Financial Management of Family Businesses: Transparency – Compliance - Performance – Strategy - Governance (Contributions to Finance and Accounting) 3658422114, 9783658422110

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Contributions to Finance and Accounting

Thomas Zellweger Patricio Ohle   Editors

Financial Management of Family Businesses Transparency – Compliance Performance – Strategy - Governance

Contributions to Finance and Accounting

The book series ‘Contributions to Finance and Accounting’ features the latest research from research areas like financial management, investment, capital markets, financial institutions, FinTech and financial innovation, accounting methods and standards, reporting, and corporate governance, among others. Books published in this series are primarily monographs and edited volumes that present new research results, both theoretical and empirical, on a clearly defined topic. All books are published in print and digital formats and disseminated globally. This book series is indexed in Scopus.

Thomas Zellweger • Patricio Ohle Editors

Financial Management of Family Businesses Transparency – Compliance – Performance – Strategy – Governance

Editors Thomas Zellweger Center for Family Business University of St.Gallen St. Gallen, St. Gallen, Switzerland

Patricio Ohle FBXperts AG Zurich, Switzerland

ISSN 2730-6038 ISSN 2730-6046 (electronic) Contributions to Finance and Accounting ISBN 978-3-658-42211-0 ISBN 978-3-658-42212-7 (eBook) https://doi.org/10.1007/978-3-658-42212-7 Translation from the German language edition: “Finanzielle Führung von Familienunternehmen” by Thomas Zellweger and Patricio Ohle, © Der/die Herausgeber bzw. der/die Autor(en), exklusiv lizenziert an Springer Fachmedien Wiesbaden GmbH, ein Teil von Springer Nature 2022. Published by Springer Fachmedien Wiesbaden. All Rights Reserved. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer Gabler imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH, part of Springer Nature. The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany Paper in this product is recyclable.

Without the families Harald von Bohlen und Halbach (Krupp), Dr. Jürgen Manchot (Henkel), and my godfather Joachim Pfeifer (Pfeifer & Langen), I would not have chosen the topic of finance in family businesses as my passion. I am, therefore, grateful to them. I am grateful to my first supervisor at Intersnack, Mr. Klaus Köster (CFO), for his appeal to uphold the 'flag of financial management,' and I thank the many CFO colleagues who motivated and influenced me on this journey. I must say thank you to Prof. Dr. Rolf Dubs for his mentorship and advice, Prof. MüllerStewens for helping with my workshop concept, especially my Ph.D. supervisor, Prof. Dr. Martin Hilb (recently for the motivation to take FBXperts international), and Prof. Dr. Thomas Zellweger for inspiration, support in Switzerland, and academic guidance along the way. Last but not least, I value so much the supportive help of CFOs like Felix Hess, Mathias Margreiter, Christoph Michl, and Annette Beller, Thomas Holzgreve and Peter

Sielmann, Fabian Kracht, Dominique Graz, and Frank Jehle. Also I say thank you for helping to build our FBXperts.ch community of CFOs to Constanze Coelsch at ETH, Nadine Zangger and Michael Fleisch (Technology) in Switzerland, Marta Babir and Kyrill te Water Mulder in the Netherlands, Itziar and Jose Masifern and Jaime in Spain, George Shirley and Mike Roskelly in the UK, Alex Maletz and Victoria Peresson in France, Marco Baldassari, Yuri Emdin and Piero Martellini in Italy, Ines Botica and Guilherme Santos in Portugal, and Yvan Jansen in Belgium. Thank you to my beloved wife Sandra for supporting me since 1993 and up to today with her never-ending energy and kindness. Thank you to my children Frederick, Philipp and Franziska for lifting me up. This book is dedicated to the CFOs of family businesses and scale-ups and to my almae matres, Universität St. Gallen & University of Chicago, and to all those great academic institutions we try to support in their practiceoriented research of finance and family firms. Dr. Patricio Ohle, Zürich, 11 August 2022

Contents

Part I 1

2

From Impact to Insight: Family Business and Financial Leadership in Practice and Theory . . . . . . . . . . . . . . . . . . . . . . . . . Thomas Zellweger

5

Five Development Stages of Financial Management of Family Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patricio Ohle, Yvan Jansen, and Marco Baldassari

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Part II 3

4

Remarks on the Methodology of Financial Management from Theory and Practice

Transparency: Kickstarter for Transformation

Optimal Financing Structure: Avoid Bottlenecks and Maintain Headroom with Foresight: Everything Done Right. . . Almost! . . . . Johannes Stankiewicz, Mark Hill, and Peter Sielmann

19

Meaningful Data for Right Decisions: How to Achieve Impact with Data Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anja Lagodny and Nikolai Graf Lambsdorff

29

5

The Chief Financial Officer and the Family Office . . . . . . . . . . . . . Michael Gaska

6

Generational Wealth Preservation: Perspectives and Fields of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stanislaus Sayn-Wittgenstein

7

The Family Office as a Modern Form of Majordomus . . . . . . . . . . Thomas Pierre Trinkler

8

‘Structure Follows Strategy’: From Bean Counter Mode to Aligning Financial Processes with Strategy . . . . . . . . . . . . . . . . . Patricio Ohle, Michael Noth, and Yvan Jansen

37

43 51

53

vii

viii

Contents

9

Optimising Planning Systems in a VUCA Environment . . . . . . . . . Felix Hess and Franz Wirnsberger

65

10

A Plea for More Transparency: The FBXperts View . . . . . . . . . . . . Patricio Ohle and Itziar Masifern Gómez

73

Part III 11

12

Compliance: A ‘Must’ to Avoid Risks

Internal Control System Also for Family Companies: the Basis for Proper Management?! . . . . . . . . . . . . . . . . . . . . . . . . Annette Beller and Vanessa Muellner

79

What People Do Not like to Talk About: Dealing with and Defending Against Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Martin Gasser and Franz Berger

87

13

Cyberattacks: Company Risk No.1—Underestimated by Many . . . Fabian Kracht and Patricio Ohle

93

14

Compliance Is a Must: The FBXperts View . . . . . . . . . . . . . . . . . . Patricio Ohle

99

Part IV

Performance: Profit as the Basis for Self-Financed Growth

15

Agility Through Digital Transformation: It Is High Time . . . . . . . . 103 Guido Huppertz and Fabian Kracht

16

Control Systems and Incentives as Value Drivers: Separating Financial Objectives from Action Planning and Control Through a New Control Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Felix Hess and Franz Wirnsperger

17

Fostering and Steering Innovation . . . . . . . . . . . . . . . . . . . . . . . . . 125 Samuel Zimmermann, Lars Grünert, and Constanze Coelsch-Foisner

18

Net Working Capital Management in Family Businesses . . . . . . . . . 139 Carsten B. Henkel, Claus Martini, and Frank B. Jehle

19

Performance Must Be Managed: The FBXperts View . . . . . . . . . . . 147 Patricio Ohle

Part V

Strategy: Ensuring Success and Staying Relevant for the Customer

20

Strategy Development in Family Businesses . . . . . . . . . . . . . . . . . . 151 Carsten B. Henkel

21

Strategic Planning in the Family Business: Dealing with the Principal-Agent Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Stefan Borchers

Contents

ix

22

The M&A Phenomenon in the Context of Family Businesses: Growth Through Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Akash Saini and Andreas Lindner

23

The M&A Function in (Family) Businesses Considering a Frame of Reference: Observations of a Practitioner . . . . . . . . . . . 171 Andreas Zetzsche

24

Internationalisation and Digitalisation as a Growth Path . . . . . . . . 175 Andrej Vizjak and Mathias Margreiter

25

Identifying ‘Shifting’ Customer Demand and Megatrends: Sustainable Growth Through a Focus on the Customer . . . . . . . . . 187 Victor Dijon de Monteton and Mathias Margreiter

26

Sustainability as a Competitive Advantage and Sustainable Financial Instruments for Working Capital Financing (ESG-Linked) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 André Wehrhahn

27

Strategy Requires a Balanced Leadership Team, Feasibility Check and Good Cooperation with the Supervisory Body: The FBXperts View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Patricio Ohle and Alexander Maletz

Part VI

Governance: The Duty or the Pleasure of Leadership?

28

Optimal Board, Decision-Making Processes and Shareholder Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Christoph Michl and Thomas Holzgreve

29

Generational Change and Conflicts Among Shareholders . . . . . . . . 223 Christoph Michl and Günter Schäuble

30

HR Strategy: From Hire to Fire . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Béatrice Wenzel-Lux-Krönig and Matthias Würsten

31

Change in Corporate Culture as a Driver of Success . . . . . . . . . . . . 241 Marco Gadola

32

Sustainable and Long-Term Development of Family Businesses . . . 251 Alexander Pfeifer

33

Good Governance: The FBXperts View . . . . . . . . . . . . . . . . . . . . . 257 Patricio Ohle and Kyrill te Water Mulder

x

Contents

Part VII

Conclusion: Being Able to Leverage Collective Experiences

34

The FBXperts View: A Review of the Five-Step Model and the ‘Critical’ Challenges for Family Businesses: The Genesis . . . . . . . . 263 Patricio Ohle

35

The Value of Experiential Knowledge for Complex Decisions . . . . . 267 Axel Wachholz

Editors and Contributors

About the Editors Thomas Zellweger is Professor of Corporate Management with a special focus on family businesses at the University of St. Gallen and Executive Director of the KMU-HSG.

Patricio Ohle is the founder and managing director of FBXperts AG. He has held management positions in family businesses for three decades, including as a director at Hipp Holding AG, Switzerland, Intersnack GmbH & Co KG and Bertelsmann AG. Dr. P. Ohle is a Research Fellow of the Center for Family Business at the University of St. Gallen, where he completed his doctorate. He is also a lecturer at the University of St. Gallen in “Finance of large family firms.”

xi

xii

Editors and Contributors

Contributors Marco Baldassari Procter & Gamble, Geneva, Switzerland Annette Beller B. Braun SE, Kassel, Germany Franz Berger Ivoclar Vivadent AG, Schaan, Liechtenstein Stefan Borchers Vaillant Group, Remscheid, Germany Constanze Coelsch-Foisner ETH, Zürich, Switzerland Marco Gadola DKSH, Zürich, Switzerland Michael Gaska St. Galler Family Office Forum, St. Gallen, Switzerland Martin Gasser Formerly Reichle de Massari AG, Wetzikon, Switzerland Itziar Masifern Gómez Former Oliver Wyman, Valldoreix, Sant Cugat del Vallès, Barcelona, Spain Lars Grünert TRUMPF GmbH & Co. KG, Ditzingen, Germany Carsten B. Henkel Skyadvisory AG, Zürich, Switzerland Felix Hess Hilti Group, Schaan, Liechtenstein Mark Hill awk Aussenwerbungs GmbH, Koblenz, Germany Thomas Holzgreve maxingvest AG, Hamburg, Germany Guido Huppertz Formerly Benteler Group, Salzburg, Austria Yvan Jansen Formerly Partner Kearney, Brussels, Belgium Frank B. Jehle Benteler Group, Salzburg, Austria Fabian Kracht mesakumo GmbH, Ulm, Germany Anja Lagodny Formerly Japan Tobacco International, Dagmersellen, Switzerland Nikolai Graf Lambsdorff Signature Ventures, Berlin, Germany Andreas Lindner Orior Group, Zürich, Switzerland Alex Maletz Formerly BCG, Paris, France Mathias Margreiter Swarovski AG, Männedorf, Switzerland Claus Martini IVF Hartmann Group, Neuhausen, Switzerland Christoph Michl Formerly Schörghuber Group of Companies, Munich, Germany Victor Count Dijon de Monteton Kearney, Zürich, Switzerland Vanessa Muellner Credit Suisse, Zürich, Switzerland

Editors and Contributors

xiii

Michael Noth Nordzucker and Hellmann Worldwide Logistics, Osnabrück, Germany Alexander Pfeifer Pfeifer & Langen Gruppe, Köln, Germany Akash Saini Citibank (Citigroup), Frankfurt, Germany Stanislaus Sayn-Wittgenstein Munich, Germany Günter Schäuble Schindler AG, Ebikon, Switzerland Peter Sielmann Neumann Group, Currumbin, Australia Sandtorpark GmbH, Hamburg, Germany Johannes Stankiewicz FBXperts AG, Zürich, Switzerland Selbständig, Cologne, Germany Thomas Pierre Trinkler Trinkler & Partners LTD, Wealth Management, Zürich, Switzerland Andrej Vizjak University of Eichstätt, Eichstätt, Germany Axel Wachholz Phoenix Contact, Blomberg, Germany Kyrill te Water Mulder Arthur D. Little, Amsterdam, Holland André Wehrhahn Hansgrohe SE, Fulda, Germany Beatrice Wenzel-Lux-Krönig Cartier AG, Geneva, Switzerland Franz Wirnsperger Hilti AG, Schaan, Liechtenstein Matthias Würsten Universität St. Gallen, St. Gallen, Switzerland Andreas Zetzsche Carlsquare, Berlin, Germany Samuel Zimmermann Dorma Kaba AG, Zürich, Switzerland

Part I

Remarks on the Methodology of Financial Management from Theory and Practice

Patricio Ohle

Family businesses are different, it is often said. Above all, they are unlikely to survive in the long term. According to a study by John Ward, on average no more than 10% of family businesses remain in family hands when the third generation is reached—a terrible record, as global research supports (Ward, 2011).1 This, in turn, only seems to confirm the wisdom of a quasi-law spread around the globe in proverbs and bon mots: Success and prosperity do not seem to be available to family businesses for longer than three generations (Fig. I.1). In this respect, we can also confidently deny the question that the owner of a large medium-sized company asked us with an almost cautionary undertone during the development phase of this book: No, here you cannot expect the ‘folklore’ of the superior family business. We do not want to cultivate myths. We want to face reality. After all, there is no lack of prominent examples of the decline of well-known names and brands in the German-speaking world. An incomplete list includes the Erb Group, Charles Vögele Group, Praktiker Baumärkte, Grundig and Saba, Nordmende, Schlecker, Glunz AG, Müller-Brot GmbH, Wienerwald and Bankhaus Oppenheim, Veritas AG, Esprit, Eisenmann SE and Gerry Weber, Beate Uhse AG, Heinz Kettler GmbH & Co. KG, Marbert, Walter Bau AG, Suhrkamp AG, Schiesser GmbH and Strenesse, Weltbild, Libro and so on. It is obvious that the financial management of the family business has a key position in preventing such declines. 1

Of course, this is not only negative in every case. Businesses do not necessarily disappear just because they are no longer listed as family businesses. Sometimes the sale of a family business can make a lot of sense because the family is no longer the best owner. But that is not in line with the purpose of this book. Certainly, financial management has a very important role to play in clarifying the question of the best owner, by creating transparency and a basis for decision-making. The survival rate of 10% is an average value most probably from the United States. In Germany, for example, the value tends to be higher—and differs according to sector and region. P. Ohle FBXperts AG, Zürich, Switzerland e-mail: [email protected]

2

Part I

Remarks on the Methodology of Financial Management from Theory and Practice

Fig. I.1 The ‘law’ of three generations. (Source: Hay Group 2014)

To put it simply, we assume that the finance department can raise at least one-third of the possible improvements of a total potential of approximately 10–15% (whether related to EBIT, EBT or NOPAT). If it works optimally with the production and marketing/sales departments, this value is correspondingly higher. In particular, the2 Chief Financial Officer (CFO) faces specific requirements and is often at the centre of various challenges and roles. This makes the financial management of family businesses an exciting task—and an equally exciting field of research. Our book is a result of this basic idea. It is a practical guide and follows the structure according to the five-step model developed by Dr. Patricio Ohle in his research at the University of St. Gallen. The five task areas discussed go far beyond mere financial management. We cover issues ranging from transparency and compliance to performance and strategy, governance and more— and provide concrete suggestions for everyday business life. Whether management, owner or advisory board, we are convinced that everyone who bears responsibility in family businesses can benefit from this bridge between theory and practice. In this book, top CFO experts share their wealth of knowledge and experience. At the end of each of the five main chapters, they briefly comment on the key challenges of the respective stage of development. This final commentary is marked as ‘FBXperts View’ (see Chaps. 34 and 35 to illustrate this). ‘fb’ stands for ‘family business’ (www.fbxperts.ch).

2

For better readability, the following articles do not use masculine and feminine forms of language at the same time. If a masculine form is used, it always refers to both men and women.

Part I

Remarks on the Methodology of Financial Management from Theory and Practice

3

References Ward, J. (2011). Keeping the family business healthy. How to plan for continuing growth, profitability, and family leadership. Palgrave Macmillan. Zellweger, T. M., Nason, R. S., & Nordqvist, M. (2012). From longevity of firms to transgenerational entrepreneurship of families: Introducing family entrepreneurial orientation. Family Business Review, 25(2), 136–155.

Chapter 1

From Impact to Insight: Family Business and Financial Leadership in Practice and Theory Thomas Zellweger

The best justification for addressing family businesses from a scientific perspective seems to stem from their economic significance. The fact that these businesses make up more than 85% of all businesses and around 70% of all jobs globally appears to be reason enough to give the topic more thorough consideration. However, this motivation is not entirely compelling as previous business studies, which did not specifically focus on family businesses, must have covered the topic as well. This means that there might not be much new to learn. A more appropriate approach to the topic of family businesses would be to be guided by the question of how family control affects a business’ strategic decisions. This brings us closer to the essence of the topic and the question of what constitutes a family business. The current understanding is that family businesses are organizations controlled by a family with the intention of maintaining this control for future generations. This definition is crucial as it can be used to determine the impact of family influence on the business, with particular emphasis on their influence on financial management.

Family Business and Financial Management The above definition raises the question of how family businesses are managed differently from nonfamily businesses in financial terms. Research has found some answers to this question in recent years: Family businesses are more liquid and less indebted than nonfamily businesses. They pay lower dividends, are smaller; have a T. Zellweger (✉) University of St. Gallen, St. Gallen, Switzerland e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_1

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preference for investing in fixed assets, especially real estate; and are more reluctant to invest in research and development. They are concerned with perfecting the existing business and thus have higher operational efficiency than nonfamily businesses. In contrast, the focus on stability and long-term survival goes hand in hand with lower efficiency in the use of the often extensively available assets. These empirical facts can be traced back very well to the strategic preferences of the owners: the preservation of a business that is of great importance to its owners not only financially but also emotionally. The concentration of assets and heart and soul in a business thus leads to financial corporate governance that does not fit properly into the standard models of financial theory. These models usually assume that all investors are broadly diversified, that investors hold only a very small share in the company, that markets for company shares are liquid, that all investors invest only over a single period of time, that perfectly transparent information exists, and that investors are only interested in the financial value of their investment – what a difference compared to family businesses!

The CFO in the Family Business Against this background, it is not surprising that the chief financial officer in family businesses has a special role. It is not an easy role. On the one hand, there are owners who identify with their companies and are interested in their efficient management, solid financing, and long-term success. In these companies, CFOs work with owners who do not think in terms of quarterly results and who create a working environment in which they can develop over the long term. However, the peculiarities of family businesses also go hand in hand with some specific challenges for CFOs. CFOs are confronted with a risk-averse attitude in the company and at times inconsistent attitude, for example, when, as we have observed, sometimes the owners’ pet projects are pursued even though they incur high losses, because the owners’ private assets are mixed with business assets, or because personnel decisions are made on the basis of family ties and not on the basis of professional suitability. CFOs in family businesses are often caught between family and business, and the interests of family and business may not always be aligned. Against this background, CFOs sometimes face a conflict of loyalties, with the interests of the ultimate boss of the business on one side and the interests of the business and its wider stakeholders on the other. Great CFOs in family businesses understand the need to balance the interests of all stakeholders in the business, including the owners. They manage to discuss and balance interests at eye level with the CEO, supervisory/board of directors, and owners, creating transparency and objectivity to assess complex issues through their analytical work. A professional CFO in a family business keeps a certain distance from the owners in the knowledge that the role of the CFO can also require critically questioning the owners’ proposals, an exciting but also challenging task with many conceivable role aspects.

1

From Impact to Insight: Family Business and Financial Leadership. . .

7

The Center for Family Business at the University of St. Gallen and Its Financial Forum for Family Businesses It is precisely these differences between the theory and practice of (financial) management that make family business a fascinating field of research. In 2005, the University of St. Gallen (HSG) founded its Center for Family Business with the purpose of closing knowledge gaps on family business management. Given the lack of theory on family businesses, combined with difficult access to data on these businesses, a research approach lends itself to participatory observation, listening, questioning, and deriving explanatory approaches, which can be examined quantitatively in a next step. The University of St. Gallen, in particular its Institute for Small- and Medium-Sized Enterprises and Entrepreneurship, has pursued this “engaged” research approach since its foundation in 1946. This approach was also the inspiration behind the founding of the St. Gallen Financial Forum for Family Businesses (SGFF). In close cooperation with Dr. Patricio Ohle, Director of Hipp Holding AG with responsibility for finance and Research Fellow of our institute, a circle of CFOs of major family businesses from German-speaking Europe (D/A/CH) has been formed over the years. This program meant an intensive learning for all of us and a “Unité de Doctrine” of this special circle developed over time. The university, in turn, generates knowledge, thought-provoking impulses, and examples of experience that fertilize its own teaching and research. It is first and foremost the sharpening of the problem and the deep insight into the practical world that are so valuable from a business perspective. On this basis, experiential knowledge initially emerges and, supplemented by an in-depth examination of the topics outside the Finance Forum, secures knowledge. This knowledge in turn finds its way not only into research, teaching, and further education, but also back into the forum itself. This feedback takes place by systematizing the observations made in the forum, supplementing them with the knowledge gained outside the forum and clarifying causal relationships behind the CFOs’ practical and individually experienced problems.

From Impact to Insight The guiding principle of the University of St. Gallen is “From Insight to Impact.” This means that the university wants to achieve a practical impact with its research, or simply pursues the claim: “Knowledge creates impact.” As a university with a claim to excellence, impact-oriented research is an essential component of the HSG’s positioning in the higher education landscape. The St. Gallen Finance

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Forum for Family Businesses or the digital knowledge portal fbxperts.ch is in line with this strategy, as it shows how valuable the opposite approach can be, namely, to go “From Impact to Insight.” In the quintessence, this forum shows in an impressive way how mutually beneficial the exchange between theory and practice of business management can be, typical of the University of St. Gallen. Prof. Dr. Thomas Zellweger is Professor of Corporate Management with a special focus on family businesses at the University of St. Gallen and Executive Director of the KMU-HSG.

Chapter 2

Five Development Stages of Financial Management of Family Businesses Patricio Ohle, Yvan Jansen, and Marco Baldassari

Knowing how to manage private companies is a broad field: start-ups, private equity transactions or even a partial IPO, the typical one-, two- or multi-generational company, single-family offices. Where could one determine a common denominator or a common ‘unité de doctrine’ in financial management? ‘Often, even today, owners primarily look at profits’, said Prof. Ingo Böckenholt, now President and CEO of the International School of Management in connection with his retirement as CEO of the family-run freight forwarder Dachser from the Allgäu region of Germany (Dachser SE, 2007): ‘As long as the company is still halfway in the black, all is still right with the world for most shareholders’. Unfortunately, this view is not appropriate. I concur with Ingo Böckenholt. Family businesses need to optimise financial management from all perspectives. This optimisation is necessary, but as we will also show, not sufficient to ensure the long-term success of the company. In my research at the Center Family Business at the University of St. Gallen, as well as from what I have learnt as a CFO, I have developed a system for this purpose (Ohle, 2012). It consists of five distinguishable development steps, whereby each individual one can be seen as a breakthrough (system breakthrough) with regard to the overall goal: Surviving independently as a family business and ensuring that it

P. Ohle (✉) FBXperts AG, Zürich, Switzerland e-mail: [email protected] Y. Jansen Brussels, Belgium M. Baldassari Procter & Gamble, Geneva, Switzerland © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_2

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Stages level of Maturity

This is the level that this book aspieres

Most Family Businesses are here Integrations Breakthrough

Normative Sphere Strategic Sphere Performance Perf r ormance Breakthrough

Operative Sphere

Controlling g Breakthrough

Informations formations Breakthrough reakthrough

Level V: Governance Level IV: Strategy

Level III: Perfo f rmance Performance Level I: Transparenz

Level II: Compliance( Assurance)

Breakthrough

Fig. 2.1 The five stages to excellence in financial management. Source: Own representation

continues to meet the needs in its market in the next generation of family entrepreneurs—better than its competitors. The development model (Fig. 2.1) begins with the creation of transparency, which as a catalyst has overriding importance in the methodology, followed by ensuring compliance, optimising performance, a periodic adjustment of the strategy and finally the so-called ‘good’ governance (leadership). If one were to look for examples of the phases, one would probably rank companies such as Hilti AG, Pfeifer & Langen KG and Henkel KGaA high up—to name just a few. Thus, one should categorise each family business once in principle, e.g. with the help of a rating model. Our analysis also uncovers how specific risk factors affecting family businesses can be classified and addressed in our development model. To illustrate, we examined a variety of well-known family-run companies, including Walter Bau AG, Haribo GmbH, Oetker GmbH & Co KG, Aldi, Lidl, Tengelmann, Dussmann Group, Oppenheim, Merck KGaA, Diehl Stiftung & Co, Drägerwerck AG & Co KGaA, Unternehmensgruppe Tönnies, Doppelmayr Holding SE, Müller Milch, Stihl GmbH & Co KG, Teekanne, Bahlsen, Peek & Cloppenburg, and many more. Accordingly, typical risk factors in family businesses include, for example, an unclear organisational structure as a result of tax-driven or evolved structural decisions or as an effect of intransparency. Practitioners are well acquainted with

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Five Development Stages of Financial Management of Family Businesses

11

Succession Dramas

Horrible Family Feuds

Unclear Organizational Structure

Paternalistic Leadership

Nepotism

Control Gaps

Financial Preassure

Specific Financial Logic

Intransparency

Fig. 2.2 Specific problem areas of family businesses. Source: Own representation

shareholders who wear several hats: once a partner, then a board of directors’ member and finally an additional operationally ‘responsible’ managing director. ‘Family and friends’—a challenge. Specific financial logic, which is ultimately due to the preferences of the owners, also belongs here. Examples are an unusual dividend policy, ‘plugging holes’ through inter-company loans (Buomberger, 2005), lack of budget discipline and too low or too high indebtedness that follows not business but family purposes. Let us summarise in simplified terms the typical risks of family businesses from which the risk of suboptimal decisions can arise (Fig. 2.2). The finance function is faced with a complex balancing act in the family business world. To help navigate this challenge, our five-step model has placed a strong emphasis on risk management, as it is often considered by some to be the most crucial aspect of financial management in these types of companies. The significance of starting with transparency is exemplified by the unfortunate story of Adolf Merckle and his Merckle Group. In 2008, the group employed 100,000 people.

