives as well. “If you order a pizza, you can now see exactly where it is every step of the way. But this was not the experience my customer was getting when waiting for his product or my employee experienced while waiting for a spare part. I realized that we needed to give them the same experience they were receiving as consumers by communicating with them » December 2022 • I by IMD 35

[ Family business ]

regularly and on the platforms that they preferred — that is, on their mobile devices,” he said. A digital transformation

In 2017, OIG embarked on a journey to create a digital enterprise. This involves data scientists working hand-in-hand with experts in the field to ensure that all processes are digitized, unlocking the knowledge within the business to create digital assets of the company’s physical assets. Today at OIG’s 20 factories, digital technologies provide end-to-end connectivity across all machines in the facility. Data from these machines is analyzed to contribute to artificial intelligence and advanced analytics that drive continuous improvement in machine and production efficiencies. Smart equipment raises maintenance tickets automatically and there is real-time machine health check reporting and production target tracking.

‘We don’t measure our success by the flashy screens we have on the shop floor, we measure our success by real money on the bottom line’ The success of the digital transformation is measured in improvements in productivity, in quality, in customer experience, and in employee engagement. “We don’t measure our success by the flashy screens we have on the shop floor, we measure our success by real money on the bottom line,” said Al-Obeikan. “Through smart manufacturing, we have moved from a world where people manage machines to where machines, data and analytics are enabling us to improve our productivity and experience continuous improvement. We have transformed our supply chain, and we are able to make decisions quickly across the entire spectrum of our operations, which is greatly improving customer experience.” He is also on a mission to create a truly “autonomous enterprise”. The group uses AI for almost everything, from budgeting to cashflow to understanding its engagement with people. Job descriptions are generated automatically. And the company has also developed a sophisticated knowledge center where lessons are learned from performance issues by simulating the operations involved. It acts as a useful training tool to improve staff performance. Human capital management is also automated, from talent acquisition to retirement. The group is even automating succession planning by identifying suitable candidates based on clear competencies and experiences. Then the system automatically generates the ideal learning path. All these processes happen digitally without human intervention, in addition to leveraging AI to predict the organization’s dynamic and future behaviors. “This will enable the organization to drive even faster,” said Al-Obeikan. “Today we have self-drive cars, and self-drive planes, there is no reason why we can’t have autonomous enterprises too, even if this is hard for some to accept.” 36 I by IMD • December 2022

Enabling digital transformation

Al-Obeikan admits that the journey is not without its challenges. But he is clear that, for companies embarking on a digital transformation journey, it’s important to understand that the key to getting it right is not so much availability of digital talent, but rather an organizational issue. He believes that having the right people with a deep understanding of the processes within an organization is essential. “Many people talk about a lack of data scientists and coders as being a hindrance to digital transformation. However, it is not that,” he explained. “The big technology companies have put the tools in place to make that aspect of transforming your business so much cheaper, easier, and faster. “What you need to do is focus on harnessing the knowledge of your subject matter experts, the people that understand your business, your customer, and your supplier. Digitization involves cementing their knowledge so that if they leave, you don’t lose it. “In short, you need to get organized, understand all your verticals, connect all your assets and then optimize them using machine learning. If this backbone of your business is not in order, you won’t be able to move forward.” What’s more, he emphasizes that digital transformation must come from the top. “The CEO has to lead the transformation. If the CEO from an intellectual point of view doesn’t have a deep understanding of what the digital opportunity is, the threat is that you won’t digitize. As CEO, you need to be persistent and decisive about digital. You have to repeatedly deliver the message that digital is the strategy. Yes, you need to give people a chance to learn and to adapt — but if they don’t, then you have to make the tough decision of letting them go.” Part of this learning for Al-Obeikan is training people in the practice of design thinking, the process of solving problems by prioritizing the customer’s needs above all else. “After three years of hard work I now have the majority of my employees across the threshold,” he said. “There is no more debate in the company about the direction, or why we are doing this, or how we can win by using digital tools. Today, all questions have been answered, there is no doubt.” Another challenge is how companies should scale transformation. “Many companies can transform on a small scale, but it’s when they try to do it for the whole enterprise that they fail. There are a number of reasons for this from lack of connectivity of assets to a lack of deep process knowledge.” Enabling other companies to be future-ready

Al-Obeikan’s commitment to harnessing the benefits of digital extends beyond OIG. Through the creation of a smart manufacturing platform and innovation hub, he is bringing the benefits of a digital enterprise to customers, partners and companies across the Kingdom of Saudi Arabia and beyond.

OIG is building software-as-a-service (SaaS) models for everything it does and has so far built more than 20 use cases. “We validate everything on our own shop floor. We identify the required data and once we have tried and tested it, we share our domain expertise to the market. Data scientists work hand-in-hand with subject matter experts to achieve this.” Al-Obeikan says that being able to show companies digital transformation in action is incredibly useful. “I meet two to three CEOs a week. It’s one thing to listen to a lecture, read a book or go to a workshop on digital transformation, but another to see it happening with your own eyes. We bring people to see what we are doing in our operations at our Obeikan Knowledge Academy, which works as a research and development hub for Obeikan Group. “We understand the pain of manufacturers. We have four decades of experience in producing products. Everyone in our value chain is involved in building our platform, from forklift drivers to the CFO. All my employees are responsible for challenging the platform, for dealing with bugs, and this has enabled us to mature at a rapid pace.” Al-Obeikan said the success of his company’s digital transformation can be traced back to its entrepreneurial roots. “For us it was easy to adopt the Silicon Valley approach in our business, that is: to start small, scale fast or fail fast,” he said. What the company’s rapid digital transformation makes clear is that family businesses have the innate ability to self-innovate and create competitive advantage thanks to their entrepreneurial spirit and desire to build a lasting legacy. With the pace of technological change, the opportunities are enormous — provided businesses equip themselves to face the future. ■

‘You have to repeatedly deliver the message that digital is the strategy. Yes, you need to give people a chance to learn and to adapt — but if they don’t, then you have to make the tough decision of letting them go.’ Abdallah Al-Obeikan

OIG no longer sees itself as a product provider but as a solutions provider. It offers companies digital tools to simulate their operations before implementing them. “Since the beginning of our transformation journey, we have been on a mission to give back to our country’s industrial business ecosystem,” said Al-Obeikan. “Through our innovative digital solutions, backed by world-renowned technologies, we are enabling them to be ready for a different tomorrow.”

Hischam El-Agamy has been an Executive Director at IMD since 1999. He is responsible for IMD’s activities in Africa, the Middle East and SouthCentral Asia. Dr El Agamy’s expertise and teaching experience include scenario planning, entrepreneurship, family business transformation, private - public partnership and stakeholder engagement. He is teaching regularly in IMD customs programs and taught in several IMD open programs, including the EMBA and MBA programs.

December 2022 • I by IMD 37

[ Family business ]

Eight ways for an outsider to successfully get on board Soren Toft, CEO of MSC Mediterranean Shipping Company, makes the case for respecting the legacy of a family-owned business when taking the helm Soren Toft, the first CEO of MSC to be appointed outside of the family, sees his job as respecting the legacy while ensuring that the company remains fit for future challenges

38 I by IMD • December 2022

hief executives are sometimes portrayed as the rock stars of the business community: individuals with extreme confidence and power who believe they can conquer the world. While this may be true for a few leaders, the majority of CEOs I’ve met are human beings who also have their doubts. And this humility is a good thing, particularly if you are working for a family firm. When I decided to jump ship from Maersk and join rival MSC Mediterranean Shipping Company in December 2020 as the first non-family CEO, I was careful to not act like an elephant in a glasshouse. A good friend of mine gave me some sound advice: “Remember: when you start, you may be the prime minister but you’re not the Queen.” I think this is a particularly good analogy for leaders joining family firms. Elected officials, like prime ministers, may come and go but the monarch is constant. For me, it’s important to pay tribute to the fact that in my role I am standing on the shoulders of giants. Since he purchased his first ship in 1970, Gianluigi Aponte, the founder and owner of MSC, has transformed it into a world leader in container shipping with more than 700 vessels and 150,000 employees. My job is to respect this legacy while making sure MSC remains fit for the future. Many people have asked me why I decided to leave my previous employer, Maersk, after 25 years. The truth is, I felt I had come to a juncture in life where I had to decide whether I stayed for the rest of my career or moved somewhere else. Maersk is a great company that shaped me as a leader and gave me huge opportunities. I no doubt could have stayed and continued to progress in my career. Yet I had started to feel that I should try something new, that I should see another company and really learn new things. I had a thirst for a fresh challenge and was assessing my options when the call came from the Aponte family asking if I’d be interested in joining as CEO.

Photos: MSC (2)

In some ways, this is a journey I have been on before. When I joined Maersk, Danish shipping magnate Arnold Maersk Mc-Kinney Møller was gradually retreating from operational involvement in the company. MSC today reminds me in some ways of Maersk 25 years ago when the company still had an active family owner and was growing significantly into other areas. Appointing me as CEO was, I presume, a longer-term strategic decision by the family. MSC is in an excellent position and, buoyed by a couple of years of favorable markets, has grown to become the world’s largest container shipping company. The family owner recognized that MSC’s growth, developments and size called for further leadership competencies and, with an eye to supporting succession, wanted to ensure there was enough time to ensure a steady handover. There are three aspects of working for a family firm that I’ve grown to particularly enjoy over the past two years. First is the long-term lens MSC uses to steer its operations. Of course, we need to perform. We cannot grow if we don’t perform. But we are

not under constant scrutiny from a mass shareholder base. This has also shaped my leadership style. Like every CEO, you also want to get off to a good start and go after the low-hanging fruit. But I’ve allowed myself to think long term; it helps that I am not obliged to justify my decisions before investors and analysts every quarter. The second aspect is simplicity. MSC doesn’t have as complicated a structure as a listed company, where to push through a decision you need to deal with many different stakeholders. Here, I have a discussion with the family owner, we coordinate closely, and we make quick decisions. I consider this a privilege. Finally, MSC’s success is built upon its strong culture. Many of the firm’s employees have worked here for a lifetime. In some ways, people consider the company an extended part of their family. This is down to the strong sense of loyalty shown by the Aponte family which in turn is reciprocated by the staff. At the same time, MSC has growth infused in its DNA. There’s also a flat hierarchy. You don’t have to go through multiple layers to speak to me. It’s a large company but we are still trying to operate as a very lean and agile enterprise. This is something I’ve kept as I see it as a key ingredient of the culture and something to treasure. So, what would be my advice to outsider CEOs joining family companies? You need as much EQ as IQ: I never came to MSC with the mission that I would change the culture. That would have been misguided. My aim is to understand the culture and develop it appropriately for the future rather than turning it upside down. To do this, you need a good portion of emotional intelligence (EQ). It would be very difficult to make the move successfully, as I did, without as much EQ as IQ.

‘MSC doesn’t have as complicated a structure as a listed company ... here, I have a discussion with the family owner, we coordinate closely and make quick decisions. I consider this a privilege’ Leave your ego at the door: When joining a family firm, you don’t come in with an ego that outshines the owner. In fact, I wouldn’t recommend that in any context. A person with a very high ego would not be comfortable in this role. You need to read the room first. You have to learn to influence people in a different way over a much longer period of time. This starts with listening and figuring out how you can help others to grow and flourish. Gain the full confidence of the owner: I have spent a lot of time building trust so that the owner is comfortable with me. It’s a little bit like a marathon. I am not here for a 100-meter sprint, I am here to do a good job over a long time. Before I joined as CEO, MSC had had the same owner and leader for 50 years. It’s not a negative thing to have the owner » December 2022 • I by IMD 39

[ Family business ]

MSC by numbers MSC

150,000 MSC group employees

730 vessels

by your side. It can take some of the pressure away, and if you need sound advice you have it immediately. Even for people who are working for a less active owner, it’s fundamentally important to build a relationship that is second to none. The chemistry has to be right: From when I was first approached by the Aponte family to agreeing to take the role it took a long time. I am glad that both sides took the time to do plenty of due diligence. I knew Diego Aponte fairly well; we were competitors but also business partners. We worked together on a shipping alliance with Maersk that still runs today. I have an excellent relationship with Diego, and this is one of the key reasons I am still here. I felt I could work for someone who I respect for his personality and human qualities, as well as for being the owner and a clever businessman. Despite one of us hailing from the north of Denmark, while the other comes from southern Italy, we get along really well. The chemistry has to be right. You want to work with people who you enjoy being around.

‘I’ve allowed myself to think long term; it helps that I am not obliged to justify my decisions before investors and analysts every quarter’ Respect and support the employees: In the shipping world, there is perhaps a notorious rivalry between MSC and Maersk. But there is also mutual respect and recognition. Joining MSC, I prioritized getting to know the MSC team and the key players. I chose not to bring in a lot of new leaders out of respect for the culture and the people that had already brought MSC so far. Instead, I wanted to develop and encourage existing employees of MSC. Of course, like any company, we are continuously evolving and we hire some specialist competencies, but we continue to cherish and develop the people who have been here for a long time. For me, it was important that I build trust with the thousands of individuals who make up MSC. After all, you can have a great strategy, but if you have a poor culture and lack followership, you have nothing. 40 I by IMD • December 2022

675 offices

520 ports of call

260+ routes

155 countries

Be mindful of why you were hired: Sometimes it’s easier to bring in an outsider to make required changes, so I am mindful that the Aponte family probably didn’t hire me to simply keep the status quo. It’s about finding the balance to have a constructive dialogue. I like to think that between the family owner and myself, we are good sparring partners. Be humble and realistic about the challenge: It’s often said that you shouldn’t change industry and function at once and I am glad that I stayed in the same industry while moving up to the CEO role. As an outsider, I’ve done the analysis of what I believe is the strategic direction as well as the short-term gains for the company and have been able to draw on my experience at Maersk to implement changes that have been effective. I have also been especially fortunate to benefit from favorable market conditions. At the same time, it’s important not to underestimate the strain such a move might take on your personal life. One of the hardest parts of accepting this job has been uprooting my teenaged children and helping them to navigate life in a new country. A human being that fits the culture: I have learned more in the past couple of years since joining MSC than I had done for a number of years prior. I am proud that I’ve been able to find my place here and build a followership based on mutual respect while also taking steps to reshape the organization. We’ve made a number of acquisitions and added new lines of business, bringing MSC into a better place for the future. I’ve always had the view that before you come in and judge, you need to put your hands and feet in the mold and feel, smell and taste the earth. I felt able to do this because MSC was in a strong position. The Aponte family also understood that they didn’t necessarily need and want a leader who was a prototype of themselves, but somebody who could complement them, and a human being who fits into the culture. ■

Soren Toft is CEO of MSC Mediterranean Shipping Company. Before joining MSC, he was COO and a Member of the Executive Board at Maersk. He holds an Executive MBA (2009) from IMD.

Source: msc.com

23m TEUs carried annually

[ Family business ]

How working for the collective good helped bring a family closer together The Ahlström family in Finland recognizes that commercial success depends not only on generating profit but also on making a positive global impact on the lives of others, write Malgorzata Smulowitz and Peter Vogel

aria Ahlström-Bondestam, a descendant of the Ahlström industrial dynasty, has always held a keen desire to contribute to society — even in small ways. Aged nine, she wrote a letter to Finland’s president asking him to repair a dangerous slide in a playground. To her family’s astonishment, she received a reply and the slide was fixed. Years later, these values would go on to shape how the 171-year-old family enterprise approaches philanthropy — in a way that not only inspires greater impact but builds a stronger family. That approach brings together the efforts of businesses, investments, and philanthropy by creating a “collective impact” strategy, an approach that other family businesses are now emulating.

