Can family businesses become pioneers of sustainability?
Now that COP27 is over, it is a good time to focus on sustainability in family businesses. What does sustainability mean in the context of a family business? What are specific factors within these companies that promote (or hinder) the adoption of more sustainable practices? What are the good practices that should be adopted, including in terms of governance? In this article, we provide some answers to these questions.
Sustainability: “What’s in a name?”
In recent years, sustainability has become a key concept in good governance codes. The 20201 Code is the reference code for listed companies but is also a useful resource for all other organizations. Among other things, it recommends the pursuit of sustainable value creation, through an explicit emphasis on the long term, on responsible behavior by all parts of the company and an ongoing focus on the legitimate interests of stakeholders. It is thus about pursuing long-term goals for the company's stakeholders that go beyond the short-term financial interests of shareholders.
Such requirements are also imposed on non-listed companies, especially family-owned companies. For example, the Buysse Code III gives companies a "social responsibility." This involves, first of all, identifying and properly understanding the needs and expectations of the company's stakeholders (shareholders and investors, customers and suppliers, employees, citizens, governments, certain non-governmental organizations, etc.). It also involves optimizing the company's environmental, social and economic performance in a sustainable manner.
When does the sustainability strategy of family businesses go beyond philanthropy?
How do family businesses apply sustainable value creation in practice? In our study "Governance practices in Belgian family businesses "2 we identified three levels of action in terms of sustainability. These are, in increasing maturity:
Companies may undertake concrete actions (sometimes only of an ad hoc nature) within or outside their core business with a positive environmental or social impact. These actions often focus on one or more of the following dimensions: people (employees), the environment (sustainability of products and production processes) and society (external groups). For example, a company may decide to install solar panels to reduce its carbon footprint, or to support philanthropic initiatives.
Many family businesses go a step further by embedding their initiatives in a broader sustainability strategy. These companies set some general objectives at the management level, and turn them into concrete actions. They also establish quantified goals and procedures to measure the achievement of those goals. One of the company executives we interviewed for the study said, "Sustainable development is one of the three pillars of our business strategy, along with value creation and operational excellence. The company, in collaboration with its management and stakeholders, has developed a sustainability strategy with goals and areas of action for the next 10 years." At this stage, though, the pillar of sustainability is often still separate from the company's core strategy.
The final step in this evolution is to integrate sustainability into the company's core strategy and its governance practices. This means that the company has implemented procedures that ensure that the company's governing bodies consider sustainability in all decision-making (e.g., through a sustainability check for every major decision). To achieve this level of maturity, several family businesses are pursuing the attainment of B Corp certification. This is a label awarded to companies that meet strict social and environmental requirements, good governance requirements, and transparency to the broader public regarding all these aspects. One of the conditions for obtaining this certification is the inclusion in the bylaws of a corporate purpose ("purpose") beyond short-term shareholder profits. It also requires a roadmap to integrate sustainability into all aspects of the company. Listed family company Spadel and family office VP Capital are among about 25 B Corp certified companies in Belgium.
Factors that promote and/or hinder family business sustainability: a review of the literature
What factors specifically in family businesses contribute positively to sustainable value creation? The academic literature provides some answers3. In their literature review, Mariani, Al-Sultan and De Massis (2021)4 identify family involvement as a determinant of sustainability measures. The degree of entrepreneurial orientation of the family also plays a role in this regard. Their research also shows that the family CEO is a driving force in the pursuit of sustainable value creation. The same goes for the presence of independent directors and female board members, as the latter would be more sensitive to the expectations of external stakeholders. The pursuit of non-economic goals at the family level (e.g., through philanthropy, wishing to realize a long-term legacy, or promoting a particular charity) would also be positively related to sustainable development actions. Finally, the authors indicate that ethical and value considerations may play an important role here. In summary, the reflex of family businesses to pursue sustainable value creation stems from two main factors: strong family involvement in the control and management of the business, combined with adherence to long-term non-economic goals and strong ethical values.
There are also some unfavorable factors that hinder family businesses in their pursuit of sustainable value creation. A review of the literature by Herrera and Heras-Rosas (2020)5 suggests that family firms are less likely to pursue open innovation (including "eco-innovation") because of greater risk aversion and fear of loss of control. The same authors also indicate that lack of awareness of sustainability issues delays the adoption of a true sustainability strategy. For example, in a recent article, Villalonga, Tufano and Wang (2022)6 indicate that companies with concentrated and family shareholdings perform less sustainably than other companies. One exception is that the presence of a family CEO may again be associated with better sustainability performance. It also suggests that new family generations are more aware of social and environmental issues.
Family vision and next gen as drivers for a "roadmap to sustainable value creation"
We conclude with some "lessons learned" and tips for family businesses looking to embark on a sustainable path.
Defining a vision at the family level. It is useful for family shareholders to clearly define their sustainable development expectations in line with the family's values. This can be discussed in a thorough way, for example in a family forum, and lead to a definition of the family's "sustainability appetite," similar to its level of risk appetite. Indeed, we observed that family involvement is a determining factor in the implementation of a sustainable development policy.
Board involvement. Based on the family vision, the board of directors can develop key strategic objectives for sustainability. To do so, the board must be sufficiently aware and informed on the issues. Organizing training on ESG aspects and considering these criteria when selecting new directors contribute to this. The presence of several independent/external directors can also help ensure that the expectations of all stakeholders are better taken into account. Consultation with the company's stakeholders (customers, suppliers, employees, etc.) can contribute to a better sustainability strategy.
Operationalization of the vision. It is important for the management team to operationalize the sustainability strategy adopted by the board of directors, by defining tangible and, where possible, quantitative objectives. It is also important to measure the company's progress in achieving the objectives ("to measure is to know"). For concrete implementation, it is helpful for the CEO himself (or the management team as a whole) to communicate the company's sustainability project.
Engage the next generation. The next generation is often well aware of sustainability issues. Therefore, it can be useful to involve them to reinforce the company's sustainability initiatives. This can be done by organizing so-called "shadow boarding" (advisory voice on the board of directors), or by involving the next generation in the company's team.
Innovation and entrepreneurship. Entrepreneurial spirit and innovativeness are among the strengths of family businesses. They can use these qualities to develop new products, services and processes that contribute to a sustainable transition. The use of open innovation, based on external collaboration and knowledge sharing, could further strengthen the "eco-innovation" capacity of family businesses.