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Phönix Pharmahandel, VEM Group, Ratiopharm, Kässbohrer Geländefahrzeuge and HeidelbergCement generated a consolidated turnover of about 30 billion euros. On the other hand, however, there were more than 3 billion debts to over 51 banks, 1.2 billion of which were owed to Commerzbank AG. In the 2008 financial crisis, shares had been pledged as collateral. Now some banks demanded early repayment. Not least, the non-transparent structure of the group led to considerable difficulties in restructuring and trying to convince the banks to grant a bridging loan. Many parts of the company were sold on an emergency basis, resulting in considerable damage. In 2009, Adolf Merckle took his own life—an entrepreneur who had built up a European group from a medium-sized business without adequately shaping the financial structures (Handelsblatt, 2009). The example underpins the fact that with growth and expansion of business, sophisticated processes become necessary even in family businesses, e.g. operational accounting and cost accounting, budgets, reporting systems and the management of liquid assets, growth financing and cooperation with banks and shareholders (Fischetti, 2000). Fortunately, only a few family businesses meet such a fate as that of the Merkle Group. Many grow over the years and generations and remain steadfast even in stormy times. In this sense, the analogy with a fruit tree as shown in Fig. II.1 (below) may apply: Transparency would form the roots here and at the successful end would be the harvest in the form of good governance—or, this is another way to understand Fig. II.1, in the form of long-term success.

References Buomberger, T. (2005). The Heritage Bankruptcy, Part 2: Die Erb-Pleite,2. Teil: Der Zusammenbruch, in: Handelszeitung vom 22.3.2005. https://www.handelszeitung.ch/ unternehmen/die-erb-pleite-2-teil-der-zusammenbruch. Last Accessed July 19, 2022. Dachser, S. E. (2007). https://www.pressebox.de/inaktiv/dachser-gmbh-cokg/Dr-IngoBoeckenholt-als-Dachser-Geschaeftsfuehrer-abberufen/boxid/132098. Last Accessed July 19, 2022. Fischetti, M. (2000). Financial management of your family company. Family Business Publishing Company. Handelsblatt. (2009). https://www.handelsblatt.com/unternehmen/industrie/unternehmertragoedie-milliardaer-adolf-merckle-begeht-selbstmord-seite-3/3083488-3.html. Last Accessed July 19, 2022. Ohle, M. P. (2012). The role of the CFO in large family businesses. (Diss.), University of St.Gallen.

Dr. Patricio Ohle is the founder and managing director of FBXperts AG. He has held management positions in family businesses for three decades, including as a director at Hipp Holding AG. Dr. P. Ohle is a Research Fellow of the Center for Family Business at the University of St. Gallen, where he also completed his doctorate. He is also a lecturer at the University of St. Gallen in ‘Finance of large family firms’.

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Yvan Jansen is a board member and independent advisor specialised in strategy and transformations mainly for family-controlled companies. He was previously Senior Partner at Kearney, Partner within private equity and Senior Partner at The Boston Consulting Group (1990–2010), based subsequently in Paris, London and Brussels. Marco Baldassari works as Finance Manager in Procter & Gamble, Switzerland. Marco studied Business Administration at Bocconi University. Then, he completed a double master’s degree in Accounting and Finance between Bocconi University and University of St. Gallen. Marco supports the growth of our network in Italy with CFO of Italian Family companies.

Part II

Transparency: Kickstarter for Transformation

Patricio Ohle

The Merkle case serves as a striking example of the challenges faced by many family businesses, particularly in terms of transparency (Rappers, 2022). However, transparency serves as the crucial link for all other dimensions of excellent financial management and acts as the foundation for every successful transformation, as depicted in Fig. II.1. It is for this reason that our journey begins with a focus on transparency. In this section, we address key aspects of financial management in family businesses. These include the following: • Optimal financing structure: We will explore the importance of establishing an optimal financing structure that allows the family business to maintain its independence. We will discuss various financing options and strategies to ensure long-term stability and financial sustainability. • Data-driven transformation: We will highlight the significance of leveraging data for transformational initiatives within the family business. We will emphasize the importance of data analysis, utilization of technology and avoiding common pitfalls that can arise during the transformation process. • Role of the CFO as family officer: We will examine the unique role of the CFO in family businesses, where they often take on additional responsibilities as a family officer. We will discuss the challenges and opportunities that come with this dual role and provide insights on how to effectively manage both aspects. • Structuring the family’s assets: We will explore strategies for structuring the family’s assets in a way that aligns with their long-term goals and vision. We will discuss considerations such as diversification, risk management and intergenerational wealth transfer.

P. Ohle FBXperts AG, Zürich, Switzerland e-mail: [email protected]

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Fig. II.1 What bears fruit in family businesses. Source: Own representation; unpublished paper from lecture: Challenges of international family firms (2021)

• Aligning financial processes with strategy: We will emphasize the importance of aligning financial processes with the overall strategy of the family business. We will outline step-by-step approaches to deriving financial processes from the strategic objectives, ensuring coherence and effectiveness in financial management. • Flexible planning: We will highlight the advantages of flexible planning in the context of family businesses. We will discuss the benefits of adapting financial plans to changing market conditions, evolving business priorities and unforeseen circumstances. We will also provide guidance on implementing flexible planning practices.

The finance department must deliver concrete and well-supported reasons for the proposed alterations that align with the established objectives. This approach will help to win over the support of the other departments and encourage them to follow our recommended path (cf. Fig. II.1). This initial stage of the transformation is referred to as the transparency phase, which we view as a pivotal informational

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system breakthrough. Do you see from the selection of challenges that we assign to transparency in our stage model that we think it is about more than funding? Do you also see the potential of new technologies and AI to make this point a foundation about new steering models for family firms? Reference Rappers, T. (2022). adieu-geheimniskraemerei-und-eigenbroetlerei. Last accessed July 19, 2022, from https://dienews.net/artikel/adieu-geheimniskraemerei-undeigenbroetlerei/.

Chapter 3

Optimal Financing Structure: Avoid Bottlenecks and Maintain Headroom with Foresight: Everything Done Right. . . Almost! Johannes Stankiewicz, Mark Hill, and Peter Sielmann

The CFO of the medium-sized mechanical engineering company has just successfully placed its first promissory note financing. The company was able to optimally complement its maturity profile with long maturity profiles of five, seven and ten years and establish a second financing pillar alongside its existing syndicated loan. The (unsecured) promissory note also enabled the company to tap new lenders from the savings bank, Volksbank and insurance sectors. Maturity profile optimised, capital provider circle expanded, favourable financing conditions secured: All this was also described to the company in the banks’ presentations as advantages of the new financing structure. But less than a year later, the CFO finds himself in a very messy creditor round, fighting to keep the financing partners from cancelling their instruments and keeping open the lines that are so important to him. What had happened? First of all, a significant deterioration in the economic situation occurred. The CFO regularly informed his core banks and the so-called agent of the consortium about the development within the agreed information intervals, but only very cautiously about measures initiated. Nevertheless, a renegotiation of the financial covenants to be met could not be avoided. As a result, the confidence of individual financing

J. Stankiewicz Cologne, Germany M. Hill (✉) AWK Aussenwerbung GmbH, Koblenz, Germany e-mail: [email protected] P. Sielmann Neumann Group, Hamburg, Germany Sandtorpark GmbH, Hamburg, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_3

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partners visibly dwindled, and individual promissory note creditors no longer felt comfortable with their commitment. They terminated their share in the promissory note transaction in order to clean up their own loan portfolio. This massively increased the nervousness of the other Schuldschein creditors, and the first banks in the syndicated loan also became restless. Unlike the Schuldschein (promissory note), however, the syndicate banks did not have the option to terminate bilaterally and initially remained on board. Nevertheless, capacities of the management and the finance department were massively tied up in order to avoid further terminations of promissory note creditors. However, the company had forgotten its credit insurer. The insurer had not been informed intensively about the current development, but learned ‘from the market’ that several promissory note creditors were critically reconsidering their commitment in the meantime and that individual terminations could not be avoided. This led to a reduction of the credit insurer’s commitment lines and the suppliers of the mechanical engineering company were no longer able to secure their claims accordingly. In the course of the creditors’ meeting, the management was suddenly condemned to be a spectator as the various lenders pondered whether to continue to support the company or to terminate their commitments, thus sending the company into insolvency. The company was only able to keep its various creditor groups together and resolve the situation with great difficulty. How could such a development come about? Where could the management have reacted earlier and differently?

Financing Strategy Does Not Necessarily Mean the Lowest Possible Interest Rates! Many companies still lack a sustainable financing strategy. Rather, financing is still carried out on an ad hoc basis and a financing strategy is then considered as part of an individual process. Very often, however, this strategy focuses on four points: 1. At the lowest possible interest rate 2. As long a maturity profile as possible (in order to secure the current interest rate level in the long term) 3. As few financing partners as possible (in order not to spread information widely among a group of capital providers) 4. As little say as possible (therefore no further external equity or subordinated capital) These points are all valid in themselves, but they only represent one part of a financing strategy. In more difficult creditor rounds, one regularly experiences that entrepreneurs cannot even answer the question according to which financial ratios they manage the company and where important threshold values lie, not to mention the formulation of a financing strategy that is derived from the corporate strategy.

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The core task of the CFO in a family business is to ensure liquidity and thus successful independence. This includes, for example, a kind of traffic light system as soon as lines above a certain % rate are used, in order to be able to start negotiations promptly.

Building Blocks of an Integrated Financing Strategy Basically, four elements or building blocks of such a financing strategy can be built up, which then have to be adapted to the individual needs of the individual company: 1. 2. 3. 4.

Linking the financing strategy with the general corporate strategy The definition of strategic financing needs The selection criteria for funding instruments and partners The definition of a basic financing process

Figure 3.1 gives an overview of these four elements and their most important aspects.

Linkage with the Corporate Strategy and Key Performance Indicators The company’s overarching strategic goals also define its financial possibilities. For example, going public and the structure of equity investors: Family businesses are generally not attracted to the stock exchange or there are clear limitations with regard 1

Corporate strategy and financial ratios

2

Strategic financing requirements

Link to corporate strategy

Definition of demand

■ Consideration of strategic goals

■ Quantification of the goals and measures based on the corporate strategy, e.g.

■ Definition of the financing structure Implementation of relevant financial ratios

– Strategic investments – Capital markets assessments

■ Application of quantifiable ratios management and determination of dimensions and thresholds

■ Dividend policy

– Profitability ratios

■ Limitations regarding provision of securities

– Financial ratios

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Financing instruments and partners

Corporate financing strategy

4

Financing process

Definition of suitable financing instruments

Development of an exemplar process

■ Determination of a portfolio of generally acceptable financing instruments and their share in the envisaged financing structure

■ Preparation of an ideal financing process that can be adopted to future financing situations

■ Specification of exclusion criteria and minimum requirements Definition of appropriate financing partners ■ Definition of minimum requirements regarding potential strategic financing partners

– Determination of milestones for the management – Development of templates for evaluating and presentation of financing offers received – Composition of a company maturity profile to define of ideal starting points to initiate (re-)financing processes

■ Definition of exclusion criteria

Fig. 3.1 Elements of the financing strategy. Source: Own representation

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to the voting rights situation after an IPO. There are two main reasons for this. Firstly, entrepreneurial families do not want to give up control of their family business, or only to a limited extent, and still want to secure access to the organised equity market on the stock exchange. Secondly, family businesses in particular are still extremely cautious when communicating internal circumstances to external financing partners. These are primarily explanations of the sometimes complex business model and corporate structure, as well as strategic information on planned investments, acquisitions or product or innovation launches. However, the issue extends to caution about communicating the development of earnings and the annual dividends or withdrawals of the owners. Complex governance structures of a legal or personnel nature, which are often present in family businesses, also make interaction with capital providers more difficult. Finding a balance between this cautious attitude of the (family) shareholders and external capital partners with their (justified) interest in such relevant information is regularly one of the most difficult issues in negotiations with external capital providers. From the point of view of the family business, it is important to balance out the difference in knowledge on the part of the capital providers. In the best case, this will also reduce financing costs. Larger, capital market-oriented family businesses take this step, but must also prepare themselves strategically for it. Particularly in times of activist investors, such an IPO is likely to be met with considerable headwind from shareholders when different expectations regarding strategic development and expected returns collide. If, in extreme cases, activist investors appear and try to score with management, supervisory board and shareholders in a way that attracts public attention, this is not only annoying but can be really damaging for the company. No board of directors likes to be sent textbook charts on performance and corporate governance with the indication that there are probably corresponding failures in their own company (Schmitt, 2017).

Strategic Financing Needs What do I need funding for in the coming years? This is the strategic question behind this building block. What are the main projects to be realised in the coming years? International expansion, acquisitions of competitors or upstream or downstream value creation stages? Financing of suppliers and customers? Rapidly rising raw material prices? Or a consolidation course, pushing ahead with important replacement and expansion investments? It is crucial that the financing strategy always strikes a balance between the source and use of funds (Fig. 3.2). The dividend or payout policy must also be considered in this context. Many family businesses limit their annual withdrawals, for example, to a fixed amount or to a low percentage of the annual profit. Here, however, there are regularly very different starting positions, which occur due to diverging interests, especially among

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Source of proceeds

■ Capital structure ■ Cost of capital ■ Cash-flow capacity ■ Access to capital markets 2

Use of proceeds

■ Dividend policy ■ Investment horizon ■ Risk appetite ■ Return on capital invested

Fig. 3.2 Interaction between source and application of funds. Source: Own representation

larger ownership groups. Examples include Brenninkmeijer, Haniel or Heraeus. Here, family statutes or articles of association can provide a framework. Where this is lacking, withdrawal restrictions in financing agreements may take effect. Nevertheless, they are ill-prepared when demands from other capital providers for additional funding arise in economically difficult situations (Student & Werres, 2020). In the development of a financing strategy, sufficient scope for fluctuations (‘headroom’) is regularly neglected. All this must be included in an integrated business plan with cash flow projections, even if the information policy is cautious.

Financing Instruments and Partners Only after the first two building blocks of a financing strategy have been developed can the financing instruments suitable for the company be derived and the respective suitable partners identified.

Equity, Mezzanine and Debt Capital Different opinions can be formed among the shareholders about the orientation of the financing structure in the family business. Generalisations about the financing structure are usually difficult to justify—each phase of a family business is too specific. The impetus for a change in the financing structure can be as follows: – – – – – – –

Capital requirements to be able to grow (organically or inorganically) Financing of investments (digitalisation, innovations, factory construction) Change of shareholders (succession or changes), taxes in the event of succession Upcoming refinancing Restructuring Insourcing external suppliers Changed framework conditions on the financing markets

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Especially on the equity side, the options for family businesses are regularly limited. Thus, Peter Kratz mentions as special features of the finances of the family business, in addition to the dividend and equity capital policy, the role of the banks; the separation of private and business assets, including the separation of liability; and the attitude to risk, also an investment policy that is limited by self-financing, including the target debt, since the capital market is hardly available (Kratz, 1994, p. 205). New equity capital from outside the family is regularly undesired. A temporary minority shareholding by an investment company can be an option. In this case, however, it must be clear from the beginning what the future exit of the investment company will look like. Equity-like financing components (mezzanine) in the form of subordinated loans or profit participation rights, for example, are widespread. However, these have to be adapted very individually to the respective situation. In this segment it is particularly important to look ‘behind the packaging’. On the other hand, due to the equity-like character—for example, through profit-related interest or subordination—investors demand extended information and co-determination rights. In the area of debt capital, on the other hand, the variety of instruments is very large. From short-term financing components such as receivables and inventory financing to leasing components and traditional bilateral or syndicated bank financing, many variants and forms are possible. Financing elements close to the capital market, such as promissory notes or bonds, are also suitable for family businesses. However, it is important to maintain an overview and to keep an eye on the right balance between diversification of financing sources, on the one hand, and complexity in subsequent handling, on the other hand, when developing the individual financing strategy from the outset. Examples of family businesses that rely heavily on bonds as a central financing component are Schaeffler and Würth. They realise their long-term financing requirements through their own financing companies. For example, Schaeffler financed a volume of €1.5 billion in 2020 to refinance maturities in 2022. This was done via two bonds of € 750 m each with maturities of 5 and 8 years. The transaction was supported by a syndicate of banks consisting of Bank of America, BNP Paribas, Deutsche Bank and HSBC. Net debt versus EBITDA was 1.6×, below a critical level of 3.5×. In addition, undrawn credit lines of approximately € 2 bn were available at group level. From the Schaeffler Group’s perspective, it was important to maintain liquidity buffers during the COVID-19 crisis and transformation of the automotive market, accompanied by appropriate discipline in investments and costs. The prerequisite for long-term success is always a stable operating business. Schaeffler may also be cited for a placement of a green promissory note in 2020. Moreover, €300 million of the €350 million volume is to flow into the financing of sustainable projects. The terms of the promissory notes were 3, 5 and 8 years. BayernLB, Helaba, Unicredit and ING acted as arrangers. This financing instrument is also gaining significant importance as an equity-related hybrid bond for larger family businesses, including Henkel and Hero.

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Banks, Capital Providers, Investors Typically, family businesses still have a core banking group that is available with credit facilities in addition to account and payment transactions. Depending on the size of the business, this can be between 3 and 15 banks. Every company needs an experienced, resilient and homogeneous bank mirror in terms of line provision. The smallest and slowest bank causes delays and sometimes leads to illiquidity. Today, pension funds and family offices are also increasingly interested in financing as capital providers. However, there are still cases in family businesses where there is a strong dependence on a house bank. However, this may not be the optimal bank to manage a larger financing transaction. In the course of financing, the personal preferences of the partners can lead to a suboptimal composition of the banking group. In addition to a personal level of cooperation, the financial strength, experience and conditions of the banking partners should be considered essential criteria. It is also important to combine financing partners from different banking sectors (commercial banks, savings banks and Landesbanken, cooperative banks, international houses, specialised financiers), because it is always important to keep in mind that these financing partners could also change their strategy and withdraw from market segments. There must be no gap here! As a rule, companies combine this ‘basic structure’ with instruments for financing their current assets (factoring, forfaiting or inventory financing) or leasing structures. Here, too, the financing partners regularly come from the banking environment, which should fundamentally simplify coordination between the financing partners. However, even in this constellation, the management must keep a very close eye on the at times complex contracts, which are not necessarily fully coordinated with each other. It is not uncommon to encounter contractual structures in which different financial ratios and escalation mechanisms have been agreed upon that do not fit together at all. The details in the documentation are crucial, and management must develop its own very good picture of this. This becomes even more extensive if the company is oriented towards the capital market (debt capital markets). In the case of promissory notes, the documentation is comparatively compact, but the investor groups can be very heterogeneous. Not only savings banks, Landesbanken and cooperative institutions are active here. The share of international houses, insurance companies and pension funds as well as family offices has increased significantly in recent years. However, this also makes coordination in difficult situations complex, as investors pursue different interests. In the case of bonds, the topic of prospectus preparation and prospectus liability represents an additional level of complexity for the management. However, above a certain size, companies create an even lower interest and more independent access to national and international investor groups beyond the promissory note. In addition, the company has to weigh up whether it will also go down the route of an external rating in the context of bonds. Especially in uncertain capital markets, companies stabilise a still addressable access to investors through the external and neutral

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assessment of recognised rating agencies. However, one should think twice. The ghosts that one calls annually... also mean costs. Even large family-owned companies such as Otto in Hamburg therefore refrain from doing so, despite everything.

Stakeholder Management Not least the opening example shows that all these financing groups with their individual requirements have to be ‘picked up’ regularly. This is often forgotten in times when companies are prospering economically. If the situation changes, it is not always possible to meet the complexity of the individual creditor groups. The central instrument for getting a grip on complexity is, in addition to the careful selection of suitable financing partners per instrument, the creation of a uniform and transparent information basis. These established standards must be adhered to and create trust among the financing partners. This includes not only a regular information package, but also constant exchange, for example, through recurring bank meetings or investor rounds, at least with the most important external financing partners. The credit approval process has currently tended to lengthen and can take up to 4–6 months in the critical case. Another important instrument for building trust with external financing partners is the behaviour of the corporate family. This includes the involvement of the corporate family in strategic and entrepreneurial decisions, but also quite simply the withdrawal policy. In the negotiations on financing agreements, there is regularly intense wrangling over dividend or withdrawal restrictions on the part of the shareholders. The aim here is to be able to continue to pay the ‘entrepreneur’s salary’, on the one hand, but at the same time to limit withdrawals, especially in times of economic downturn for the company. The agreements found here also serve to discipline the equity investors. This is particularly necessary in the case of larger and widely ramified shareholder groups.

Financing Processes Financing processes are still often not started early and actively, but rather on an ad hoc basis (e.g. in the case of a pending acquisition) or on the initiative of a financing partner who wants to score with new innovations. However, in many places—even in large companies—there is a lack of an early and proactive approach, for example, in refinancing. And there is a lack of process know-how, as companies may only have to implement such a financing process once a year or even less frequently. This regularly leads to friction, as the company’s finance organisation cannot manage this with the necessary speed and precision in addition to its day-to-day business. First of all, it is important to set up a ‘model financing process’ in the company. This begins with the internal preparation of the necessary information and

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decision-making documents. It also describes the market approach (how, with which documents, who is to be approached, etc.) and the subsequent selection and implementation phase. This is not primarily about coordinating the external financing partners, but above all about coordinating the internal resources and steps. What information should controlling and financial accounting compile, who compiles and coordinates? But above all: who has to approve, decide and sign when? It is not favourable when you have to try to summon the managing director of a subsidiary back to the office from his holiday on a Friday afternoon because you forgot to have him sign the new syndicated loan agreement. Or the shareholders were not informed early enough about the necessary resolution. These and other stumbling blocks must be eliminated in advance if possible. In addition, management needs to be aware in advance of what developments and changes have occurred since the last financing process. Especially in recent years, there have been significant developments towards more business-friendly loan and bond documentation. But for this, management needs its own channels and sparring partners to be able to follow these developments.

Transparency and a Structured Approach as Building Blocks for Success A sustainable financing strategy must be developed individually for each company. The above four building blocks are intended to serve as an idea for essential elements that have crystallised out of practice and that have repeatedly led to challenges in financing situations, even to the failure of the financing process. A decisive factor for the strategy is the degree of transparency that can and will be shared with the various providers of capital. This determines the available financing components and partners. Interaction with creditors is very important. According to which KPI’s is the company actively managed? What are the maximum covenants/collateral that the borrower would accept? Sometimes the covenants of the banks do not fit the business of the borrower: must have versus nice to have. We consider it very important for a ‘medium-sized CFO’ to establish and maintain good contact with the back office at the banks. In this context, it is worth remembering that all companies (have to) publish their annual financial statements and creditors pay a lot of attention to the quality of the management reports. From the bank’s point of view, transparency improves flexibility and conditions in the financing area for a family business that does not want to approach the capital market but would like to use capital market-like instruments (US private placement or similar) (Knop, 2011). For the qualitative rating components, banks collect the process time from the balance sheet date to the preparation of the financial statements—this must be comprehensible. However, the connection between transparency and the financing potential as well as the costs is clear.

