What family firms can learn from Samsung’s internal battle and its two memorial services held yesterday

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One hand’s not talking to the other.
One hand’s not talking to the other.

The ongoing, highly acrimonious feud within the Lee family, which runs the Samsung empire, has gotten so out of control that the factions could not bear the thought of looking at each other at the annual memorial service for deceased founder Lee Byung-chul, held Nov. 19 (He died in 1987).

On the day of the memorial service, Lee Jae-hyun, the chairman of the CJ Group (which formally split from Samsung in the 1990s) held a press conference. He said, “The Samsung Group did not allow us through the front door [figuratively].” (link in Korean) “We were unable to attend Lee Byung-chul’s memorial service this year.” He had pitched a fit about his persona non grata status a few days prior, but it was not clear until now that he had actually skipped the service.

Later on the same day, Lee Jae-hyun held a competing service; a ceremony that involves bowing  at the deceased one’s grave (in Korean, called a jae-sa). This time, it was Jae-hyun’s enemy and uncle Lee Kun-hee (current Samsung chairman) who gave word at the last minute that he would not attend.

It’s impossible not to wonder whether the disintegration of the family will lead to the end of the Samsung dynasty. The old proverb “Shirtsleeves to shirtsleeves in three generations” comes to mind: a plucky entrepreneur can make a fortune, and the second generation grows up in privilege. But the third generation loses the family wealth, and the fourth generation are laborers again.

This phenomenon has been borne out many times, all over the world. Several branches of the Chung family, which controls the Hyundai Group, were quarreling so viciously that some experts at one point speculated the company wasn’t going to make it. The Lacoste power struggles led to the French apparel company being sold earlier in November.

Quartz talked to John A. Davis, the faculty chair of the Families in Business Program at Harvard Business School, to find out what such firms need to do to survive. (Davis also has a consulting practice for family businesses.) Edited excerpts:

Quartz: Is there any truth to the “Shirtsleeves to shirtsleeves in three generations” proverb?
Davis: It’s true in every country I’ve been to, over 60 countries, and every country has a similar saying. I’ve recently started to empirically test this. It’s a very common understanding that family success doesn’t last. Some families that become successful lose it in the same generation. Within three generations, most families lose their success, at least defined in terms of financial wealth.

[That said,] family businesses actually tend to live longer than non-family businesses. It’s hard to keep any business going for a long period because you have to keep regenerating it: you have to change your product focus or your technology. It used to be that you could revamp your company once a generation. That’s no longer true. The ongoing innovation is pretty dramatic. It’s hard [these days] to stay on top and in front of what’s happening so markets and industries don’t overtake you.

Quartz: In what areas are family-owned companies different from non family-owned companies?
Davis: Family businesses are very commonly quite traditional. They hang on to old ways longer. The good family companies are highly innovative, but they move systematically and only when there are strong arguments for doing it. They tend not to take risks; they tend to make incremental changes.

Quartz: But wouldn’t you say that companies like Samsung have not followed that model? They expanded rapidly from being a food company to making electronics and selling life insurance.
Davis: Most companies [including Samsung] can’t grow to a huge scale without being public.

Quartz: But if a company goes public, how can it still be called a family-owned business?
Davis: At some publicly traded companies, the [founding] family owns a minority of the shares, but they still have significant control. You only need enough shares to elect the board of your choice and run the company as you want it. In a private company, [by contrast, decisions are made by] majority control.

Quartz: What does a family-owned company need to do in order to survive?
Davis: First, you need to be very innovative. That requires not only wise leadership, but also adopting the right technology and being very adaptable. You also need very, very strong balance sheets so that you can move decisively and go after big opportunities and also weather financial storms.

Secondly, you need a family that is united and contributes back to the company. You can do that by being a good owner, a good board member, a good business leader, a good executive, and also maintain a good reputation in the community or society. But the family needs to stay united, stand together around important issues, and have a very united approach. It doesn’t mean families have to be best friends. There are many families that have squabbles who are very good at owning a business.

Sometimes, they even have serious conflicts. But around their business, they stand together. And when they don’t stand together, they have tie-breaking mechanisms to make important decisions, and they have ways of buying out family members who are disruptive to the company.

Ferragamo and Hermes are examples of good family businesses. SC Johnson, another very good example. With Mars, the family are very skilled owners.

Third, you have to have a very good board. If a family disables the board’s ability to make important decisions, that is really a warning sign.

Quartz: What can a board do to prevent being overpowered by the owning family?
Davis: The board has to represent the owners, but also make responsible decisions for the company. Sometimes the board has to make a stand in defiance of what the family owners want. It’s not foolproof. But [in the example of] Samsung, it’s a public company, so the board has obligations to its shareholders. This can be an important insurance policy that things will be done in a professional manner.