Those values have been inspired by her forebear Antti Ahlström, a 19thcentury Finnish industrialist who founded the family enterprise in 1851, and his wife Eva — one of the first female industrial leaders in Finland. The business has its beginnings in the timber industry, but over much of the past two centuries it has evolved into a diversified conglomerate with interests in sectors such as forest products and industrial technology. “Antti and Eva strongly believed in equal opportunities for girls and boys, and that the community their businesses resided in needed to be well taken care of to be prosperous. They felt that companies need functioning societies to be able to succeed,” said Ahlström-Bondestam.

Photo: RIJSKAMP

Over the years those values were crystalized in her when she married the business leader Sebastian Bondestam and had three children of her own. “I lived in 10 countries on four continents during a 20-year period. During this time, I came to reflect on inequality and the injustices of the world and my role in society,” Ahlström-Bondestam explained. “Martin Luther King defined power as the possibility to affect change. »

‘I felt that there was so much inequality and injustice in the world. At the same time, I was born into an old industrial family that had the power to contribute ... that’s when I reflected on the unique possibility to affect change while uniting the family around social issues ’ Maria Ahlström-Bondestam

December 2022 • I by IMD 41

[ Family business ]

I sincerely believe that it is time for all of us to activate our collective power to affect the changes we want to see in today’s world.” That approach ultimately involved forging partnerships in 2020 between the 13 organizations within the Ahlström family network (including public and private companies and foundations) and UNICEF, United Nations Children’s Fund, in response to its COVID-19 appeal. It also involved investing €240,000 ($247,000) to support vulnerable families in countries with weaker infrastructure, where the effects of the pandemic could cause devastating increases in child mortality and malnutrition. While the direct impact of COVID-19 on child mortality has been limited, the indirect effects have been severe. According to estimates from UNICEF, an additional 100 million children are living in “multidimensional poverty” as a consequence of the pandemic — meaning they have no access to essential services — while 60 million more are living in financial poverty. The pandemic also disrupted education and led to a considerable decline in the number of people accessing basic services, such as primary health and nutrition care, clean water, child protection and social services.

“I felt that there was so much inequality and injustice in the world. At the same time, I was born into an old industrial family that had the power to contribute to the world. That’s when I reflected on the unique possibility to affect change while uniting the family around social issues,” said Ahlström-Bondestam, the foundation’s Co-founder and Honorary Chair. At the core of this strategic approach to giving is the foundation’s historic collaboration with UNICEF, through which the Ahlström family achieves greater societal impact, particularly with regard to underprivileged women and children. “After starting the foundation, we realized that we had a vision, energy and a big heart — but actually, a relatively modest budget and no real expertise in how to solve the world’s problems. So we needed a global partner who had the expertise, the power and the mandate to implement our vision,” Ahlström-Bondestam explained. The family chose to partner with UNICEF because it has more than 75 years of experience, a network that spans the globe, and direct access to governments and local officials — key ingredients for generating societal change. “For us it was a perfect match where we could bring different strengths to the partnership to fulfill a joint vision of a better world for children,” she said. 42 I by IMD • December 2022

A thirst for knowledge: Ahlström Collective Impact has joined forces with UNICEF Finland

That involved teaming up in 2011 with UNICEF to support their project on Water, Sanitation and Hygiene, or WASH, in schools in India. That saw the family enterprise, through the Eva Ahlström Foundation, invest €200,000 to improve access to clean water, basic toilets and good hygiene practices in Madhya Pradesh, India — a neighboring state to Gujarat where the Ahlstrom company had recently opened a plant in which it produces fiber composites.   The success of the project, which reached 40,000 children, inspired the local state government of Madhya Pradesh to invest a further $102 million to scale up the results of the initial project. Through these funds the pilot project reached 10 million children. The impact exceeded Ahlström-Bondestam’s wildest expectations: “We were flabbergasted. We didn’t really think we could have such a big impact and the results filled us with hope for a better world with hope that there is a solution, [that] things can become better if we just act, if we find new partnerships, if we collaborate.” The family’s partnership with UNICEF continues. Ahlström-Bondestam and her cousins became founding members of the UNICEF International Council, a community that includes representatives from the world’s

Photo: © UNICEF/UN0339412/Frank Dejongh

Partnering with UNICEF has been at the heart of the Ahlström family’s cohesive approach to giving, which was formulated in 2010 when Ahlström-Bondestam and 25 of her female cousins came together and created the Eva Ahlström Foundation, a humanitarian organization named after the family’s inspirational matriarch. The 25 cousins in the fifth generation reflected a recognition that commercial success depends not only on generating profits, but on whether or not a business takes care of all its stakeholders, including employees from outside the family.

Photo: © UNICEF/UN0325666/Ralaivita

in an effort to give every child access to a good education and clean drinking water by 2030

leading business families and global influencers. They want to optimize their philanthropic investments for children by bringing together their funding, influence, and expertise. Ahlström-Bondestam serves as its inaugural chair. To date, the Council has mobilized more than $420 million for children.

‘The feeling of creating something new from a joint heritage and values has been immensely important for our extended family’

Yet this is not the only benefit to have been felt by the family. There has also been a marked increase in family cohesion, as the foundation increased opportunities for the family’s 450 members, spanning seven generations, to work together on non-business issues.

from Nasdaq Helsinki and Stockholm, last year. Today, Ahlstrom-Munksjö operates under the business name Ahlstrom.

“The sensation and the feeling of creating something new from a joint heritage and values has been immensely important for our extended family; we have been able to include not [only] all generations, but also our in-laws who have contributed greatly to the foundation’s work,” said Ahlström-Bondestam. She is clear that keeping the family together has been an important part of the family enterprise's longevity over the past 171 years; something that was reinforced by the foundation's creation. The preservation of unity was evident in the family’s decision to delist Ahlstrom-Munksjö, which manufactures fiber-based materials,

Family members recently had the option of exchanging their listed shares for shares in a non-listed investment company called Ahlström Invest B.V. Ninety-nine percent of the shares owned by the family were tendered. “Nobody on the outside thought that would be possible or expected such family unity. The work that has been done around philanthropy has actually united the family to act as one, also when it comes to these kinds of business decisions,” said Peter Seligson, one of Ahlström-Bondestam’s cousins who is a member of the board of Ahlstrom and is the inaugural Chair of the new A Ahlström Oy. The family has managed to stay together — even as its business empire expanded. The group employs about 13,500 people in 33 countries and had net sales of €4.4bn in 2021. » December 2022 • I by IMD 43

[ Family business ]

Ahlström-Bondestam is clear that for the company to continue building on this momentum and ensure its long-term success, it must take good care of the communities in which it operates. Moreover, she believes that the challenges facing society are too complex for any one organization alone to solve. “Already before the pandemic there was an annual lack of about $2.5 trillion [in developing countries] to reach the Sustainable Development Goals (SDGs) by 2030. Now that figure is estimated to be even bigger. No single company or government has those resources — and money alone is not the solution,” she said. Those goals are the 17 SDG targets agreed by world leaders in 2015 to address key challenges including poverty, inequality, and the climate crisis by 2030. They can only be realized with strong global partnerships and cooperation, built on shared principles and values. That belief led to the creation in 2020 of Ahlström Collective Impact, an initiative that brings together the family’s network of companies, foundations, employees, and shareholders under one umbrella in partnership with UNICEF Finland — a vehicle for collective giving. The family is drawing on the strengths of each organization to super-charge its impact in society — particularly when it comes to providing quality education for all and achieving gender equality and women’s empowerment. Ahlström-Bondestam said that, by working together, the whole becomes greater than the sum of its parts: “Ahlström Collective Impact is a vehicle that makes it possible for everyone in the Ahlström network to contribute towards solving some of the most pressing challenges facing our global society. The uniqueness lies in the power that comes from bringing all entities together under one umbrella and letting purpose and values be the guiding principles that unite the Ahlström network.” Bringing together the family enterprise united with this ambition is part of what Ahlström-Bondestam sees as a competitive advantage in today’s business environment. She said that, in a competitive labor market, many potential recruits wanted to join companies with a purpose. That gives the Ahlström family an edge when it comes to attracting and retaining talent. “The collaboration gives member companies tools for internal and external branding, which is imperative in today’s competitive world when purpose is one of the top drivers for any talent looking for employment”. Moreover, she says that a “collective impact” approach to giving is key to attracting investors, who are coming under greater regulatory and market pressure to demonstrate how their capital is making a positive social and environmental contribution. In addition, Seligson is clear that corporate philanthropy is helping Ahlstrom to attract the attention of customers — in particular its campaign to raise awareness of fiber-based solutions as a renewable packag44 I by IMD • December 2022

ing option. This has helped the company to woo corporate customers who themselves are responding to their own consumers’ demands for eco-friendly products. “People want to engage with us. They want to co-develop new products that are not plastic based,” he said.   While for most business customers price is still the key factor in their buying decision, Seligson is clear that, all else being equal, “they choose the brand or the business partner that has a slightly better image”. Meanwhile, there has been a marked increase in cohesive giving in general. This is a trend that is also being driven by a desire to mitigate reputational risk, since philanthropy can sometimes be seen as a way for families to clean up their reputations or cover up wrongdoing. According to research at IMD, the collective impact approach to philanthropy is being employed by other enterprising families, which use the same principles adapted to their context. One example is C. Hoare & Co, a UK-based family-controlled bank with over 350 years of history of philanthropic practices across its 11 generations. Philanthropy remains central to the bank’s culture and, beyond its positive impact on beneficiaries, it has tangible effects on its owners, employees, and customers. Rennie Hoare, descendant of the bank’s founder Richard Hoare, and Partner and Head of Philanthropy at the bank, has stated that: “We espouse the view of what we call ‘total portfolio impact’, where both grants and investments are set out to do intentional good.” Ahlström-Bondestam is clear that for any enterprising family trying to align and magnify impact, building a network and identifying issues that stakeholders are passionate about are two keys to success. “Identifying a common cause, key players, and the necessary resources, such as financial, skill and time needed, is essential. Based on that, you need to create a framework — in our case a foundation — guided by key principals, and to clearly state your mission and vision to drive impact,” she said. Yet Ahlström-Bondestam is also clear that earnest statements of intent must be followed up with action. “The UN called this the decade for action, a decade for transformation, a decade for hope and for peace. And I personally believe that it all starts with us, with the individual. Agreements and declarations are just words on paper if we do not act to make these words a reality.” ■ Malgorzata Smulowitz is a Postdoctoral Research Fellow at the Debiopharm Chair for Family Philanthropy at IMD. She has published work on topics including family philanthropy, cohesive giving, and the use of blockchain in philanthropy. Peter Vogel is Professor of Family Business and Entrepreneurship. An expert on family enterprises, he leads IMD’s work in this field as Director of the IMD Global Family Business Center and holder of the Debiopharm Chair of Family Philanthropy. He was named by Poets&Quants as one of the world’s best business school professors under the age of 40 in 2022 and included in Family Capital’s Top 100 Family Business Influencers list in both 2020 and 2022.

[ In the mind’s eye ]

In times of transition, allow emotions to enter the room By George Kohlrieser

motions are not often talked about in most organizations and yet they are a significant factor in every decision made. Neuroscience and behavioral economics have clearly demonstrated that we are emotional beings who happen to think, rather than thinking beings who happen to have emotions. Many emotions – such as a fear of heights, darkness, or even spiders – are instinctive reflexes from our evolutionary past. Others are rooted in our past experiences, and many become positive or negative triggers throughout our lives. The brain has one fundamental goal: to survive. This means one has to be always on the lookout for danger and threat, as chronic worriers are prone to be. Some decisions are made from this survival state where there is an overemphasis on a negative risk assessment. Research has shown that we have four main emotions that influence decisions: anger, fear, sadness, and joy. Emotions play a critical role in helping us to assess if something is important for our wellbeing – regardless of whether the perception of reality is accurate or distorted. And they take on an even greater significance in family enterprises where business decisions and transitions can become deeply intertwined with personal ties.

Illustration: Jörn Kaspuhl

A major transition such as the sale of a family business or handing it over to the next generation can reopen old wounds and unresolved traumas. Some owners may feel afraid about the future and their lost identity, while others may be angry if the next generation wants to take the business in a different direction. Others are sad to let go and hold on for too long. If handled poorly, a transition can have disastrous consequences for both the business and family unity. A case in point is the bitter feud that broke out between brothers Mukesh and Anil Ambani, heirs to the Reliance Industries empire, following the death of their father in 2002. After months of infighting over who should control the family enterprise, their mother brokered a demerger in 2005, which split the business in half. Mukesh gained control of oil and gas, petrochemicals, refining and manufacturing, while Anil took over electricity, telecoms and financial services. De-

spite this, the brothers continued their public feud via the media and government officials and Anil even dragged Mukesh into court. All these decisions were influenced by destructive and unresolved emotions rooted in childhood wounds. So how can family enterprises ensure that a time of transition doesn’t derail the business and break family bonds? 1. Understand your own desires and the desires of others

Before embarking on a transition, such as the sale of a business or the establishment of a family office, it’s important to have a clear understanding of the desires of different family members. Do you want to hand the business over? If so, to whom? What amount of involvement would other family members like to have in the business in future? What are the desires of the next generation and how might they differ from those of the current generation? Parents shouldn’t assume that their offspring will want to run the firm in the same way as them. And what are the desires of all of the parties involved? 2. Foster dialogue and open channels of communication

Dialogue is crucial to sorting out how the transition is going to affect the identity of the owners and different family members. Create a safe space where family members can speak openly about their emotions. There may be sadness at loss of identity, fear of the unknown, and uncertainty. At the same time, there may be joy and excitement about new challenges, such as using the wealth extracted from the business to start new ventures or engage in philanthropy and impact investing. Identify what you are letting go of and saying goodbye to, then focus on the future and the new opportunities and benefits that this change can bring. Family members who refuse to face their emotions in a transition are at risk on many levels. Emotions must be part of the dialogue. 3.‘Put the fish on the table’

In order to move forward constructively, it’s also important to “put the fish on the table” – an expression that means raising a difficult issue openly and dealing with important differences. If you don’t address these differences, they can start to smell and become toxic. The root of all conflict » December 2022 • I by IMD 45

[ In the mind’s eye ]

Heart and sole: still life with fish by Clara Peeters, 1611 (Prado, Madrid)

is difference – and different desires, whether unexpressed or expressed, are fueled by emotion. Once desires and emotions are openly expressed, listened to, and understood, then constructive concessions can be made. And that concession may become a “fish under the table”’ in the future. 4. Allow for younger generations to be emancipated from the family first

One source of conflict within family enterprises is when the younger generation reject the older generation’s wish that they take over the business and prefer to pursue their own vocation. This can create all kinds of emotions: disappointment, fear, frustration and confusion. A good succession plan might involve the son or daughter stepping away from the business for long enough to allow an emancipation process to take place. This might involve going to study abroad or pursuing a career in another company, so giving them the chance to establish their own identity. This way they are less likely to feel that they are in the shadow of the older generation and may be more willing to return to the family firm later. Families should aim for interdependence, not dependence. 5. Don’t forget that a family business is a family

As the name suggests family businesses are ultimately families that come with their own set of special dynamics, from sibling rivalry to over-controlling parents. A transition is likely to trigger old wounds around fairness, guilt and a sense of belonging. If a brother or a sister

46 I by IMD • December 2022

feel they have been treated less favorably when growing up, or if there was an absent parent, this is likely to spill over into any negotiation for a stake or control of the business. It is vital to separate personal conflicts from business conflicts. When families can’t agree, they often turn to legal help, which can exacerbate the conflict. They would be better off seeking psychological help that addresses any past wounds and helps families to look beyond those wounds to focus on the present. If a family has a strong bond, it will be much easier to solve conflicts through dialogue and healthy negotiation techniques. Close bonds can also be a major strength of any family enterprise. Blood runs deep, and this drives loyalty and trust. When Anil Ambani was threatened with a prison sentence due to an outstanding debt owed by his company to Swedish telecoms equipment group Ericsson, his older brother Mukesh stepped in to help him avoid jail — notwithstanding the brothers’ acrimonious relationship. Anil at the time thanked his “respected elder brother, Mukesh, and [his wife] Nita, for standing by me during these trying times, and demonstrating the importance of staying true to our strong family values by extending this timely support”. Often we ignore the question, “How do you feel?” We prefer instead to ask, “What do you think?” But if you disconnect from your emotions, this will likely have negative ramifications on your life, such as depression, illness and addiction. By taking the opportunity to name and label the primary emotion that you feel, you will be more likely able to move on from it, rather than allowing it to fester and sever relationships. ■ Dr George A. Kohlrieser is Distinguished Professor of Leadership and Organizational Behavior at IMD and Director of the High Performance Leadership Program.