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The second central aspect is the structured approach, because every financing process ties up massive internal capacities and intervenes in the activities and processes of the companies. It is important not to let this process be completely taken out of one’s hands, but to actively drive it forward, if necessary, supported by advisors and sparring partners.

References Knop, C. (2011). Familienunternehmen entdecken den Kapitalmarkt. Last Accessed July 19, 2022, from https://www.faz.net/aktuell/wirtschaft/unternehmen/finanzierungsalternativenfamilienunternehmen-entdecken-den-kapitalmarkt-1358035.html. Kratz, P. (1994). Finanzielles Management im Familienunternehmen. In H. Siegwart, J. Mahari, & M. Abresch (Eds.), Finanzielle Führung, Finanzinnovationen & Financial Engineering (Vol. 1, pp. 203–214). Schäffer-Poeschel. Schmitt, J. (2017). Aktivist Wyser-Pratte kritisiert Mittelständler OHB in bissigem Brief. Last Accessed July 19, 2022, from https://www.finance-magazin.de/finanzierungen/kapitalmarkt/ aktivist-wyser-pratte-kritisiert-mittelstaendler-ohb-in-bissigem-brief-1410421/. Student, D., & Werres T. (2020). Grillo-Werke brauchen dringend Kapital. Last Accessed July 19, 2022, from https://www.manager-magazin.de/unternehmen/ulrich-grillo-die-grillo-werkebrauchen-dringend-kapital-a-00000000-0002-0001-0000-000174480372.

Dr. Johannes Stankiewicz currently works in real estate management and as a founder. Previously, he was Head Corporate Finance at Chocolat Frey AG/Delica AG. Dr. Mark Hill has been CFO of awk Aussenwerbung GmbH since 2020. He has more than 20 years of experience in corporate finance, including international positions at Dresdner Bank and KPMG. Peter Sielmann shaped the fortunes of Neumann Kaffee Gruppe as CFO for 32 years. In 2012, he was named ‘CFO of the Year’ by Finance Magazine. Before that, Sielmann had been a member of the executive board of Bernhard Rothfos AG.

Chapter 4

Meaningful Data for Right Decisions: How to Achieve Impact with Data Management Anja Lagodny and Nikolai Graf Lambsdorff

The board of directors of a hidden champion in the German-speaking region with a turnover of over one billion euros meets for one of its four annual meetings. The chairman is a co-owner and family member and has been with the company for over 30 years, including having an operative position in the firm. He wonders how to deal with new technological challenges and future technologies. And anyway: Are virtual or augmented realities (VR/AR), artificial intelligence (AI) applications and blockchain solutions relevant to his company? At first glance, no. After all, the company operates in a rather traditional business segment. But is that the case? Not by a long shot—as you have indeed already guessed. Technologies of the future not only enable entirely new business models but also offer all companies—regardless of their field of activity—the opportunity to gain advantages: cost savings, efficiency, speed, innovation and more (Fig. 4.1). But what should the board of our example company do now? The first step is for the board to make a fundamental decision and thus answer a fundamental question: What does ‘digital’ mean for our company? Figure 4.2 shows three possible strategic answers to this question. There is a tendency in many companies to want to do everything at once, and obviously, data plays a significant role in all three strategic approaches. This first strategic decision is an important signpost as clearly, each company will need to develop a realistic investment strategy. In addition, the technologies of the future that are particularly relevant for the company can already be filtered a little.

A. Lagodny (✉) Selbständig, Basel, Switzerland N. G. Lambsdorff Signature Ventures, Munich, Germany © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_4

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Fig. 4.1 The value of data. Source: https://insuranceblog.accenture.com/smart-insurers-will-usedata-to-outpace-competitors-heres-how. Last accessed on 22.07.2022

Fig. 4.2 Approaches for a digital strategy. Source: Own representation

Our hidden champion had made such a landmark decision—a very good start for a successful digital journey, but only the first hurdle. In practice, the challenges are just beginning. Let us hear the CDO on this: Data is not only an essential ingredient for managing and steering the company. Data management and a data-based corporate culture are crucial for ensuring future success. Why is data management so important? • The volume of data is increasing rapidly—data is being created from ever-new sources and has become an essential asset for data-based business models. • Data sovereignty has become extremely important: New strategies are needed to secure company data important for the company’s future success, with high quality. • Legal requirements and new regulations (e.g., GDPR) make data governance indispensable (what data is where, and who uses it?).

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Fig. 4.3 Critical capabilities for a data-driven enterprise. Source: https://www.accenture.com/usen/insights/technology/closing-data-value-gap. Last accessed on 22.07.2022

Accenture’s ‘Data-driven enterprise strategy framework’ exemplifies 12 critical capabilities that a data-driven enterprise needs (Fig. 4.3). Many companies—and perhaps this sounds familiar to you too—have long since recognized this and have made data management an important topic at management level. Often under high pressure from the management level, data governance is set up, and technological investments are made very quickly. Our example company has even brought new expertise on board and hired data scientists. But despite all the efforts: In the next board meeting, the update on data management leaves many questions unanswered—and gives the impression that nothing has moved yet. The board is not alone in this: Many different studies assume that by 2021 only 10% of companies will have made significant progress in data management. In practice, the same challenges seem to play a role in this: • Top-down approach • No real solution to the problem • Silos and the overvaluation of technology

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The Problem of the Top-Down Approach If a company push the data agenda, it is often driven as a top priority, overseen by senior management. This is a good approach because of its importance—however, this is often where the challenges start. In many companies, there is already a certain level of data management: for example, in sales and marketing, where department heads actively use data for customer segmentation, key sales figures, etc., or often driven by the finance department for better control figures. Unfortunately, all these projects often end up in the design of new dashboards that are now automated instead of being built manually. The problem: Data management needs broad support from across the company. Automated reports might be questioned again and again and often will be judged as a further control mechanism. The typical result: People are happy with the new, automated MIS that allow ad hoc real-time access, but managers and employees always constantly question the numbers. By the way, our hidden champion’s board of directors precisely met these challenges. They have succeeded in connecting different data sources and created something new—but it does not feel like great progress for the company. What can be done? Given the substantial investments and the strategic impact, it is certainly right to put data management on the executive agenda. However, every employee in the company must be involved in this topic from the beginning: Why are we doing this, what is the goal—and what do we need from everyone to make the project a success? Especially with data management projects that come from the finance and controlling area, proper communication is important.

No Real Solutions to Problems Let us stay with our dashboard example from above: Surely you have also attended meetings where the new dashboards were presented, and people thought appreciatively: The fact that we now get all this automatically and from one source is excellent progress. But is it? Or are the dashboards more of an end in themselves? The raw material ‘data’ is primarily extracted to generate impact at all levels of the company. Optimized corporate data may be a first step towards this. Still, the true value will become apparent when real business challenges are solved because of the right data usage. Often, this has little to do with corporate key reports but rather with operational data. The raw material ‘data’ is primarily extracted in order to generate impact at all levels of the company. Optimised corporate data may be a first step towards this, but the true value will only become apparent when real problems are solved with the help of data. Often, this has little to do with corporate key figures, but rather with operational data. Some examples:

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• Can we measure our customers’ willingness to buy with our CRM system via an AI integration and send corresponding triggers automatically? • Can we prevent out of stock situations in retail with smart shelf data points? • Can the installation of sensors in the production area optimise our output? This ties in with the ‘problem of the top-down approach’: Asking the right questions requires specialists from a wide range of fields to positively impact progress in data management. The board of directors of our hidden champion had recognized this early on. It was able to quickly outgrow ‘new automated’ dashboards: with real solutions to problems, new goals and many new ideas for optimization and innovation.

Silos and the Overvaluation of Technology In many studies on the status of data management, one repeatedly reads that one of the major challenges is the lack of expertise in the company. According to a WHU survey, many companies do not employ experts who can assess future technologies and their impact on the business model in detail (Soluk et al., 2020, p. 14ff.). When data expertise is brought into the company, it is often via a new team made up of specialists. However, the new specialists do not necessarily know the company. And if we are honest, many of the terms such as API, data lake and AI that appear in presentations on the topic of data management are usually not entirely comprehensible at their core. What is more, while the new team is starting its work, many different departments have often already embarked on the path of data management on a small scale: Marketing has tested solutions offered by agencies, and sales has already integrated a CRM solution. The latter was piloted ‘outside’ in order not to lose momentum before turning to the internal IT department to integrate and scale the tool. The problem: Although data management has been declared a top priority, and although the new specialists have been hired, only another silo has been created. Other departments continue as before, since they have to push their topics forward. Although the data team is tackling the challenges set by the board of directors with full vigour, other areas of the company are rather sceptical about the team: IT is concerned about security and the system landscape, sales and marketing are working with the data team on a pilot, but all other projects are being driven forward independently as before. This does not have an impact on the culture in the company. The solution approach: The quintessence lies at the beginning of this article—in the digital strategy and the company’s data management strategy derived from it. Data management can be a very complex issue. Therefore, it is advisable to proceed step by step: 1. Create transparency and clarity: What does our company’s data value chain look like?

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2. Identify the starting point—and what your ‘level up’ should look like (establish, value proof, scale, accelerate, optimise). 3. Data strategy: Identify your vision, strategic focus areas and ‘how to win’—your data agenda or ‘data strategy on a page’. 4. Before you go operational: Create a solid communication strategy and a stakeholder map. These first four steps will take about three to six months. Do not underestimate them: They will be your foundation in the future, and with these steps, it will be possible to test first tangible solutions and to understand which technologies are important for you.

Future Outlook: Distributed Ledger Technology (DLT) or What Does the Blockchain Bring? (Nikolai Graf Lambsdorff) One technology that will have a fundamental impact on the Internet, data management and thus innovation, in general, is distributed ledger technology (DLT), also called ‘blockchain’. At its core, DLT is nothing more than a database that makes it possible to store information immutably and transparently (in encrypted form). Database changes are appended to previous changes in the database, similar to a chain. This makes it possible not only to read out the current status of the database, but also to view the entire history of all database changes. Since this ‘chain of changes’ (considered in its entirety as a database) forms an open network with a collection of nodes that collectively verify the legitimacy of each change, a DLT does not have a central entity with special rights (‘gatekeeper’). This is called ‘trustless’. What sounds trivial at first has enormous implications. For many of the most valuable companies of our time, a key aspect of their competitive advantage lies in the data they collect, hold and analyse (Fig. 4.4). The consequence of a ‘trustless’ database is that applications, users and developers can no longer develop around a company as a ‘gatekeeper’, but can build directly on the basis of the actual database. Communication and interaction can happen directly on the basis of the data, as everyone can fully trust the accuracy of the database. In doing so, a blockchain, similar to a ‘ledger’ in accounting, can ensure the exchange of values and services between entities. Therefore, one of the most evident use cases for DLT is the financial industry. Furthermore, today’s Internet works by linking many data silos in which data is collected and managed by specific platforms or applications. Although the user has a certain legal claim to his/her data, technically he/she has no access to it and no control over it. DLT makes it possible for the first time that, on a technical level, only the user has control over their data (be it bank accounts or stock portfolios, health

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Fig. 4.4 The database as an open ecosystem. Source: Own representation

data or social networks). As a result, DLT will have a profound influence on how companies deal with all the data they currently collect and analyse. What exactly data management will look like in the future is still unclear, because we are just at the beginning of this paradigm shift. But because it is an innovation at the base of our IT infrastructure, it will have a massive impact on all industries in the next 10 to 20 years. In as little as five to ten years, this trend can become a threat to the business of many companies, but also an immense opportunity. It is therefore all the more important that companies deal with this technology as early as possible, even if they do not suspect a direct threat from DLT-driven business models in their industry. The most important foundation is to build up a deep understanding of the technology and core competencies within the company. Concrete action steps would be the following:

• • • •

Recruit and train R&D staff in relation to DLT. Create a broad, fundamental understanding of DLT throughout the company. Further develop the corporate philosophy. Develop DLT-based pilot projects, within and outside your core business.

As DLT will become relevant to your company on a very broad level, all employees should be familiar with the technology as early as possible. Especially in the areas of accounting and finance, the technology could become relevant (and of great benefit) sooner than you can imagine. Developing a sustainable business philosophy is costly and time-consuming. Therefore, they should incorporate important aspects of DLT into their philosophy as early as possible. An important rethink must take place in the area of data handling, which ties directly into the idea from the previous section. Data must continue to be seen more as a kind of infrastructure on which products, applications, communication and interaction can be built. “Open source” is also an important part of DLT and should therefore also become a component of your corporate philosophy. The further development of the corporate philosophy should be accompanied by the development of smaller experimental projects and applications based on DLT.

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Above all, this also serves to research and establish the server and software infrastructure that is necessary for DLT, because a stable and cost-effective infrastructure will mean a strong competitive advantage for your company thanks to the higher scalability and security it makes possible. If you as a company see DLT as a threat and an opportunity at the same time as early as possible, you will lay the foundations for your business model in time to build a competitive advantage in a world where data no longer resides in silos but in ecosystems. Of course, blockchain will not be the solution for everything in the future. Please see the opportunities.

Reference Soluk, J., Kammerlander, N., & Zöller, M. (2020). Digitale Transformation im Mittelstand und in Familienunternehmen. WHU.

Anja Lagodny has more than 20 years of experience as Global Chief Digital Officer and Senior Advisor in the consumer goods industry. Most recently, she served as CDO at Japan Tobacco International (JTI) from 2019 to 2022. Prior to that, she held positions at the Carlsberg Group and Mondelēz International. Nikolai Graf Lambsdorff is an investment manager at Signature Ventures, a venture capital fund focused on funding start-ups in the areas of blockchain and distributed ledger technologies as well as Web3 technologies.

Chapter 5

The Chief Financial Officer and the Family Office Michael Gaska

Family offices have increasingly established themselves as wealth management vehicles for wealthy entrepreneurial families in German-speaking countries over the past ten years. However, these organisations do not limit themselves to core tasks of asset and investment management, but also provide accompanying services, such as tax and legal advice, depending on the scope of services. Compared to traditional bank-related institutions, the range of services offered by family offices is characterised by the fact that, in addition to wealth management, they also address the non-financial needs of wealthy entrepreneurial families. Maintaining family cohesion across generations is one of the central tasks of family offices. With the help of family reunions, further education events for the next generation or philanthropic activities, family offices try to strengthen the family glue and maintain core values and traditions. This is a task that becomes increasingly important when the original family business that created the family’s identity no longer exists and the family now has to find its way in its new role as investor of the predominantly liquid assets. Over time, three types of family offices have emerged, which differ both in their scope of services and ownership structures: In addition to the multi-family office, which provides wealth management services on a commercial basis, these are in particular the family-owned single-family office and the embedded family office. A single-family office is a special family business that is wholly owned by one entrepreneurial family and—as the name already suggests—serves only one family. Over time, with increasing family complexity, such a single-family office may well comprise assets of several tribes and generations. As a legally independent organisation, detached from a possible existing family business, it enables the separation of M. Gaska (✉) Universität St. Gallen, St. Gallen, Schweiz e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_5

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private and business assets. The advantage of single-family offices is the freedom to design the scope of services. Entrepreneurial families have the possibility to select the range of services and personnel according to their own needs and criteria. This enables tailor-made services that other types of family offices can only provide to a limited extent. Furthermore, single-family offices are much more efficient in meeting the family’s need for confidentiality and privacy, as the family has considerable control and influence over the strategy and operation of such a family office. Limited visibility is an advantage that is even more pronounced in so-called embedded family offices. This type of family office is an informal wealth management structure embedded in the existing family business. As a rule, particularly loyal and trustworthy employees of the finance department (especially the chief financial officer) take over the management of private assets of the owner family in addition to the actual business tasks. The embedded family office is supposedly a more costefficient wealth management option compared to a dedicated single-family office. While the latter can usually only be operated profitably for assets in the hundreds of millions, the embedded family office enables administrative synergies with the family business even for significantly smaller-sized assets.

The Chief Financial Officer as Family Officer When it comes to choosing a suitable family officer, business families face the dilemma between selecting a trustworthy person and a competent one. If the family appoints a member from its ranks as family officer, this can satisfy the family’s need for a trustworthy person. At the same time, deficits in competence and training may have to be accepted. If entrepreneurial families rely on qualified family officers from outside the family, there is ex ante uncertainty regarding the loyalty of an employed family officer. In order to actively manage the areas of tension between trust and competence, entrepreneurial families are increasingly appointing CFOs of family businesses as their family officers. In practice, the CFO of the original family business in particular is often entrusted with the family’s wealth management if he or she has distinguished himself or herself through a particular track record in the business. Tax knowledge is also an advantage. From the family’s point of view, the CFO thus proves on the one hand the professional prerequisite for the job of a family officer. At the same time, his expertise creates a relationship of trust with the family that has often grown over years and includes knowledge of the family’s needs and interests as well as inherent dynamics. The appointment of the CFO as the family’s family officer is thus a natural development that is, however, not without controversy. Is the CFO really the best family officer an entrepreneurial family can win over? Certainly, more experienced investment and asset managers from the banking environment would be available. However, families mostly want family officers who have the ability to integrate personally and empathise, who think entrepreneurially and not in terms of products and who are pleasant to deal with—qualities that

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they not all too seldom miss in potential family officers from the banking environment. For the CFO, on the other hand, taking on the role of family officer of an entrepreneurial family results in an expanded range of tasks. In the case of entrepreneurially active families, single-family offices function as parent companies within the framework of holding structures, so that the family officer is still expected to have entrepreneurial qualities in the management of the investment portfolio. In the case of embedded family offices, where the CFO plays a dual role by continuing to be the CFO of the family business and at the same time managing private assets as the family’s family officer, his or her wealth of experience from the corporate sector is also essential. Other tasks for the family officer could be added (including personnel selection for the family office, maintaining an overview and coordination for/with the family, etc.). However, a new field of activity arises from the management of liquid assets. Unless the CFO comes from a banking or insurance background, he or she will hardly have had the opportunity to build up an equity fund as part of his or her job. Such tasks are performed in a correspondingly enriching way. Regardless of possible deficits in investment expertise, a decisive advantage emerges for CFOs in their new role as family officers: the existing understanding of the process and the already existing knowledge of the family’s investment interests and values. The basic understanding of managing an M&A process as CFO and investing in financial market assets (e.g. shares) as a family officer is congruent. The decisive factor for the success of a CFO as a family officer is therefore his or her ability to reduce complexity and solve problems in a structured manner. Entrepreneurial families see their family officers as loyal persons of trust. Accordingly, they have a high degree of freedom and scope to deal with the shareholders’ assets. Family officers are thus much closer to the family than financial directors, have insights into shareholder life and deal with highly sensitive and personal issues of individual family members. Family officers perceive emotional aspects of the cooperation as particularly valuable, such as the good feeling of being needed by and supporting the family.

Challenges of the Family Officer Acting as the family officer of an entrepreneurial family can therefore be a fulfilling task for the CFO. However, the requirements in terms of expertise and personal integrity are significantly more complex in the family office than in the family business, as the inherent challenges are also more complex. Particularly in the context of embedded family offices, which represent informal structures in the existing family business, there is potential for conflict due to the lack of formalisation of the activity for the family. The CFO, for example, is exposed to conflicting objectives in his or her dual role as the family’s family officer at the same time. On the one hand, as CFO, he or she is bound by the instructions of the CEO of

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the family business, and on the other hand, as a family officer, he or she is directly bound to the family. He or she is therefore in the service of two ‘masters’ who may well have diverging interests. For example, from the board’s point of view, it may seem sensible in times of crisis not to distribute profits, whereas it is in the family’s interest, and thus that of the family officer, to insist on dividend payments. Conflicts of objectives due to the dual role as CFO of the family business and family officer of the entrepreneurial family lead to dilemmatic situations that automatically condemn the CFO and family officer in dissent situations to disappoint the expectations of one of their two ‘masters’. However, diverging interests that affect the family officer do not only occur in the family business—family office line. Conflicts can also arise within the family ownership. Due to the low level of formalisation of an embedded family office and the associated lack of agreements on charging for services, an escalation of demand for services on the part of individual family members is not uncommon. Once again, the CFO finds himself or herself in a dilemma in his or her role as family officer: Which shareholders’ needs should be taken into account first? And how should family members be dealt with who tie up a disproportionate amount of the family officer’s capacity? This inevitably leads to interfaces with the role of the CFO, in that a fundamental prioritisation of corporate tasks versus family office tasks must be considered. Since the embedded family office is a barely institutionalised form of wealth management, which not only lacks dedicated employment contracts, but also regulations and statutes, the CFO in his role as family officer should also be aware of the special responsibility that the handling of sensitive data entails. For the fulfilment of family wealth management, he can certainly avail himself of the help of his employees from the finance department. However, for tax purposes it must be noted that these services may have to be offset (problem of hidden profit distribution). It must be ensured that these employees process highly sensitive information on the family’s financial circumstances with the necessary confidentiality and secrecy. Indiscretions and leaks, which can occur in such constellations, not only have the effect that personal data of the family is carried into the family business, but over time it is also passed on to external parties. This undermines the family’s trust in the CFO as a family officer. Due to its strong institutionalisation and implemented governance instruments, the single-family office allows for a significantly more efficient wealth management. But even this type of family office is not free of challenges in the interaction with the family. Information asymmetries between the family officer and the family occur when there are large discrepancies in expertise between the two parties and particularly affect those shareholders who are not operationally involved. With proactive communication, the family officer should create transparency and avoid the impression of only selectively passing on information that is beneficial to him to the family. Externally, the single-family officer serves as the family’s gatekeeper within the framework of this organisation. His or her task is thus also to seal off the family and its assets from the public whenever this is in the interests of the shareholders. Accordingly, the challenge on the family side is to avoid the family office taking

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on a life of its own and to create a balance of interests between the family officer and the family. Since disciplining external governance mechanisms are lacking in the single-family office, internal control and incentive mechanisms gain in importance. Advisory boards, which do not only consist of insiders and friends of the family, play just as important a role as remuneration structures for the family officer. In contrast to medium-sized and large family businesses, however, performancebased remuneration structures are much rarer in the single-family office. In order to avoid false incentives for the family officer in the allocation of family assets, families instead rely on unsystematic monetary remuneration. However, these payments are unpredictable in terms of their amount and regularity and are based on the family’s subjective criteria, which are not transparent to the family officer ex ante. Experience shows that the incentivising effect of such variable remuneration structures is rather low, so that family officers who come from the financial board may become disillusioned over time. This leads to resignation, especially in cases of dissatisfaction with the content of the job and conflicts with shareholders. If there is also a lack of career alternatives and the job in the family office turns out to be a career dead end, opportunistic behaviour can creep in. CFOs who switch to the single-family office should be aware of this paradigm shift on the family side and any personal consequences. But a family officer must also be prepared for specific challenges of a substantive nature. For example, the topic of wealth succession and the involvement of the next generation is regularly at the forefront. This is accompanied by a diversity of world views and political attitudes, which must be taken into account accordingly in strategic asset allocation. More recently, this concerns the issue of sustainability of investments as well as the conformity of the portfolio with ESG criteria. Central to the success of change processes is the family officer’s ability to integrate across different family tribes and interests. Tips for the chief financial officer in his or her new role as family officer: • Transparency creates trust. • Choose the right banks and financial advisors. • Take into account the views of all shareholders without neglecting his or her own viewpoint.

Reference St. Galler Family Office Forum. Last Accessed July 19, 2022., from https://www.sfof.ch.

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Dr. Michael Gaska has been President of the St. Gallen Family Office Forum (see Reference) for over ten years. He received the Best Doctoral Paper Award of the European Academy of Management for his dissertation at the Center for Family Business of the University of St. Gallen on governance challenges and costs in single-family offices.

Chapter 6

Generational Wealth Preservation: Perspectives and Fields of Action Stanislaus Sayn-Wittgenstein

The view of the entrepreneur as well as the family accompanying him or her on the entrepreneurial activity is inseparably linked to the concept of wealth. It is a prerequisite in the sense of risk capital as well as a measure of success. In the cycle of its development, the spectrum ranges from the enterprise as the main cause and original source of wealth to diversification considerations to ensure a sensible spread of risk outside the enterprise. The further this development progresses and the original enterprise increasingly becomes only an asset in the portfolio of the entrepreneurial family, the more important considerations become to create wealth-preserving competences in an entrepreneurial family in addition to skills that concern the original core of its entrepreneurial activity. These are quite regularly to be understood as being cross-generational and can over a longer period of time only be provided for with the support of non-family employees and/or service providers. Cross-generational wealth preservation within the company and/or in structures outside the company is undoubtedly one of the major tasks of every entrepreneurial family.

