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WELCOME By David Pring Welcome to 2016! The New Year brings with it renewed energy and enthusiasm for our businesses and often thinking turns to doing things differently. Innovation was the buzz word for 2015 and we’ve seen some great examples in the market of all types of businesses using innovation to get an advantage in the market. Our first article focuses on Innovation and the keys to success. The reputation of your BF FAMILY BUSINESS WESTERN SYDNEY business is your most valuable asset however it can be overlooked given that it is intangible. Our article on safeguarding the reputation of your business provides some useful pointers. Last, we look at High Net Worth Individuals (HNWIs) as a source of capital for family businesses. All the best for a prosperous 2016. You can contact me at 9455 9996 or email davidpring@kpmg. com.au Achieving innovation by inspiring people LEADERSHIP FAMILY businesses succeed through multiple generations by striving to be the best. As the world around us changes at an ever faster rate it’s important to inspire management teams to innovate to grow. In this article, we focus on what it takes for family businesses to create a high performance environment. When coaching Family Businesses in innovation, the ultimate challenge is in achieving the balance between the traditions of the family’s business with innovative ideas and business practices that will enhance the growth, profit and sustainability of the family’s business. To develop a successful family business innovation program, the mind set of both management and family members needs to be considered. Specifically: • Employee motivation – the difference between ‘emotions’ versus ‘reason’. In non-family businesses the business model is based on ‘rational problems’ and ‘rational solutions’. In family businesses you have ‘rational problems’ and ‘emotional solutions’. In some family businesses decisions are not based on what is best for the business but what is best for the family or a member of the family. • Envisioning Capabilities – the difference between ‘what you wish/want’ versus ‘what is’. Being able to honestly and accurately assess the strengths and weaknesses of your family’s business is the starting point. • Today’s ‘Gen Y’ expect to have potentially 15-16 different employers during the length of their career. This means that the family business of the future will be influenced by the need for increased flexibility across the workplace and the changing demands of both employees and family members. The organisational responses are likely to be: • The organisations of the future will operate with a new set of principles. Future organisations that are purely driven by profit will always put money ahead of people, organisations that are driven by prosperity will put people ahead of wealth. • Companies will need to brand and position the business and talent ecosystem in ways that can attract the best talent and engage them to participate, whether that talent resides within or outside the enterprise. It will also be key to be attractive to next generation family members. • Organisational purpose is important – it is not just about what and how but why we do things. The issue is not whether a company has articulated its purpose, visions or values – but rather – how motivating and invigorating are they? How much are they actually lived and breathed by those within the business? How do family members who are leading the business demonstrate this purpose in action? • The future organisation enables innovation to come from anywhere and at any time, and it sees learning from failure as a strength. Innovation can come from five places: employees, customers, partners, the general public or from competitors. • An intrapreneur is an employee of a corporation allowed to exercise some independent entrepreneurial initiative. In the future, organisations will need to allow its employees to innovate, exercise creative thought and contribute to the shape of the business. A number of myths surround innovation which can lead us to underestimate the role of good management and leadership in making innovation happen. For example, there are actually two sides to innovation: exploration of ideas and the execution of those ideas. So what are the barriers, enablers and misconceptions that impede innovation in terms of the ideas and the execution? What can individuals, teams and leaders do to allow innovation to flourish? The leader’s role in innovation is often overlooked; with the emphasis on creative, entrepreneurial types simply making innovation happen. But the reality is that innovation is unlikely to succeed if not managed effectively. For instance, depending on the nature and scope of innovation, the exploration and execution phases might be carried out by separate teams. Strong leadership is needed to ensure true collaboration between the team tasked with generating the ideas and the team responsible for implementing them. Leaders also need to manage the tension between innovation and core business. Often, radical innovation should be separated from business as usual (BAU). This protects the core business from the inevitable uncertainty of radical innovation. At the same time, you maintain strong discipline around the process of testing innovative concepts, rigorously reviewing outcomes and making explicit decisions on when to stop, continue and whether to integrate into business as usual. Trials don’t end up merging into BAU without proper testing. If you don’t practice asking questions you are going to fear change. If you are comfortable questioning, experimenting, connecting things then change becomes an adventure. THIS ARTICLE IS BASED ON AN ORIGINAL PIECE WRITTEN BY INGRID WATERFIELD, KPMG AND DOMINIC MAHONY, LANE4. Thinking Beyond today Are you thinking beyond today? So are we. Talk to KPMG. kpmg.com.au © 2015 KPMG, an Australian partnership. All rights reserved. 18 WESTERN SYDNEY BUSINESS ACCESS JANUARY 2016