Photo: Wikipedia

‘In order to move forward constructively, it’s also important to “put the fish on the table” – an expression that means raising a difficult issue openly and dealing with important differences’

[ Family business ]

Take note: how ‘social dividend’ ensures unity down the generations Based in Colombia, Carvajal SA is one of the world’s largest manufacturers of paper notebooks. For more than 30 years, all family members have been given free or heavily subsidized access to education, healthcare and housing. Cristina Carvajal, president of the family council, explains to Anouk Lavoie and Peter Vogel why the scheme has been instrumental to the company’s continued success

or any family enterprise that’s handing control from one generation to the next, finding ways to engage the heirs at an early stage and prepare them for their future roles in the family business are keys to long-term success.

Carvajal SA, one of the world’s largest paper notebook makers, based in Colombia, has ensured those two qualities define how the eponymous controlling family has approached its development of the next generation of the company’s leaders through its 118-year history. Initially a newspaper publisher, Cali-headquartered Carvajal has over the past century expanded into the paper and packaging, technology, and real-estate industries across and beyond Latin America. The family adopted a novel approach to developing the next generation known as the “social dividend” — a benefit which was established » December 2022 • I by IMD 47

[ Family business ]

in 1990 to provide all family members with free or heavily subsidized access to education, healthcare and housing. The dividend also supports their professional development and preserves family unity. “The social dividend is a very important part of what glues this family together,” said Cristina Carvajal, President of the Carvajal Family Council, which oversees governance and ownership of the business and runs activities that strengthen family ties. “This family has been very generous, and that makes the rest of the family feel that they want to give back. “It’s very nice to feel that, no matter where you are and no matter what you need, the family will back you up. We don’t need to be together all the time, or meeting all the time, but there’s a family unity, and that is key for the next generations to come.” Arguably the most unique aspect of the social dividend — which funds 70% of school and university tuition fees in addition to a one-off home purchase — is that it levels the playing field. That means all 300-odd family members have access to these benefits, regardless of the number of shares they own or will eventually own in the business. As the sixth generation arrives and the wealth gap amongst different branches of the family increases, the dividend guarantees the same opportunities to those who are less well off financially. Yet that is not the only strategy for succession planning that is being successfully deployed by the family. Younger relatives are offered internships in the company’s various business units, as well as in the Carvajal Foundation (a non-profit organization aiming to improve quality of life in the most vulnerable communities such as Valle del Cauca), and the investment fund that pays the social dividend.

‘It’s very nice to feel that, no matter where you are and no matter what you need, the family will back you up. We don’t need to be together all the time, or meeting all the time, but there’s a family unity, and that is key for the next generations to come’ Those internships can help empower the next generation and give them an opportunity to begin thinking about creating their own legacy. Cristina Carvajal points out that some hesitation in changing the company’s usual way of doing business has hobbled the succession process in the past, when the third generation of the family – her parents’ generation – was handing over control to the fourth.   “The third generation had a hard time empowering the fourth,” she said. “They asked, ‘Why do you want to change something that has worked for 48 I by IMD • December 2022

a long time?’ That resistance is where most of the tension comes from, and those have been the hardest issues that we’ve faced.” That rift prompted the family to take steps to ensure that it does not repeat the same mistakes when it comes to nurturing the fifth generation. Those steps include the creation in 2018 of the NextGens Boards program — an initiative that allows family members aged 25 to 40 to join the board of directors of the Carvajal business, the foundation, or the family council for two years. Having NextGens on boards develops future leadership talent and boosts family harmony. “The fifth generation needs to get educated,” said Carvajal. “This company is going to be theirs one day, and they need to be good shareholders. That’s where the board program comes in very handy. We have discovered a lot of talent in our younger family members with this program.” The success of the family’s approach to nurturing the next generation is evident in the longevity of the business. The company was founded in 1904 by Manuel Carvajal Valencia, the family’s patriarch, who sold his wife’s farm to buy a printing machine and publish the weekly newspaper El Día. His sons, Hernando and Alberto, grew the business when he imported printing machines from Germany and expanded into selling paper products such as notebooks. The company established new business units in the 1950s and 60s, for example printing the Yellow Pages telephone directories, and expanded across and beyond Latin America. As of 2021, it employed 17,000 people and generated annual revenue of $900 million. Carvajal is still entirely family owned, though a quarter of its equity belongs to the Carvajal Foundation (in 1960, the family decided to donate 24% of its shares to a charity dedicated to social development and poverty alleviation). Cristina Carvajal believes that communicating openly is a key part of what keeps the family together, even as it expands. That means empowering family members to have hard conversations respectfully, a transformation that has been led by Pedro Carvajal, a fourth-generation scion who became CEO in 2020. “We’re a family that is very respectful of feelings,” she said. “And in that sense, it has been very difficult for us to deal with conflict. So sometimes it’s easier not to speak about it because you're very mindful of not hurting other people's feelings. But I think that has changed a lot with Pedro and his way of communicating and being transparent. “I personally have insisted to the family that I want to hear everything — the good, the bad and the ugly. And the family has felt more comfortable in speaking up on difficult issues that we didn’t deal with before.”    That strategic approach to communication includes employing a community manager to keep the various family members, 30% of whom live outside Colombia, talking. This approach includes sharing company information through groups on Instagram, Facebook, TikTok, and a magazine published three times a year named El Día — a nod to the origins of

Cristina Carvajal with part of the family history archive. The company dates back to 1904

the business. “It's hard to keep a family of 300-plus members together. And I think the key for that is communication,” Carvajal explained.

neurial ecosystem that helps family members launch new business ventures and provides funding for them.

“I lived outside of Colombia for 26 years, and I still feel close to the family because I knew what was happening in the business, I knew what was happening with the family. For us, it´s very important that the family feels close — that, as a shareholder, you know how the company started, the work of previous generations and how the company is doing now, so we start strengthening the ´Carvajal Heart´ from an early age.”

“We tried to glue the family together through many different processes, and we failed until we found that in our DNA there's entrepreneurship. So this is a new branch that we are starting to open up. And it's because of family unity that the fifth generation have gotten together and worked on fostering this entrepreneurship community. So, I think if you take care of family unity, a lot of magical things happen. And I'm sure that we're going to be here for many more years.” ■

Moreover, she believes that such communication has been key for the family’s governance structures to succeed. These structures include the family council that she leads, which was established in the 1990s. “We needed to have strong family governance and some rules to be able to work together,” she said. “And I think that has been key in upholding family unity. I am convinced that unless there's family unity, it's very difficult to pass over control from one generation to another.” In 2022, the family became the 27th winner of the IMD Global Family Business Award, recognizing Carvajal’s dynamism and resilience over several generations, as well as its high standards of governance. Carvajal is clear that finding new ways to engage young heirs is key to future-proofing the business. Those ways include CarvaLab, an entrepre-

Anouk Lavoie is a Research Associate at IMD. Her work focuses mainly on leadership, entrepreneurship and family business. Peter Vogel is Professor of Family Business and Entrepreneurship. An expert on family enterprises, he leads IMD’s work in this field as Director of the IMD Global Family Business Center and holder of the Debiopharm Chair of Family Philanthropy. He was named by Poets&Quants as one of the world’s best business school professors under the age of 40 in 2022 and included in Family Capital’s Top 100 Family Business Influencers list in both 2020 and 2022.

December 2022 • I by IMD 49

[ Family business ]

The investor who believes in giving back to his homeland The Wallenberg sphere operates in about 180 countries and its holdings generate a total of $260bn of annual revenue. But Marcus Wallenberg, chairman of the family holding company, explains to Jean-François Manzoni why working for the benefit of his native Sweden is so important. The Swedes even have a word for it: landsgagneliga

s companies grapple with some of the biggest upheavals since the industrial revolution, today’s business owners face multiple challenges, from how to transition seamlessly towards sustainability to ensuring that their companies harness the full potential of digitization.

But they also have to satisfy an increasingly complex tapestry of stakeholders while ensuring that their governance structures remain transparent and agile enough to respond to a backdrop of growing economic and geopolitical uncertainty. As chair of Wallenberg Investments AB and FAM AB, Marcus Wallenberg sits on the front lines of these critical issues. The two entities are pillars of his Swedish family’s business empire that stretches across everything from pharmaceuticals to banking and industry.

Marcus Wallenberg: ‘It’s important to acknowledge that being a CEO is quite a lonely job, and they need some sort of communication to feel that they are on the move’

“Our way” revolves around a personal sense of duty but also deep commitment. “When the three of us grew up, the older generation always said that just because your name is Wallenberg, you shouldn’t believe that you have a place because you really have to perform and you have to work,” he said.

Indeed, the Wallenberg’s strong sense of purpose is grounded in social responsibility that is captured in the Swedish word landsgagneliga, which translates loosely as “for the benefit of the country”.

The combination of hard work and social responsibility has produced more than a dozen foundations over the years that today funnel more than $200m a year into a variety of research projects and research organizations involved in science and education – all with a clear objective to help the development and competitiveness of Sweden.

“It's a way to give back, to really have the possibility to support Swedish society,” Wallenberg said. “The family has been very focused on working for Sweden and with Sweden over the years, so it suits our way – and the way we think about ourselves.”

Twenty years ago, for example, Wallenberg foundations backed research into genomics, then and now one of the critical areas at the frontiers of scientific investigation. Two themes that the foundations have focused on and that have the potential to revolutionize the course of human

50 I by IMD • December 2022

Photo: Investor

Together with other fifth-generation family members and cousins, Jacob and Peter, the Wallenberg sphere, as the collection of family holdings is known, reads like a corporate Hall of Fame. Through its publicly listed industrial holding company, Investor AB, it has large interests in ABB, AstraZeneca, Ericsson, Electrolux, Saab and Husqvarna. All told, the sphere generates about $160bn in annual revenue and employs 600,000 people across about 180 countries. But the Wallenberg family is more than business holdings. It operates a unique ecosystem of which Investor, through a number of Wallenberg Foundations, is one part. The purpose of these foundations is the betterment of Sweden through the funding of top-flight education and basic research projects at the country’s universities. That makes the Wallenbergs custodians, as well as owners, highlighting a strong sense of purpose.

development are artificial intelligence and autonomous systems, including self-driving vehicles, smart transportation systems, and cloud infrastructure. Identifying such areas of focus requires long-term vision. But how does that approach translate to the world of business? Wallenberg says taking the long view is important because it facilitates innovation, which he considers central to succeeding in two areas that he believes will help determine societal and corporate success in the coming years – digitization and sustainability. On the first, he says that the rapid uptake of digitization during the lockdowns due to COVID-19 is just scratching the surface. “There are so many more things that we could do to improve our offering and to make our operations more efficient,” he said. “And that, in turn, demands that companies change their business model to operate in a different way vis-à-vis customers and suppliers.”

‘The older generation always said that just because your name is Wallenberg, you shouldn’t believe that you have a place because you really have to perform and you have to work’

When it comes to sustainability, he argues that adopting the right policies and practices now will pay dividends down the road. “It’s part of building for that future even though I understand that it involves making investments that will be costly,” he said. “I still think for the long term, and since we have a long-term focus, that it will benefit companies and their customers, and give very good returns in the future.” The stable of Wallenberg-owned companies has delivered extraordinary results for shareholders over the past 20 years or so, with returns averaging about 15% a year – roughly double that of Warren Buffett’s Berkshire Hathaway. So, to what does Wallenberg attribute much of that success? “It is a continuous development of the relationships with these companies, trying to stay close without interfering in operations, but still having an active dialogue with these companies,” he said. “We’ve been trying to find this balance between ownership, very engaged ownership, where we make sure that the right board, primarily the chairman and CEO, is in place.” With the rise in importance of environmental, social and governance (ESG) factors, investors have placed increased scrutiny on the way business owners administer their companies, and the Wallenberg sphere is no exception. While many of its companies are ultimately

controlled by the family, such companies also have many other investors – and some of the family’s holding companies are publicly listed. Against that backdrop, Wallenberg says that the family tries to tread a delicate line between influence and interference. “You could say that you should not meddle in the operations of a company, and this is a very important point because you have to let the CEO do his or her work in a way that they can develop the company according to the strategy that you have set out,” he explained. “But I also think it’s important to acknowledge that being a CEO is quite a lonely job, and they need some sort of communication to feel that they are on the move.” Wallenberg also says that appointing CEOs, as well as sometimes having to dismiss them, is an essential part of a board’s responsibility – and that making the right choice depends on having an objective understanding of where a company is in terms of corporate health and development. “We have to realize that if you appoint a CEO to a company which is in trouble for one reason or another, it’s probably a different skill set than when you are trying to find somebody to help expand an already successful company,” he said. “It’s really trying to find the right person for the right company, and at the right time … besides the normal qualities of a leader, which are very important, I think the choice also has to be tailor-made for the specific situation.” With the sixth generation of Wallenbergs growing up and taking an active interest in the business, what does he hope they will learn from previous generations as well as his own? One is to maintain the long view. “Where are you trying to aim? What are you trying to achieve long term? Because it’s easy to get into a situation, when things are more challenging, where you deviate from the longterm goal.” Another is to balance that long-term view with an acute focus on the present. “My ancestors always made sure to look and see what was coming – and how to make adjustments,” Wallenberg said. “That is something that my cousins and I carry with us and feel is very important because otherwise it’s difficult to be relevant as an owner.” ■

Scan the QR code to watch the full video interview

Jean-François Manzoni is the President of IMD, where he also serves as the Nestlé Professor. His research, teaching, and consulting activities are focused on leadership, the development of high-performance organizations and corporate governance.

