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Global Recession: Potential Impacts on Family Businesses

If global capital markets continue to fall and recession brings deflation and lower standards of living accompanied by social suffering, family businesses likely will be impacted in a variety of ways.

Stock market declines, for example, have already stopped many family company decisions to go public or to sell. That=s probably unfortunate. Those who wish or need to exit as family businesses probably should be encouraged to do so. Reluctant hangers-on face business inefficiencies and mounting family frustrations that tear at productivity and family cohesiveness.

Recessions cause businesses to tighten their belts. Spending is cut ... so investments in family business education, consulting, family meetings, board of directors development and the like may suffer. On the other hand, perhaps these are exactly the times when investment in personal and family growth is most important.

If recessionary pressures cut into family business profits, family business leaders will face difficult choices. To preserve profitability, they will be tempted to cut funding for long-term strategic initiatives, community or employee programs or other spending. Communicating financial performance to non-employee shareholders may become especially challenging---particularly if you've enjoyed a long run of prosperity. We urge you to prepare family owners by making sure they understand the circumstances facing the business and any programs designed to foster strategic growth or family values. Encourage shareholders to be aware of costs associated with such initiatives and the progress achieved toward expected outcomes. Invite shareholder questions, discussion and input. Managing shareholder expectations is perhaps one of the most important tasks of family business leaders, especially in tough economic climates.

Political and cultural ramifications are perhaps the most profound responses to harsh economic times. Already there are popular calls for fiscal stimulation of the economy, more protectionism, and tougher federal regulation. Undisclosed currency exposures, investment risks, and leverage levels have prompted calls for more transparency.

Increased government intervention is a cause of concern. Artificially re-inflating the economy will burden future generations with more national debt and higher taxes. Government bail outs reduce responsible behavior as people come to expect protection from their own naivete, greed or careless due diligence. If public psychology moves away from confidence in the marketplace, the special advantages of responsible, conscientious family firms will wane. And, future society will surely pay a dear price.

One likely government policy, besides restraint, does make sense: more disclosure, more transparency. Increased public information of private enterprise practices, coupled with a vigilant private press, would promote more moderation, more due diligence, more acceptance of personal responsibility for investment decisions, and more honest business behavior. Higher levels of information and honesty only improve the working of free markets.

Many family businesses may recoil at this proposal. It is a mixed bag for family firms.

A final possible consequence of tough economic times is increased dissatisfaction with capitalism. If the glory of capitalism is attacked, not far behind will be increased contempt for personal wealth, especially inherited wealth. Taxing the "rich" may become judged as "necessary" to make up for fiscal bailouts and the costs of unemployment. Hope for reducing death and gift taxes will further decline.

If private enterprise B especially private firms B becomes misperceived as the culprit behind bad times, a lesson from family firm experience in long unstable political and economic countries may become more relevant. In such societies, family firms may be protected against arbitrary populist and government attack to the extent they are seen as actively supporting a better society.

 

 

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