EP16 Redefining Business Succession and Success: Dr. Vikas Mehrotra, Alberta School of Business

Speakers

Speaker 1: Matt Knight

Speaker 2: Vikas Mehrotra

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Matt Knight  00:51

So welcome to Table Talk, I'm excited to dive into these topics with you and more today. 

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Vikas Mehrotra  00:55

Well, I'm delighted to be here, Matt. 

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Matt Knight  00:57

Well, before we get into kind of some of the technical aspects of your research, I'd love to learn a little bit more about you know, kind of the person behind, behind you. So maybe give us a quick overview of your journey to becoming Dean at the Alberta School of Business.

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Vikas Mehrotra  01:11

So let me, let me start way back in the 20th century. Okay, so I was born in India. I did my first degree in chemical engineering, and that was mostly because my dad was an engineer, so I thought I should pursue engineering. And then four years later, I discovered, really, I'm more interested in economics. So I pursued an MBA from Florida, and then from Florida, I went all the way to Oregon, across the US, and spent five years pursuing a post graduate degree, a doctoral degree in finance, and hence my interest in finance. 

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From then, I met my wife there. She was visiting from Tokyo, and we got married in Calcutta. We went back, and then the two of us, we drove from Eugene, Oregon to Edmonton on a crisp July morning. Okay, beautiful. So I come to Edmonton in July, and I said, Wow, this is the best place on the planet. And then I discovered winter. 

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Matt Knight  02:16

Okay, so what? So you came, came here, moved here with your wife, started at the Alberta School of Business. What kind of drew you into some of that Family Business Research?

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Vikas Mehrotra  02:25

Well, Family Business Research, really, if you think about it, all firms start by some founder. So at some point, you have to question, what really is the motive for starting this business? What motivates entrepreneurs at some level. So that's a question as important in economics as it is in family business as it is in society. So it's curious. We're all curious about what motivates these entrepreneurs that go into businesses, that they founded businesses despite the fact that the average return to entrepreneurship is less than the risk free rate of return. Okay, that's a fact.

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Matt Knight  03:07

Okay, so we should all just not have a job and put money in the market. 

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Vikas Mehrotra  03:12

Exactly. We should put all our money in in the bank and earn a safe rate of return, and on average, we would do better than entrepreneurs. Now, don't tell that to Jeff Bezos, okay,

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Matt Knight  03:24

okay, so asides from kind of, maybe that, that kind of piece of advice. So you've done research on, you know, whole bunch of different continents looking at a lot of different types of family businesses from a global perspective. What's kind of one international insight that shapes how you think about Alberta business families. 

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Vikas Mehrotra  03:42

The International insight is that the commonalities, despite, you know, we tend to overplay what's different across countries, but really, there's much, much more things in common than there are differences. Yes, there are some salient differences, like you mentioned, the work I've done on adult adoptions in Japan, that clearly is a unique practice that I haven't encountered in any other part of the world where business families have this flexibility to adopt adults into their family. Literally, the adoptee has to divorce their biological parents, and they have to go through a registry and all of that, and then they become part of the adopted family. For example, every single CEO of Suzuki has been adopted.

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Matt Knight  04:29

Okay? So those family members, they're not even competing, just with their own brothers and sisters. There, they have that risk of their parents adopting someone else, if they're not the right successor?

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Vikas Mehrotra  04:42

That's a good way to put it, that if I am the heir of a business tycoon in Japan, I dare not put my feet up, because then I could get a new sibling. 

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Matt Knight  04:54

Yeah, that's a big, you know, imagine being, you know, a 22 year old, thinking you're going to take over the family. My business, and next thing you know, you have a 24 year old older brother who went to Harvard or the Alberta School of Business.

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Vikas Mehrotra  05:07

Exactly. 

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Matt Knight  05:09

Well, let's maybe take this global perspective and dive a little bit into what was really kind of a bit of a provocative idea around we've maybe been misdefining family business or not looking at the right things. So in your work, you've looked at, you know, we're almost like victims of what you've called this lamp post fallacy, where we measure ownership, you know, and connect that to families more because it's easy and it's in the light than you know it may be being the right factor. So you know what? You know, what does that bias do to our definition of family businesses?