December 2022 • I by IMD 51

[ CEO dialogue ]

Building a social enterprise requires both a big heart and a clear strategic focus, says Khadija Mohamed-Churchill, founder and CEO of Kwanza Tukule. In an in-depth discussion with Jean-François Manzoni, she reveals what motivates her and offers advice for other impact entrepreneurs on how to build a committed team and attract investors 52 I by IMD • December 2022

Photo: elea Foundation for Ethics in Globalization

Khadija worked for a bank but now uses her skills to feed those in need

n Nairobi’s industrial area, motorcycles piled high with bright yellow plastic tubs zip through the early morning traffic to deliver food staples like flour, cooking oil and pulses to women who have set up makeshift stalls to cook meals for low-income workers. The street food vendors place their orders the day before via an app and pay for their purchases with mobile payment system M-Pesa. This tech-enabled business-to-business food distribution service was the brainchild of Khadija Mohamed-Churchill, who founded Kwanza Tukule (which means “first, let’s eat” in Swahili) to address the lack of affordable and nutritious food for people living in Kenya’s growing informal settlements. Born and raised in Kenya, Mohamed-Churchill worked for a bank before moving to the UK to do an MBA at Imperial College, London. After graduating, she worked for 11 years in various tech consulting roles. When she traveled back home she was struck by the challenge faced by many Kenyans in finding affordable food and began asking herself why the food issue hadn’t been solved. An estimated 10 million Kenyans routinely experience hunger. With ever larger numbers moving to urban areas and ending up in informal settlements where they lack the space to cook, street food vendors have become an increasingly important source of food and nutrition. On returning to Kenya, Mohamed-Churchill worked for an NGO before realizing she could use her skills, experience, and MBA training to create a more efficient and effective supply chain for the street food industry. From the outset, Mohamed-Churchill had strategic clarity about the customers she wanted to serve. “We are very militant about understanding what the customer needs so we can stay profitable," she said. “We’re impactful and we can prove that these kinds of models work. We care so much, and if you care so much then you do the extra work that most people might not be willing to do.” Founded in 2018, Kwanza Tukule originally started by pre-boiling raw food such as lentils and pulses, which take a long time to cook, and then supplying them to vendors. They have since shifted to supplying food staples, addressing their cus-

Khadija Mohamed-Churchill • Raised in a mostly Muslim, poor, rural area in Eastern Kenya. Her parents, who were largely uneducated, encouraged her and her two sisters to study.

• Studied at Imperial College, London, and the University of Nairobi. • Worked as transformation and IT consultant in banks in Nairobi and London for 11 years.

• Moved back to Kenya in 2017 and did voluntary work for NGOs in low-income areas of Nairobi.

• Founded Kwanza Tukule in 2018, a last-mile distribution business that supplies informal street vendors in Nairobi.

• Thirty trucks, each with sales rep and driver, visit clients daily to supply 5,000 vendors.

tomers’ needs by delivering daily, allowing them to pay as they go, and taking small orders, since many vendors lack storage. “It’s not like a shop,” Mohamed-Churchill explained. “Sometimes it’s just under a tree, sometimes it’s behind a building.” The reliability, convenience, and regularity of the service eliminates guesswork for their customers and saves them time and money since they no longer have to get up early to take a motorcycle taxi to the store.” To earn customer loyalty, Kwanza Tukule also provides employment. “Whenever we have recruitment […] we ask our customers, ‘Do you have anyone looking for work?’ And then we employ in the areas they live, because then they don't spend a lot of money on transportation, they know the local people and we get more loyalty that way,” she said. Technology also helps a great deal. Customers pay and order via an app, allowing Kwanza Tukule to consolidate orders and plan its delivery routes. The app also helps the company to manage its stock, predict supply and demand, and ensure suppliers are paid on time. Building a social enterprise is not without its struggles. One of the biggest challenges has been hiring a committed team when she can’t offer them high salaries or a fancy office with computers. “Initially, you don’t have too much you can offer, so you have to work harder to paint the picture of what the future could be like […] It’s time consuming!” Mohamed-Churchill explained. Through a mix of trial-and-error, she has learned to find out what motivates people and recognizes that this might be different to what motivates her. “But it’s crucial that you have people who are committed in the beginning, or at least get rid of the people who aren’t […] because the commitment is what drives you through the start.” The child of a shopkeeper, entrepreneurship was a natural path for Mohamed-Churchill. “In class, if I was asked a mathematics question, maybe I’d struggle. But if the teacher used an example of buying a banana and then selling it, and asked, ‘What’s the profit?’ I would be first with my hands up,” she recalled. Reflecting on her approach to running a social enterprise, Mohamed-Churchill says she has a laser focus on customers. Every day she checks in with her chief operating officer to see how the company is performing with existing customers and how many new customers they are adding. Her second strategic priority is to keep track of suppliers, many of whom are grateful that she is catering for a demographic they hitherto have been unable to reach. The rest of her day is punctuated by calls to the sales team and investors. With plans for Kwanza Tukele to expand to other cities in Kenya and Africa, Mohamed-Churchill anticipates that her daily work pattern will increasingly shift away from day-to-day operations to becoming more of a visionary leader, focusing on acquiring strategic partners and developing a model that can be rolled out in different locations. » December 2022 • I by IMD 53

[ CEO dialogue ]

viability of their business model so they can convince others, she said. “If it really doesn't work, then you have to be honest with yourself because no one else will tell you. People will avoid telling you and will instead encourage you to come see them again next week. But then you’ll keep meeting them, they won’t be writing the check and you’ll be wondering, ‘why are people not investing in me?’ So you have to face reality and use the failure to improve your business model. Through it all, you must also continue to believe in yourself because people for sure won’t believe in you if you don’t.”

The transition is bittersweet for Mohamed-Churchill, who is energized by her interactions with customers. “I don’t visit them on a daily basis now, but when I drive to work, I usually stop to have a chat and eat,” she said. “The customers that we serve don’t just provide food. They’re like a therapist, they listen, they laugh, they joke, they challenge.” So, what is her advice to future social entrepreneurs? “Think about the long-term viability of the business. It's good that we are doing good for customers and the community, but it's also important that the business be sustainable in time, which requires it to be sufficiently profitable.” Secondly, she advises bringing in the right partners. Mohamed-Churchill decided to pitch to investors rather than apply for grants because she wanted people who would hold her accountable. One such partner has been the elea Foundation for Ethics in Globalization, which exists to help fight poverty using entrepreneurial means. When Mohamed-Churchill was just starting out and didn’t yet have a management team, elea helped her with everything from recruitment to growth plans and by providing financial support and helping to attract investors. “Attracting investors is a special skill, even for someone who lived outside Kenya for over 10 years and was a banker,” she said. “So to open the doors for Kwanza Tukele is incredible.” Now, she says the other businesses within the elea network act as a mutual support system by sharing their knowledge. Does she have any specific advice for female entrepreneurs? “Know your numbers,” she said. “Because there’s a gender bias that women might not know the business well. So show that you do.” Mohamed-Churchill also spends a lot of time using numbers to highlight the value in catering to female-run businesses. Data is also something that entrepreneurs should collect to convince themselves about the 54 I by IMD • December 2022

“If you speak to our customers, they don't even know that Kwanza Tukule is an ‘impact business’. They'll just tell you, ‘They're so great. I need them’. And I think we meet them halfway because we need them, they need us. So it's kind of like a relationship of equals.” Her focus right now is validating the business model before it is scaled nationally and internationally, displaying some of the drive that has helped her grow Kwanza Tukele to 60 employees in under four years. “With technology, we can take what we’ve done and replicate it elsewhere,” Mohamed-Churchill said, describing how the people the company serves – manual laborers who work hard but lack the space to cook – can be found almost everywhere in developing countries. “This is a problem that's going to continue and get even bigger. Now, Kwanza Tukule what does it do? In a small way that’s what we are doing, we start with a model, then we want to bring in partners. There are people out there with resources, with even more enthusiasm than I have to breathe life into stuff that others have started. And that’s what we want to do.” ■

Scan the QR code to watch the full video interview

Photo: elea Foundation for Ethics in Globalization

Mohamed-Churchill has plans to expand the business to cities across Africa

Unlike many entrepreneurs who start a business with ambitions to get rich, Mohamed-Churchill admits she isn’t motivated by material wealth. “I don't particularly like houses or cars or nice handbags,” she said. “That doesn't mean I want to live under a bridge and be poor because I don’t. But it does mean that I don't need or want to consume unnecessarily to make myself feel good. What really matters to me is making a connection with people and making a difference in their lives. It is solving a problem that people and society need to be solved, and ideally doing so in a way that people don’t even notice that they are being helped.

[ In my view ]

Hallelujah!

This time the quest for purpose and meaning may be more than empty promises Michael Skapinker, who once shared the quiet pessimism of Leonard Cohen, explains why a new era of positive change may be upon us

ost management writers have their preferred gurus. For some it’s Peter Drucker, while others might look to Michael Porter or Charles Handy. When I come across a new business fad, I turn to the words of Leonard Cohen: “Baby, I’ve been here before, I know this room, I’ve walked this floor.”

I quoted Cohen’s lines from his much-covered song Hallelujah in the Financial Times in 2019 when I wrote about the companies, from JP Morgan Chase to Glencore, that had committed themselves to acting with purpose, recognizing that they had a responsibility that went beyond Milton Friedman’s instruction to focus purely on shareholders’ desires, “which generally will be to make as much money as possible”. The reason for my resort to Cohen was that, in more than 30 years of covering business, I had seen these corporate commitments to serve society – and not just shareholders – come and go. Company leaders usually made these pledges in good times, only to abandon them when the economy turned sour and they needed to return to making enough money to survive. I watched it happening during recessions and especially after the 2008 financial crisis. When executives see their companies imploding, their promises to work for the greater good tend to crumble in the struggle to bring in enough cash to fend off collapse. I thought the same would happen to the current fashion for ESG (environment, social and governance) and purpose beyond profit. When the Business Roundtable, representing the US’s largest companies, issued a statement in 2019 redefining the purpose of a corporation as being to benefit “all stakeholders – customers, employees, suppliers, communities and shareholders”, I thought: here we go again. I had seen these pious undertakings called many things: business in the community, corporate social responsibility, sustainability, ESG, and now purpose. Same idea, different labels. As Cohen wrote: “I see you’ve gone and

changed your name again.” I suspected the outcome would be the same: company promises to behave for the good of society would be ditched when the bad times came. The bad times did come, early in 2020, first with COVID-19 and then, in 2022, with Russia’s invasion of Ukraine – and the subsequent energy shock. Yet, to my surprise, much of the corporate world maintained its commitment to purpose beyond profit. Indeed, as I write in my new book, Inside the Leaders’ Club: How Top Companies Deal with Pressing Business Issues, the demands that businesses maintain their allegiance to a wider social purpose became even stronger. There was a good reason for this. Unlike the previous responsible business waves I had witnessed, this one wasn’t just being pushed by NGOs and campaigners: the pressure was coming from shareholders. In November 2020, a group of 38 investors, including JP Morgan Asset Management, Fidelity International and M&G Investments, wrote to 30 of Europe’s leading companies saying they expected them to list material climate risks in their accounts. When mining company Rio Tinto found itself in trouble after destroying a 46,000-year-old sacred Aboriginal site in Western Australia to expand an iron ore mine, it was shareholders who helped force the departure of its CEO and two other senior executives. There were some wobbles in keeping businesses on the purpose path. With the Ukraine war restricting access to Russian gas, some of the most prominent advocates of “business with purpose”, such as BlackRock, pulled back a bit. The FT reported in July 2022 that the group’s support for shareholder proposals on environmental and social issues had fallen by nearly half. BlackRock insisted its principles hadn’t altered; just the pace at which it could act on them. “We haven’t changed. The context is changing around us,” it said. But for many businesses, despite the struggles caused by the pandemic and war in Europe, the direction of travel remained the same. Walmart, the US retail giant, was still committed to a wider purpose. “We understand that for a business to last, it must have a fundamental reason for being – which is found in the value it creates not only for shareholders, but for the world,” the company’s website says. Jamie Dimon, JP Morgan Chase’s CEO, dismissed claims from some conservative US politicians that the duty to a wider range of stakeholders » December 2022 • I by IMD 55

[ In my view ]

was “woke”. He said it made business sense for companies to care about their customers, the environment and their employees. It seems that, unlike in earlier eras, companies’ commitment to a purpose beyond profit seems to be surviving. Why? First, because many executives recognize the dangers to business and society from climate change. Most accept the need to “keep 1.5 alive” – to limit global temperature increases to two degrees centigrade, and preferably 1.5 degrees, compared with pre-industrial levels. But there is a second important reason why companies are sticking to the idea of a wider purpose: their employees are demanding it. I moderate many business conferences and executive education programs and senior executives often say that when their companies interview new recruits, the potential employees all ask the same question: what is your organization’s purpose? What does it do for society? The same applies to retaining people: executives say it’s easier to keep staff if they believe they are doing something useful. In my book I quote Emmanuel Faber, former CEO of Danone, who said his employees insisted on the French food group being a purpose-led company that cared about the climate and sustainable agriculture. “We see it as a magnet for talent,” he said. “People are more and more impatient. If they don’t get what they were expecting to get from the company, they leave.”

This is an important point. Those who have jobs that pay them enough to live comfortably can start to think about what else they would like from work: interest, stimulation and the feeling that they are making a difference to the world. Others, as my dissenting executive pointed out, have more fundamental needs: feeding and housing themselves and their families. The American psychologist Abraham Maslow called this a “hierarchy of needs”. In his 1943 paper, A Theory of Human Motivation, Maslow laid out the five stages in his hierarchy, from the bottom to the top. He said the first needs that humans had were physiological: food, water, clothing and shelter. People could not think about higher-order needs until those were satisfied. Second came the need for safety and security, including financial security. After that came the need for love, friendship and intimacy. Fourth, and second highest, in the five-step hierarchy was the need for esteem. When people’s esteem needs were satisfied, Maslow said, they had “feelings of self-confidence, worth, strength, capability and adequacy of being useful and necessary in the world”. On the 56 I by IMD • December 2022

Leonard Cohen: finding truth in a popular song

other hand, “thwarting of these needs produces feelings of inferiority, of weakness and of helplessness”. At the top of the hierarchy was selfactualization, which came from putting your talents to full use, to being the person you wanted to be.

‘Unlike the previous responsible business waves I had witnessed, this one wasn’t just being pushed by NGOs and campaigners: the pressure was coming from shareholders’ How does Maslow’s hierarchy apply to recruits asking about the purpose of the organization in their interviews? As the dissident executive at the manufacturing company was saying, not all new recruits are bothered by the company’s contribution to society. They have more basic needs, the first two in Maslow’s hierarchy: feeding and clothing themselves and their families and attaining some financial security. Much of the world is in this position. If they are fortunate, they can also achieve the third level in the hierarchy – love and friendship. It is only the luckiest and best placed who can start looking for Maslow’s two highest-order needs: esteem

Photo: Wikipedia

There is occasionally a dissenting voice. Once, when I was running a program for the leadership of a European manufacturing company, the heads of departments such as HR and marketing all made the usual points about how much new recruits valued the organization’s purpose. But one top executive remained silent, looking increasingly unhappy. Eventually he spoke. All this talk of purpose was fine, he said, but can we just remember that 80% of our people spend their days in front of a machine in our factories, and their only purpose is to make enough money to support their families.

THE FIVE STAGES IN MASLOW’S HIERARCHY OF NEEDS self-actualizatioN

(achieving individual potential)

esteem

(achievement, confidence, position in a group, status)

BeloNgiNg

(love, affection, family, friendship, sexual intimacy)

safety Needs

(security of body, employment, health, property)

Physiological Needs (food, sleep, sex, shelter)

and a feeling of self-worth, and self-actualization, the ability to use their talents fully. They are the ones who most naturally ask what the company is doing for the world. Their needs for safety, security and, they hope, love and intimacy met, they can start to look for self-esteem, self-actualization and feeling, in Maslow’s words, “useful and necessary in the world”.

