Patagonia effect in the Netherlands
What is coming to the family business?
It will not have escaped your notice that after the quiet “interwar” of the Corona era, a multitude of new developments are coming at us at a rapid pace. There are many geopolitical challenges on the global stage. In the Dutch market, themes for family businesses are playing out in the areas of:
Increasing regulations and legislation around sustainability
Changing labor market
Changing supervisory standards
Themes with very different perspectives. As a company you need to be well prepared to deal with the multitude of challenges in such a broad field. This, of course, in addition to “normal” business operations and strategic choices around the specific market and products. Where are these changes actually leading us? What are the implications for family businesses and especially for the new generation that should take over?
This plays out all the more because in far from all cases the new generation is either willing or able to take over the family business. In America, the founder of the American clothing company Patagonia, Yvon Chouinard, chose a different route with his children. He struck out on this path back in 1985, when he decided to devote 1% of sales to sustainability. Patagonia now has sales of €3 billion and makes €100 million in profit. In 2022, Yvon Chouinard did not transfer the company to his children, but relinquished his ownership of the company by transferring it to a trust organization. The profits will be used alongside sustainable projects to put climate change better on the social agenda. In the Netherlands, such a construction is virtually impossible because of our tax system. This is a pity, because through such a construction more money could be available for sustainability initiatives. See also Ineke Koele: The Patagonia Revolution.
Regulation in the field of CSRD
Of course, it can be less rigorous than this Patagonia example to still contribute to society and the environment. But the trend is to inescapable, see also our article on innovation. Indeed, there are more and more obligations to pay attention to sustainability.
The Corporate Sustainability Reporting Directive (CSRD) already announces the new regime and indicates the necessary changes for companies in this area.
The CSRD regulations taking effect from next year are aimed at improving the quality and transparency of corporate sustainability reporting. Companies that meet two of the three criteria are expected to follow the new regulations. The relevant criteria are: 1) more than 250 employees, 2) more than €40M turnover, and 3) more than €20M total assets. In the Netherlands, more than 2,000 companies will meet these criteria, according to a KPMG estimate. In 2024, 2025 and 2026, the first guidelines will be phased in, and by 2028 most companies will have to comply. Under the new regulations, companies will be required to provide more and better information about their sustainability performance. There will have to be more emphasis on corporate (social) responsibility. The interests of all the company’s “stakeholders,” including customers, suppliers, employees and society at large, will have to be taken into account.
Although the rules are initially aimed primarily at large corporations and listed companies, family businesses will also have to comply with the new requirements in the near future. It is therefore important that family businesses are aware of the developments in sustainability reporting and take timely measures to improve their reporting and communication in this area.
Structure regime at family businesses
Because the interests of the companies’ stakeholders and social responsibility must increasingly be considered, companies will also have to operate more openly. This also has implications for the supervision of family businesses. Many larger family businesses still operate traditionally and do not always meet the new requirements around this supervision, according to a survey of family business specialists. The regulation for so-called statutory two-tier companies requires the establishment of an external Supervisory Board, among other rules.
A statutory two-tier company is subject to the requirement that its capital has a value of at least €16 million and at least 100 employees are active in the Netherlands. A works council (OR) must then be in place, and this is usually where the shoe pinches. In many cases, no works council is appointed because there is simply no interest in it or it is not sufficiently encouraged.
Although no recent studies or publications on this subject can be found, the general impression is that still a very large proportion of family businesses have not applied the structure regime despite the size of the company.
Step-by-step adaptation to a new model
The above developments are a consequence of the increasingly important social responsibilities, also for a family business. Responsibilities that go beyond the interests of the company itself or the interests of shareholders.
This may require an adaptation of John Davis’ 3 circle model, widely used in family businesses. This model identifies three interests of a family business. These interests that interfere with each other and also overlap are expressed in three circles. An interplay of these three interests (circles) is necessary to create a strong company.
Figure 1. The Three-Circle Model of the Family Business System was developed by Renato Tagiuri and John Davis at Harvard Business School, and disseminated in working papers beginning in 1978. It was first published in Davis’ dissertation.
The increase in societal issues such as climate change, CSRD guidelines or changing supervision may make it necessary to adapt the model. This longer-term thinking, by the way, is in the DNA of many family businesses. In this sense, the social trend toward greater sustainability is playing into the hands of many family businesses. The question is then more how to fit this better into the model of family businesses.
Framework round the three circles
Social interests and regulations, also called the eco-system in which the family business operates, are, in our opinion, the framework around the three circles in the model. By focusing on this domain, the family business can become aware of the opportunities and threats coming from outside. Based on this, it can adapt to changes in the market and regulatory environment.
This can help make the company more resilient and better able to grow in the long run. But sustainable and socially responsible.
Opportunity for the new generation
Transferring the family business to the next generation may therefore remain attractive to this younger generation. They are more motivated to take over the family business because they can set up the business sustainably and use it as leverage to achieve personal and socially sustainable ambitions.
For more information about this article call Thomas van ‘t Westeinde (0624406144), Gonneke van der Lee (06 52466518) or Maarten Vijverberg (06 55853074)