BF FAMILY BUSINESS WESTERN SYDNEY WWW.WSBA.COM.AU Safeguarding your business reputation YOUR VALUES YOUR company has no single asset more valuable than its reputation. Yet because of its intangible nature, it is an often overlooked or side-lined one by managers more caught up with short-term goals like increased revenue, which can be easily measured and seen. Paul Argenti, Professor of Corporate Communications at Tuck School of Business at Dartmouth, says companies need to be cognisant of what he terms their ‘reputational risk’. Argenti says companies that communicate or take actions which are out of alignment with their stated mission and values are putting their reputations at risk. With brand trust at all-time low, consumers – Millennials in particular – are looking for brands they can trust. Argenti urges companies to be authentic in their business dealings, to act according to their stated goals and values, even when it means taking a hit in the short term. Think, for example, of recalling a widely sold faulty part, ceasing to sell a high-grossing product that has recently been proved to be harmful or withdrawing from a particular market for sanctioning reasons. These actions may cost the company excessively in monetary terms, but long term they protect the values and reputation of the company, and their worth is therefore incalculable. Identifying your company’s reputational risks Argenti believes that companies can evaluate their reputational risk by answering the following two questions: • What are we doing that we should not be doing? • What aren’t we doing that we should be doing? Once you’ve answered those questions, be directed by them in policy and strategy, even I the immediate cost or inconvenience seems high. Competitive advantages of firms with strong reputations For those unconvinced of the value of placing reputational concerns above all others, consider the following pay-offs of having a strong, tried-and-tested reputation: • Better class of recruits • Greater investor loyalty • Greater long-term stability • More stable revenue • Reduced susceptibility to crises • Higher benefit of the doubt from stakeholders Pay attention to what you say A final point from Argenti about safeguarding your brand’s reputation is to be careful what your executives and spokespeople say. Many businesses have landed in hot water not because they are doing anything wrong, but because their communication has been misguided. In a world of social media where things can quickly go viral, you don’t want to speak flippantly, thoughtlessly, or speak out of turn, as the damage can quickly escalate outside of your control to contain it. The adage “Say what you mean, and mean what you say” will stand you in good stead as a guiding principle for communications that will protect – even bolster – your reputation. Long-term horizons, current income and diversification drive investment decisions LONG-TERM HIGH net worth individuals (HWNIs) invest for three main purposes: • Long-term capital appreciation, • Current income, and: • Gaining a level of diversification. Long-term capital appreciation ranks as the primary reason HNWIs invest in familyrun businesses according to the report Family Matters – Financing Family Business Growth through Individual Investors. (The report was based on the findings of the KPMG 2014 Family Business Global Survey, which in turn interviewed 125 family businesses and 125 HNWIs from around the globe.) The second main reason HNWIs gave for investing in family firms is current income, followed by gaining a level of diversification. That said, many HNWIs also seek to match their investment choices with their expertise and experience in running companies – entrepreneurship and a passion for business are also important drivers for HNWI investments. A risky business The desire for long-term capital appreciation is reflected in HNWIs’ appetite for risk. The majority (60%) of HNWIs canvassed in the survey said they take a balanced approach to risk for investments outside of their main WESTERN SYDNEY BUSINESS ACCESS JANUARY 2016 business, searching for reasonable risk with reasonable returns. As one entrepreneur said: “Wealth management for me is a focus on maintenance rather than rapid growth and mostly I prefer slow and steady gains to risky investment opportunities.” Nevertheless, there are HNWIs at both ends of the risk spectrum. One-fifth of HNWIs are prepared to assume high risk investment strategies in a bid to generate high returns. A further fifth are risk-averse and will settle for low returns in exchange for low risk. This is an encouraging scenario for family businesses wishing to investigate the pool of HNWIs – there may well be an investor suited to your needs and requirements. What is the appetite for HNWIs investing directly in businesses? HNWIs are extremely active business investors and the vast majority invest directly in companies. While some have an appetite for investing in larger companies and startups, the sweetspot for most HNWIs is small and medium-sized companies where their capital and expertise may be highly valued and where there is significant potential for upside through growth. Direct investing second only to listed equities Direct investment in businesses is a large part of the typical HNWI portfolio. These investments account for the second-highest proportion of committed investment from HNWI overall. Only listed equities account for a larger share. Moreover, direct investment in business is the most important part of the investment portfolio for nearly a third of HNWIs (29%). Some 73% of respondents already invest directly in other businesses. The reasons for investing directly in businesses vary, although are generally centered around the need for some diversification from their own businesses and from stock market volatility, and also because this type of investment often closely matches HNWIs’ risk appetite. As one HNWI commented: “We expect a good amount of liquid returns from our investments. We invest in businesses so that we can procure adequate working capital for our operational needs.” The value of familiarity Familiarity is another reason for investing directly. “With the rise in media and communication, a substantial amount of our investments go towards direct businesses, mainly businesses which are in the same sector,” said an Australian HNWI. Favouring small and midsized businesses Consistent with the risk profile and long-term return horizons preferred by most HNWIs, small and middle-sized companies are their most popular investment targets, with 62% and 68% respectively citing these, and a smaller proportion targeting start-ups and large companies. This is because many HNWIs see these types of business as offering the potential for a degree of stability but also rapid growth. Another entrepreneur noted: “Small companies have more phases to go through and if managed well in the initial stages, a lot of success can be expected in little time by defining processes, monitoring financial synergies, and adapting to the latest technology.” Another investor added: “As small companies have more possibilities to be tweaked and appraised, I feel comfortable approaching small companies who have opportunities to make it large in the near future. I prefer investing for at least three years and I reinvest the best I can.” “Mid-size companies are good targets as they are partially developed businesses … and with proper guidance they could outperform larger companies,” said a French HNWI. Unsurprisingly, given HNWIs’ preference for largely managing their wealth themselves, the majority (67%) like to make fewer, more significant investments. The remaining third prefer to make multiple, smaller investments. This article is based on the KPMG Family Business report “Family Matters – Financing Family Business Growth through Individual Investors”. 19
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