Infographic: Theresa Schwietzer

Does this mean that those in lower-paid jobs never experience the satisfaction of contributing to the world and feeling useful in society? Of4 course not. Hospital porters and ambulance staff know they are IMD • March 2021 making a difference. But so are many others; it’s just that our societies and companies have not always recognized that. The pandemic brought home to us the importance of jobs that many of us had not paid enough attention to. The COVID-19 lockdowns showed how vital the roles of street sweepers, refuse collectors, supermarket delivery drivers and neighborhood shopkeepers were. They kept our world running. Many hoped that these key workers’ contributions would continue to be recognized when the lockdowns ended. They often weren’t. Recognition would have meant paying those people more, and few countries and companies were prepared to do that. In the UK and France, many of these workers, battered by high inflation, went on strike. How can we

show that recognition? Pay is the best way to demonstrate to people that you appreciate what they do, that you understand their importance to your organization and our societies. But there are other ways too. In my book, I talk about the importance of top executives spending more time with people who do jobs far away from the C-suite. People in these posts often have a good idea of what is really happening in the organization and how to make it more productive. I tell a story of when Allan Leighton was CEO of Asda, the UK supermarket group. He was talking to the checkout staff and they made a suggestion. The biggest-selling Asda item was bananas. If there was a single button they could press every time a banana appeared at the cash register, they could save a lot of time. That one change increased checkout productivity by 20%. Did this push the Asda checkout staff up Maslow’s hierarchy of needs, from the ability to feed and house their families to self-esteem and self-actualization? Possibly not. But it probably made them feel more appreciated and a greater part of the company’s ability to keep its customers happy. People want to feel that they are part of something bigger than themselves, that they are not just small parts of a machine but actors in making the machine work. It is not just in the highest reaches of organizations that we can find happiness. In his best-selling book Man’s Search for Meaning, the Viennese psychiatrist Viktor Frankl wrote that people could find meaning in their lives in the least promising circumstances. Frankl, who survived Auschwitz and other Nazi concentration camps, formulated many of his ideas while he was a slave laborer, close to starvation and death. He believed that all humans searched for meaning in their lives. What that meaning was depended on them and on their circumstances. Trying to prescribe what that meaning should be was like asking what the best move was in chess: it depended on your position at the time. I believe that “meaning” is a more useful word than “purpose” when it comes to what employees are after and what organizations can give them. You could be offering them more money. But people also want to feel that their work has meaning, that they have made a difference. The leader’s role is to create an organization that not only makes the world a better place but in which all employees feel that they are making a difference too – an organization in which they are appreciated and listened to, in which they understand how they contribute to the whole, whether they are at the top of the marketing department or standing in front of a machine. Leaders who achieve that will not only attract people who want to stay – they can win over all the employees, the community, customers, and, in the long run, shareholders too. ■ Michael Skapinker is a contributing editor of the Financial Times and the author of Inside the Leaders’ Club: How Top Companies Deal with Pressing Business Issues. He is also a member of the I by IMD editorial board.

December 2022 • I by IMD 57

[ Digital transformation ]

Sarena Lin says she expects leaders to step up and ‘drive this transformation journey forward’

58 I by IMD • December 2022

Digital transformation: Bayer prescribes a different approach The life science giant is using the latest technology to drive change in three very distinct areas of its business: agriculture, pharma and personal healthcare. Training and developing a new breed of leader is paramount to success, Sarena Lin, the company’s Chief Transformation and Talent Officer, tells Misiek Piskorski

igital transformation has been a company-wide exercise for many large companies for years. But at Bayer, the German life science company, the approach it’s taking is unique to each of the company’s three main divisions of pharma, crop science and consumer health. That’s because the needs of the end customers in each of the three divisions is different.

captures and studies weather patterns, soil information and crop growth to deliver actionable intelligence to improve yields and reduce risks for farmers. A key focus for Bayer is understanding the behavior of farmers, understanding the data, and the overall environmental effects as well as understanding how the solutions need to be offered in such a way that's easily grasped.

Crop science

“The variables affecting farming are complex, whether it's changes in the water level in the soil or changes in the climate in terms of temperature. How will this affect crops? And what kind of crop protection is needed? Constantly updating the algorithms as well as understanding how to improve data analytics and improving the user experience are key,” Lin explained.

Farmers who were previously sold seeds, fertilizers and pesticides now need data-driven insights to help them plant and grow more efficiently. This means moving into software and data. “Ultimately, if you think about what science tries to do, it’s really driving much better efficiency, much better precision, and also convenience for our farmers and eventually for the consumers,” said Sarena Lin, Bayer’s Chief Transformation and Talent Officer, in a podcast with I by IMD.

Photo: Bayer, www.muellersaran.de

This starts with data science, which can provide digital tools allowing predictive and prescriptive capabilities to farmers in terms of when to plant, how to plan, and how to carry out crop protection, to get the best yield through the most efficient of use of products. “That's a critical ecosystem in terms of the number of variables that need to come together, powered by truly analytical skills behind the scenes, to empower the farmers to do what they need to do in terms of making better decisions,” said Lin. Bayer has made a number of investments in this area, including its acquisition of Monsanto several years ago, which gave Bayer a precision farming capability known as Climate FieldView. The software platform

Pharmaceuticals

In pharma, the focus at Bayer is shifting towards preventive medicine and diagnostics, and away from solely producing drugs. This requires a change in how clinical research and clinical trials are done – using digital tools. Any approach to digital transformation in the context of prevention and diagnostics required a focus on what diseases to “double down on”, said Lin. “It requires a change in how we think about how you use digital to do clinical research and clinical trials. And, ultimately, how we think about digital technologies in terms of how it’s applied to patients — the right medicine for the right patient. “Precision medicine requires a true understanding and a combination of biology and technology, both in terms of diagnostics as well as treat- » December 2022 • I by IMD 59

[ Digital transformation ]

Bayer has been engaging in collaborative partnerships for some time and has five Innovation Centers in cities across the world so it can maintain local scientific networks while looking for new collaborations. Some of these are called “lighthouse” projects. “There are a number of deeply technical digital technology companies that are our partners, because they are just tremendously good in terms of data mining,” said Lin. “So, for us, it is really looking at different factors and saying, how do we best build a set of possibilities? This is the idea of the ecosystem.” Consumer healthcare

Digital transformation is all about empowering consumers, giving them the mandate to allow them to take care of their own healthcare and wellness needs. More and more people want to take healthcare into their own hands — hence the idea of “self-care” and having a say in how they want to take care of themselves. This opens up opportunities and requires developments on the digital transformation front.

‘In this transformation journey we expect leaders to engage differently, engage themselves, engage their teams, engage across functions differently. That really drives a sort of ownership mindset’

60 I by IMD • December 2022

Lin believes that the collaborative partnership idea also applies here. “How do you create that ecosystem and build that digital solution where the consumers know if there is a one-stop shop where you're rating the kind of information that they find objective and useful and are willing to engage?” All of this illustrates how digital has brought Bayer much closer to consumers and has made it a much more consumer-focused company. This has implications for leadership — and for what differences have been observed across Bayer’s various divisions in this context. Lin believes that while everybody defines digital differently, it’s important to “galvanize the organization and to be able to start painting more of a common vision and direction of what digital should mean for an organization that's large” — as Bayer is. A second element is learning. Specifically, how to create a learning opportunity to make sure that people start speaking in common languages about the transformation required. That’s because the concept of digital “isn’t just owned by those people who have ‘digital’ in their title”, said Lin. “It becomes a mindset question. What is it that digital can do? It should work for them whether they're in a functional role, a commercial role or in the business department. That’s a critical aspect of helping to drive that mindset and is at the forefront of our leaders’ minds when they think about what they do.” So how has Bayer implemented those changes across three divisions and what organizational design has been involved? “Instead of changing organizational design, it's more important that we create an environment that foster cross-functional and divisional collaboration and exchanges in terms of best practice, and that builds awareness of the mindset we want to drive towards,” explained Lin.

Photos: Bayer (2), iStock

ment. And this is where the digital aspect really becomes critical in every step of the value chain in terms of pharmaceutical development and in terms of application.”

“This includes changing expectations of how we want leaders to lead and apply that not just to digital but to transformation in a broader sense. We're basically saying, in this transformation journey we expect leaders to engage differently, engage themselves, engage their teams, engage across functions differently. That really drives a sort of ownership mindset. We expect leaders to step up and lead to be able to drive this transformation journey forward.” Bayer was still at the early stage of this journey, said Lin, but in practical terms it had involved three things so far: 1. Asking leaders to start by creating an environment with their teams so that the ideas can flourish and trust can be built. 2. Encouraging leaders to become coaches, to drive team performance, and hold them accountable for it. 3. Helping leaders to set audacious goals that are tailored to their teams and to the individual members of them. “We are really going back to fundamentals to say that transformation starts with leaders equipped with the ability to build, trust, to know how to coach, to know how to get feedback, drive performance culture and organization as a starting point — and hold them accountable for the kind of transformation journey that we expect to see,” said Lin. As many as 500 Bayer executives have taken part in a training scheme launched at the beginning of the year. The aim is to further roll out the scheme to all leaders to instil a common language and approach to digital transformation.

‘Precision medicine requires a true understanding and a combination of biology and technology, both in terms of diagnostics as well as treatment. And this is where the digital aspect really becomes critical in every step of the value chain’ back as an organization. This identified several challenges. “We know that as an organization we are too complex,” said Lin. “We know we are too slow in making decisions. We also know we are not empowering decision making at the lowest level. And sometimes accountability is not as clear.” This told the business that there were some “organizational health” questions that needed to be addressed if Bayer was to remain competitive. This was where leadership came in, and a realization that the company needed “transformational leaders”, rather than transactional leaders. “The transformational leader is the one who says, ‘Look, I can give you enough leeway as well as direction, and I'm going to lead this organization in an inspirational and empathetic way. But at the same time, I am demanding. I know how to drive performance. I know how to inspire right, and I am absolutely demanding the best from everyone’. The leaders of the future need to have both of these abilities,” said Lin. ■

In order to prepare its leaders, Bayer also conducted employee engagement surveys and focus groups, looking at what might be holding Bayer

Getting better all the time (from the left): Climate FieldView is helping farmers to make more accurate predictions; in the area of pharma, Bayer is shifting towards diagnostics and prevention; and in the consumer health market, products are being developed to help people take better care of themselves and their families

Scan the QR code to listen to the podcast

Misiek Piskorski is Professor of Digital Strategy, Analytics and Innovation at IMD, where he also serves as the Dean of IMD Southeast Asia and Oceania. He is Academic Co-Director of IMD Strategic Talent Solutions.

December 2022 • I by IMD 61

[ The I reader ]

Winter’s tales to thrill and chill you From how to make the most of your time on earth to an insider’s encounter with Steve Jobs, IMD professors recommend a wide selection of books to while away the dark evenings

Disorder Helen Thompson The war in Ukraine unveiled the inconvenient truth of Europe’s dependence on Russian gas, as well as Russia’s dependence on energy sales revenues. This book vividly illustrates how energy is heavily geopolitical. Thompson, a political economist at the University of Cambridge, describes three forces — of geopolitics, the global economy, and of western democracies — and how disruption in each became one big story in the years of political disorder even prior to the COVID-19 pandemic. It is a difficult book to read, but worth it if you are interested in reflecting on your leadership mission for driving innovation for a better world in which we must cope with the interplay of these three forces. Kazuo Ichijo, Professor of Innovation and Leadership

The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy David Gelles One school of thought on leadership holds that legacy leaders leave behind their most significant contribution, and so evaluating a leader’s impact needs to be done after their term is over. In keeping with this dictum, David Gelles takes a cold, hard look at General Electric chairman and CEO Jack Welch’s legacy and finds the good that he did is overshadowed by the bad practices that he championed. This is a sobering evaluation of a man often celebrated as the greatest corporate leader of recent times. Anand Narasimhan, Shell Professor of Global Leadership and Dean of Research

This is How They Tell Me the World Ends Nicole Perlroth I finished this book in a heartbeat and was totally awestruck. It provides a great initiation on the evolution of the cybercrime market and how things evolve online, hidden from our unsuspecting eyes. The author also makes a very clear case for how intelligence agencies around the world have ignited the organized cybercrime market as we know it today. After reading this book, things suddenly start looking even more grim. So what can we do about it? The answer is security by design – we all need to be more proactive in thinking what can go wrong during the process of our digital development initiatives. Öykü Isik, Professor of Digital Strategy and Cybersecurity 62 I by IMD • December 2022

The Ministry for the Future Kim Stanley Robinson As we are living in highly uncertain times, often unsure whether we, as a human species, have what it takes to address climate change with all its dire consequences, Robinson’s novel presents a hopeful account of the future based on different pathways we must take for social and environmental change. It is not always an easy read, but it is one that leaves the reader with a much clearer understanding of the systemic changes needed to tackle the most pressing challenge of our time. Julia Binder, Professor of Sustainable Innovation and Business Transformation

Disruption in Action: 7 Inside Stories of how Global Companies Take on Digital Transformation Alexandra Jankovich, Tom Voskes, and Adrian Hornsby The book shows what digital transformations really look like through the eyes of insiders, via the power of storytelling. It shines a light into the murky world of digital disruption from high-level decision making to the nitty-gritty of execution, written from the viewpoint of people who were there. In many cases, the names of companies and individuals have been disguised, but that allows the authors to tell the stories “warts and all”, including failures as well as successes. The book is well written and easy to read. There are plenty of illustrations, examples, and call outs to break the monotony of the written word. Michael Wade, Professor of Innovation and Strategy

Discipline Is Destiny: The Power of Self-Control Ryan Holiday One cannot master anything without first mastering oneself. According to recent studies, the average office worker can focus on one task for only three minutes at a time, and teenagers' attention spans are even shorter, clocking in at 65 seconds. When we don't have boundaries or restraints, we not only lower our potential for success and put what we've already accomplished at risk, but we guarantee unhappiness and regret. Through interesting examples of historical figures, Holiday demonstrates the value of self-control and warns readers against succumbing to distractions. Crucially, he teaches us how we can reclaim our focus — as individuals and as a society— if we are determined to fight for it. Howard Yu, Lego Professor of Management and Innovation

To Pixar and Beyond: My Unlikely Journey with Steve Jobs to Make Entertainment History Lawrence Levy Written from the perspective of Lawrence Levy, readers learn how Steve Jobs invested in Pixar very early on and pushed the company to a successful IPO. The narrative is a mixture of biography, drama, and a textbook on entrepreneurship. According to the author, it was not Jobs’s inspiration or creative genius that made Pixar successful, but his aura of being inspirational and creative. Jobs was willing to take significant risks and would not compromise on anything, not even on sharing credit with the people who built Pixar. Stefan Michel, Professor of Strategy and Marketing

Power Failure: The Rise and Fall of an American Icon William D Cohan Jeff Bezos famously said: “Companies come and go. And the companies that are, you know the shiniest and most important of any era, you wait a few decades and they’re gone.” General Electric (GE) certainly was one of the “shiniest and most important” companies of the last century. It featured on all the lists and magazine covers. It was “high performance central”, as well as being a renowned developer of executive and C-suite talent. Business school graduates the world over coveted places on its managerial fast track. So what happened? GE isn’t what it was. Cohan, banker turned acclaimed journalist and award-winning author, offers an explanation. The book is an important contribution to our understanding of the dynamics underlying corporate decline and how the seeds of that decline are sown during the growth period. All companies need to resist the natural gravity of decline especially when they are enjoying success – even the shiniest and most important ones. Seán Meehan, Martin Hilti Professor of Marketing and Change Management and Dean of Faculty

4,000 Weeks Oliver Burkemann In his most recent book, Oliver Burkemann provides a refreshing and counterintuitive message about how to think about our limited time on earth of somewhere around 4,000 weeks (for most of us). Highly recommended to anyone who has grown tired of traditional time management techniques. Albrecht Enders, Professor of Strategy and Innovation December 2022 • I by IMD 63

[ Changing times ]

How to be diplomatic in the age of Twitter The diversification of actors and a widening of issues challenges the traditional model of diplomacy. A convergence of skills is needed from the public and private sectors to facilitate engagement between states, business leaders and civil society groups, writes Mohamed Mahmoud Mohamedou

n recent years, we have witnessed a transformation in diplomacy. Government attachés are no longer first among equals. Instead, there has been a diversification to include more actors – from corporate leaders to civil society groups and members of communities – who now engage on a broader set of issues ranging from the environment to health, sport, equality, and peace building. This decentralization of diplomacy arguably has made the field more democratic by catering to a wider set of views and issues. At the same time, it has raised questions around accountability – particularly if unelected officials seek to shape foreign affairs through unregulated channels. There is a further risk of asymmetry in diplomatic relations with the power going to those who have the biggest megaphones rather than those with the knowledge and skill to conduct nuanced negotiations.