Challenges and Areas of Tension The challenges of shaping this development in a meaningful and effective way are complex. In addition to factors within the company as well as within the family, they originate in a dynamic environment that sooner or later subjects every design measure to an effectiveness test. In addition to market developments, the S. Sayn-Wittgenstein (✉) Munich, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_6

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consequences of political influence, armed conflicts and all forms of crises known to history threatening the preservation of companies and entrepreneurial assets should be mentioned. From a current perspective, these crises seem to occur at shorter intervals and with specifically greater effects. They harbour risks, but also opportunities for entrepreneurial design. Looking at the enterprise as a source of wealth, one of the first questions is to what extent there is a permanent and regular need for capital to refinance the company’s purpose and growth, or whether or to what extent there is the possibility of a payout of capital for asset structuring outside the entrepreneurial liability mass. Obviously, this will depend on existing growth opportunities in relation with the company and what kind of investment projects appear attractive under the applicable investment criteria. Usually, the availability of external funds for corporate financing will also play a role here. The more advanced the level of maturity in the company’s development cycle, the more the element of creating an asset structure outside the company will come to the fore under the aspect of risk diversification. The decision on how much wealth to transfer from the actual original entrepreneurial activity to an external structure is closely linked to the development of the families of the entrepreneur(s). In the early phase of the business, which is usually characterized by one or more strong entrepreneurial personalities, reinvestment in the business is likely to be the priority. However, at the latest with a generational transition, this question needs to be re-evaluated. While the ingenious founder and inventor of novel products and business models will tend to reinvest any potentially free liquidity in the company in order to finance growth, the preparation and structuring of an inheritance situation already has to be designed under the aspect of reserve liquidity for inheritance taxes. The next generation may want to build up a different entrepreneurial focus in parallel with or after selling the original company. To a certain extent, they will need to reinvent themselves and their business approach emancipating themselves from the previous generation. This naturally depends on the extent to which entrepreneurial talent and the ability to manage the business are present, as well as the passion and persistence to muster the necessary commitment. The different needs, inclinations, areas of interest and demands on the asset structure shaped by the original company will result in areas of tension within the entrepreneurial family that must be taken into account in the structural design.

Orientation Points and Efficiency Factors The above-mentioned areas of tension will need to be considered and resolved specifically for each family and business constellation. However, overarching patterns can be identified that contribute to solutions and which are effective. Under the basic assumption that the financing situation of the original company allows for a systematic and regular dividend distribution resulting in a substantial build-up of assets outside the entrepreneurial liability mass, the classic elements of

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wealth management must be taken into account. In addition to a strategic asset allocation, i.e. the determination of asset classes and their size, risk/return parameters must be defined. Usually, the investment horizon is also defined in this context, which in the environment described here has a rather long-term character (at least 5–10 years, usually longer). An essential element will be the definition of liquidity parameters, which in the planning must satisfy refinancing requirements of the original company as well as tactical and strategic requirements. Elements of inheritance tax requirements must also be taken into account, as well as lifestyle requirements, if applicable. Especially in the transition phase during which the ownership of the original company accounts for a large share of wealth to the build-up of substantial external asset structures, the target definition of an asset allocation to be aimed for in terms of efficient diversification is important, as is the time path to achieve it. Naturally, at the outset the overall asset structure cannot meet the requirements of a sensible risk diversification as cluster risks cannot be avoided. This makes it all the more important to define and efficiently execute on a systematic process to achieve the target asset allocation. However, the essential element in the design of cross-generational wealth structures is the development of the entrepreneurial family itself. The emotional challenge of the transition from a strong imprint of a founding entrepreneurial personality to a large family consisting of many members who want to formulate demands on the entrepreneurial assets and exert influence should in no way be underestimated. It can continue to have an effect in the next generation after the business has been founded and the ones succeeding influencing the decision-making. The emotional strain resulting from conflicts arising from this can be considerable. The negative effects of protracted legal disputes on assets and the opportunity costs of decisions not taken cannot be compensated for even by the most efficient risk/return diversification. The avoidance or effective mitigation of major conflicts is essential for all parties involved in terms of asset preservation and at least as important as wise investment decisions. In order to ensure this, in the context of decisive structural decisions at the latest before upcoming inheritances, it is worthwhile to formulate a series of questions. The answers to which should form the basis for the upcoming decisions to be taken. Experience shows that an orderly process is useful involving heirs and testator equally with sufficient time to make interests transparent and to create the possibility of taking them into account. If necessary, it makes sense to involve external, neutral and professional moderators to accompany the process (Table 6.1). It makes sense to document the answers found to these questions in a kind of a family charter and to make them transparent for all family members concerned as a basis for identity. The explicit reference to it in communication and decision-making serves as a culture-creating element helping to set an orientation framework for all family members as well as for external partners joining. A regular review serves to coordinate and take into account changing interests and a dynamic environment and to adapt the family charter to new conditions if necessary. The answers found will in

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Table 6.1 Typical questions in the context of heritages Family

Company of origin

• What cultural values does the family aspire to in its dealings with each other and in relation to its business decisions? • Which entrepreneurial self-understanding should be pursued? • Reference to the original company as an entrepreneur or as a multi-asset manager with several investment fields and forms? • How to communicate in relation to business issues within the family? • Governance within the family structure: Which family members should be involved in decision-making processes (structured and transparent decision-making mechanism)? Does it make sense to establish a decision-making body or board of executive directors? What are the prerequisites for involvement in decision-making processes in terms of education and experience? How, if necessary, are family members compensated if they have no influence on decision-making processes (preference share model) and how are those who take on functions remunerated? How do the decision-making processes work; how are they organized? Establishment of quorums in the case of required votes. Which conflict prevention and mitigation mechanisms should be used? • From when on and in what form should family members participate in the administrative structures of the family or in the original company? • Which training measures for family members of the succeeding generation are supported, and in what form? • Do the views and interests of different groups within the family differ on the above issues? • How in this case can a meaningful balance be created without reducing the entrepreneurial assets in their ability to function in relation to the formulated goals of the investment strategy? • What role should the original company play in the family’s selfunderstanding—essential determinant or portfolio asset? • What level of participation is being sought on a sustainable basis, or what opportunity costs are being accepted—in the context of a defined participation quota? • Involvement of family members in operational or supervisory (non-executive) functions: What should be the ideal educational and career patterns for family members? Should an external, family-independent career qualify as a qualification criterion for admission? Are external family members (partners marrying in) desired? If so, under what conditions? Definition of performance measurement in career development for family members

Source: Own representation

any case play a decisive role both in the development of the original company and in the development of the family assets in the generational transfer.

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Requirements for Administrative Structures The implementation of the aforementioned processes usually requires a certain administrative apparatus. Depending on the size of the assets and the development from within the original company, this can be efficiently implemented in embedded, multi- or single-family office formats. Regardless of the format, however, the tasks to be solved are comparable and will have to be dealt with in the same way in terms of the objectives, whether with an own family-specific construct or one that is essentially shaped by external service providers. In any case, it is helpful to think of the establishment of the administrative structures as a separate company foundation and to execute on it in a comparable way. The operation of such an administrative structure should be understood as the management of an enterprise in its own terms in the context of its purpose. This ranges from leadership and governance structures, staff recruitment and management, decision-making processes and controlling functions to appropriate reporting. The fields of action mentioned in Table 6.2 are partly to be understood as necessary, but also partly as optional. An important design criterion here will be the extent to which family members are active in the management structure of the family office. Like the activity in the company of origin, this will depend on whether ability, inclination, talent and experience are present. If one understands wealth preservation and development as an intrinsic entrepreneurial activity, one will exercise just as much care in the selection and training of family members as in the question of who should be active in the original company and in what form. A critical question and potential area of conflict is certainly the information asymmetry of family members working in the family office vis-à-vis those who are not. This makes it all the more important to provide for transparent decision-making processes that meet the investment criteria and, if necessary, to set up an investment committee consisting of non-operational but well-trained and specifically experienced family members. Leading and managing a family constellation that may continue to hold a significant stake in the original company as well as a portfolio of diverse assets ranging from illiquid direct investments, PE and VC funds to capital market investments, real estate and, if applicable, agriculture and forestry is a highly complex task. In this management of complexity, the family office has a core function. It serves as an implementer of the strategy, but also as an impulse generator for new investment approaches, a sparring partner and input provider (and if necessary, as a facilitator) for the family’s strategy development. It coordinates due diligence activities, embodies the client’s competence vis-à-vis service providers and ensures quality assurance, generates the necessary steering information and serves to provide discipline in the family’s decision-making processes. In addition, the leadership of the family office can play a role in reflecting on the extent to which family members are actually capable and suitable to perform functions in the family’s entrepreneurial context. Performing such a function successfully requires a wide range of skills by the personalities involved, above all empathy for each other and communication skills.

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Table 6.2 Fields of action when founding a family office External management structure (Family Office, FO)

• Supervisory function/governance structure • Execution of non-executive mandates in the context of participations/investment structures (who—family or employees of the FO?) • Organisation and preparation of strategic decisions Strategic asset allocation New business areas Entrepreneurial direct participations—investment and disinvestment Asset manager selection Definition of risk/return parameters Investment horizon • Organisation of decision-making processes (preparation, documentation, follow-up); if necessary, establishment of an investment committee • Depth of value added What knowledge, with regard to legal and tax advice, auditing should be held internally within the FO structure? Which services are to be provided with own capacities within the FO structure and which sourced externally? How is client competence vis-à-vis service providers organised and quality assured? • Remuneration models for FO employees Salary structures Long-term incentive programs Co-investments by FO staff • Control procedures and support processes Internal and external reporting IT • Establishment of an external advisory board: Which fields of competence and qualifications are to be covered? Remuneration structures What powers does the advisory board have vis-à-vis the FO (council or supervision)? • Service and supervision of non-business activities (philanthropic, charitable, cultural engagement of the family)

Source: Own representation

Undoubtedly, this must be based on trust generated over an appropriate period of time. This will always need to be a two-way street, the family members having trust in the functionaries in the family office as well as the latter in the family members. The success of decision-making processes will depend on whether critical input from non-family members is valued and perceived as positive and relevant. The effectiveness of the family office in the family structure will only extent as far as the leadership of the family towards the employees of this company allows. In this context, like any other company, a family office will have to deal with the recruitment of high-performing non-family employees as an essential basis for entrepreneurial success in terms of the company’s purpose. The competition for

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talent will also have to be contested here, just as it was in the original company. The recruitment profile will depend on the depth of value creation within the family office and the knowledge and capacity to be held in-house in the various functions. The question of whether a non-family management of a family office will be more effective with a CEO-type personality bringing a strong entrepreneurial impetus of his own, or a controlling and process-oriented CFO type, or a legal/auditor/tax advisor or with a wealth manager/asset manager at the helm is directly related to the question of the family’s own focus in asset structuring and in transaction activity or intensity. What seems to be important here is above all a clear objective and self-reflective ability of the family (who are we, what do we want?), as well as complementarity to the family functionaries regarding education, experience and decision-making behaviour. There will have to be an understanding between family and staff as to how career patterns and remuneration structures should look. Motivation to work in a family office structure will usually not result from hierarchical development but to a large extent will have to be intrinsically motivated. One possible design element can be the opening of co-investment opportunities for key non-family performers in the family office. However, there is a risk potential for conflicts of interest here, so that this must be weighed up and provided for with appropriate governance structures. In addition to professional competence, a very important criterion for the selection of non-family talent will be their willingness to position themselves culturally in the family’s value system and to take on a constructive role that is appropriate to the family’s overall situation. The family charter described above will also provide essential support in this regard. It serves to create transparency about the relevant value system both within and outside the family and to communicate it. Loyalty, integrity and discretion, in addition to professionalism, are decisive for long-term success in and with such a special constellation. This applies both to the members of the family and to the employees outside the family circle. An entrepreneurial family depends on constructive and positively critical spirits. However, one thing must be clear to everyone who joins a family structure or who is born into it: No one is bigger than the family. Stanislaus Sayn-Wittgenstein (CEO Steinbach & Vollmann Holding) is a member of an entrepreneurial family structure and has many years of experience as a non-executive board director of large public companies as well as private investment companies. He is active as a mid-cap entrepreneur and has served as a CFO/deputy CEO in a large cap environment.

Chapter 7

The Family Office as a Modern Form of Majordomus Thomas Pierre Trinkler

In our opinion, the core objective of a family office should be a clear separation of private assets and operational activities. If well organised, this can also bring advantages in terms of content and taxation, among other things. In addition, in the event of legal proceedings or civil disputes, a mixing of business and private assets can be prevented (Fig. 7.1). A family office can also help to initiate succession planning at an early stage. Unfortunately, many patrons of family businesses forget that the ‘life clock’ is ticking for them too. There are enough prominent examples where succession planning failed. For example, in Switzerland one hears that Ueli Prager with Mövenpick and Rudolf Sprüngli, the chocolate entrepreneur, ‘missed the exit’. They found it difficult or impossible to let go as they got older. Our experience shows that p.a. on average, depending on family complexity, a return of up to 2% above the competition and above inflation must be achieved to ensure wealth preservation over generations. Thus, in order to secure substance for future family members in the face of generational succession, a growth strategy should be pursued. However, the UBS/Camden Wealth Global Family Office Report 2020 shows that in North America over 50% of assets were classified under growth, while in Europe this was 15%. Asia was in between with 33% (UBS/Camden Wealth Global Family Office Report, 2020). Not without reason, many claim that investing is an art and not a science—and this consists of making adjustments again and again

The majordomus or steward was originally the head of the household administration at a princely court or in an abbey. Under the Merovingians, the majordomus became the head of the royal court. He was responsible for the staff and the administration of day-to-day business. The prince could concentrate on the business of government and, not to be forgotten, his pleasure. T. P. Trinkler (✉) Trinkler & Partners LTD, Wealth Management, Zürich, Switzerland © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_7

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Fig. 7.1 Value creation in the generational sequence. Source: Korn Ferry is credited as the creator of the image/concepts shown here

and remaining true to basic truths regardless of the respective development. In such a case, a family office can offer practical help. Ideally, it is separate from the management. The patron entrusts the management of part of his assets to one or more trusted persons at an early stage. In this way, he can better concentrate on his core competence of managing the company. The family office thus becomes the majordomo of the family. Its activities include not only asset management and the administration of the family’s property assets, but also everyday administrative work that the family should separate from its operational business. This includes, for example, the administration and financing of the real estate, the private plane or the yacht; the separation, administration and curation of the art collection; but also the organisation of trips, the education of the offspring and the payment of salaries of employees who do not work in the business. In principle, this can include all administrative activities of the family that are not part of business life. In order to offer these services efficiently and, above all, conscientiously, I think a different profile is needed than that of a financial manager or that of a pure asset manager or former banker. Above all, it needs a manager—and that is not everyone.

Reference UBS/Camden Wealth Global Family Office Report 2020. Last Accessed July 19, 2022, from https:// hkifoa.com/wp-content/uploads/2021/05/ubs-global-family-office-report-2020.pdf.

Chapter 8

‘Structure Follows Strategy’: From Bean Counter Mode to Aligning Financial Processes with Strategy Patricio Ohle, Michael Noth, and Yvan Jansen

The new CFO is here. The arrival of the new chief financial officer has generated excitement within the company. With his impressive education, exceptional communication skills and diverse international experience, he is seen as a valuable asset. The veteran employees warmly welcome the new CFO and assure him that everything is running smoothly. However, not long after his arrival, the new CFO becomes aware that some individuals within the company harbour concerns about him. The reason for this unease remains unclear, leading to speculation about possible hidden issues. The presence of ‘skeletons in the closet’ has yet to be determined. What would you advise the new CFO to do in this situation: Get to work and act decisively? Or caution, wait and see? And what about the CFO’s business versus his career interests? A Deloitte study in 2003 postulated a correlation between ownership structure and the role of the CFO—basically unsurprising, since the expectations of the owners also have an impact on culture, incentive systems and the management of the company and thus the processes (Deloitte Consulting, 2003). This makes it all the more advisable for the CFO to first take a prudent and very close look—almost like a doctor who does not scratch the surface for his diagnosis, but rolls up the history of his patient holistically. Especially in this typical situation, there is a danger of acting too measure-oriented and being pushed into action on the basis of incomplete information and a lack of knowledge of the company. You P. Ohle (✉) FBXperts AG, Zürich, Switzerland e-mail: [email protected] M. Noth Nordzucker and Hellmann Worldwide Logistics, Osnabrück, Germany Y. Jansen Brussels, Belgium © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_8

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quickly end up on the wrong track—or are led up the slippery slope by your colleagues. The sure way to fail is to act quickly without transparency, because every family business is ‘completely different’. A common regret in such situations is the failure to spend enough time listening and learning before taking action. By avoiding this pitfall, the CFO can establish a solid foundation for their role and ensure that decisions and actions are based on a thorough understanding of the company’s needs and objectives. But it goes even further: Owners often formulate high expectations of the CFO without providing the necessary support and resources. What helps here is experience with the specifics of family businesses: Then you will also be heard by those who have partly built up their business themselves—or at least know it well. But even that is no guarantee, as rapid CFO changes in the Müller Group or Hero AG, for example, show (Wnuck, 2006). Whatever the reasons may be in individual cases, these separations within a short period of time show how delicate the famous ‘100 first days’ are for both sides. It is a delicate period where initial impressions are formed, and the CFO needs to establish credibility and rapport with key stakeholders. High turnover rates among CFOs in some cases highlight the challenges and complexities associated with this initial phase. Alfred D. Chandler laid down an important basic rule for this as early as 1962: Structure must follow strategy (Chandler, 1962). It remains a core theme of organisational theory to this day. The following two examples of family businesses are only intended to show that the structure must follow the strategy and how differently this can be motivated in each individual case and look in the result.

Knorr-Bremse: Repositioning Before IPO Before the IPO in 2018, investor relations were not an issue for Knorr-Bremse, as the company was 100% owned by the Thiele family. When preparations for the IPO began, CFO Ralph Heuwing set up a project organisation of all specialists for the IPO. KPMG supported the IPO readiness assessment and the overall process. Corporate governance and many of the central corporate processes had to be adapted to the new transparency requirements. Among other things, this concerned the articles of association and rules of procedure of the board of directors and supervisory board, compliance, internal audit, risk management and external reporting. Accounting was converted to IFRS and the closing processes were accelerated. Corporate controlling had to work on giving more reliable forecasts to secure market guidance. The equity story and prospectus were developed together with the IPO banks (JPM, MS and DB) and with commercial DD support from BCG. IR was initially handled by the CFO himself and accompanied by a communications consultant from CNC Kekst. A few months after the successful IPO, the position was then filled by an experienced IR manager (Fig. 8.1).

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Fig. 8.1 Knorr-Bremse project organisation prior to IPO. Source: Own presentation, lecture at the University of St. Gallen; interview with CFO

Fritz Meyer Holding AG: Transformation Through Restructuring Restructuring can also trigger such a transformation. A good example is Fritz Meyer Holding AG from Switzerland. There, the finance department was realigned: by handling the sales transactions (asset deals), restructuring the remaining legal entities, setting up real estate management and outsourcing the IT and restructuring the finance department (Top Fifty, 2019). These examples illustrate that a coordinated realignment of the finance department takes place when the strategy and, as a consequence, the processes and organisation change. But this does not answer the question we asked at the beginning: Where should the new CFO start to adapt the organisation of his department? • Handling sales transactions (asset deals): The finance department took charge of managing sales transactions, likely involving activities such as financial analysis, due diligence and structuring deals to optimize financial outcomes. • Restructuring legal entities: The finance department played a pivotal role in restructuring the company’s remaining legal entities. This involved reviewing and optimising legal structures, streamlining operations and ensuring alignment with the company’s strategic objectives. • Setting up real estate management: The finance department took on the responsibility of establishing a dedicated real estate management function. This encompassed tasks such as property valuation, lease management and financial analysis of real estate investments. • Outsourcing IT: Recognizing the need for specialized expertise and efficiency, the finance department decided to outsource its IT functions. By engaging external service providers, the department aimed to optimize IT infrastructure, software systems and support, allowing internal resources to focus on core financial activities.

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• Restructuring the finance department itself: The finance department underwent its own restructuring to enhance its effectiveness and align with the transformed organization. This may have involved redefining financial workflows, clarifying roles and responsibilities, implementing new reporting structures and leveraging automation and technology solutions.

The Road to Financial Transformation We propose to establish this connection methodically through a transformation process, which will be briefly described below with its five steps. Through a systematic approach, this five-step process ensures the harmony (one speaks of alignment) of structure and strategy. Are you familiar with the book ‘Sleepwalkers’ about the European powers before the crisis of the First World War (Clark, 2013)? It reminds us that one can also stumble unconsciously into disaster. A concept is always better—at least that would be our advice. We envisage five steps here, which are briefly described (Fig. 8.2). In the five-phase model (which is similar to other models that are also practised, e.g. first goals, then control concept, then processes (process organisation), then IT tools and then organisational structure), it would help to be more specific in the later phases than is required here, for example, to work out what the concrete deliverable of the respective phase is. To do this, however, one must familiarise oneself in detail with the situation prior to a transformation, which would go beyond the scope here, as there are very different initial situations.

Step 1: Structure Follows Strategy (Alignment with Mission and Goals) It is essential to first define goals and metrics to measure their achievement before addressing processes, tools and organization. However, many companies lack clarity regarding their goals and key performance indicators (KPIs). Triggering events such as M&A activities or an IPO can be trigger events to launch such changes in the finance division. Fig. 8.2 Five steps to financial transformation. Source: Own representation

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Our concept aims to assist finance managers in setting up their vision for the next five years fitting the overall company picture. This involves defining the vision, goals and role of financial leadership, as well as collecting performance data and KPIs for analysis and target setting. A functional model is then created, and a roadmap is developed to outline the necessary steps towards achieving the vision.

Step 2: KPI of the Process Organisation (Processes and Structural Elements such as Number of Accounts, Number of Profit Centres, Bank Relationships, etc.) Determining KPIs requires focusing on financial processes and breaking them down. Finance should identify the essential main processes and assess their maturity level. This broader analysis includes not only accounting but also other functions within the CFO’s purview, with direct resources such as treasury or indirect resources such as partial planning (Gibson & Birkinshaw, 2004). The maturity of each process can be rated using a procedure involving external parties or benchmarks. The design of the process organization is as important as the organizational structure itself (Horvarth & Partners, 2006, p. 98). Consideration should also be given to structural variables like the number of accounts, profit centres, divisions and bank relationships. While we cannot elaborate all the details here, it is important to understand the basic principles and conduct qualitative assessments to gauge process maturity, classify them and ensure the right approach (Fig. 8.3).

Fig. 8.3 Schematic representation of maturity levels. Source: Own representation

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Skills Accounting/Controlling Financial Accounting

Costing & Controlling

MIS

Annual Corporate Accounts

Controlling

Networks

Operational Reporting Auditing

Planning

Communication

Software

Accounting

Integrated balance sheet & profit planning

Management Reporting

Statistics & Analytics

Security

Hardware

Fig. 8.4 Assignment of activities and persons. Source: Own representation

However, the perspective of the analysis is broadened to include not only accounting, but all instruments and methods assigned to the CFO with direct (e.g. treasury) or indirect (e.g. partial planning) access to resources. These processes have already been addressed by Harvard professor Michael Porter (Gibson & Birkinshaw, 2004). In the end, processes are fast-running organisational structures and can also be assigned to the functionaries as ‘process owners’. The design of the process organisation must be considered at least as important as the organisational structure (Horvarth & Partners, 2006, p. 98). It is also important to assess the maturity of the process and to classify it in a rating model, as shown in the simplified diagram above. This enables the target/actual comparison later on. In practice, the prioritisation of processes within the finance transformation can be done based on their necessity and importance. This involves planning the processes in time units and collecting actual values through time recording. By doing so, it becomes possible to allocate resources effectively. This allocation can be represented using a two-axis model, with one axis representing the activities and the other axis representing the individuals responsible for those activities. Let us take the example of accounting/controlling to illustrate this concept further (Fig. 8.4). In order to effectively plan resources, the processes presented here need to be thoroughly dissected. Additionally, new processes may emerge over time, such as competition analysis, supervisory body organization or innovation process monitoring, which should be incorporated into the model. To ensure transparency, these processes can be assigned within an activity analysis if they are adequately detailed. This approach is akin to the time recording methodology employed by law firms or consultants when invoicing clients. To establish linkages between various dimensions, such as projects, profit centres, reporting units, targets or national subsidiaries, envision a multidimensional matrix. This matrix serves as a framework that connects the different dimensions, enabling a comprehensive view of the relationships.

