How can family businesses not just survive, but thrive in an era of big data and automation? James Beech asks futurologists what the world will look like for families by the middle of the 21st century and how families, with their patient capital, can start shaping tomorrow today.
Ferrari is at a crossroads. The family-controlled supercar maker’s conundrum is laid bare at the end of an exhibition at the Design Museum in London that celebrates the marque’s 70th anniversary.
The Italian car maker is an exotic, world-renowned brand, with innovation born of the race track—a byword for passion, style, and wealth. But what is Ferrari to do about the advent of functional, yet mundane, driverless cars? How will engineers transform Ferrari’s throaty roar to the anaemic hum of electric power? How to deal with the algorithms that predict human behaviour, those new markets and their different tastes, the changing demographics of its consumers, and an ageing base of owners, collectors, and fans?
It is a familiar puzzle for multigenerational family businesses as they contemplate what the fourth industrial revolution means for their businesses in the 21st century. Ferrari, and its fellow old-economy peers, face brave new worlds of artificial intelligence, robotics, virtual reality, 3D printing, biotechnologies, sensor and green energy technology. Should these families, which have already survived wars, revolutions, and depressions, even try?
Things to come
The answer is a resounding yes, from thought-leaders, academics, and family business principals. Doing nothing is not an option. Investors “must either embrace the revolution that is sweeping through their societies or risk becoming its unwitting victim”, says the 2018 report Alternative investments 3.0 by KPMG International and CREATE-Research.
Jamie Arbib is a London-based investor in technology, second-generation family member, and founder of the independent think tank RethinkX. Arbib says the world is going to see constant and accelerating change with no end point.
“A lot of these transformations are about lowering the cost of goods and services and creating greater access to them,” he says.
“The cost of the things we need—energy, transport, material goods and even food—will largely trend towards zero as we do things ever more efficiently. That is great from a perspective of social outcomes—the ability of people to afford the things they need. But also from the environmental outcome—the ability for people to do much more with much less.”
Arbib says the future is “hugely positive” however, the issue for businesses and investors is there will be a lot of destruction along the way.
“That is going to create huge threats, but also huge opportunities for the companies that do very well out of these disruptions and take over those markets.”
Mark Stevenson, a London-based author, broadcaster, and expert on global trends and innovation, has a grittier vision. We are at a crossroads as a species and “everything is up for grabs”, the futurist and author of An Optimist’s Tour of the Future notes. The systems used to govern for the last 150 years and the way we think about money are “wholly unfit” for the challenges humanity faces, he says.
“If we do not innovate in the way we think about money, wealth, equality, the environment, then most of us are dead. There are some thoughtful high net worth people who are beginning to understand that how they made their money is part of the problem.”
Stevenson says if humanity does not change its ways, the year 2050 will be an extrapolation of the dire situation already evident all around us. At the root of many of our challenges is growing wealth inequality—the richest 1% saw their share of the globe’s total wealth increase from 42.5% at the height of the 2008 financial crisis to 50.1% in 2017, or $140 trillion, according to the Credit Suisse Research Institute’s Global Wealth Report 2017.
Jobs for the boys and girls
Family businesses have traditionally understood the link between staff welfare and sustainable success, so what will this relationship look like in 2050? A lot will depend on how the seismic changes affecting the global workforce will play out. About half of the jobs done by humans will be up for automation in the next 25 years, Stevenson predicts.
However the next generation of workers are not being educated into a world that understands and can harness technologies like artificial intelligence in a socially useful way.
As much as one-fifth of today’s labour force, 800 million workers in developed and emerging economies, may lose their jobs to robots and automation by 2030, says consultancy firm McKinsey & Company. PwC says 38% of jobs in the US could be at risk of automation by the early 2030s, compared with 30% in the UK, 35% in Germany and 21% in Japan.
Democratic governance is failing. The Economist Intelligence Unit’s annual study of global democracy in 167 countries found 45% of the world’s population lives in “flawed democracies”.
The public’s trust in the institutions of government, business, media, and non-government organisations is also at an all-time low and there are few signs of it improving by 2050. The 2017 Edelman Trust Barometer of more than 33,000 respondents across 28 countries declared a “total collapse” in trust in the institutions that shape our society. Trust in the UK is at an historic low of 29%.
Stevenson says its reasons like these that mean “it’s very likely that 85% of the people who work for you don’t care about their jobs, they’re not engaged [according to Gallup’s study of more than 140 countries for its State of the Global Workplace report in 2017].
“They realise the system is treating most of the people unfairly,” he says.
Family businesses will also have to reconsider their employee relationships.
“Nobody would work for the company they work for if they had as much money as the company they work for,” Stevenson says.
“If you ask someone what wealth is, usually they get it wrong, in my opinion. They say it’s basically how much stuff you’ve got. My experience with more thoughtful high net worth investors is they say what wealth really is, is power. The power to make things happen that you would like to happen, whether they are good things or bad things. Your wealth allows you to coerce people into doing things in the direction you think is important and that coercion usually takes the form of an employment contract.”
However, the rampant accessibility of technology could mean employees will not need as much money from employers as they used to. Savvy wealth holders Stevenson consults know this and look to increase their so-called social capital.
“What they realise is that if they don’t start saying interesting, important, and useful things about climate change, social justice and inequality, then their power is going to be eroded, because people won’t have to work for them anymore,” Stevenson says.
“Your ability to make things happen, which is what wealth really is, will be eroded, because your team just lost all its best people.”
How then can family businesses gear up for this 2050 vision? Arbib says the first critical step business leaders need to take is to understand what the disruption might look like, sector by sector, and what the implications are for those incumbents or for potential new entrants. That understanding will inform the strategies they should be adopting as an investor.