64 I by IMD • December 2022

Take the case of Elon Musk, the world’s richest man, who in October waded into geopolitics by putting forward a peace proposal to end Russia’s war in Ukraine on Twitter – the social media platform he has since bought for $44 billion. The intervention sparked a strong rebuke from Ukraine President Volodymyr Zelensky. Musk later suggested that Taiwan should hand over some control to China. US officials have been quick to distance themselves from the remarks, but there is growing concern about the billionaire’s ability to influence foreign affairs, and ultimately his business investments, by using Twitter’s clout to propagate his views. Musk is by no means the first business executive to get entangled in diplomacy. Indeed, business leaders have previously been invited into diplomatic forums, as was the case when Mark Zuckerberg, the CEO of

Photo: Facebook, Wikipedia

Vanessa Nakate, a climate justice activist from Uganda, is a skillful operator in the new world of diplomacy, while Elon Musk cuts a more divisive figure

Meta, and his Google counterpart Eric Schmidt attended the G8 in France in 2011. Moreover, CEOs are increasingly expected to speak out on issues ranging from climate change to equity, inclusion and diversity, which requires growing engagement with stakeholders such as NGOs, trade unions, and civil rights groups. Yet Musk’s ability to bypass traditional channels of diplomacy and use Twitter as a means to meddle in foreign affairs raises thorny questions about responsibility and whether his actions can be disentangled from his own economic interests. The concerns about accountability are not just limited to corporate actors. We shouldn’t romanticize civil society either. On the one hand, they can speak up on behalf of people’s values such as equality, the environment or health. But they can also amplify narratives of self-interest and do so in a way that is divisive and polarizes the debate.

‘Diplomacy will continue to be both a profession and an art, with the most successful diplomatic actors developing the instinct, intuition and ability to read the room’ Despite these challenges, I believe that there is an opportunity for states, corporations, and civil society groups to develop a symbiotic relationship of engagement where they seek to address the world’s growing problems – from the war in Ukraine to a deterioration in US-China relations, rising populism, inequality and climate change – through a new type of diplomacy. So what kinds of skills and capabilities will be relevant for diplomats of the future and those business and civil society leaders that find themselves operating in spaces traditionally reserved for government attachés? In this new world of diplomacy, players must be able to synthesize many existing diplomatic skills with the leadership attributes present in corporate and civil society. This will require a need to go beyond traditional diplomatic training that historically has put an emphasis on writing memos and communications. Existing diplomatic skills that will remain crucial include an ability to contextualize. History is dynamic and to understand where we currently are, we need to first figure out how we got here and where we come from. In addition diplomacy will continue to be both a profession and an art, with the most successful diplomatic actors developing the instinct, intuition and ability to read the room. They must be comfortable operating with a general sense of uncertainty and master how to build links and bridges

with others, even when they don’t have all the information they need. The language of diplomacy – which has long been a crucial factor in transcending regional codes of communication and allowing intermediaries to build a bridge, develop trust and find common ground – will continue to play an important role. It allows intermediaries to identify meaning and learn how to give and take with a certain amount of flexibility while remaining firm on principle. While the move into more informal diplomatic space – such as social media channels – will increase the informality of exchange, it is important that a certain professionalism remains. You can’t just let loose on Twitter. Just as business leaders will require a more nuanced understanding of geopolitics, diplomats can learn lessons from executives operating in the private sector. For example, diplomats should hone their leadership skills and ability to work across teams in an engaging manner. Moreover, companies tend to move faster which has intensified the pace of communication. By adopting the agility and the transformation ethos found in many companies, future diplomats may be able to throw off the bureaucracy that sometimes plagues government institutions. Finally, the new diplomat will have to be very versatile. Many of the initiatives that are now being discussed by government committees and corporate boards were first raised by civil society groups that mobilized around a certain topic and pushed conversations on diversity, global health and environmental destruction onto the global stage. As they engage with others, the modern diplomat needs to be able to move back and forth between different worlds and use these skills both internally within their entity and group and externally. There are many examples of individuals who are already skillfully operating in this new world. We’ve also seen the emergence of many young leaders who have been able to connect local issues to the global conversation. A fine example is Vanessa Nakate, a climate justice activist from Uganda. She has raised awareness of the impact of climate change and rising temperatures in Africa and spearheaded a campaign to save Congo’s rainforests. In conclusion, the old image of a diplomat as an agent of government is changing. We need to shake off the cliché that decision makers are heads of states or organizations. Diplomacy can now take place at a grassroots level within civil society and around the corporate boardroom. It is less of a job title and more of a mindset that requires creativity, but also a measure of humility and an understanding that we are acting in a wider world beyond simple, unique state interests. The change requires proper and respectful engagement based on knowledge that aims to bring institutions and people together rather than set them apart. ■ Mohamed Mahmoud Mohamedou is Deputy Director of the Graduate Institute, where he also serves as Professor of International History and Politics and Director of Executive Education. He holds a PhD in Political Science from City University New York.

December 2022 • I by IMD 65

[ Psychology ]

How do you get a quality answer? Now, that’s a good question Leaders will get far more useful responses if they learn the art of asking ‘clean’ questions. Heather Cairns-Lee, James Lawley and Paul Tosey explain how to do it Asking good questions is a vital part of being a business leader. But how can you be sure the answers someone gives accurately reflect their real thoughts? The solution we recommend is to use the principles of clean language interviewing (CLI) – an approach to asking questions aimed at eliciting authentic answers about a person’s thoughts and experiences. In business, CLI is a useful tool for improving the quality of information in both formal and less structured situations. CLI involves three principles. First, minimizing the use of the questioner’s own terms and assumptions. Second, using the exact language of the person being questioned to enquire about their thoughts and experiences. And third, asking questions that give the person maximum freedom to express their answers. You may think, “I already do that”. And you might be right, but only to a degree. Even people highly experienced at asking questions rarely appreciate how much of their own views and assumptions can unintentionally “leak” into a question. As leaders have significant authority, this is compounded by the “acquiescence effect”, whereby people respond with what they believe the questioner wants to hear. We are all prone to asking leading questions. Biases in questions arise from three things: the questioner’s own terms, their assumptions, and their value judgments. For example, suppose an employee says to their manager, “We need to take some actions to maintain quality standards”, and in response, the manager asks, “What does your department need to change in order to improve?” This question (1) introduces the manager’s own terms by using the word “change” rather than enquiring about the “actions” the employee is thinking of; (2) assumes that “we” refers to the employee’s department; and (3) implies a value judgment, that the department “needs to improve”, which could lead to a defensive response. What distinguishes CLI from other methods is that it removes potential biases from questions. This increases the chances that the person being questioned will contribute their own take on the matter – which could provide important knowledge and unexpressed subjective views. While 66 I by IMD • December 2022

CLI’s origins lie in psychotherapy, its principles and methods are widely applicable in other contexts – including business, coaching, conflict resolution, and market research. By adopting CLI techniques, people at all levels can gain better access to information they need to do their jobs to the highest standards. Cleaning up your questions

Central to CLI is the use of “clean questions”, which are as free as possible from the questioner’s terms, assumptions and value judgments. Such questions aim at directing the interviewee’s attention without ascribing meaning or suggesting answers. Creating such questions calls for following a few guidelines: First, use the other person’s words. Paraphrasing in follow-up questions – rewording an idea in the belief that it will make it clearer or give it more impact – is actually more likely to distort meaning and reduce understanding. Changing words changes meaning. Staying close to the exact words, including metaphors, used by someone in a conversation – respectfully and without robotic “parroting” – preserves that person’s meaning. Second, remove assumptions that indicate the kind of answer a questioner might be looking for. For example, asking “How should we eliminate this problem?” presupposes that elimination is necessary. That is likely to limit the scope of a respondent’s answer; when asked by someone in authority it may prove especially hard for the respondent to disagree (the “acquiescence effect”). A cleaner question would be, “And what kind of problem is that?” Using CLI does require practice to notice and reduce the assumptions that so often slip into the ways that people ask questions. Third, avoid conveying the questioner’s opinion. This can happen simply through expressing surprise, for example, “What’s that, you’re not going to meet your target!?” Further applications of CLI

The basic level use of CLI described above can be applied to almost any conversation or situation where a high quality of information is required, simply by incorporating clean questions wherever they are helpful or relevant. CLI can be particularly useful in situations of conflict, helping a questioner

HOW TO ASK ‘CLASSICALLY CLEAN’ QUESTIONS TO FIND OUT ABOUT ...

ASK

ATTRIBUTES

And what kind of X is that X? And is there anything else about X?

LOCATIONS

And where/whereabouts is X?

RELATIONSHIPS

And when X, what happens to Y? And is X the same as or different from Y?

SEQUENCES

And then what happens/what happens next? And what happens just before X?

SOURCES

And where does/could X come from?

SELF-REFLECTION

And how do you know?

CLI is easy to apply because it provides a small number of “classically clean” questions – questions that anyone can use to inquire into another person’s experience. In all cases, `X’ stands for the exact word(s) used by the interviewee or person being questioned. Of course, these are not the only clean questions you can ask. However, getting used to asking these questions will sensitize you to your own assumptions. You may also be surprised at the range of answers you receive. Using CLI can also be a useful way of signaling that you’re paying careful attention. Repeating the other’s words back to them accurately shows that you are trying to understand things from their perspective rather than converting what they are saying into your way of thinking. These questions are especially useful in following up on a person’s statements to elicit further information, replacing commonly used “probe” questions. For example, try asking, “And is there anything else about X?” There usually is, and this question signals interest on the part of the questioner to find out more. In print, these questions might appear stark. Delivered with a tone of curiosity, and more slowly than in normal speech, they offer an invitation for the person being questioned to search within themselves for their own answer.

Source: Authors

One feature to note is that all the questions start with “And …” This is important because it suggests that what follows will continue on from what the person being questioned has just said. Questions starting without “And...” can often be interpreted as “yes, but”, implying some form of disagreement, challenge or dismissal of the interviewee’s previous statement. Also worth noting is that clean questions are not the same as open-ended questions. The idea that closed questions are bad and open questions are good has become ingrained. But from the perspective of CLI, open-ended questions are just as likely as any other kind to be “leading” through introducing the questioner’s own terms, assumptions and value-judgments. The example given earlier (“What does your department need to change in order to improve?”) is an open question, yet it includes all three of the biases that make it a leading one.

better understand the perspectives of those involved – particularly important if they are one of the parties involved or want to maintain neutrality. On a broader canvas, CLI principles can be applied in market research or other investigatory projects (from design and planning to the gathering of data, to analysis and reporting) to produce findings about which people can feel more confident. CLI can be particularly useful in situations of conflict, helping a questioner better understand the perspectives of those involved – particularly important if they are one of the parties involved or want to avoid having to justify their position. CLI is also an important tool in managing diversity. Its use in assessments, for example, can help make procedures far less susceptible to unintended forms of bias. It can enable the emergence of different perspectives, including from people with different backgrounds to the questioner. That could be people with different social or educational backgrounds, with different kinds of expertise, or from another culture or country. Key tips for business leaders

With the possibilities they offer for learning and enhanced self-awareness, CLI techniques are highly relevant for business leaders. CLI is particularly useful for avoiding self-deception or confirmation bias through seeking evidence, even if subconsciously, that supports existing or preferred beliefs or theories. Instead, executives can open dialogues in which the person being addressed is enabled to speak on their own terms. When this happens, the person can search for their own ideas rather than reacting to the assumptions of their questioner. In addition, an awareness of CLI makes it possible for people with more power to put themselves in the shoes of those less powerful. People who become fluent in asking clean language questions often gain a greater understanding of the influence that their words have on others. This can help them to avoid bias and communicate with others with genuine curiosity. ■ Further details about this method of asking questions can be found in Clean Language Interviewing: Principles and applications for researchers and practitioners, published by Emerald in July 2022.

Heather Cairns-Lee is Affiliate Professor of Leadership and Communication, specialized in creating cultures of inquiry. She is a member of IMD’s Equity, Inclusion and Diversity Council, and a keen advocate for gender equity. James Lawley is a partner at the Developing Company and an independent researcher specializing in psycholinguistics, phenomenology, psychotherapy methods and qualitative research methods. Paul Tosey is an independent researcher, consultant and coach. Formerly, he was Senior Lecturer in the Business School at the UK’s University of Surrey.

December 2022 • I by IMD 67

[ CEO dialogue ]

How Ipsen chief emerged stronger from a double dose of misfortune David Loew, CEO of the family-owned pharmaceutical company Ipsen, in discussion with Jean-François Manzoni, explains how he dealt with the challenges of a regulatory knockback and the firm’s best-selling drug going off patent

hen former Sanofi Pasteur Vaccines head David Loew became CEO of mid-sized biopharma firm Ipsen in 2020, he felt like he was standing on not one, but two burning platforms. The year before, Ipsen acquired a business developing palovarotene, a medicine for a rare genetic disorder that triggers abnormal bone growth. Postacquisition, palovarotene faced an unexpected regulatory setback, leading Ipsen to withdraw its US application for the drug – a bitter outcome in pharma where medicines are developed at great cost and risk. The challenge for Loew didn’t end there. The global French-based firm was also staring into the abyss of a “patent cliff”, with its blockbuster cancer drug Somatuline facing the drop in sales that comes with post-patent generic competition. “People knew that the biggest product … which was like half of the profit, was going to face a patent cliff,” says Loew of Somatuline. “So there were these two burning platforms that we really had to fix.” Faced with this baptism of fire and under pressure to reposition Ipsen for the future, the Swiss executive devised a four-pillar strategy that included the replenishment of the firm’s drug pipeline through a clear and highly specific focus on where to play in the market, alongside a purpose-based commitment to work collaboratively with all stakeholders through a patient-centric and community-minded approach. “Focus. Together. For patients and society” became the new mantra for the 5,000 or so employees. The early signs of this strategy have been encouraging. Canadian health authorities approved palovarotene earlier this year and Ipsen has resubmitted its US new drug application following a request for further analysis of trial data. Loew also orchestrated acquisitions and growth in new products to more than make up for Somalutine’s erosion in sales, with forecasts of at least 7% growth in sales this year. And, last year, Beaufour family-owned Ipsen announced plans to divest its consumer healthcare division — one of Loew’s biggest strategic decisions as he pivots the firm to become more focused on specific areas of medicine within oncology, rare disease and neuroscience. Reflecting on his approach to leadership and transformation, Loew explained his strong belief in “single accountability”: when delegating projects to his top team, he holds one individual accountable for each project’s progress. “It creates a bit [of an] adrenaline rush in that leader to know that, while you are contributing as a member of a company, and with other members also having a big stake in a certain project, you are the one who is going to get the call,” Loew said. He also explained his belief in surrounding himself with people who have different skills and traits that augment his own. This means – first

68 I by IMD • December 2022

“This was a life-changing experience for me, where you really realize what you're doing has such a big impact on people,” Loew said. This highly personal purpose now informs Ipsen’s mission and transformation. Driving organizational change has also meant making changes to personnel: reshuffling about half of the top leadership team by bringing in executives with fresh perspectives from the outside, while retaining insiders with organizational knowledge – all aligned through a shared purpose and direction of travel. “You want to create the mayonnaise between all these people,” he explained. “It is really important to spend time on developing a very strong executive leadership team which knows where we want to go and has a strong cohesion and shared values, a shared culture. It takes time, but it’s really worth it.” Loew has had plenty of opportunity to refine his recipe for the perfect mayonnaise, with a career path of clear leadership progression in pharma spanning 30 years, starting at the Swiss drugmaker Roche in 1992. Becoming group CEO at Ipsen marks a career high that he has aspired to since his teenage years.