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However, the process analysis should encompass all areas, necessitating significant knowledge and experience. To prevent fragmentation, it is recommended that specialist departments (e.g. finance, controlling, treasury, tax, legal, IT, M&A, reporting, etc.) are not situated at disparate instance levels but rather integrated into the overarching financial management structure (Gleich & Michel, 2007, p. 39 and 259). In addition to the considerations mentioned, there are numerous other key performance indicators (KPIs) to take into account, such as structural variables like booked accounts, the number of profit centres, divisions and bank relationships. Qualitative assessments, such as scoring analyses, must also be conducted. To provide a visual representation, a graphic or diagram can illustrate the relationships and interdependencies within this comprehensive framework. In addition to the factors mentioned, there are numerous other key performance indicators (KPIs) to consider. These may include structural variables such as booked accounts, the number of profit centres, divisions, bank relationships and more. While it is not possible to go into all the specific details here, it is important to highlight these fundamental principles. It is essential to conduct qualitative assessments, such as scoring analyses, to gain a comprehensive understanding. To visually demonstrate the relationships and interdependencies within this framework, a graphic representation would be beneficial. The graphic can serve as a visual aid in illustrating the key components and their connections, providing a clearer understanding of the overall structure and its various elements.

Step 3: Gap Analysis The person in charge at the top must draw up a target picture and compare it with the initial situation. This results in a so-called gap analysis and a profile. In practice, situational circumstances will then lead to priorities in relation to the vision and mission that were worked out in the analysis. When losses sprout, one needs to focus on controlling, MIS and accounting. If there is a complaint about antitrust issues, it is the assurance area with the compliance function. A cartel fine can be very expensive, as even family businesses know—Wiltmann, Eberspächer, Brose or Villeroy & Boch. In view of fines in the high double-digit millions, it is worth checking whether the processes fit. However, the finance function must focus on the core processes and adapt them according to the situation and with the right prioritisation in the following aspects: • • • • •

Setting priorities depending on the vision, mission and strategy Leadership role in group-wide process definition Standardisation and quality assurance Digitalisation and automation, if possible and sensible Continuous improvement of performance and service orientation

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Experience has shown that optimising all processes at the same time is hardly possible or makes sense, as some of them build on each other and feedback from the organisation and stakeholders has to be taken up again and again. For example, clean controlling is hardly possible if the allocation of IC services according to their cause has not been established, e.g. within the framework of a transfer pricing concept. This then includes services, merchandise and finished products, licences and R&D and IC rents—and other special matters that have to be regulated internally between legal entities on an arm’s-length basis. As was shown by way of example, the processes can be planned in relative detail and at a sensible level of detail (e.g. production controlling). It is important to bundle the processes in order to be able to determine meaningful KPIs. Interesting aspects of the gap analysis include the following: • Distinguishing activities attributable to cost units (e.g. reporting units, projects) from those attributable to shareholders or owners • Project allocation and related cost unit accounting (e.g. management income statement) • Evaluating duplication (considering redundancy for risk management purposes) • Assessing IT penetration (standardising enterprise resource planning systems, implementing specialised planning and consolidation systems, etc.) • Analysing the target versus actual skills profile of the finance team • Defining functional locations and evaluating service outsourcing (e.g. legal department, tax advice) Harmonising processes, which become ‘routines’ following standardisation and alignment with the described strategy and goals, is of great importance. In addition to the process-oriented approach mentioned above, other factors such as technology, physical locations, management philosophy (performance management) and more come into play as design variables. This convergence of strategy and structure is also known as the alignment of strategy and structure in management theory.

Step 4: Design a Strategic Financial Model Let us look at Fig. 8.5 as a result of an activity analysis.

Fig. 8.5 Activity analysis of major family businesses. Source: Own analysis of family businesses >1 billion EURO turnover

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The survey illustrated here shows a relatively high share of accounting with 28% of the time units, which points to optimisation potential, e.g. for business support. A typical result: We are still in ‘bean counter mode’. There are certainly reasons for this. But it must not stay that way. These key performance indicators (KPIs) can be compared with the strategy and the goals within the framework of a gap analysis. The goal of a corporate vision should be to optimise corporate finance and business support in order to strategically align the finance area and to use more resources here. For example, it cannot be right to spend 28% of resources on external reporting. Strategic alignment starts with such KPIs. The integration of central and decentralised functionaries of financial management is to be assessed as a potential for optimisation, since often there is no disciplinary subordination, but only a functional subordination (the so-called ‘dotted’ reporting line). Important with regard to process allocation are the respective interfaces that arise with other processes, as well as the appropriate performance potential depending on the management and control philosophy. The bundled knowhow around processes, synergies with IT and MIS, a certain standardisation and consistency of the message speak for bundling at the CFO. However, the CFO must be in a position to carry the message into the company, i.e. to make the employees affected.

Step 5: A Functioning Team and Organisational Model To achieve the desired breakthrough, it has been proven that effective financial leadership requires the establishment of a well-functioning team and organization. This team should present compelling recommendations and support them with comprehensible facts, building credibility in the process (McKinsey, 2008). It is important to recognise that financial leadership is a cross-functional role, similar to quality management, with a significant impact on communication, information flows, structures and processes. As a result, it affects various aspects of the company and the owner family as a whole (Seghezzi, 1996). The adaptation of the financial management role not only influences structural and operational organizations or processes but also has implications for overall management, such as the degree of centralisation (e.g. financial holding, strategic holding or operational management holding, in contrast to the parent company organisation). For the new CFO to establish credibility, they must gain a detailed understanding of heterogeneous IT systems, manual processes, organisational structures and the team. The initial months in the role should be dedicated to acquiring this overview and subsequently focusing on continuous improvement. Proper prioritisation is essential in this process. Risks may arise from inaccurate valuation of foreign currencies and derivatives, operational issues, inadequate accounting and controlling data or incorrect transfer pricing leading to distorted results. While there may be outstanding financial specialists, effectively managing a company financially within the specific framework of a family business requires

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more than technical expertise. The term ‘leadership’ implies the need for management skills. Therefore, the accurate translation of ‘financial leadership’ would be ‘financial management’ since ‘leadership’ and ‘management’ are synonymous in English. The leadership aspect is particularly crucial for success in C-level positions, especially given the complex structure of family businesses. This area can greatly benefit from mentoring programs.

Practical Example: Family-Owned Global Automotive Supplier (Dr. Michael Noth, Former CFO Hellmann Worldwide Logistics and Nordzucker) We will explain the systematic transformation process using the example of the automotive supply industry, an industry that has offered great growth opportunities for a long time, but also a challenging market environment. The most important strategic goal set by the owner was annual double-digit profitable sales growth through the introduction of new technologies, globalisation and expansion of customer relationships, especially with Asian OEMs. In order to realise these goals, the aim was to create the highest possible transparency in a globally integrated and uniform organisation. A second important focus was performance. Since the owners did not want to use external equity, investments and working capital had to be used efficiently. The recording of the actual processes was very pragmatic. The organisation had a uniformly implemented IT system and was managed centrally and regionally, but there were three somewhat different regional approaches that could be determined by simple KPIs. For example, with comparable size, one plant had less than 10 cost centres, another had 200 and a third had around 1000. Instead of detailed data collection on processes that were only comparable to a limited extent, the focus was therefore on evaluating existing data and gaining a good understanding of the existing processes with their advantages and challenges. Intensive discussions within the finance department, with the functional managers and the main owner helped to develop an agreed picture on gaps and target concept and especially on the action plan. The main owner was not only very entrepreneurial but also financially oriented—a strong support for the transformation process. Developing a meaningful medium-term action plan was a considerable challenge, all the more so as financial and human resources were strained by growth. Finding the right balance between short-term improvements and medium-term effective basic measures, the realistic setting of time schedules was an intensive process. Life cycle controlling or planning tools could only provide approximate information with ERP systems that were not fully harmonised, but their rapid introduction was enormously important, especially because new orders were being acquired on a large scale. If, after harmonising the ERP systems, the preliminary costing, for example,

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had to be adjusted again, that was not a bad thing—it just had to be clear to everyone beforehand and ‘thought through’ in the projects. The speed of transformation was just as critical. Promising too much too fast creates frustration and puts finance in a bad light; if the plans are too unambitious, you lose momentum. In the end, however, the plans had to be adjusted to be able to react flexibly. For example, if central software for managing and archiving development data (‘PLM’) was to be introduced at more and more development sites, or if a general financial crisis made short-term action necessary, as in 2008/2009, the CFO had to change his priorities and react. A reorganisation of the entire company was the basis for the realignment of the finance division. Even before the transformation, experienced employees filled the most important central and regional management positions, a truly strong management team. However, due to the growth in the business and the creation of new important positions, attracting more high-performing employees and developing them further was one of the most important tasks of the CFO and the entire team. The global search for high potentials, the development of a talent pool, a teaching assignment at the university at the headquarters, regular workshops for the development of junior staff and international rotation of promising employees were essential for the successful transformation. Let us summarise: Hopefully, we have been able to show at least to some extent that and how financial processes can be made strategy-compatible through optimisation and the five-step approach outlined above. Of course, there are many similar methods. Financial processes can also be pioneers in family businesses when it comes to making necessary adjustments to the complexity with which we are increasingly confronted. This can be seen, for example, in the ‘voluntary rating’ of the Würth Group, of which Reinhold Würth can be justifiably proud (Würth, 2022). The CFO thus exerts a significant positive influence on the management and success of the family business—or in the sense of M. J. Roe: ‘Finance determines Governance’ (Roe, 1994). We encourage owners to take charge of the process and empower the finance team to lead its implementation. The potential benefits make it a worthwhile endeavour. If you desire, consider initiating a visioning exercise for the finance organization in collaboration with your management team. Our experts at FBXperts are ready to assist you every step of the way.

References Chandler, A. D. (1962). Strategy and structure: Chapters in the history of the American industrial enterprise. MIT Press. Clark, C. (2013). Die Schlafwandler: Wie Europa in den Ersten Weltkrieg zog. DVA. Deloitte Consulting. (2003). Restoring Trust: Empowering the CFO. Deloitte Research 7/03. Gibson, C., & Birkinshaw, J. (2004). The antecedents, consequences, and mediating role of organizational ambidexterity. The Academy of Management Journal, 47(2), 209–226.

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Gleich, R., & Michel, U. (Eds.). (2007). Organisation des Controlling: Grundlagen, Praxisbeispiele und Perspektiven. Haufe Media Group. Horvarth & Partners. (2006). Das Controllingkonzept. Beck. McKinsey. (2008). Perspectives on corporate finance and strategy 27. Roe, M. J. (1994). Strong managers, weak owners: The political roots of American corporate finance. Princeton University Press. Seghezzi, H. D. (1996). Integriertes Qualitätsmanagement: Das St. Galler Konzept. Hanser. Top Fifty. (2019). Restructuring of the Fritz Meyer Group, Basel. Last Accessed July 19, 2022, https://www.top50interim.com/Portals/0/adam/News/tYegjRmNu0eGuW_vp49E2A/Body/ TopNews_Herbst_2019_mit_Datum_X4.pdf. Wnuck, C. (2006). Hero: CFO Grenz leaves again after six months. Last Accessed July 19, 2022, from https://www.finance-magazin.de/cfo/cfo-wechsel/hero-cfo-grenz-scheidet-nach-sechsmonaten-wieder-aus-1203502/. Würth. (2022). Financial strategy. Last Accessed July 19, 2022, from https://www.wuerthfinance. net/web/de/wuerth_finance/investor_relations_1/wuerth_gruppe_1/finanzielle_strategie/ startseite_finanzielle_strategie.php.

Dr. Patricio Ohle is the founder and managing director of FBXperts AG. He spent three decades in management positions at family businesses, including as a director at Hipp Holding AG. Dr. P. Ohle is a Research Fellow at the Center for Family Business at the University of St. Gallen, where he also earned his doctorate. He is also a lecturer at the University of St. Gallen in ‘Finance of large family firms’. Dr. Michael Noth he was former Executive Board member/CFO Hellmann Worldwide Logistics SE & Co KG and before CFO Nordzucker AG. Yvan Jansen is a board member and independent advisor specialised in strategy and transformations mainly for family-controlled companies. He was previously Senior Partner at Kearney, Partner within private equity and Senior Partner at The Boston Consulting Group, based subsequently in Paris, London and Brussels. Yvan studied Law at Leuven (KUL) before getting his master’s degree in Economics at Louvain (UCL). He obtained an MBA from the University of Chicago, Booth School of Business.

Chapter 9

Optimising Planning Systems in a VUCA Environment Felix Hess and Franz Wirnsberger

A very critical business process is planning. There are companies that only complete their planning when the next cycle begins: the company is caught in the hamster wheel. On the other hand, there are industries whose business success absolutely depends on good planning, e.g. out of stock or working capital management—a topic for experts.

Does Long-Term Planning Still Make Sense in the VUCA Environment? The term VUCA—meaning volatility, uncertainty, complexity and ambiguity—has become the standard way of describing the current business environment. The COVID-19 pandemic has once again given a new dimension to the term uncertainty. ‘Driving on sight’ was and is, at the time of writing, forced to become the rule for many companies. Budgets are becoming obsolete even faster than before and medium-term planning is increasingly being suspended. Scenario planning is the order of the day. The extreme situation of the ‘COVID-19 pandemic’ brings to a head a fundamental management question that exists due to the VUCA environment: Is it still expedient to plan for the longer term in VUCA times? If one follows the practical and scientific discussion on the question, then a quite clear answer crystallises: Yes, but. Yes, because especially in times of rapid change and uncertainty, long-term vision and goals are needed all the more in order not to lose orientation and sink into chaos. According to experts, the importance of strategy F. Hess · F. Wirnsberger (✉) Hilti AG, Schaan, Liechtenstein e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_9

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is therefore increasing, not decreasing (Baaij, 2018). But because in the VUCA environment, a different kind of leadership, planning and organisation is needed (Drucker, 1988). Traditional linear planning and control patterns are based on the age-old hypothesis that it is possible and therefore useful to make plans in a relatively high level of detail and over a long period of time, the fulfilment of which is then tracked as rigidly as possible in order to reach the goal. The fact that this hypothesis is probably no longer tenable in a VUCA environment is likely to meet with a very high level of consensus among practitioners. However, what consequences can be derived from this for the planning process of a larger organisation and what VUCA-compatible planning and control might look like in concrete terms is much less clear. Many companies are experimenting with agile methods in sub-areas of the organisation. However, very few still dare to tackle and adapt the entire planning and control system or do not see it as purposeful. In addition, the idea for a really practicable alternative approach is often lacking. The following article shows a path that the Hilti Group has taken to deal with the problem of increasing dynamics and complexity. The core hypothesis on which it was based was that the ability to learn quickly organisationally is becoming a decisive competitive factor in a VUCA environment and that, therefore, a linear planning approach following the ‘command and control’ pattern with medium-term planning and annual planning and budgeting routines is no longer up to date and falls short. A new approach should both strengthen the orientation towards longer-term goals and allow for more frequent reflections and flexible adjustment of resource allocation to better integrate short-term ‘driving on sight’ as well.

Decoupling of Goal Setting and Action Planning The first and essential step was to loosen the tight coupling of goal setting and action planning/coordination that was prevalent in the traditional steering approach. The underlying consideration was a very simple one: if, on the one hand, there is clarity and stability with regard to strategic goals—this was present to a large extent at Hilti due to a solid strategy process—and, on the other hand, annual plans and budgets are becoming obsolete more and more quickly despite a lot of effort and energy, then why not radically simplify the goal-setting process and declare the strategic goals to be the only relevant goals? This simple change of the relevant performance measurement criterion—‘change in the strategic gap’ instead of annual budgets—implicitly separated goal setting from action planning and control. The result was a planning and control system based on two control loops. Control loop one ensures that strategic goals, the so-called North Star goals, are set and made relevant. Control loop two coordinates a regular reorientation and adjustment of the plans as needed. The type of goal setting—relative and rule-based and thus self-adjusting—breaks the close link between goal setting and planning and enables more flexibility in steering.

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Relative Northstar Target System

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self-adusting

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Fig. 9.1 Separation of objective from planning/coordination by two control loops. Source: Own representation

The result is a much higher degree of self-control and self-organisation in the management system (Fig. 9.1). The approach corresponds to a more agile approach to managing and controlling an organisation according to the motto ‘Roughly right is better than precisely wrong’ and is based on a strong leadership culture conviction that few strategic guidelines in an increasingly dynamic and complex environment are significantly more efficient and effective than a ‘command and control’ system with narrow guidelines. The characteristics of all key control practices (goal setting, link to compensation, planning, forecasting, measurement/reporting) are adjusted and realigned, leading to the integration of medium-term planning and annual planning and budgeting into an integrated planning and control system focused on continuous improvement. The characteristics of the control loops are explained below.

Control Loop 1: Dovetail North Star Goals with Strategy and Make Them Relevant The strategic goals should also be able to be used for operational control and management and thus become the central control instrument in the organisation. This should eliminate the bureaucratic effort for ‘double’ planning (medium-term planning and annual planning), which is considered completely disproportionate, especially in the increasingly volatile and complex corporate context. The goals therefore had to be dovetailed as closely as possible with the company’s strategy and the goal-setting process should also be as simple as possible. For the dovetailing with the strategy, the ‘House of Performance’ (HoP) was developed. This is a structure of the most important financial ‘outcome KPIs’ that is used to

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$ Sustainable Value Creation (Economic Profit)

Growth

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Fig. 9.2 Outcome KPI target setting structure—‘House of Performance’ (HoP). Source: Own representation

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Fig. 9.3 Target rule logic and measurement of the strategic gap. Source: Own representation

consistently manage the financial value drivers (growth, profitability, capital efficiency) at all management levels of the corporate group (group level, business units, sales companies, service units, support units) (Fig. 9.2). With the help of this outcome KPI structure of the HoP, the respective North Star targets were defined for the respective management levels of the organisation, based on the group’s targets. In addition, a flexible target rule logic was defined for deriving annual improvement targets for business units, sales companies, service areas and the main functions. The responsible management was involved in the development and target definition process, similar to a strategic planning process. The rule logic for deriving the annual improvement targets is simple: the closer the actual result of the previous year of the respective KPIs is to the strategic target (North Star target)—i.e. the smaller the ‘strategic gap’—the smaller the annual

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improvement targets, which are also expressed in relative terms, and vice versa (Fig. 9.3). After the one-time effort for the development of the North Star target system— which was not insignificant, as the set of rules had to reflect all past experiences and the management’s assessment of future improvement potential in order to meet with full acceptance—the set of rules was able to completely replace both the targetsetting function of annual budgeting and the target-setting function of medium-term planning. Consequently, these rule-based targets were also used as the new assessment basis for variable remuneration. This completed the first of the two control loops of an integrated strategic and operational planning process. The entire organisation has now been permanently aligned with the strategic (financial) goals of the group with this control loop for two strategy periods using the same self-regulating approach and with negligible bureaucratic effort. It has had to be slightly readjusted in between in order to refocus a change of priorities in the group’s strategy towards more growth.

Control Loop 2: Rolling Planning and Adjustment The change of target setting to relative north star targets and target rules for selfadjustment of annual improvement targets in combination with the adjustment of the measurement system to rolling measurement of the ‘strategic gap’ created ideal conditions to further develop the annual planning rhythm into a more agile rolling process. Every four months (trimester), the following question is now asked in all sub-areas of the group: Are we moving forward as expected or do we need to adjust our existing roadmap of measures? The central coordination tool for this ‘rolling planning and adjustment’ is the rolling forecast (RF), which is closely linked to the rolling planning (RP). With the RF, the ‘sensing’ is done. With the RP, the measures are adjusted if necessary (‘responding’). The conversion of the measurement system optimally supports this rolling planning process. The measurement of the trend and the development of the strategic gap provide a high level of transparency for answering the central question that is regularly asked: Do we need to adjust our measures against the background of the trends? Do we need to redirect? By ‘outsourcing’ the target setting to the first control loop, the forecast is also no longer the basis for the next target, thus freeing the financial forecasts from tactical considerations. (Fig. 9.4). The division of the planning and control system into two control loops has meant that the organisation always has a strategic north star in mind, which also remains stable and is not, as before, adjusted again with each medium-term planning process. At the same time, reflection is more frequent and measures and resource allocation are adjusted depending on the progress of the results. This also provides better support for ‘driving on sight’.

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„Sensing“ (RF)1

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Fig. 9.4 Integration of RF and RP in control loop 2. Source: Own representation

Summary of Experiences from the Application The following key findings can be derived from more than ten years of application: • The adaptation of the planning and control system has more than paid off. The approach systematically supports the agility of the entire organisation and has very positive effects on the entrepreneurial behaviour of team leaders and employees. It leads to ‘letting go without letting control out of one’s hand’. The impact of this adaptation is very often significantly underestimated in larger companies. At Hilti, for example, the approach has undoubtedly contributed to increased performance and value of the company. Decoupling goal setting from action planning and coordination as well as the design of the north star goal system are key to the impact of the entire control system (Wirnsperger, 2017). • It is possible to integrate strategic and operational planning and gain much more effectiveness and efficiency in planning and control with much less effort. For the finance organisation, this liberation from non-value-added planning and budgeting activities meant a great opportunity to present itself even better in the role of a business partner. • Experience to date in the Hilti Lab at the University of St. Gallen—on whose work the documentation above is based—shows that the planning and control approach with two control loops can in principle also be transferred to other, less homogeneous business models than the Hilti business model. The patterns of planning and control processes in larger, more complex organisations are similar in essence and the problems and possible solutions are therefore also similar. • However, the ‘command and control’ pattern in corporate planning and management is very deep-seated. An adaptation of the system touches on a fundamental

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leadership and control paradigm (theory Y instead of X (McGregor, 1960)) and therefore needs the fundamental willingness and conviction of the top management bodies to let the leadership culture underlying the approach also flow into the practices of financial management. Above all, owner-managed or familyowned companies very often already lead with the corresponding leadership paradigm and therefore generally have very good prerequisites for the application of the outlined approach. If we transfer this consideration to the SME sector, a number of other exciting questions arise, which we have dealt with: 1. 2. 3. 4.

The use of AI (unsatisfactory to date) The abandonment of planning (not proven) Use of planning software and interfaces to other systems Planning of external reports and planning of internal reports based on internal cost rates (two worlds) 5. Industry-specific models 6. Planning in a crisis and long-term planning and scenarios It can be seen that this process intervenes in the capillaries of the enterprise and is also important for the control of the success mechanisms. No one can get around this—and we are happy to help.

References Baaij, M. (2018). Mapping a winning strategy. Emerald Publishing Limited. Drucker, P. F. (1988, January–February). The coming of the new reorganization. Harvard Business Review. McGregor, D. (1960). The human side of enterprise. McGraw-Hill. Wirnsperger, F. (2017). Flexible, relative Zielsysteme zur agilen Unternehmenssteuerung, St. Gallen.

Felix Hess began his career at Hilti in 2011, following positions at Arthur D. Little and Porsche Holding GmbH. He has been Group Executive Vice-President and Global Finance Director of the family-owned company since 2017 and will be a member of the Group Executive Board from 2023. Franz Wirnsberger has more than 30 years of international management experience as CFO, mainly in the Hilti Group. He now works as an independent expert and coach in the field of corporate performance management.