Families of wealth from business are renowned for taking the long view. One family principal memorably once said to CampdenFB that despite the disruption and uncertainty Brexit causes now, no-one would care in 10 years’ time.
However, Arbib warns against burying one’s head in the sand. Certain sectors will be disrupted more than others, but all sectors will experience some disruption and no sector exists in isolation. Change often enters from outside the market. Businesses of longevity may be set up to adapt to incremental and linear change and improvement, but the track record of existing companies which thrived during seismic changes in economies is far from great.
Coach makers gradually improved their horse-drawn carriages over centuries then disappeared in a matter of years with the disruptive advent of the internal combustion engine. There was a plethora of search engines when the internet went mainstream and now there are very few. The same natural selection is expected with cryptocurrencies and there are no guarantees Bitcoin will emerge as the new Google.
Asked if family businesses must ‘adapt or die’, Arbib says there will be time over the next decade or two for principals to explore more options, like merge, acquire, split, or sell.
Arbib says the principals of all ages he meets at seminars around the world are genuinely interested in the potential for change, especially the next generation. But it is much harder for holders of patient capital to make five, 10 or even 25 year plans now. He counsels a constantly evolving plan in the expectation that industry conditions will not remain stable for long.
Arbib oversees a family office with a diversified portfolio across all asset classes, so what is he doing to future-proof his interests?
“We are in the early stages of working out what we do about this because we like it as a theme but there is not a lot of investment product out there that we feel comfortable with or that understands this process.
“Things like index tracking might be dangerous because you have got an overexposure for businesses doing well and an underexposure to some of the disrupters. A lot of value is being created off-market these days.”
Arbib paraphrases a 1999 comment by billionaire investor Warren Buffett, who said there were about 2,000 US auto-makers at the dawn of the industry, that had an incredible impact on people’s lives, and now there are three. How could families know which companies to invest in?
A family business may well be disrupted, but you do have choices, Arbib says.
“You can try and lead the disruption yourself or you can try and buy the disruptors and get ahead of it. You are not entirely exposed—doing nothing is not a great idea, but you do have options. It does not have to be bad news, but it does require some active management.”
Stevenson says multigenerational families can probably protect themselves from the worst excesses of a changing world, but the question is, is this the right thing to do?
Stevenson says awareness is slowly growing among family offices and wealth holders. Sustainable scalable solutions do exist. However, those solutions do not sit well with people who have made their wealth “the old way”.
“Your question is, as a high net worth, do you want to help 500 million family farms out of poverty and return our agriculture to sustainability by promoting agroecology, or would you like a short-term gain that might come from an agribusiness investment that is contributing to our soil problem?
“If you are thinking about succession planning, the latter makes no sense because your kids grow up into a world where everything has gone wrong: We have mass war, a refugee crisis, and everybody hates you. If wealthy families do not get it, we are in trouble.”
Robotics, the Internet of Things, and artificial intelligence are incredibly powerful technology platforms that can actually help with the scalability of the family business, says Dr Ilian Iliev, the managing director of EcoMachines Ventures, a London-based venture capital firm which makes early-stage and growth investments in industrial high-tech companies.
“There is a risk of the ‘Amazonisation’ of more business sectors, which may lead to declining profitability for many traditional businesses,“ says Iliev.
“Mid-cap family-owned businesses (with capitalisations of $2-10 billion) that have been relatively localised will need to grow, innovate, or be acquired by bigger players,” he says.
“Where that is the case, family owners need to decide early on what to do. They can cash out, for example, in 10 years, or choose to dedicate [themselves] to the growth and investment resources required to become number one, not only in their local market, but also nationally and internationally.”
Adapt or die?
Asked if family businesses thinking about their business’s place in the world of 2050 must ‘adapt or die’, Arbib says there will be time over the next decade or two for leaders to explore more options, like merge, acquire, split, or sell.
“Keep your eyes open, do not come with too many preconceptions and it doesn’t have to be doom and gloom. Businesses do have choices, it just means seeing the opportunities and taking them.”
Stevenson says the question family businesses should ask themselves is: What do we want the world of 2050 to look like?
Iliev says family businesses “absolutely” need to prepare for technological disruptions and there are several investment strategies they can pursue.
“Invest in new businesses that are in higher-value areas, in the industry sectors they already understand. Use the knowledge, technology, and networks they have in the traditional areas to build on and invest in businesses that are in other sectors, but are using similar capabilities.”
Iliev says second and third-generation family owners may use family wealth to go into altogether new areas of interest. He says they should combine interest in impact investment in environmental, social, and governance areas to learn about and adapt their core businesses.
Stevenson says holders of patient capital should think systemically and be future-literate or they have no chance of designing their business and assets in a sensible fashion.
“If you are not giving yourself an understanding of artificial intelligence, blockchain, climate change, the state of our soils, the failures of democracy, what is wrong with our education system, then anything you do is probably going to be a shot in the dark,” he says.
“Also understand that investment that does not take the environment seriously is not an investment in any meaningful sense, it is a cost on the future.”
Stevenson points to Unilever chief executive Paul Polman as a good example of investing in social capital. He took over the Anglo-Dutch consumer goods giant in 2009 and said he was not going to deal with the shareholders he had, but instead find the shareholders he wanted. He amassed enough patient capital investors who shared his values of sustainable businesses to rebuff the takeover from Kraft in 2017.
“You want to be hanging out with the Paul Polmans, John Elkingtons and Richard Bransons of this world who are looking to work with investors who understand the challenges the world faces. We need to destroy the opportunities for short-term aggressive money to put quick gains above the survival of the species.”
Which way will Ferrari turn?