‘You need to get to know yourself very well. Where are you good? Where are you not so good? Look in the mirror and think, OK, I need to work on myself’ and foremost – some honest self-reflection. “You need to get to know yourself very well. Where are you good? Where are you not so good? Look into the mirror and think, OK, I need to work on myself.”

Photo: @Ipsen 2020 – Pierre Olivier, CAPA Pictures

It also involves being willing to ask for feedback, even from subordinates. “If you don't ask, everybody knows what your weakness is — except you.” But embracing difference and addressing areas of weakness does not mean capitulating in the face of opposition, especially when driving an organizational transformation. “It's probably a question of character that you need to be comfortable, not wanting to be loved by everybody for your decisions. You need to be very strongly grounded in your values and in your vision.” Loew’s values and vision were forged from the fire of personal experience and deeply linked to a sense of purpose in his career: finding solutions that keep people healthy or enable them to regain their health. He recalled how several years ago two close family members were treated for cancer with a drug that he was responsible for.

This personal ambition and the potential positive impact of his work in pharma have been powerful motivators. “You don't become CEO by checking in at nine and going home at four; that doesn't work,” he says. “You will do quite a substantial amount of work, but for me it doesn't feel like work. I really have so much pleasure [from it].” Nonetheless, the role of CEO, especially leading complex and often painful transformations, comes with a unique level of pressure that must be actively managed. Loew unwinds by getting out on the open water to sail or wakeboard. “As corny as it sounds, it helps you lower the adrenaline that you build up during the week … Adrenaline, in a way, makes you stupid because it triggers a ‘flight reflex’. So, you want to get rid of this flight reflex … You want to pause and sometimes calm down.” And time with friends and family – to remind yourself of who you are and where you come from – is crucial. “You have some CEOs who can become a bit narcissistic and that's always a danger. Being connected with your friends and your family is so important to keep you grounded and humble and down to earth.” ■

Scan the QR code to watch the full discussion Jean-François Manzoni is the President of IMD, where he also serves as Nestlé Professor. His research, teaching, and consulting activities are focused on leadership, the development of high-performance organizations and corporate governance.

December 2022 • I by IMD 69

[ Sustainability ]

While the world trades punches, New Zealand shows the road ahead

70 I by IMD • December 2022

In pursuit of its mission to advance sustainable trade, the Hinrich Foundation in partnership with IMD's World Competitiveness Center released the Sustainable Trade Index in November. Against a backdrop of gloom, the revamped index underscores the importance of integrating sustainably conducted trade with global economic growth, writes Chuin Wei Yap

n many ways, 2022 was a pivotal year for global trade, and not in a good way. Nowhere was this more evident than the effects from Russia’s invasion of Ukraine in February. Beyond the human cost and devastation on the ground, the conflict brought surging into public consciousness how easily and quickly trading ties between nations, once the measure and symbol of their comity, can be undone and weaponized. Its impact gummed up some of the world’s most basic supply chains, from energy to food. As shortages loomed, governments elsewhere raced to ban exports of their own food and food-related products in turn. The conflict came just as inflation was increasing worldwide, growth was slowing, and new tariffs were rising among the world’s biggest economies.

Photo: Casey Horner via Unsplash

Beyond the war’s immediate impact on commodity markets, trade has become an instrument for nations to probe each other’s strategic weaknesses. President Putin’s move to turn off Europe’s natural gas was the opening gambit in such warfare. Sanctions, both primary and secondary, extended the West’s arsenal. They reflect another dangerous new trend in global trade, with all major powers weighing the expansion of such trade weapons. In 1995, when globalization was still in its heyday, the Canadian economist Daniel Trefler wrote in a celebrated paper, The Case of the Missing Trade, about how international trade very often does not conform to the economic theorem that countries will export products from resources that they own in relative abundance. Economists found the theorem works for only about half the time. Trefler identified a consumer bias toward domestically produced goods as a key reason for this discrepancy, or what he called “the missing trade” – a proxy for the trust between trading partners. Trade and trust are expressions of each other. Increasingly, that bond is under attack. These events are unfolding as the international will to enforce order in the multilateral trading system is in full retreat. Faith in such institutions is fading. Blocked by a US embargo on its highest court, the World Trade Organization remains unable to adjudicate the world’s biggest trade disputes. Until the world trading order again finds a way back to mutu-

ally agreed rules, the golden age of globalization spanning the past 30 years can be regarded as having been an aberration, not the norm, of the global economy. Reinventing our flagship

It is against this backdrop that the Hinrich Foundation launched its fourth iteration of the Sustainable Trade Index, supported this year by the IMD World Competitiveness Center’s (WCC’s) world-class research. Bleak as the landscape looks, there may be no better time to reboot the index. The STI’s most obvious feature is a ranking of economies – expanded this year to 30 and covering major economies across Asia and the Americas, including current and likely members in the Asia-Pacific Economic Cooperation grouping. They are measured by 70 indicators across economic, social, and environmental factors. New Zealand topped this year’s rankings, scoring well in most indicators across all three factors. Aside from maintaining openness to trade in its macroeconomic and monetary policies, the island nation posted top marks for political stability, labor standards, and gender diversity in hiring outcomes. And New Zealand has – comparatively speaking – the least polluted air. It also implements the most international agreements for conserving the environment. The index reveals the increasingly fragile global macroeconomic environment. Barriers to trade are rising, especially among major economies. The US and UK’s economic rankings were dragged down by their relatively high-tariff and non-tariff barriers to trade. As a cold winter looms, especially in Europe, the rankings also illustrate the importance of environmental policies for making trade more sustainable. The UK, Japan, and Mexico earned high marks in the rankings for their management of energy intensity, which measures the amount of energy consumed for each dollar of gross domestic product.

‘Until the world trading order again finds a way back to mutually agreed rules, the golden age of globalization spanning the past 30 years can be regarded as having been an aberration, not the norm, of the global economy’ In addition, our research highlights a worrying trend among developed economies via a new indicator that measures how much an economy’s merchandise imports may be tainted by labor practices akin to modern slavery. While New Zealand has been more successful than others in avoiding the problem, Japan ranked 27th, China 21st, and the US 18th. Rankings are inherently controversial. For many, placement on a table is all about their own rank and very little about the substance or the methodology. » December 2022 • I by IMD 71

[ Sustainability ]

SUSTAINABILITY INDEX: THE OVERALL RANKING Rank

Economy

Score

Rank

Economy

Score

New Zealand

100,00

Mexico

45,22

United Kingdom

94,38

Cambodia

45,04

Hong Kong, SAR

87,87

Indonesia

41,21

Japan

83,09

Ecuador

40,98

Singapore

82,70

Vietnam

40,54

Australia

78,23

Peru

36,71

Canada

76,48

Sri Lanka

36,55

South Korea

75,35

Laos

31,32

United States

71,57

Bangladesh

27,41

Taiwan

65,53

Brunei

21,81

Chile

62,87

India

11,67

Philippines

49,52

Papua New Guinea

11,33

China

49,42

Myanmar

3,20

Malaysia

47,97

Pakistan

2,36

Thailand

46,55

Russia

0,00

MODERN SLAVERY Societal pillar

35,00 Russia

Pakistan

30,00 Brunei 25,00

Peru

Vietnam

Overall STI

20,00

Cambodia Thailand

15,00

China

10,00 United States South Korea 5,00 Hong Kong, SAR

Singapore

United Kingdom 0,00 0,00 5,00

Myanmar

Papua New Guinea

India

Bangladesh Ecuador

Laos Sri Lanka

Indonesia Mexico

Chile

Malaysia

Taiwan

Philippines

Canada Australia Japan New Zeland 10,00

15,00

20,00

25,00

30,00

35,00

Economic pillar The key to the graph: The economic pillar quantifies how well economies are fostering economic growth through international trade (for example, the quality of trade infrastructure, the ease of conducting international trade, export diversification in bilateral trade partnerships, and export goods concentration).

72 I by IMD • December 2022

The societal pillar captures the social factors that contribute to long-term capacity of economies to conduct trade (for example, education levels and labor standards, which feed the development of human capital).

But details matter. Rankings are meant to be the start of a conversation, not the end. The indicators measured in each ranking reflect a body of policy research that went into the STI’s composition. The evaluations in each indicator help us to understand more about the diversity of trade policies and practices. They reveal how economies can sustain growth and equitable prosperity by managing their trade and trade-related regulations well. What the rankings say

This year’s index identified commonalities among high-performing economies: they tend to provide policies that encourage technological innovation and low trade barriers. Their residents have relatively high life expectancy, go to school for longer periods, and enjoy more opportunities to move up in life – whether measured by income, job opportunities, housing, or other factors of mobility. They value and conserve energy at home and respect climate goals globally. The 70 indicators represent insights into how economies function. They help us to understand, for instance, how a nation’s capital account peculiarities might put its financial system at risk, or which economies are signatories to key global environmental accords – and which are not. They help us to learn about economies that rely more on forced labor than their peers, where gender discrimination is more of an issue, or where carbon pricing is taking off. We will constantly refine the indicators with each iteration of the Index, which from this year will be published annually. In 2022, we added consumer price inflation and healthcare as additional indicators in the calculation of the sustainability of an economy’s trade.

Infographics: Theresa Schwietzer, Source: Hinrich Foundation

‘Our research highlights a worrying trend among developed economies via a new indicator that measures how much an economy’s merchandise imports may be tainted by labor practices akin to modern slavery’ The inclusion of each indicator is a collection of deliberate decisions. When we wanted to measure the effectiveness of an economy’s healthcare system as a factor of sustainable global trade, we debated which indicator to use. We eschewed total healthcare spending due to the failure of such spending sometimes to translate into a strong public health system. Neither did public healthcare spending make the cut, as we felt there were too many variations of what that term meant to make for equitable international comparisons. We ultimately picked life expectancy as an overall measure – a literal summation of life-and-death choices – of an economy’s healthcare system. During the process of refining our assessment of the global social sustainability of traded goods, we sought an indicator that could quan-

tify how much economies were exposed to trade in goods made by modern slavery. We hadn’t expected the findings to be a sobering indication of how the appetite of developed economies is driving forced labor. We hope such findings rally our wider policy, business, and academic communities to discuss solutions. The lesson: know your supply chains. Global trade in crisis

We publish the STI’s methodology and research free of charge. The indicators ultimately amount to a set of principles about the way we should live, distilled by the United Nations in 2015 as Sustainable Development Goals, a benchmark for global growth, climate change, and the reduction of inequality. During the pandemic, we saw countries that had allowed overdependence in their supply chains become vulnerable to great economic losses. We saw the social and economic toll of this vary depending on how governments mobilized coherent and intelligent policies. This year, as the pandemic ebbs, we are living with a new danger. Global trade is in crisis. Nations are turning inward, emphasizing self-sufficiency and “friend-shoring” in place of strengthening trust and commercialties. Political leverage has supplanted comparative advantage. Mediation is increasingly ineffective or absent. These global developments are a reminder of why sustainable trade is more critical than ever before. At the Hinrich Foundation, our mission is to advance trade that balances economic outcomes with the need to strengthen social capital and environmental stewardship. We believe that trade isn’t just a sum of economic efficiencies, but reflects and strengthens our shared values, the transparency of our rules, and equal opportunity. IMD’s WCC is dedicated to the advancement of knowledge on world competitiveness by offering benchmarking services for countries and companies alike. They see competitiveness, prosperity and sustainability as almost interchangeable concepts. The index is a showcase of the ever-evolving interplay of factors that influence global trade. We expect it will identify trends crucial to informing the needs of global trade policy makers, businesses, and researchers. The world benefits from trade and needs to constantly figure out how to do it better. We and our colleagues at IMD believe our Sustainable Trade Index shows a way forward. ■

Chuin Wei Yap is the program director for Hinrich Foundation’s international trade research, leading the Foundation’s development of original research content including analysis and insights across global trade. He specialized in trade and economic issues as a journalist in the US and Asia, notably including more than a decade in mainland China and Hong Kong with The Wall Street Journal.

December 2022 • I by IMD 73

[ Crisis planning ]

Conflict is not inevitable, but ask yourself: what if?

tives who wonder why stakeholders believe that their stance matters on, say, LGBTQ rights or abortion – after all, they usually didn’t end up in the top job because of their political philosophy or eloquence when discussing political matters.

Yet, as we know, that’s exactly what happened. Why did companies react so quickly, effectively abandoning a market that they had spent many years developing? And what does it mean for the future, both with respect to the role of business in society and the role of communications professionals positioned at the interface?

There are two reasons why we have seen this growing demand for CEOs to speak out. On the one hand, politics in many countries has become increasingly polarized. This means that less gets done and stakeholders consequently look to other actors in society – especially business – to address pressing problems. However, intense polarization also means that there is increasingly no middle ground, forcing key societal actors – including business – to choose a side.

In my view, we have witnessed the confluence of two distinct trends: the rise of stakeholder capitalism on the one hand and on the other a new era of global ideological struggle that is reshaping geopolitics.

Second, the growing importance of values. Key stakeholders, especially younger customers and employees, want to know exactly where a company stands and, crucially, where the CEO stands.

Stakeholder capitalism

Businesses have partially brought this upon themselves. Over recent decades, marketing moved from being product or feature based to being lifestyle based. And then, more recently, it shifted from lifestyle based to values based. The same has happened with recruitment: gone are the days when top talent could be enticed with the promise of a nice cubicle, a good salary, and job security. Increasingly, employers speak about the community a prospective employee would join, and about the values that define it. That is why CEOs have become more visible, not just to communicate quarterly results but to convey the values that define the

f I told you a year ago that within three months, Russia was going to invade Ukraine, that massive land war would return to Europe for the first time since the Second World War, and that a very large number of Western multinationals would leave the Russian market virtually overnight, I suspect few would have believed it. Neither would I.

In a world of global challenges, from climate change to gender equity to pandemics, in a world in which companies’ moves are scrutinized by an army of NGOs and activists, one in which anybody with a smartphone can reach hundreds of thousands or even millions, companies must carefully balance the expectations of a growing number of demanding stakeholders. What is relatively new, however, is the expectation that businesses – and often CEOs personally – take political positions, often on controversial issues. I frequently speak with execu74 I by IMD • December 2022

Photo: Kevin Frayer/Getty Images

Xi Jinping has shown that he puts security above economic interests, and much the same can be said of Biden

Stakeholder capitalism has forced CEOs into taking political positions, even on controversial topics. Tensions over Taiwan make it critical for companies to plan ahead for the next values-driven conflict, warns David Bach

brand and organization. It's therefore entirely logical that, when there are key moments in our politics that touch on central values, CEOs and the companies they lead are asked to take a stance. In the US, for example, that was clearly the case with the murder of George Floyd, the violent attack on the Capitol on 6 January, and the Supreme Court overturning the constitutional right to abortion. Similarly, the murder of Jamal Khashoggi led many Western CEOs to shun high-profile events in Saudi Arabia, at least for a time.