Chapter 10

A Plea for More Transparency: The FBXperts View Patricio Ohle and Itziar Masifern Gómez

Every company must ultimately deal with the principles of corporate management, its governance, i.e. the totality of all regulations, values and principles that constitute corporate management. The CFO, as the ‘guardian’ of good, forward-looking, responsible governance, has a certain key role to play. A key element of good governance is transparency, both within the company and vis-à-vis external stakeholders and the public. If a CFO defines his area of responsibility, from the perspective of financial management the improvement of transparency in a comprehensive sense is the central task and the first step for a system breakthrough (cf. Fig. 2.1). It is a matter of getting down to the nitty-gritty: translating strategy options into quantifiable and comprehensible variants that can serve as a basis for decisionmaking. In the financial sphere, family businesses are exposed to the danger of inadequate and transparency-avoiding structuring of organisation, processes and strategies, which can result in typical undesirable developments. We have been observing a change in thinking for some time now, at least among medium-sized and larger family businesses. Companies with family influence include Roche, Looser Holding, Schindler, SFS Group, Stadler Rail, Vetropack, Ypsomed and Bossard, which went public between 1975 and 2003 and are still more than 50% family-owned. But this is also increasingly true for private companies such as Maxon, Endress & Hauser, Liebherr, Hilti, Würth and REHAU (Braun & Kissling, 2020). All these companies P. Ohle (✉) FBXperts AG, Zürich, Switzerland e-mail: [email protected] I. M. Gómez Formerly with Oliver Wyman, Barcelona, Spain e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_10

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see transparency as crucial. A good example of comprehensive transparency is also the digitalisation network ‘Maschinenraum’ founded by Max Viessmann, which sees itself as an ‘open ecosystem for long-term cooperation and innovation’ and aims to promote ‘awareness of and responses to new realities’ (Maschinenraum, 2022). The CEO of ‘Maschinenraum’ Tobias Rappers writes somewhat pointedly: ‘Goodbye, secrecy and parochialism!’ The role of financial leadership is naturally that of an authority that will bring rationality and clarity to a discussion, also in terms of improving transparency. This discussion is sometimes also dominated by gut decisions and incomplete facts—and not so rarely also deliberate lack of transparency. The question arises as to how much of this ‘CFO-ness’ in terms of improved transparency seems appropriate for a family business and what has proven successful under these specific boundary conditions. The following quotes from our interviews with board members of major family businesses give an impression of the current starting situation in the companies and the boundaries that are drawn with regard to transparency: • ‘The family is proud that we are transparent. Many things are significant: the credit rating of an institution, the comparisons that become possible in addition. A stipulation of the owning family is that we don’t want to be below standard just because we could as a family business’. • ‘Dialogue as a risk management tool is also promoted through the better information base’. • ‘In addition, transparency regarding performance is a must for the management of the company. Without timely transparency on weaknesses, there is a risk that countermeasures will not be taken promptly either’. • ‘Outside management and supervisory board/advisory board provide transparency—because of measurability and complexity’. • ‘We are always rethinking: What is desired? Where do we have deficits and where are we ahead of the peer group?’ • ‘There are limits: Everything that concerns the shareholders. For example, salaries, dividends, private matters—even management’. • ‘We take the accusation of bureaucracy seriously. Decentralisation is a basis for success to cope with greater competition’. As a central element of good, future-oriented, responsible governance, transparency is a must. We advise family businesses to follow a path of the ‘golden mean’, as Aristotle might have recommended: not too little and not too much—just the right amount of transparency and in appropriate steps. Transparency should be gradually improved in a process. By formulating clearly comprehensible and appropriate goals and comprehensively evaluating the options, tailor-made solutions can be defined for the individual family business. The trend to improve Transparency continues to progress, often externally induced and then also due to the conviction of the businesses. We advise you to study the following practical reports and presentations, especially from the perspective of transparency.

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In the following chapters, we will turn to the next step in the model: better known as the stage of ‘compliance’. Compliance naturally benefits greatly from an improvement in transparency, which in turn forms the basis for avoiding risks— a must for family businesses that want to remain independent. The level of compliance is understood comprehensively: risk management (RMS), internal control system (ICS including internal audit)—compliance in the narrower sense. These functions, which often relate to the CFO’s department, are also referred to as assurance functions (e.g. by the ‘big 4’ audit groups).

References Braun, B., & Kissling, S. (2020). Erfolgreich an und jenseits der Börse: management tools in family businesses. Orell Füssli. Maschinenraum. (2022). Über uns. Last Accessed July 19, 2022, from https://maschinenraum.io/ ueber-uns.

Dr. Patricio Ohle is the founder and managing director of FBXperts AG. He has held management positions in family businesses for three decades, including as a director at Hipp Holding AG. Dr. P. Ohle is a Research Fellow of the Center for Family Business at the University of St. Gallen, where he also completed his doctorate. He is also a lecturer at the University of St. Gallen in ‘Finance of large family firms’. Itziar Masifern Gómez is a former consultant of Oliver Wyman for more than 7 years and now self-employed. Itziar graduated in Business Administration and Management and Law from the University of Navarra and has developed skills in strategy and business finance in development programmes at IESE Business School. Itziar and and her brother Jose Masifern support the expansion of our Spanish CFO Forum.

Part III

Compliance: A ‘Must’ to Avoid Risks

Patricio Ohle

Together with risk management (RMS) and the internal control system (ICS), compliance forms one of three so-called lines of defence for good corporate governance. The large auditing firms (e.g. Ernst & Young, KPMG etc.) also speak of ‘assurance processes’ in this context. In the following, we use compliance as an umbrella term for some of the most important facets related to it. In this part you will learn: • How to combine an international ICS with risk management and internal auditing to form a holistic system of proper corporate governance • Which fraud risks you might suspect where (early warning) • Why you need to pay utmost attention to cyberattacks and how to minimise the associated risk

P. Ohle FBXperts AG, Zürich, Switzerland e-mail: [email protected]

Chapter 11

Internal Control System Also for Family Companies: the Basis for Proper Management?! Annette Beller and Vanessa Muellner

Compliance and ICS: Goals and Tasks While the term ‘compliance’ can be described as adherence to legal regulations and generally accepted rules, it is the task of the internal control system (ICS) to help ensure this. However, the ICS goes further, because compliance with internal guidelines is also to be ensured through the establishment of an ICS. An ICS provides sufficient security for the management and contains the procedures, methods and measures defined by the company. The aim is to ensure the effectiveness of business processes, the accuracy of financial reporting and compliance with laws and directives. There are constant reports in the press about costs and penalties that companies have to bear because compliance violations were not prevented. The case of the emission manipulation at VW with its magnitude and effects shows that a compliance problem has the potential to wipe out a family business. In the more recent past, the 55 million euro fine against Melitta should also be mentioned (Compliance praxis, 2014) or the Haniel Group (Stern, 2008) or Prym: according to newspaper reports, 75 million euros was the fine imposed in this case. It almost led to the demise of one of the oldest family-owned companies ever (there is talk of 475 years) (Die Welt, 2007). Even these few examples point to systemic weaknesses. In individual cases, the financial consequences of non-compliant behaviour are so significant that they can endanger the company’s ability to continue as a going

A. Beller (✉) B. Braun SE, Kassel, Germany e-mail: [email protected] V. Muellner Credit Suisse AG, Zürich, Switzerland © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_11

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concern. The consequences can not only be of a financial nature, but also significantly damage the company’s reputation in the public eye—with unforeseeable consequences for the sales side. In 2014, one could have read that Henkel KGaA (Die Welt, 2014) took some significant measures as a result of a cartel fine of over 100 million euros: • Installation of a Chief Compliance Officer with global responsibility • Fifty local competent persons • Introduction of a compliance management system, audited according to the IDW PS 980 standard (Henke, 2015) For Henkel, the cartel fine was a delicate matter, as the company had previously promoted its sustainable business practices and positioned itself as a premium manufacturer. As consumers in Europe become more demanding about corporate social responsibility, the image of brands such as Persil, White Giant, etc. was affected and thus the credibility with consumers and trade customers. The insolvency of Wirecard certainly offers an object lesson in the consequences of a lacking ICS par excellence. Anyone who reads the ‘Countdown to bankruptcy’ (Handelsblatt, 2021) in the Handelsblatt learns how desperately the management tries at the last minute to contact the bank, in whose trust accounts 1.9 billion euros are supposed to lie—but even this does not succeed, as not even the bank’s contact details are generally known in the organisation, but apparently only to one employee. The inglorious end of Wirecard is well known, but it shows very clearly that the establishment of an adequate compliance organisation in the company and a functioning ICS are essential success factors for sustainable successful entrepreneurial activity. Family businesses are often characterised by continuous, organic growth over generations. Existing organisational structures are often continued and not adapted to new requirements resulting from the growth and size of the organisation or technological changes. Increasing networking in the context of digitalisation and the increased speed of change also lead to greater complexity in the company. If the founder perhaps still knew the people and processes involved, rapid growth means that this is no longer the case. For example, in the Prym case, there are statements that the processes had to be adapted. The cartel fine threatened the company’s existence, but was fortunately reduced significantly in spring 2011. Company boss Andreas Engelhardt reacted with relief: ‘Prym has been saved by the concession of the Brussels Commission’, he told Der Spiegel in an interview (Der Spiegel, 2011). The establishment of an adequate organisation and corresponding processes as well as effective controls pays off, as the publicised non-compliant cases show. However, in order for an organisation to actually achieve its goals, compliance thinking and action must become part of the corporate culture and be underpinned by a well-functioning compliance management system—which also includes an ICS. It pays off in any case: in comparable cases, large corporations had to pay cartel fines of between 0.5% and 1.1% of turnover. The objective of the internal control system is to ensure the proper implementation of decisions and the flow of processes within the company in order to guarantee

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compliance with legal regulations and internal guidelines. This is not only to prevent the existence and further development of the company from being endangered, but on the contrary to create the basis for its development. This indispensably includes ensuring compliance with legal regulations and standards, safeguarding the existing assets as well as preventing fraudulent acts and the taking of disproportionate risks. A functioning ICS is an essential building block for a legally compliant and secure organisation in the company, but also the basis for reliable accounting and meaningful reporting. It thus creates a solid basis for entrepreneurial decision-making. At the same time, it enables the establishment of a risk management system in the company (DIIR, 2020). Last but not least, the ICS can also be used to make work processes more efficient and transparent. The establishment of a suitable ICS should therefore not only be understood as an obligation, but above all as an opportunity to optimise operational processes by integrating the controls into the operational processes (so-called in-process controls) and—whenever possible—automating them. As a continuous process, this contributes to increasing efficiency in the company.

Principles of the ICS The established controls must be designed to be transparent for the employees and regularly include a target-performance comparison. The implementation of the control and its result must be documented. This not only ensures that the control is carried out, but also documents who carried out the comparison and when. Such a process strengthens the assumption of responsibility in the company. Another core principle of the ICS is the dual control principle, which prevents employees from making far-reaching decisions or taking measures on their own. The dual control principle thus ensures that an independent person is always involved in the process or decision. The central and fundamental importance of the dual control principle for a functioning ICS should be explicitly pointed out at this point. In order for this principle to be recognised by all employees in family companies, it is necessary that shareholder-managers also accept and apply this for themselves.

Obligation to Establish an ICS The establishment of an ICS by means of a proper organisational and operational structure with effective structures and processes is the responsibility of the management of a company (sections 9, 30, 130 OWiG), including the provision of the necessary resources. An inadequate organisation may not only give rise to liability of the company, but also to personal liability of the management. However, to breathe life into the ICS in a company, more is needed: the management must act accordingly as a role model (sections 91, 107, 111 paragraph 1–3 AktG)!

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Organisational Model: The IIA’s Three-Line Model The Institute of Internal Auditors (IIA) has developed the so-called three-line model, which is intended to provide orientation for the organisational structure of a company and at the same time enable the establishment of strong governance and a strong risk management system (DIIR, 2020) (Fig. 11.1). The model divides the management below the executive board into the first and second line. The task of the first line is to establish and maintain ‘appropriate structure[s] and process[es] for managing operations and risks (including internal controls)’ (DIIR, 2020, p. 5) and to ensure ‘compliance with legal, regulatory and ethical expectations’ (DIIR, 2020, p. 5). The task of the second line, in addition to advising and supporting the first line, is primarily to monitor risk-relevant activities ‘such as compliance with laws, regulations and acceptable ethical behaviour, internal controls, information and technology security, sustainability and quality assurance’ (DIIR, 2020, p. 6) and to analyse the effectiveness of the risk management system, including internal controls (DIIR, 2020, p. 6). These roles ‘are part of management’s responsibilities and are never completely independent of management, regardless of reporting lines and responsibilities’ (DIIR, 2020, p. 9). In the third line, internal audit assumes the tasks of an independent auditing and advisory function (DIIR, 2020, p. 9) and informs management accordingly. The basic prerequisite for internal audit to be able to fully perform this task is its independence from the first and second reporting lines. Independence is to be understood in such a way that the internal audit

The IIA’s Three Lines Model GOVERNING BODY Accountability to stakeholders for organizational oversight

KEY:

MANAGEMENT

INTERNAL AUDIT

Actions (including managing risk) to achieve organizational objectives

Independent assurance

First line roles:

Second line roles:

Provision of products / services to clients; managing risk

Expertise, support, monitoring and challenge on risk-related matters

Accountability, reporting

Delegation, direction, resources, oversight

Fig. 11.1 The IIA’s three-line model. Source: IIA

Third line roles: Independent and objective assurance and advice on all matters related to the achievement of objectives

Alignment, communication coordination, collaboration

External Assurance Providers

Governing body roles: integrity, leadership, and transparency

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is integrated into the operational communication, but has no authority to issue instructions to the first and second line (DIIR, 2020, p. 7 and 9).

Setting Up an Internal Control System (IDW, 2012) Internal controls (Fig. 11.2) can be integrated into operational processes (so-called in-process controls), whereby these are regularly designed as organisational security measures in such a way that the next process step can only take place once the required check has been carried out and documented. An example of this is an automatic credit limit check for customers when a sales order is entered into the ERP system. For this purpose, credit limits are granted to individual customers depending on their previous payment behaviour and external credit ratings. When a new sales order is created, the system automatically checks whether the credit limit granted would be exceeded with the new order. If this is not the case, the sales order can be created. If the limit is exceeded, a release can still take place on the basis of a defined manual process for the individual case, in which qualitative aspects can also be taken into account, whereby the dual control principle must then be observed in any case. This can prevent customers who do not have the required creditworthiness from being supplied, which would result in financial losses for the company. Another important process-integrated security measure is the establishment of a dedicated authorisation management for IT systems. By means of the authorisation concept, it can be decided in advance which employee is granted which competences. It can also be used to ensure compliance with the dual control principle.

Internal Control System

Internal Control System

Internal Monitoring System

Process-integrated Monitoring Measures

Organisational Security Measures

Prozess-independent Monitoring Measures

Controls

Internal Audit

Fig. 11.2 Overview of the internal control system. Source: IDW (2012)

Other

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The advantage of safeguards that are integrated into the process is primarily that they prevent actions that can harm the company. Controls that are downstream often cannot. It is certainly decisive when the control takes place within the process. For example, a downstream control regularly takes place during the posting of business transactions, when it is checked whether the documents required under commercial law and tax law are also available. Process-independent monitoring measures regularly take place only after the business transaction as such has been completed. The primary goal here is to uncover weaknesses in the organisational structure and the structural and procedural organisation as well as in processes. In order to achieve continuous improvement in the company, it is necessary to implement the identified opportunities for improvement in a timely manner and to follow up on this. Internal auditing, which takes on this task, thus supports the management, is itself part of a functioning ICS and thus creates added value for the company’s development.

Trends in ICS It is becoming apparent that internal control systems are increasingly being integrated into the existing governance, risk and compliance framework and into corporate planning. This has the advantage that synergies can be created within the company. In addition, IT solutions are increasingly used, as the automation and digitalisation of an ICS can bring enormous advantages. An automated ICS ensures that large amounts of data can be processed and analysed in real time. Thus, in addition to standardisation and simplification, preventive control systems are created to make the right decisions and detect risks early enough. An automated control system enables a company to identify control and potential business process gaps and ensure continuous risk monitoring. Digitalised solutions will therefore be an integral part of every ICS in the future (Glage, 2018).

Summary The establishment of a compliance management system to ensure a proper organisation is a success factor for successful corporate development. The establishment of a well-functioning ICS is an important component of a proper organisation. Essential core principles of an ICS are the dual control principle and the transparency of the established controls as well as their regular implementation and documentation. ICS should not only be understood as an obligation, but as an opportunity for continuous process improvement.

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References Compliance Practice. (2014). Gericht bestaetigt Millionen Geldbusse gegen_Melitta. Last Accessed July 19, 2022, from https://www.compliancepraxis.at/Themen/Aktuelles_Meinung/Archiv/ Gericht_bestaetigt_Millionen-Geldbusse_gegen_Melitta.html. Der Spiegel. (2011). Niedrigere EU-Strafe: Deutschlands älteste Firma kann weiter leben. Last Accessed July 19, 2022, from http://www.spiegel.de/wirtschaft/unternehmen/geringere-eustrafe-deutschlands-aelteste-firma-kann-weiterleben-a-754498.html. Die Welt (2007). Last Accessed July 19, 2022, from https://www.welt.de/wirtschaft/article11 96820/EU-deckt-Reissverschluss-Kartell-auf.html i.V.m. Die Welt. (2014). i.V.m. Accessed July 19, 2022, from http://www.welt.de/wirtschaft/article13552 6659/Kosmetik-Kartell-erhaelt-drastische-Milliarden-Strafe.html und http://www.n-tv.de/ wirtschaft/Henkel-und-Beiersdorf-erhalten-dicke-Strafen-article14183781.html. DIIR. (2020). The IIA’s Der line model. An update of the three lines of Defence. Last Accessed July 19, 2022, from https://www.diir.de/fileadmin/fachwissen/downloads/Three-Lines-ModelUpdated-German.PDF. Glage, D. (2018). Trust in controls: Better safe than sorry. Last Accessed July 19, 2022, from https://klardenker.kpmg.de/vom-vertrauen-in-kontrollen-iks-interne-kontrollsysteme/. Handelsblatt. (2021). Countdown to bankruptcy. 04.06.2021, 44–50. Henkel. (2015). Annual report 2014. Last Accessed July 19, 2022, from https://www.annualreports. com/HostedData/AnnualReportArchive/h/OTC_HENKEL_2014.pdf. IDW. (2012). Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW); (Hrsg.): IDW Prüfungsstandard: Feststellung und Beurteilung von Fehlerrisiken und Reaktionen des Abschlussprüfers auf die beurteilten Fehlerrisiken (IDW PS 261 n.F.). In IDW-Fachnachrichten, para. 20. Stern. (2008). Construction scandal: Haniel subsidiary risked damages. Last Accessed July 19, 2022, from https://www.stern.de/wirtschaft/news/bauskandal-haniel-tochter-riskierteschaeden-3855382.html.

Dr. Annette Beller is CFO of B. Braun SE. With a doctorate in business administration, she began her career at an auditing firm before moving to the medical technology manufacturer in Melsungen in 1995. In 2011, she was appointed to the Management Board, and one year later she was appointed CFO. Beller is also a member of the Board of Directors of Landesbank HessenThüringen. Vanessa Muellner , after obtaining a master’s degree in Business Management from the University of St. Gallen, Vanessa Muellner started her career at Credit Suisse, where she is currently Market Head Service and Advice Private Banking Staff Clients.

Chapter 12

What People Do Not like to Talk About: Dealing with and Defending Against Fraud Martin Gasser and Franz Berger

Employee fraud and theft are sensitive issues that can affect all companies. Rarely, however, is it reported because it is unpleasant to talk about. Companies have a duty to prevent this, as the saying ‘opportunity makes thieves’ is of central importance in this context. This applies just as much to family businesses—especially those that operate internationally and have reached a certain size in terms of employees, profit centres and subsidiaries. Criminal energy and fraud are not only limited to foreign countries. Many examples show that it can happen anywhere—even in the finance department of the head office. In the following, we outline two cases from the experience of a longstanding CFO of an internationally active company with numerous foreign subsidiaries.

Case 1: Foreign Distribution Company The case illustrates the difficulties and complexity of managing and monitoring a foreign subsidiary which, due to the language, culture and environment, can only be monitored to a limited extent via group controlling and management processes. First is the chronicle of events: The company was running a local sales company in Eastern Europe. For cost reasons, the auditing of the accounts and the annual audit M. Gasser (✉) Reichle de Massari AG, Wetzikon, Switzerland e-mail: [email protected] F. Berger Vivoclar Vivadent AG, Schaan, Liechtenstein e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_12

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were carried out for many years by a local auditing company; the audit was only later transferred to the group auditor. The company was very successful and continuously increased its turnover through major projects with key customers. The local managing director had been in office for about ten years since the company was founded. He left the company to take up a new position with one of the major clients. The previous sales manager was then appointed managing director. Shortly thereafter, major financial discrepancies came to light. An investigation was initiated in cooperation with a Big 4 audit firm with local forensic specialists. The aim was to clarify fraudulent activities and to validate the value of the balance sheet items as well as to review the risks of the business model. The main findings from this case were as follows: • A substantial part of the business was conducted through a DELTA scheme with ‘overpricing and kickbacks’. The accounting and reported profits were thus incorrect. • Retained earnings and receivables listed in the balance sheet were not recoverable and had to be written off in full. Thus, a significant part of the profit carried forward from the past successful years was not recoverable or non-existent. • Evidence was limited and, due to the long duration of the grievance, no longer or hardly verifiable. The case could not be prosecuted under criminal law. • Oversight by the head office was only possible to a limited extent due to language and cultural barriers as well as the criminal energy. Several internal and external parties were involved, so that the malpractice was not uncovered for a very long time. How did the company deal with this? An analysis regarding the options for future market development in this country led those responsible to sell the local branch to the new management and to continue sales as an independent, local company. This made it possible to achieve the following goals: • After the change of the company’s name and the conclusion of a distribution agreement, the local market could continue to be served. • Thus, a closure and withdrawal from the market were not necessary. A closure would have caused high closure costs in addition to write-offs of non-existent receivables. • With the distributor model, the risks for the group company were reduced and contained. • In retrospect, this solution proved to be good and sustainable. Since then, the cooperation has functioned without problems and the market could continue to be supplied with an independent distributor. The lessons learned from this experience are as follows: • The consistent use of the group audit company pays off, especially in critical countries—despite sometimes significantly higher additional costs.

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• The use of an independent local ERP solution made central control impossible. With group-wide processes and an integrated ERP solution, transactions can be validated or audited centrally. • The ‘gut feeling’ should always and immediately be taken seriously. • Risk management must be practised consistently (examples): – Legal set-ups: Avoid own subsidiaries in risk countries; prefer cooperation with local, independent distributors. – Creation of a compliance unit (risk management, ICS, compliance) and thus intensification of local compliance reviews and auditing (internal and external). – Definition and implementation of a binding code of conduct. – Roll-out of group-wide, standardised processes including ERP systems with central control options. – More critical scrutiny of key performance indicators (KPIs)—even in successful companies.

Case 2: Headquarters Despite existing regulations with regard to passwords and e-banking access, negligent handling, misplaced trust among colleagues or disregard can have fatal consequences. The following is a classic case that should not actually exist, but nevertheless happens due to human error and a lack of sustainable control: During a holiday absence, the assistant accountant took over the password and e-banking access from her colleague. At that time, there were still ‘tally sheets’ for e-banking. In addition, the password was not reset after the return. The combination of these two vulnerabilities meant that, if criminal energy was present, it was only a matter of time before fraud occurred. Learnings from this experience include the following: • Existing guidelines alone do not protect against fraud. Ongoing training, awareness-raising and automated monitoring are essential. • Any conspicuous behaviour on the part of employees must be addressed immediately and followed up—here, too, it is worth listening to one’s ‘gut feeling’. • Evidence and automation for password changes must be set up and checked. Finally, the following is a typical package of measures in such cases initiated by the CFO of a family business: ‘We responded: 1. the role of the local Finance Director is strengthened by a very strong dotted line to the CFO. This means that the Finance Director can and must report grievances that concern the Managing Director. 2. a whistleblower tool where anyone can report anonymously. This was linked to the development of a “speak up culture” with the corresponding “tone from the top”. Some cases have been solved and I can only advise everyone to do so.

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3. consistently expanded the ICS and established consistent control through internal audit.’

Summary and Recommendations The following insights can help to avoid fraud and criminal energy, as far as possible, through preventive measures, standardised processes and control measures: • Fraud affects every company. The risks can be mitigated through appropriate processes and procedures. But in the end, it is the employees and people who have to put up with it. When criminal energy is present, processes and systems only provide limited protection. • The company has the duty to prevent possible temptations by means of guidelines, regulations and processes. ‘Trust is good, control is better’, because we know that ‘opportunity makes the thief’. The company also shares responsibility for this. • Companies should always take their ‘gut feeling’ seriously and carry out immediate and rigorous checks in cases of suspicion. • In the case of foreign subsidiaries in exposed countries and lack of local language skills, the group audit company should definitely be used for independent control. Savings at this point can prove fatal. • The use of group-wide ERP systems and processes is a prerequisite for ensuring central oversight and an audit approach for exposed countries. • A group-wide uniform audit office can also bring great benefits in this regard through standardisation and the exchange of auditors via the team.

Almost Every Second Company Is Affected Of course, there are also cases which, because of their dimension, make quite different and bigger waves—such as that of WALTER BAU, which Manager Magazin summarised as follows: ‘WALTER BAU: Bankrupt Ignaz Walter finally wants to provide an explanation for the insolvency from his own point of view. Meanwhile he is pilloried for possible self-enrichment’ (Werres, 2006). Such things unfortunately happen—and regardless of whether it is a listed company or a family business. The following statistics for Germany apply similarly to Austria and Switzerland: • Twenty-four percent of companies are victims of crime annually, 50% at least twice a year, trend rising. • Forty-eight percent of the violations come from internal employees, 33% from external business partners and 19% in cooperation of the first two groups. • Ten percent of offences happen at the first managerial level.

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• Almost every second company is affected (PWC, 2020). External perpetrators are predominantly from among the company’s customers or suppliers. These are just a few examples and solutions for the defence against ‘traditional’ criminal attacks. In the next chapter, we will look at a challenge that is no longer entirely new, but is growing massively: the danger from the Internet. And here, too, the human factor plays a decisive role.

References PwC Study. (2020). Global economic crime and fraud survey. Last Accessed July 19, 2022, from https://www.pwc.de/de/managementberatung/forensic-services/fast-jedes-zweite-unternehmenvon-wirtschaftskriminalitaet-betroffen.html. Werres, T. (2006). „Geschröpft und geplündert?“. Last Accessed July 19, 2022, from https://www. manager-magazin.de/unternehmen/geschroepft-und-gepluendert-a-49a59d12-0002-00010000-000045451594.

Martin Gasser brings many years of experience as CFO and member of the executive board of a privately held international technology company. He also has international professional and management experience in Asia and two years of sales management. Since 2015, he has been managing director of a family holding company and has held various board of directors mandates. Franz Berger has more than 20 years of experience as a finance executive: as Finance Manager, Finance Director and Regional Finance Director in international FMCG companies (Kraft, Bacardi), as Group CFO of a listed healthcare company acquired by private equity (Unilabs), as EMEA Finance Director and Business Partner of a listed biotech and pharmaceutical company (Shire) and since 2012 as Group CFO of Ivoclar Vivadent, a leading dental company.

Chapter 13

Cyberattacks: Company Risk No.1— Underestimated by Many Fabian Kracht and Patricio Ohle

Holidays at last! The suitcases are packed, the skis are stowed away and off we go on a well-deserved holiday. The Group CEO of a food production company with 20 locations worldwide and 30 international sales units is looking forward to relaxing days with his family. It is day 3 of the holidays, shortly after Christmas. The CIO’s call comes at 3:45 in the morning. For 30 minutes, all the company’s servers have been encrypted, the ERP system is no longer functioning, e-mails can no longer be sent, and even the telephone systems are out of action. In the emergency, the entire IT network has been shut down, with the consequence that production has come to a standstill worldwide. But it gets worse: after a few hours, it turns out that all the company’s backups are encrypted and cannot be restored. In other words, one comes to a global standstill! Shortly afterwards, a ‘readme’ file is found on the infected computers, in which the attackers ask people to contact them in order to pay a ransom. If people are not prepared to do this, they will start offering the company’s sensitive data on the darknet. This, or similar, is how numerous cyberattacks on companies have presented themselves in the meantime, and although only a fraction of the cases reach the public, media reports are also increasing in German-speaking countries: at the end of 2018, the machinery and plant manufacturer Krauss Maffei was attacked by cyber criminals. The headquarters in Munich, where 1800 employees work alone, is particularly affected. For at least two weeks, the company can only produce at F. Kracht (✉) Mesakumo GmbH, Ulm, Germany e-mail: [email protected] P. Ohle FBXperts AG, Zürich, Switzerland e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_13

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reduced capacity. Many of the company’s computers have been affected by a Trojan attack, also known as ‘ransomware’ (Ashelm et al., 2018). In 2019, the traditional Hamburg jeweller Wempe falls victim to cyber extortion. Hackers paralyse the entire IT system and extort a ransom (Stern, 2019). The Salzburg crane manufacturer Palfinger, a flagship company with 11,000 employees and 2 billion euros in sales, is hit at the beginning of 2021. Here, too, a ransom is paid (Die Presse, 2021). Even smaller companies are now regularly victims of cyberattacks. According to a study published in December 2020 commissioned by Digitalswitzerland, the umbrella organisation for digital Switzerland, Mobiliar, the Confederation’s National Cyber Security Centre (NCSC), the School of Business at the University of Applied Sciences Northwestern Switzerland (FHNW) and the Swiss Academy of Engineering Sciences (SATW), a quarter of Swiss companies with 4 to 49 employees have already experienced such an attack. Around a third of these companies suffered financial damage as a result of the attack, and one in ten attacked SMEs lost customer data (Swissinfo, 2020). Family offices have also been attacked more often, as around 40% of them have not implemented effective policies and they offer a positive riskreward profile for potential attackers due to their proximity to owners and reputational risks (Botha, 2018).

The No. 1 Business Risk The findings can be generalised: according to Allianz’s Global Risk Report, cyber incidents have risen to become the no. 1 business risk in 2020 (Allianz, 2020). Every 11 seconds, a cyberattack takes place worldwide; the annual costs caused by ransomware attacks are estimated at 20 billion dollars for the year 2020. Cybersecurity Ventures estimates that the global cost of cybercrime will be $6 trillion in 2021 (Morgan, 2019).

The Different Types of Cyberattack Not every company is affected by cyberattacks to the same extent, and the types of attack also differ. ENISA (European Union Agency For Cybersecurity) lists the top 15 cyber threats on a threat map. Malware has now established itself at number one (ENISA, 2020). Malicious software is introduced into the company and the company network is spied on over a longer period of time, usually with the aim of paralysing the company’s network in order to demand a ransom.

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The Dangers Are Manifold Many companies are not sufficiently prepared for such threat scenarios. Again and again, individual managing directors or owners are of the opinion that they are potentially not affected, or their own IT department assures them that they are sufficiently protected due to a lack of sufficient expertise of their own dealing with the topic. It is difficult to calculate or estimate the costs of a cyber incident per company. This depends on many parameters, such as the extent of the damage, data theft, preventative measures, etc. However, it is much more important to accept that every company is a potential target of an attack and to prepare accordingly based on this understanding.

How to Protect Your Business from Cyberattacks The best protection against the ever-increasing threat scenario of cyberattacks has proven to be a combination of measures aimed at technology on the one hand and the human factor on the other. The most important measures are listed below.

Sensitise Employees Many of today’s attacks use the human factor. An e-mail from a supposedly old acquaintance with a link to a shared former photo album or the link with the reset of the supposed password: all these are common methods to gain access to a computer in the company network. Therefore, it is indispensable to continuously inform employees about the threat situation and to sensitise them by means of simulations and training. For this purpose, one can make use of suitable external providers who prepare and conduct such trainings at a professional level.

Keeping the Systems Up to Date Carry out all updates in your systems promptly and apply the patches provided by the software and hardware manufacturers immediately. The system and the corresponding software must be kept up to date accordingly. What sounds banal is not always stringently implemented in companies.

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Seek External Help Discuss your security concept with external partners at regular intervals and have it checked, e.g. by means of so-called white-hat hacking It may also make sense to increase visibility within the network. To do this, install software that serves to monitor, analyse and recognise network traffic. As a rule, this monitoring is ensured by an external service provider around the clock (Security Operations Centre, SOC).

Separate the Company Networks (Information Technology [IT] vs. Operational Technology [OT]) At a time when networks are becoming more and more densely interconnected, it may be advisable to separate the IT networks from the OT networks. This prevents malware from jumping from one system to the other. Particularly critical production capacities may even be separated from each other again within the OT network by means of suitable firewalls.

Carry Out Risk Analysis Carry out a risk analysis at regular intervals. What are your most valuable assets and how can you protect them in particular? Not all of your assets need to be protected equally, but your ‘crown jewels’ should be secured with appropriate protection and backups, mirrored offline again if necessary.

Create Backups Regularly Regularly creating a backup is extremely important. Redundant storage (on-/offline) is equally essential. Make sure that your backups are regularly checked to ensure that they can be restored in the event of an emergency.

Stay Informed It is important that you and your employees stay informed about the threat situation. Criminals’ attack patterns are constantly changing, and only exchanges with other companies and up-to-date information will ensure that your company can adapt accordingly.

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Use Passwords and Multi-Factor Authentications Strong passwords are an important form of protection. If necessary, revise your password guidelines (length and composition of passwords) and change them at regular intervals. It is often advisable to secure access to your systems through so-called multi-factor authentications. However, the cardinal mistake remains that many entrepreneurs and managing directors cannot imagine or simply ignore the fact that their company can become the target of a cyberattack. This misjudgement can have fatal consequences. ‘The fact that two out of three German company bosses deal intensively with the topic of cyber security is a good sign’, says Jörg Asma, Partner Cyber Security at PwC Germany. ‘However, the fact that a third seem to have no concern at all is again a warning signal - and almost an invitation for hackers and cyber pirates’ (Heeg, 2019). Accepting that one can be a target of criminals, regardless of company size and sector, is therefore central and indispensable. With appropriate measures, you can protect your company against attacks. However, it must also be clear that there is no absolute protection.

References Allianz. (2020). Allianz Risk Barometer 2020: Cyber rises to become top global risk for companies. Last Accessed July 19, 2022, from https://www.agcs.allianz.com/news-and-insights/news/ allianz-risk-barometer-2020-de.html. Ashelm, M., Jansen, J., & Smolka, K. M. (2018). Cyberkriminelle bestechen Krauss Maffei. Last Accessed July 19, 2022, from https://www.faz.net/aktuell/wirtschaft/digitec/cyberkriminelleerpressen-krauss-maffei-f-a-z-exklusiv-15928434.html. Botha, N. (2018). Why family offices need to prioritize cybersecurity. Last Accessed July 19, 2022, from https://www.forbes.com/sites/francoisbotha/2018/11/10/why-family-offices-need-to-prior itize-cyber-security/?sh=78b5900d601a. Die Presse. (2021). Last Accessed July 19, 2022, from https://www.diepresse.com/5956054/cyberangriffe-gefaehrden-konzerne-palfinger-zahlte-loesegeld. ENISA. (2020). ENISA threat landscape 2020: Cyber attacks becoming more sophisticated, targeted, widespread and undetected. Last Accessed July 19, 2022, from https://www.enisa. europa.eu/news/enisa-news/enisa-threat-landscape-2020. Heeg, T. (2019). Last Accessed July 19, 2022, from https://www.faz.net/aktuell/wirtschaft/digitec/ deutsche-chefs-sehen-cybersicherheit-laut-pwc-gefaehrlich-entspannt-16083314.html. Morgan, S. (2019). Global ransomware damage costs predicted to reach $20 Billion (USD) By 2021. Last Accessed July 19, 2022, from https://cybersecurityventures.com/globalransomware-damage-costs-predicted-to-reach-20-billion-usd-by-2021. Stern. (2019). Last Accessed July 19, 2022, from https://www.stern.de/digital/online/cyberangriffauf-wempe%2D%2Dtraditions-juwelier-von-hackern-erpresst-8779778.html. Swissinfo. (2020). Last Accessed July 19, 2022, from https://www.swissinfo.ch/ger/jedes-vierteschweizer-kmu-war-bereits-opfer-eines-cyberangriffs/46210110.

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Fabian Kracht has been the founder and managing director of mesakumo, a consulting agency for the digitalisation of medium-sized businesses, since 2021. Previously, Kracht was responsible for the comprehensive digital transformation of the construction supplier PERI as spokesperson for the executive board and CFO (2014–2021). Dr. Patricio Ohle is the founder and managing director of FBXperts AG. He has held management positions in family businesses for three decades, including as a director at Hipp Holding AG. Dr. P. Ohle is a Research Fellow of the Center for Family Business at the University of St. Gallen, where he also completed his doctorate. He is also a lecturer at the University of St. Gallen in ‘Finance of large family firms’.

Chapter 14

Compliance Is a Must: The FBXperts View Patricio Ohle

In view of these descriptions, one might think that all those companies are lucky whose CFOs have also been IT managers at some point in their careers—but this is not often the case in practice. And even if they had been: Even that is no insurance against cyber risks. And then there are all the other dangers that make the topic of compliance and co. so sensitive. The risks are often also of a personal nature, and obviously liability issues are involved in many cases. The attitude of our major family companies is clear, as revealed by our interviews with CFO: • ‘Understanding of the CFO: I have a specific relationship to risk as a result of long service’. • ‘The CFO is in a sense an asset manager and feels almost like family. Basically, however, this also applies to colleagues. “I have a network as a result of the affiliation. That is important for understanding. As a result of the family business constellation, I have a specific relationship to the risk and a task. That is certainly also the family’s expectation.” • ‘By consistently applying the 4-eyes principle at all levels (no isolated sole decisions that are not subjected to a double-check by a second management person, a project team or an auditor)’. • ‘Due to control considerations, I tried to strengthen the internal audit. America was a role model. It’s not quite so easy in Europe. This IR reports to the boards independent of the CFO’. • ‘In the context of a very decentralised organisation, a number of procedural arrangements are in place to ensure corporate governance’.

P. Ohle (✉) FBXperts AG, Zürich, Switzerland e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_14

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• ‘Through organisation, audit with two global auditing firms, information and risk management, we realise good governance’. In the compliance mechanism stage, one is sometimes confronted with so-called sacred cows or indeed ‘skeletons in the closet’ even in family businesses. We do not shy away from difficult issues and help to deal with them. The topic touched on in this chapter does not tolerate procrastination or false compromises, but sometimes requires a lot of tact. The higher the level of responsibility, the clearer it becomes that, in addition to technical knowledge, 50% of the questions touch on the ‘human, all-too-human’, and thus, knowledge of the special features of family-controlled businesses (FBCs) in the finance function is a very important factor. There must also be a common understanding of what is meant by compliance—in our concept, for example, in a very ‘broad’ definition in order to do justice to the issue of risks. In the forthcoming chapter, we go into the subject of ‘performance’ in the context of family businesses. The media often paints these businesses as superior in efficiency, but is this truly the case? What role does financial management play and what should it aim to contribute? These are the questions we aim to answer as we challenge the mythological aura surrounding the performance of family businesses. Dr. Patricio Ohle is the founder and managing director of FBXperts AG. He has held management positions in family businesses for three decades, including Director of Finance at Hipp Holding AG. Dr. P. Ohle is a Research Fellow of the Center for Family Business at the University of St. Gallen, where he also completed his doctorate. He is also a lecturer at the University of St. Gallen in ‘Finance of large family firms’.

Part IV

Performance: Profit as the Basis for SelfFinanced Growth

Patricio Ohle

After two very special pandemic years, it is clear that transformation through digitalisation should be at the top of the agenda. We can hardly afford not to develop the companies further. The improvement of performance is clearly in the foreground. Improving profitability creates the conditions for profitable independence and growth. In this part you will learn: • What you can imagine by the term agility and digitalisation and how implementation can succeed in family businesses • Which modern incentive systems Hilti uses and develops further in cooperation with the University of St. Gallen • That innovation can come about quickly through corporate venturing—and innovation leader Trumpf GmbH also works with it • What considerable potential lies in net working capital management

P. Ohle FBXperts AG, Zürich, Switzerland e-mail: [email protected]

Chapter 15

Agility Through Digital Transformation: It Is High Time Guido Huppertz and Fabian Kracht

The topic of ‘agility through digital transformation’ is an enormously broad field. It already starts with the question of who to look at: the company that wants to optimise its processes? To the employee, who should be relieved of administrative or repetitive tasks in order to deliver more ‘added value’? Or perhaps it would be better to focus on the customer, who in the end is actually the most relevant stakeholder? Or on one of the many failed projects, such as recently at Haribo (Kroker, 2018)?1 The fact is, as especially those in our network who act as supervisory board members for start-ups know: Our companies find it comparatively difficult to tackle the digital transformation in a truly comprehensive way, let alone to map their business model completely as a digital platform. Sure, there are positive examples: Think of Schindler AG, which digitised lift maintenance, or think of Hilti’s path to becoming a ‘data collector’ or Bosch’s early strategic decision to focus on the Internet of things—a process that is now starting to pay off (Ingenieur.de 2020). But if we are honest, it mostly remains isolated solutions. There are few holistic and comprehensive approaches on how to comprehensively lead a successful company with existing customers, established products, experienced employees and

1

At Haribo, the changeover to SAP software caused numerous errors. At times, the export of Gold Bears came to a standstill and some shelves in the supermarkets remained empty. Lidl also had problems. G. Huppertz Benteler Group, Salzburg, Austria Selbständig, Paderborn, Germany F. Kracht (✉) Mesakumo GmbH, Ulm, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_15

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long-standing processes into the digital era—and there is certainly no universal solution. In this chapter, two practitioners with experience in international family businesses show how a comprehensive digital business transformation can succeed beyond individual digital isolated solutions. The focus here is on the transformation methodology: Starting from the digital status quo of most companies and the digitalisation expectations of the various stakeholders, a target image is developed. This is then brought to life by means of a digitalisation roadmap and a five-step process. Both the technical IT side and the necessary empowerment and ‘involvement’ of the workforce are important here. One will not work without the other. But first, let us hear what agility can actually mean from a CFO’s point of view and what concrete starting points are available.

Agility in the Finance Department: Starting Points from a CFO’s Perspective Rapid technological progress, especially through digitalisation, is leading to a change in habits and behaviour and thus also influences the demand for services and products. As a company, it is important to adapt quickly to these changes and thus offer products and services that meet the needs. Due to the increased speed of change, agility is a decisive success factor for companies. In addition to the continuous review and, if necessary, adjustment of the business model within the framework of the strategy process by the company management, there are various starting points in the functional area of the CFO for increasing agility in the finance organisation.

Flexibility Beats Rigid Multi-Year Planning In practice, finance departments still very often work in rigid structures with predominantly transactional activities. For example, a look at the controlling departments of manufacturing companies often shows a traditional picture of corporate management via key figures or key figure systems, in which actual values are determined and compared with target or planned values via various reporting levels such as companies, plants, business units, etc. The results are then compared with the actual values. Actual values are determined and compared with target or planned values. In many cases, multi-year plans for many organisational units are prepared, consolidated and condensed annually in order to be able to compare them later with the actual values. But in view of today’s tendency towards a shorter ‘half-life’ of assumption-based plan values, is this effort still in proportion to the benefit? What

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happens, for example, if the real development makes the plan obsolete after only a few months? A new planning process lasting months is probably rather the opposite of agility! Against the background of rapidly changing market conditions, planning calculations should at least contain scenarios that can then be used as an alternative for steering the company. Even more helpful is a quick adaptability of planning calculations, which is a great challenge in terms of personnel and time, especially in large companies with many business and organisational units. Here, for example, driverbased planning calculations with their fast simulation capability can provide a remedy. However, their basic development is costly in the case of complex corporate structures and business models. In any case, it seems advisable to switch from rigid to more flexible planning processes. A practitioner approach is a rolling forecast process with decreasing detail density in the longer time horizon of the planning calculation. Such an approach trims the organisation to a faster adaptability due to the higher frequency of forecast or plan calculations and a shortened preparation period. It reduces the—sometimes too high—density of detail in the planning process. In addition, political disruptive influences should be avoided through remuneration tied to planning. Furthermore, in ongoing controlling, such as monthly reporting, a large part of the available time is still spent on the preparation and aggregation as well as the comparison of data. Only a smaller part is spent on problem analysis and the derivation of potential countermeasures. This is a consequence of the existing processing procedures and the degree of automation. Due to this focus on transactional activities, the organisation usually does not have the necessary know-how and management skills for analysis and especially for generating improvement actions.

Automation Beats Service Centre Ultimately, an increase in agility requires that tasks that are transaction-heavy and run in rigid processes are centralised and automated as much as possible. This also changes the focus and the necessary demands on employees. Here it is important to continuously adapt the organisation according to the progress of the change. There is also a need for new know-how and increased interdisciplinary cooperation with other departments. Controlling, for example, is dependent on close coordination and evaluation of countermeasures with other areas such as sales, purchasing, production or logistics in order to be able to economically evaluate and map changes in the business model. In addition to controlling, which is in focus due to its analysis and forecasting function, accounting takes on the task of determining actual values and preparing financial statements. Only when the actual data are available in a timely manner can they be used by controlling as a starting point for forecasts and planning as well as for plan comparisons and other analyses. Immediate use is only possible if

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time-consuming adjustments due to different rules and a deviating data basis are not necessary. In terms of centralisation and cost savings, the service centre organisation for accounting in low-wage countries has been the focus of many companies for some time. However, based on the technological developments of recent years, the automation and digitalisation of accounting processes is now the much more sustainable and forward-looking approach. There are fewer interface problems and the cost advantage is not based on temporary wage arbitrage. In automation and digitisation in accounting, the focus is on pattern recognition processes. These derive typical posting patterns from historical data and transactions and apply them to current business transactions. The following applies here: The more perfect historical bookings are available for pattern formation, the faster a high automation rate is achieved in posting. This reduces the manual rework for business transactions not recognised by the system, which have to be stored in the system as new patterns. Basically, this approach increases not only speed and efficiency but also data quality, since the same facts are booked uniformly and individual interpretation of business transactions is no longer necessary. The latter is often a problem for international companies with many companies and organisational units. Another step aims to automate routine accounting activities through small programs—so-called bots. The aim of this approach is to make rapid progress in as many areas as possible and not to introduce an all-encompassing new software system. The goal is to make small, rapid process improvements in many areas. In addition to the classic accounting processes, this also applies to the finance-related but cross-functional core processes such as ‘order-to-cash’ or ‘purchase-to-pay’, in order to further optimise and automate them. The goal is always to burden the experts as little as possible with transactional activities and to focus on valuecreating activities in order to increase agility.

Process Mining with Big Data The core processes mentioned above involve interaction with several departments, are correspondingly complex and generate large amounts of data. Until now, it was extremely time-consuming to analyse the processes mentioned and to measure their performance. Today, there is also a pragmatic approach here. The performance of the processes can be visualised and measured using so-called ‘process mining’. For example, quantity structures, throughput times, rework loops and times can be determined and potential for improvement can be derived. After improvement measures have been implemented, a new data evaluation is used to check whether they were effective and successful. The whole procedure is flexible, can be implemented comparatively quickly and considerably reduces the effort of conventional process investigations. In addition to the examples listed, there are other ways to optimise and automate the finance area—always with the aim of focusing more on analysis and optimisation or creating the resources for this.

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Another central point is the internal handling and processing of complex masses of data. Of course, this does not only apply to the financial organisation, but also to the operational areas in particular. Here, expertise must be built up centrally in the company in order to leverage potential for the company from ‘big data’ and pattern recognition or other AI processes and to increase agility. In general, the topic of organisation is an important factor for agility. The motto is: away from rigid large units, towards small flexible cross-functional units with more freedom and less burden from transactional activities.

On the Methodology of Digital Business Transformation or Why Digitalisation in SMEs Is Worthwhile Now People’s expectations of digital experiences, interaction and services in a professional context are strongly shaped by experiences in their personal environment: how people get information and shop online, interact with their mobile phone or tablet, collect data, communicate and collaborate or consume media—all this is shaped by the big tech companies (GAFAM2) and their products and services. This expectation of a company’s digital capabilities, shaped by everyday life, is found among all key stakeholders, especially among the company’s own employees as well as customers and suppliers. Key aspects are as follows: • Technology works simply and error-free or is quickly improved with an update, is available at all times, feels modern and, when interacted with, leads to results in the shortest possible time. • Specific user needs are learned; the resulting service is always better. • The digital offer is continuously being developed and new features are regularly added. • Repetitive activities are increasingly automated. • Problems can often be solved in self-service, at any time and without waiting times. • Premium claim: Digitisation is largely free; only very specific and particularly value-creating requirements for the user are charged for. This ‘learned’ expectation of customers is not limited to the products of large technology companies, but also manifests itself in special requirements, for example, for a medium-sized manufacturing company. This relates directly to websites, customer portals, apps and all other online offers of the company. In the interaction with customers, this leads to customers expecting, for example, transparency at all times regarding the status of orders, deliveries or invoices. Likewise, everyday

GAFAM: acronym for the five big technology companies Google, Amazon, Facebook, Apple, and Microsoft.

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experiences influence customers’ expectations of digital complementary services to physical products (such as planning or maintenance support). This change is just as noticeable among employees. What is familiar from the private use of digital applications is shaping expectations in the professional environment: Working with software applications in the company should be as smooth as possible. User-friendliness, data availability and automation are expected just as much as possibilities for IT-based collaboration and interaction. In addition, in 2020/ 2021 the COVID-19 pandemic has led to an ad hoc need for corporate ‘work anywhere’ capabilities: Business-critical as well as business-non-critical processes must be as digital as possible and implementable from anywhere for employees— integrated, performant and secure. This requirement will continue to exist in the future and will necessitate the intelligent and functional design of a hybrid corporate world with office and ‘work anywhere’ components. Expectations are increasingly developing among suppliers and other business partners for digital business processing beyond company boundaries and thus for deeper functional integration in supply chains. Immediate and specific information availability will become the standard in these business relationships. The state as an important stakeholder is also increasingly increasing the pressure to digitise: Integration of company processes in reporting procedures, integration of state data or special requirements of the public sector are on the rise—in Germany, but in many cases also abroad, which implies increasing requirements for internationally active companies in terms of their own digitalisation. The precise analysis of all these requirements and a targeted implementation is worthwhile and creates added value for the company. This can be seen, among other things, in the fact that new technology-driven competitors are often able to successfully ‘penetrate’ a market precisely when the established market participants do not take up the trends and expectations of digitalisation and thus create the space for the new competitors in the first place. If the established market participants drive digitisation themselves and successfully transform their own business, this keeps the unwanted new competitors at bay on the one hand and is economically worthwhile on the other.