What’s next?

Was it inevitable that Russia’s invasion of Ukraine would be such a moment? I think not. After all, Russia’s 2014 annexation of Crimea did not prompt a massive business response, nor did its earlier war against Georgia in 2008. Similarly, Saudi Arabia’s de-facto war in Yemen has not triggered such a response.

Indeed, there is a book by a British author that makes exactly this point. Nations, the author argued, had become so economically interdependent that the costs of making war between them far outweighed any potential gains. The book, The Great Illusion, was written by Norman Angell. It was published in 1911. With his economy-crushing zero COVID-19 policy, President Xi Jinping has already shown that he puts security above economic interests. And Biden’s recent far-reaching ban of any sale of advanced semiconductors to China signals much the same.

What was different is that Russia’s war against Ukraine has been cast explicitly in ideological terms. Once key stakeholders accepted that framing, it left many Western firms no choice but to take drastic action consistent with their professed values. Ideology and geopolitics

At least in the West, Russia’s invasion has been clearly framed in ideological terms – democracy against autocracy, freedom against fear. The two people most responsible for casting the war in this way are Presidents Joe Biden and Volodymyr Zelensky. For Biden, the democracy-autocracy framing links his foreign policy to his domestic agenda, which seeks to mobilize democratic forces, including some within the Republican party, against the authoritarian MAGA faction led by Donald Trump. President Biden, defender of democracy, at home and abroad. Similarly, in the days following the invasion, Zelensky told Europe in dramatic appeals that Ukraine was being attacked simply for espousing European values, for wanting to be a free, democratic country within a peaceful European order. It worked. Many months after the invasion, with runaway inflation and fears of winter gas shortages, support for Ukraine remains strong. The nature of ideological conflict is such that there is no middle ground. Even Europe’s rightwing populists who had long had a love affair with Vladimir Putin have had to reassess. In 2020, 67% of Silvio Berlusconi’s Forza Italia voters had a favorable opinion of Russia; after the invasion of Ukraine, it was down to 18%. It is then only logical that leading Western businesses would not be able to remain on the sidelines, although some tried. Nestlé, for instance, argued that as a food company, and especially as the leading supplier of infant formula, it should remain in both Russia and Ukraine. That certainly seems like a defensible position. But grumbling among employees, customers, and other key stakeholders became hyper-charged when Zelensky connected live to a rally in Bern and accused the company of funding Russia’s war machine, triggering major changes in Nestlé’s policy within 48 hours.

It is already clear that the next frontline in the global struggle between democracy and autocracy cuts right through the Taiwan Strait. The growing likelihood of conflict over Taiwan involving the world’s two largest economies should send shivers down everybody’s spine. Surely, you might think, the economic interdependence between the US and China, as well as between Europe and both major economies, is such that conflict of the kind seen in Ukraine is highly unlikely.

While some commentators are already speaking of a second Cold War, it is important to remember three major differences from the 20th century version. First, when Presidents Ronald Reagan and Mikhail Gorbachev were in charge, total US-Soviet trade was about $5 billion. Total trade between the US and China today is over 100 times that. Second, during the “original” Cold War, the world was split into two blocs and most countries were clearly on one side or the other – hardly any had deep economic ties with both. Today, just about every developed economy is deeply connected with both China and the US. Finally, stakeholder capitalism has not gone away even if great power conflict is returning. What is to be done?

I know several CEOs who are annoyed that stakeholders are demanding to be told whether their offices have gender-neutral bathrooms. Yet that’s a considerably easier question to answer than one about what the company will do if the Chinese navy threatens to seal off Taiwanese ports. Great power conflict is not inevitable. But now is the time to prepare the business and to ask the question – what if? And that means first and foremost being clear about the company’s values and working to ensure that all key stakeholders – both internal and external – know what these values are and trust that the company will act in accordance with them when things get tough. This is a critical – perhaps the most critical – task for communications professionals over the next 12 to 24 months. If we are indeed entering a period of values-driven global conflict, making it up as you go along is probably not a good idea. ■

David Bach is Dean of Innovation and Programs at IMD. An expert in strategy and political economy, he holds the Rio Tinto Chair in Stakeholder Engagement at IMD. Through his award-winning teaching and writing, Bach helps managers and senior executives develop a strategic lens for the nexus of business and politics.

December 2022 • I by IMD 75

[ The forecaster ]

In 2023, take a tip from tech: diversify to survive

eing “future-ready” is always a work in progress. There is a need to constantly improve or risk sliding backwards. And it’s hard not to worry when confronted with inflation, an energy crisis, US and China decoupling, and a war in Europe. Future-ready companies are the ones capable of delivering today while building for tomorrow. The economic challenges are very real, and the uncertainty of the macro-environment is scary. But curtailing all corporate development is what smart companies carefully avoid. Easy money is no longer around, and so companies need to prioritize where to invest. Spending must be disciplined, but this doesn’t mean blindly scaling back every innovation. As Andy Grove, former CEO of the US technology giant Intel, said: “Bad companies are destroyed by crises; good companies survive; great companies are improved by them.” So, who is the most future-ready and likely to thrive in the coming year? In this year’s final round-up of IMD’s Future Readiness Indicator, we cover fashion and consumer brands, technology, and, for the first time, global pharmaceuticals. In this article, we will focus on technology and pharma. Additional information about all three sectors can be found on our website at The Center for Future Readiness (www.imd.org/future-readiness-indicator/home/). Each industry is deploying a slightly different playbook to win. But the overarching theme is inescapable: corporate behaviors among the most future-ready companies are universal. Two major themes jump out: one, diversify in product, market or service offering, and two, put purpose at the center to drive business development. Technology

Tech stocks have been plunging amid hiring freezes and, in some cases, massive layoffs. Even Amazon and Meta are not immune. The entire crypto market is in meltdown.

The uncertain economic landscape makes predicting winners and losers over the coming year more unpredictable than ever. But Howard Yu and his team focus on hard data to predict what it will take for an organization to weather the storm

76 I by IMD • December 2022

Yet, some are standing stronger than others. The Future Readiness Indicator can be thought of as a balanced score card. It measures a company’s strategic preparedness. We evaluate the health of a company’s ongoing business because investing in the future requires a healthy cash flow. Executive teams also need to see beyond their day-to-day operations. That means diversity of thought is required on the management board. We take note of gender and nationality as well as the industry backgrounds of a company’s top leadership. We measure a company’s growth prospects, look at investors’ expectations, and examine the intensity of a company’s investment in startups or new ventures. Finally, we measure the trajectory of new product rollouts. Our rankings are based on hard data, which includes financial reporting, investors’ calls, LinkedIn profiles of the management

Illustration: Jörn Kaspuhl

“Peloton equals Pets.com,” the former US Secretary of the Treasury Larry Summers said recently, likening the tech sector’s current woes to those of the dotcom bust of the early 2000s.

Source: IMD Future Readiness Center

team, CrunchBase, Factiva, and other publicly available reporting. The tech giants standing neck and neck at the top are Alphabet and Microsoft. Alphabet’s cash machine — that is, the Google search engine — is now, de facto, the barometer of the entire advertising industry. Its dominance has increased further with the weakening of Facebook. There are many causes of Facebook’s recent slippage, chief among them the shift in Apple’s iOS privacy policy. Unlike Google, Facebook never established a direct relationship with users at the phone’s operating level. Instagram, Facebook, and WhatsApp all sit on top of Apple’s iOS or Google’s Android. As a result, Mark Zuckerberg depends on others to gather data to build user profiles, which his

company then sells to advertisers to run ads. That’s how many brands are able to target you online. But Apple changed its policy last year. Public outcry about data privacy led Tim Cook, Apple CEO, to change the iPhone settings. Overnight, Facebook could no longer follow you over to other sites outside its own app. With reduced access to data, Facebook can’t target its audience as effectively as it once did. Snapchat, Instagram, TikTok and the like have also been hit in the same way. Google escapes because it operates Android, and many of us use Google Maps, Gmail, and YouTube. Your default search engine is also likely to be Google. That’s how Alphabet is consolidating the advertising industry while others are splintering. It » December 2022 • I by IMD 77

[ The forecaster ]

Microsoft follows closely behind. Its strength also lies in the diversity of its business: Word, Excel, Teams and SharePoint, Azure cloud computing, HoloLens in augmented reality, and Xbox. This is a tech giant that looks mostly benevolent and operates everywhere. It hasn’t suffered like Facebook from damaging data leaks. Nor does it have small businesses complaining about anticompetitive behaviors as Amazon does. Microsoft simply works like a good old utility company, running an information highway for all. Microsoft may not have the glamor of Apple, but almost everyone is a Microsoft customer one way or another. While other big tech companies, including Google and Meta, are effective78 I by IMD • December 2022

ly barred from China, Microsoft has more than 9,000 full-time employees there. As many as 80% of them are research and development specialists and engineering technicians. In a way, Microsoft singlehandedly defies the whole decoupling narrative put forward by Washington and Beijing. So, what lessons can be learned from tech? Never pursue easy growth; pursue instead quality growth and diversify your products and markets. No one can afford to put all their eggs in one basket as we head into a new year. Pharmaceuticals

As every CEO knows, likeability is a company’s license to innovate. Doing well on the issue of ESG — environment, social and governance

Source: IMD Future Readiness Center

is the only company that has enough essential product offerings to counterbalance Apple’s move.

— is no longer “goodwill washing”. It’s not about telling a good story. Unless purpose is placed at the center of a firm’s strategy, it will be unable to sustain new growth for long. And no sector illustrates this better than the global pharmaceutical industry. There is a crisis among pharmaceutical companies — and it’s not an economic one, as we are seeing in tech, but a social and reputational one. Governments, regulators, patient groups, and insurers are all asking the same question: why is healthcare getting so expensive? Drug costs are rising, even as the cost of cars, computers, and washing machines tend never to rise above inflation and, in many cases, drop dramatically over decades. Some products, such as insulin for diabetics, are becoming more expensive after years of commercialization. Insulin is not a diamond with limited natural supply; it’s made in a factory. Pharmaceutical companies don’t compete like automakers or fashion houses. Indeed, the pharmaceuticals market is the opposite of perfect competition, economists would claim. And it’s this unique market dynamic that leads to spiraling costs. Prescription drugs are highly regulated. A new drug cannot launch without FDA approval. Prices are determined not by market forces but negotiated with the government and then, in most situations, accepted by insurers. Patients have little choice but to follow a doctor’s prescription. Neither are discounts on offer or “Black Friday” sales. Prescription drugs operate as close to a planned economy as one can find in Western democracy. The situation is accepted only because of an implicit social contract.

‘Bad companies are destroyed by crises; good companies survive; great companies are improved by them.’ Andy Grove

better still for executive bonuses, these methods take away from the focus on science and health. That’s why we look at the R&D intensity of a drugmaker and compare that to its marketing and administrative overheads. Does it spend more money on advertisement, sales, and lawyers rather than running laboratories? It’s also important to look at the drug pipeline. How many drug candidates are scheduled for clinical trials, and what stages are they at? Also vital is the number of therapeutic areas in which a company chooses to engage. So what makes a drug manufacturer future-ready? Staying true to a firm’s purpose is key. Such a pharmaceutical company makes enough money so that it can continue to discover new drugs for society, not the other way around. And when that fundamental purpose radiates throughout the organization, everyday choices become obvious — choices around where a company should invest its resources, for example, or what type of executives should lead the company. Do we want top management dictated to by a group of financial wizards or those with deep scientific backgrounds who will influence strategic decisions? Will the company dabble in practices that are technically legal but morally questionable? Without a clear “true north”, the entire social contract underlying this trillion-dollar industry can come undone. These findings imply that ESG-related metrics are future-oriented. They gauge how much a company’s purpose sits at the core of growth. What kind of growth does a company choose to pursue during good times? What kind of spending would it slash in bad times? Day-to-day choices determine whether a company can ultimately win tomorrow while delivering today. In other words, these choices determine if it’s future-ready. ■ Jialu Shan, Lawrence Tempel, Zuriati Balian, and Matthieu Le Cauchois contributed to this article.

Nine out of 10 drugs fail in clinical trials. Most pharmaceutical companies’ endeavors are moonshots. That’s why our society has come to accept a period of exclusivity guaranteed by patent laws. These patents act as the reward for expensive but worthy research into the discovery of novel drug therapies. Patents are then followed by cheaper commodities through generic alternatives. Doctors around the world can then prescribe the same active ingredients to patients without patented products inflating costs. The privilege that drug companies enjoy is not a license to print money; it exists to help them navigate the long odds of drug development. Yet, like any social contract, trust can be abused. Very short-term drugmakers — many of which don’t make it onto our ranking — have mastered the dark art of exploiting loopholes. A drug can come to the market with minimal clinical benefits. A company can double down on its lobbying and marketing activities, or it can deploy tricks and tactics to artificially extend patent lengths. While great for the corporate bottom line, and

Howard Yu is LEGO® Chair of Management and Innovation at IMD, and the author of LEAP: How to Thrive in a World Where Everything Can Be Copied (PublicAffairs, June 2018). He is also the research director of IMD’s Center for Future Readiness.

December 2022 • I by IMD 79

[ PREVIEW ]

Crises and chaos: a survival guide

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Coming in March For leaders, knowing how and when to make the right decisions isn’t easy at the best of times. It’s even harder in the worst of times. It’s not a stretch to suggest that amid current geopolitical strains, a war on Europe’s eastern flank, inflationary pressures and economic recession in some parts of the world, leaders find themselves in such times. This is making decision making and navigating crisis supremely difficult. Yet the way markers do exist to help chart a path through the fog. In the March issue of I by IMD, we unpack how leaders can become better decision makers in times of turmoil. In the meantime, join us online daily at ibyimd.org, where you will find articles, videos, podcasts and learning exercises that will spark conversation and help you and your teams excel.

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International Institute for Management Development Ch. de Bellerive 23, P.O. Box 915, CH-1001 Lausanne | Switzerland

80 I by IMD • December 2022

Cynthia Hansen Managing Director of the Innovation Foundation, empowered by the Adecco Group Prince Michael of Liechtenstein Founder and Chairman of Geopolitical Intelligence Services AG, Chairman of the European Centre of Austrian Economics Foundation in Vaduz, Member of STEP Ann-Marie Sevcsik Catalyst of social change through innovative partnerships Michael Skapinker Financial Times contributing editor Ian Charles Stewart Executive in Residence, IMD; Main Board Director Trustee International Institute for Sustainable Development; Co-Founder of WiReD Magazine Su-Mei Thompson CEO at Media Trust

EDITORIAL

Delia Fischer Jeremy Grant Anand Narasimhan Ken Toner ART DIRECTOR

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EDITORIAL ADVISORY BOARD David Bach (Chair) IMD Professor of Strategy and Political Economy; Dean of Innovation and Programs Christine Batruch Sustainability Advisor, Lundin Group, President, Bohdan Hawrylyshyn Family Foundation Vincent Bieri Co-Founder Nexthink; Member of the Board of Advisors Trust Valley Jean-Philippe Bonardi Professor of Strategic Management and Dean at HEC Lausanne, University of Lausanne Stuart Crainer Thinkers50 Founder and author Michel Demaré Chairman of IMD; Supervisory Board Member at both Vodafone Group PLC and AstraZeneca PLC; Deputy Chairman of Louis Dreyfus Company Holdings B.V.

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