Technology and Empowerment: That Is What Matters The good news here is that not every company has to start ‘from scratch’ in its digitalisation considerations. The way to successfully digitally transform an existing company and its business is neither a highly specific undertaking nor does it need a ‘secret recipe’. Rather, it is about necessary building blocks, sensible sequences and typical options that can be planned with proven approaches and then implemented in a digitalisation programme. In such a digital business transformation programme, two aspects are crucial: technology and empowerment of the acting persons. In terms of technology, IT plays a key role. The necessary (cloud) infrastructure, system and process landscape based on the specific business needs must be designed together

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with the affected departments in a medium- and long-term IT strategy. Subsequently, IT should be responsible for its implementation, operation and continuous development. In operational reality, however, there is often a large discrepancy between the existing and the necessary staffing levels and IT competence to meet these expectations. For example, the company’s own IT in SMEs is often geared towards basic IT services (operation) and troubleshooting. Prior to a digitalisation programme, it must be determined accordingly how much of the necessary competence and equipment should be built up within the company’s own IT organisation and how much should be obtained from external partners. However, technology alone will not be enough to successfully digitally transform a company’s existing business. The second key role, without which the goal will not be achieved, is played by the employees who work in this transformed company and who are to create the added value for customers and the company in concrete terms. They must be empowered, enthused and taken along on the journey. This must be understood as an active task and accompanied from the beginning with proven approaches and measures in a digitisation programme parallel to technology development.

Target Picture: What Holistic Digital Business Transformation Achieves In a digital business transformation, it is important to draw a positive and motivating picture of the goal right from the start: Why should proven paths be left behind, new methods tried out or modern technologies introduced? What are the benefits for customers, employees and ultimately the company? How can potential fears be counteracted? The fact that a digital business transformation is economically viable is a good starting point, but it does not create sufficient motivation for management and staff to really embark on the journey. The following therefore explains typical opportunities that can be achieved within the framework of a digital business transformation and which, in their diversity and concretisation, can regularly justify such a programme: • New customers can be acquired by means of intelligent digital offers, existing customers can be retained and the intensity of the business relationship can be deepened. • Existing business models are expanded, new digital business models can emerge and service is improved through complementary digital offerings. In the worst case, this merely defends existing business; in the best case, new business is generated. • After each major milestone of a digital business transformation, concrete economic results are measurable: increased efficiency, cost reduction and/or additional revenue.

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• In-house processes, as well as those of customers, suppliers and other business partners, are becoming more integrated through digital tools, which can increase long-term engagement and transform working relationships with partners. • With more modern IT workplaces and processes, the accompanying higher degree of self-determination and more creative and less repetitive activities through automation, the company gains in employer attractiveness. • ‘Work anywhere’: Already quite early in a digital business transformation, employees can work at any time, from anywhere and fully integrated in company processes and infrastructure. • The ability to integrate and commercialise innovative software solutions from the market and the speed of their introduction increases significantly. • Through a more flexible infrastructure and software-as-a-service models, digital business transformation enables rapid growth and shrinkage of the company and workforce when possible or necessary. • Employees become so-called citizen developers, i.e. the IT users implement their reporting or process digitisation requirements themselves: Traditional work with requirement specifications is significantly reduced. • An important goal and proven result of a digital business transformation is the substantial increase in IT security: Hacker attacks and fraud attempts are made significantly more difficult, and the security standard is increased by several levels by means of market-leading standards. At the beginning of a digital business transformation, this target image is concretised, communicated and repeatedly explained for the specific company. This is an essential aspect of empowering the workforce and the starting point for the necessary organisational development.

Holistic Roadmap: Digital Business Transformation in Concrete Terms A successful and comprehensive digital business transformation, which generates economically measurable added value for customers and employees and ultimately the company as a whole, consists of overarching guard rails on IT governance and security as well as on the role of IT, the actual transformation process with definable modules and in a clear sequence and accompanying organisational development. In addition, programme management has proven its worth, ensuring that the transformation process is consistently implemented until the goals are achieved and that emerging challenges are solved quickly and in a goal-oriented manner. The futureproof basis of the transformation is a market-leading, highly available cloud platform (Fig. 15.1).

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phases of a digital business transformation

IT as Business Partner

IT Governance & Security

1 Check-up & target picture

2

3 ITaaS & Operations

4 Systems & Portfolio

5 Data integration

Continuous improvement

Organisational development & development of digital business models

Fig. 15.1 Phase model of the digital business transformation. Source: mesakumo GmbH

Overarching Framework Conditions The first overarching framework condition of a digital business transformation concerns IT governance and security. For this, the most important cornerstones and minimum requirements must be defined and formulated early in the programme. They significantly influence the way in which the goals of the transformation are achieved in the following steps. The following core aspects, among others, must be answered for this: • Determining the leading cloud platform partner • Definition of the appropriate IT security standards: authentication, IT security software, etc. • Standards for end devices: laptops, PCs and mobile devices • Standards for infrastructure: cloud servers, networks and other ‘on-site’ hardware The second overarching framework condition describes the role of IT in a digital business transformation. As already explained in the initial situation, it plays a key role in a successful transformation. However, the role is even more important beyond the initial transformation programme. In order for a company not to become dependent on consultants and technology manufacturers in the long term, the company’s own IT (if available) must be consistently aligned as an enabler and business partner within the framework of the transformation programme. In this form, the following core capabilities of IT come to the fore: • Consistent alignment of IT with the company’s core business: IT organisation, IT infrastructure and system landscape must be oriented towards the company’s business model and value creation.

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• Derived from the alignment with the company’s purpose, the IT organisation and the respective departments distinguish between two functions: run-the-business and change-the-business. Run-the-business topics are about optimising and automating existing business and processes and increasing cost-efficiency. This part of IT must therefore also face corresponding cost benchmarks of comparable companies. In particular, it is a matter of implementing highly automated standards, thus reducing one’s own operations to a large extent and, as a result, reducing the associated overall costs. Change-the-business, on the other hand, focuses on the further development of the business, the organisation and the IT required for this. Here, project budgets are used, which are regularly reviewed and can be adjusted over time. They must be aligned with the potential of the resulting business development. The initial weighting of the run-the-business vs. change-the-business functions is company-specific; developing both in parallel with the means of digitalisation will become a core capability within the framework of a digital business transformation. Through progressive standardisation and automation, the focus will increasingly shift from run-the-business to change-the-business. The third core capability relates to the way digital business transformation is implemented. In order to increase or maintain acceptance for the changes, tangible successes must be planned and delivered early and consistently. It is therefore about fast and continuous delivery and implementation. If employees and customers regularly design and experience positive smaller- or medium-sized changes themselves, they will experience the transformation as positive and value-creating. This results in multiplier effects and acceleration. On the other hand, working too long on very large steps, which are regularly delayed in practice and thus cannot enable a sense of achievement for a long time, leads to frustration and transformation fatigue.

The Transformation Process: Five Steps and Continuous Development Step 1: Check-Up and Target Image Development In recent years, almost every company has taken the first steps on the path to digitalisation: Individual processes have been automated with digital apps and tools, selected systems have been migrated to a public or private cloud, requirements for home offices and collaboration tools have been implemented or agile project work has been introduced. In order to pick up the organisation where it currently stands, it is therefore necessary to carry out an initial stocktaking. In addition, a first set of goals must be developed that can be implemented within a manageable time frame of 9 to 12 months. More far-reaching goals whose implementation goes beyond this period should also already be included. However, it is important to formulate realistic, measurable goals for this manageable period of

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time that can be felt throughout the organisation and create real added value for customers and/or employees and thus the company. In this way, the expectation is shaped from the very beginning that digitalisation is not an end in itself, but that it pursues concrete goals for the further development of the business.

Step 2: IT-as-a-Service and IT Operations After determining the starting point and defining an initial target picture, the second step is to lay the foundations for the entire programme. The aim is to standardise IT infrastructure and workstations, migrate them to the cloud and outsource operations as much as possible (IT-as-a-service). Since the requirements for infrastructure and workplaces are usually very comparable with other companies and are only subordinately influenced by the company’s purpose and business model, market-leading standards can be used. This increases security, replaces investments with flexibly adjustable costs for licensed services, increases cost-efficiency, reduces the requirements for own staff in terms of content and capacity and at the same time regularly increases availability and quality for users. The main goal of this step in the programme is to standardise all needs for infrastructure, hardware, network, security, end devices, technical workstation and software basic equipment and to reduce own efforts and costs. This standardisation is possible because the needs are shaped independently of the concrete company and its specifics. It creates the basic technical prerequisites, but also the financial, capacitive and creative ‘headroom’ in the organisation, which in turn is necessary for the following steps in the digital business transformation. At the same time, this orientation makes it technically possible to quickly and easily introduce ongoing innovations from leading software manufacturers in the context of updates and new features in the company.

Step 3: Systems and Portfolio After the basic infrastructure and equipment have been modernised and standardised in the second step, there is now a very good starting point for the comprehensive digitalisation of company-specific processes and software applications. It is essential to compare this with an established IT blueprint. The associated target portfolio of all company-specific software applications can be described as follows: • The software is cloud-based and is used in the flexible and cost-efficient softwareas-a-service (SaaS) model. • Best of breed (i.e. avoid monolithic systems): modular IT and software architecture to enable future changes of providers and solutions and thus be able to follow

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changes in customer behaviour, market, business model or internal processes in an agile way. • The manufacturers of the concrete applications are market-leading standard providers with sufficient size and the commitment that the application will remain part of their future strategy. This means that the future development of the software can be expected, which in turn ensures future outside-in innovations and digitalisation impulses. • All IT services are aligned with a strategic cloud partner. According to the current market shares of the major cloud providers, the selection for this is reduced to 2–3 partners. • The architecture of the software is open so that the associated data and services can be used by other applications. The road to this target portfolio is long and can take longer than the initial 9- to 12-month digitisation programme. However, with a well-thought-out sequence and a clear roadmap, this is not critical. To determine the sequence, the third step is to divide all existing software applications into three categories: • Software already corresponds to the target portfolio; only updates or slight adjustments may be necessary. • Software does not match the target portfolio, but can be replaced by a suitable application with manageable effort or eliminated altogether because it will be replaced by another application (existing or new already planned for introduction). • Software does not correspond to the target portfolio and could only be replaced with massive effort and associated risk. This category regularly includes, for example, legacy ERP systems that have grown with the company over the years and in which core components of the company-specific business model are mapped. There are three options for these systems: 1. Continue to operate unchanged and accept the disadvantages for the time being. 2. ‘Lift and Shift’: The system is migrated to the cloud, but the core is not adapted. This usually has advantages in terms of integration capability and IT security, but not all disadvantages can be solved. 3. Replacing the legacy system in a separate project, which brings all the benefits, but at the same time is the most expensive, lengthy and risky option, which must be well considered. After the classification of all systems, the individual conversion of the systems according to category and defined place in the target portfolio is next. The extent to which this is done sequentially or (partly) in parallel is designed companyspecifically. Important is the explained principle of continuous delivery, which must be taken into account in the planning. Regular innovations that offer benefits

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for customers and/or employees keep motivation and support for the digital business transformation high. In addition to the modernisation, standardisation and, if necessary, replacement of existing business model-specific software and processes, there are regularly process and software gaps in core functionalities that are important for digitalisation. However, closing these gaps may be necessary for future viability. These regularly include, for example, master data processes and tools or a document management system. These topics, which are necessary for the coming digitalisation steps, must be identified at this point and their introduction must be planned. In the course of this, additional, new digitisation focal points must also be selected, from which a computerisation push for company-relevant processes and selected parts of the organisation is to emanate. Which systems these are and—much more important—which underlying processes, procedures and parts of the organisation are affected by this were already outlined in the first step during the creation of the target image and are company-specific. If, for example, the goal is the digital professionalisation of sales, a CRM system could be such a building block. If the direct digital interaction with the customer is to be advanced, the most important new introduction could be a customer portal. It is important for all process and software adaptations: The selection of new systems is always based on the target portfolio and fits seamlessly into the digital basic infrastructure set-up in step two: It is cloud-based, is procured as software-as-aservice, is integrated into the new IT security concept and is future-proof because it comes from a market-leading standard provider for this specific requirement.

Step 4: Data Integration After the target portfolio of software applications has been defined in step 3 and is now being implemented step by step, the conception and subsequent implementation of the data-side integration of all systems takes place in step 4. In practice, the steps are sometimes carried out in parallel. Integration is the prerequisite for enabling important digitalisation drivers such as simple or more complex process automations and links between systems. In addition, the availability of business data and services across systems is the key to quickly implementing cross-company collaboration with customers or suppliers in productive systems. Furthermore, the focus is on providing all available business and customer data centrally in a so-called data lake (a single repository of all company data). This is the fundamental step to make data-based decisions and to identify opportunities in the market at an early stage by means of business intelligence applications such as meaningful reporting and modern analytics or AI applications. Typical examples are logistics optimisation, preventive machine maintenance or algorithm-based customer analyses to initiate additional sales.

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Step 5: Continuous Development After steps 1 to 4 have been completed and implementation is progressing, major technological steps towards digitisation have been taken. And the first digitisation successes are noticeable for customers, business partners and/or employees: The way of working and the pace in the company are changing. As the implementation of the changes towards the target portfolio and data integration continues, this progress will accelerate. At the same time, however, it is important to note that a digital business transformation will never be completed. Rather, it is absolutely necessary to keep an eye on changes in customer needs, technological upheavals or other external and internal impulses on the digital capabilities of one’s own company and to check whether they are covered by the current digitalisation roadmap. In this respect, a regular review and confirmation or adjustment of the current target picture is recommended. Depending on the dynamics of change in the company concerned and the associated market, this may be necessary more frequently (e.g. every 9 to 12 months) or less frequently (e.g. every 24 months).

Organisational Development and Digital Business Models As already explained in the description of the typical initial situation, the introduction of digital technologies within the framework of a digital business transformation is only one part of the solution. The other part, which is just as critical for success, will be to involve the workforce from the very beginning, to explain changes and necessary adjustments in everyday work, to allay any fears, to inspire enthusiasm for the new possibilities and to empower employees to use them in a beneficial way. Organisational development and corresponding empowerment concepts within the framework of a digital business transformation serve this purpose. These aspects of the programme can again draw on proven building blocks and approaches, which, however, need to be ‘coloured’ and implemented in a company-specific way. These include the following: • Continuous communication of the target picture and of the current development status of the programme, which steps and changes are coming up next, which intermediate steps have already been achieved and which successes have already been achieved. In this context, the importance of the aforementioned principle of continuous delivery becomes apparent. • Identify multipliers in the organisation who can and want to make the first digitalisation successes on their way and at the same time establish a broader positive engagement in the workforce. These should be involved in the programme early on and become cross-hierarchical ‘ambassadors’ in the company.

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• Transparency in the case of mistakes and no hiding of failures. Constructive reappraisal and learning from failures are part of a digital culture. • Accompanying the upcoming changes with explanatory communication and low-threshold self-service offers such as video training sessions, webcasts and tangible contact persons for questions. • Celebrating successes, ideally with a direct link to business and customers. Once these steps of organisational development have been taken, the most important prerequisite is met and digital business models with real added value can be developed: The company’s own knowledge about customer needs and behaviour in the minds of the employees is available. This can now be combined with the technological prerequisites that have been created with the overall programme.

Programme Management In order to keep all the strands of a digital business transformation (creating the framework conditions for IT governance and security, carrying out the actual transformation process and parallel organisational development) together, to identify and counteract deviations and undesirable developments at an early stage and to ensure the necessary time and budget control, professional programme management is recommended right from the start. After the first transformation ‘round’, i.e. after about 9 to 12 months, this function can be reduced or abandoned if necessary, provided that the further sustainable implementation has been sufficiently anchored in the organisation. However, experience shows that professional programme management is absolutely necessary for the first important year of the digital business transformation. One organisational option is to involve an external partner who brings the necessary competences and capacities. The end result is a different working environment with a different focus. Here we have followed the example of the finance department. However, an analysis with the entire value chain can result in changes in many areas (service, distribution, etc.). SMEs should leverage these opportunities to stay ahead of the competition. So much for the view of practitioners of our FBXperts network. Would you like to exchange views further and find your way to digital transformation in dialogue with experts from family businesses? Then simply get in touch with us! We did a workshop with 30 CFO in our Belgian CFO Forum in October 2023 and can say: AI adds even more opportunities for the finance department to simplify and speed processes and improve agility.

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References Ingenieur.de. (2020). Last Accessed July 19, 2022, from https://www.ingenieur.de/technik/ fachbereiche/industrie40/bosch-treibt-die-industrie-4-0-voran-und-zeigt-praxisbeispiele/. Kroker, M. (2018). The long list of difficult and failed SAP projects. Last Accessed July 19, 2022, from https://www.wiwo.de/unternehmen/it/haribo-lidl-deutsche-post-und-co-die-lange-listeschwieriger-und-gefloppter-sap-projekte/23771296.html.

Guido Huppertz can look back on a career spanning almost 20 years with the automotive supplier and steel tube producer Benteler. Most recently, the graduate economist was CFO of the Benteler Group. Fabian Kracht has been the founder and managing director of mesakumo, a consulting agency for the digitalisation of medium-sized businesses, since 2021. Previously, Kracht was responsible for the comprehensive digital transformation of the construction supplier PERI as spokesperson for the executive board and CFO (2014–2021).

Chapter 16

Control Systems and Incentives as Value Drivers: Separating Financial Objectives from Action Planning and Control Through a New Control Model Felix Hess and Franz Wirnsperger

Conflict of Cultural and Governance Principles Many CFOs of larger companies may be familiar with the following ‘spectacle’: It is budgeting time again, and after a target and many, difficult, energy-sapping bottomup planning rounds, top management sits in the final budget approval discussion and listens to number-heavy lectures about planning and budgets for the next few years by the respective business managers. They use more or less tactical skill to keep the ‘budget bar’ low over which they have to jump at the end. After all, they also want to receive a bonus next year. The spectacle then regularly ends with the CFO or the CEO—in the case of a well-coordinated team of both—announcing that X million still has to be improved on the bottom line. The lowest denominator in the agreement is then regularly the infamous ‘lawnmower approach’, i.e. everyone has to contribute proportionally to fill the gap. By now at the latest, those who have worked with open sights or tacticked less well feel they have been treated as losers and unfairly and resolve for the next round to prepare themselves better for the game and now also or even more tactically. The new year has barely begun and the CFO is already having to fight for the relevance of the budget figures in the ‘business reviews’. In the meantime, these have become increasingly obsolete due to the changes that have occurred in the environment. Only the CFO does not seem to want to admit it yet. A few months later, the CFO has also stopped looking at the budget figures, and the annual planning spectacle starts all over again. The larger of the large organisations also need multi-year planning, which additionally has to be squeezed into the management

F. Hess · F. Wirnsperger (✉) Hilti AG, Schaan, Liechtenstein e-mail: [email protected]; [email protected] © The Author(s), under exclusive license to Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2023 T. Zellweger, P. Ohle (eds.), Financial Management of Family Businesses, Contributions to Finance and Accounting, https://doi.org/10.1007/978-3-658-42212-7_16

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Culture Development Focus

Steering System Focus

„ Motivation through purpose and values

„ Detailed and rigid planning & budgeting

„ Selfresponsibility

„ Big carrots for (individual) target achievement

„ Praise progress and teameffort

„ Intensive (input) controlling out of headquarters

Core Values: Integrity, Commitment, Courage, Teamwork

Observed Behavior: Sandbagging, Lack of trust & commitment, hiding behing budgets, silo-thinking…

Paradigm:

Paradigm:

- Continuous improvement counts

-

(Individual) Target achievement counts

- Intrinsic motivation and value oriented behavior lead to success

-

Extrinsic motivation and command & control behaviour lead to success

Fig. 16.1 Conflicting culture and governance principles at the start of change. Source: Own representation

calendar somewhere. With multi-year planning, however, the pulse in the discussion is usually not so high, because it is relatively easy to push the performance increase a few years into the future in the form of hockey-stick-like performance curves. This is usually acceptable. After all, it makes sense that you have to sow first so that you can reap later. The fact that one might already have to reap more from the seeds sown in recent years is easily overlooked in the context of the strategic perspective under which the discussions take place. This play is quite old. The script for it was already written in the age of industrialisation more than 100 years ago. Two famous names can be associated with it: Mr. Frederick Winslow Taylor (1856–1915), US labour scientist and founder of Taylorism, and Mr. James O. McKinsey (1889–1937), founder of the famous consulting firm of the same name and developer or pioneer of the traditional budgeting process (McKinsey, 2022). The interplay between the philosophy of Taylorism and the methods of budgeting gave rise to the management and leadership model known as ‘command and control’, which is still used by the vast majority of companies today, although the environment has changed radically in all dimensions compared to the time when the approach was developed. The ‘command and control’ play was also followed for a long time at Hilti. Perhaps the organisation would still be playing the same game today, had it not been for the strong focus on leadership culture development at Hilti, which ultimately led to the stage for the play being dismantled. It began with an intensive and very consistent examination of the question of what behaviour really leads to top performance in an increasingly VUCA environment. Behaviour such as deliberate tactics, setting the bar low, silo thinking and elbow tactics, creating reserves and cushions, etc. were subsequently no longer classified as peccadilloes, but as behaviour lacking integrity, courage, team spirit or commitment—and thus as behaviour that was not in line with values. This made the conflict between the Hilti leadership principles and the command and control model principles clearly transparent (Fig. 16.1).

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The Finance Business Partner Vision at Hilti Finance was now challenged to rethink the governance model. Inspired and strengthened by the vision of the leadership culture, a vision was also developed in the finance area. The organisation should develop into a more forward-looking business partner organisation. In doing so, ‘business partnering’ should not remain just a vague phrase. Something fundamental was to change. The management saw the big lever for change in switching the steering pattern (Wirnsperger & Möller, 2016). One should move away from the command and control mode, which places the finance function very much in the corner of the number cruncher and the policeman on the sidelines of the organisation, and develop a model that does much more justice to the decentralised idea of responsibility and in which the finance organisation is a central orchestrator on the field and can spend significantly more time influencing value creation. Despite strengthening decentralisation, the strategic leadership claim of the centre should not be given out of hand, but even strengthened further. More delegation, but at the same time more control: how this was to work was not so clear at the beginning (Fig. 16.2).

The Breakthrough: Changing the Target Setting to Relative North Star Targets and Target Rules The breakthrough in terms of changing the control pattern was achieved with the introduction of relative goals and goal rules for self-control. This led to a decoupling of goal setting from the process of action planning and control (Fig. 16.3). The new

Traditional Finance Role

10%

30%

20%

Decision support

Finance Business Partner

Transfo

rmation and Pro of Role files

Command & control

Reporting

Para & Sys digmtem c hange

Standa rdizati on of D ata M o de l

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50%

Guided Self-Control Analytics

40%

Transaction processing

Standar dizatio Process n of es

Transaction processing

10% 20%

20%

System & Processes Paradigm & Structure Competence Management

Fig. 16.2 Hilti finance business partner vision. Source: Own representation based on PWC (1997)

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Strategy

$

Relative Northstar Target System self-adusting

Consistent Measurement System progress-oriented

Traditional “fixed” annual financial Planning & Budgeting

Consistent Invenctive System fair & participation-oriented

Rolling Planning & Forecasting fast & adaptive

Fig. 16.3 New governance model—separation of financial objective from action planning and control. Source: Own representation

performance measure was the distance to the strategic goal measured in relative numbers such as relative market shares and returns, rather than the deviation from the annual budget. For the bonus systems, which were now consistently based only on team results, this relative distance to the North Star target was also the new assessment basis—a small but, as it turned out, very significant difference in effect from linking the bonus system to annually renegotiated budget targets (Fig. 16.3). With the change of objective, the whole way of measuring performance changed. With regard to growth, the ‘outperformance’ to the market was chosen as the central benchmark. Profitability targets were no longer defined in absolute amounts but in return targets and, for the business units, additionally equipped with a simple rule for deriving annual relative progress targets. The further away the respective actual return result of a unit in the last year is from the strategic return target (North Star), the more effort must be made in the following year. The target rules created a selfadjusting target system. A unit that falls below a certain level is placed in the ‘intensive care unit’ for performance reasons (Fig. 16.4). Thus, the strategic goals are at the centre of control. With the new management model 2.0, there was much more self-control and thus also autonomy in the management system, without giving up control—on the contrary: tactics or workarounds in target setting were no longer necessary or helpful. Instead of command and control, performance progress and rules apply since then. The stage for acting has disappeared. The approach leads to very high transparency, demands and promotes entrepreneurial behaviour and is optimally aligned with Hilti’s leadership principles.

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Illust

Function of (relative) improvement targets p.a.

∆ Target Current Year (t+1)

$

Actual Prior Year (t)

rativ

If… Actual Ebit % Prio Year (t)

…than ∆ Ebit bps Target (t+1)

≥ 10%

+/-0 bps

≥ 8%

+25 bps

≥ 6%

+50 bps

≥ 3%

+100 bps

≥ 0%

+200 bps

≥ -5%

+300 bps