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Vikas Mehrotra  05:44

That's a really good question. So let's unpack all the stuff that you've said here. So what does it mean about the lamp post fallacy? Well, if you look at how the literature on family businesses has gone about identifying family firms. That's where the lamp post fallacy comes in. Traditionally, the bulk of the literature has identified family firms based on ownership. What exactly is the ownership of the founding family in the business that we are looking at? And if that passes some threshold, could be 5%, could be 10%, whatever that threshold is, if you are above that threshold, we bestow the status of family business on you. You call the family business. 

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Now you might wonder, you know, how does it distinguish this family firm from another firm where the ownership is in the hands of a different type of block holder, perhaps an institution, right? And that's a legitimate question. So some studies go beyond this, and they said that ownership is not enough. You also need to have some sort of control over the business, and typically, that control manifests itself in one of two ways. It could be managerial control, so you need to be the CEO of the company, or it could be a presence on the board of directors. So now you have governance control through the board, or perhaps even and managerial control through the C suite. 

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So now you have three dimensions. You have ownership by the founding family. You have board representation and you have managerial C suite presence. It could be all three of them. It could be any one of them. There is no hard and fast definition, or at least universally accepted definition, of what qualifies as a family firm.

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Matt Knight  07:40

Ok. 

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Vikas Mehrotra  07:40

And that is grounds for confusion, some confusion, at least, because now, if you haven't really been successful in identifying what a family firm is, then if you start measuring the performance of a sample of firms that you think are family firms, or that you have identified as family firms, that may be different from A sample of firms that I have picked with a different definition, and my outcomes would differ from yours just because I chose a different sample. 

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Matt Knight  08:09

Yeah, yeah, I can see that being quite problematic, especially from a research, research perspective, where we just don't get, you know, commonality between the samples that we're looking at. 

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Vikas Mehrotra  08:19

Yes. 

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Matt Knight  08:20

So you mentioned, you talk a little bit about there being a five part definition. You've told us about three when we talk about that, that ownership, the board presence and maybe management control, what are the other two?

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Vikas Mehrotra  08:31

So this is work, ongoing work that I'm doing with a couple of other professors, one in Taiwan, one in Copenhagen, Denmark, and our starting point was that the definition of family firm, whatever it is, must have one characteristic. It must bestow some sort of uniqueness on family firms. Vis a vis non family firms, that's the very minimum,

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Matt Knight  08:59

Okay, and is that like so some studies will talk about familyness. Is that the words that you use?

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Vikas Mehrotra  09:05

 Familyness is, it would be a very good word to use here. How do we operationalize that familyness and that sort of we go back to very early research by people like Donnelly and so on. And in their work, they talk about concepts such as embeddedness. How embedded is a family in the business? So there's a literature in economics that talks about that as well, using different language. The language in economics is, for example, Oliver Williamson has talked about, in his vast literature on transaction cost economics, he has talked about bilateral monopoly, where two parties are invested in each other, such that the value of each is less if they were separated, 

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Matt Knight  09:48

Okay.

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Vikas Mehrotra  09:49

And then therefore the value you get by being together is some sort of a quasi rent you get on this embeddedness.

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Matt Knight  09:55

Okay, so the one plus one is more than two.

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Vikas Mehrotra  09:58

Yes.

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Matt Knight  09:59

Okay.

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Vikas Mehrotra  09:59

And. So the family's value would be less if it was not part of the business, and the business value would be different if it was not part of the family. So that embeddedness, then, is an important feature of family firms. 

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Matt Knight  10:12

Yeah, that definitely makes a lot of sense. Sounds a little bit abstract, but those definitions help. 

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Vikas Mehrotra  10:18

And so how do you operationalize? That is the real question. 

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Matt Knight  10:20

Yeah. So how do you measure that? Would it be, like, number of employees, tenure, overlap, valuation? 

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Vikas Mehrotra  10:27

All of that.

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Matt Knight  10:27

Okay.

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Vikas Mehrotra  10:28

So what you said, we want all of that. Like you said, familyness is what we're looking at, but we chose two specific metrics to get into this concept of embeddedness. One is, like you said, how many family members are involved in the business? If it's just one? For example, Bill Gates starts Microsoft, and it's just Bill Gates and his progeny have no interest in running the show, nor his cousins or siblings or whatever, then it's hard for me to say, is the firm? Is Microsoft a family firm? And I would earn the side of saying, No, Microsoft was never a family firm. Microsoft, Bill Gates had no intention of bringing his family into the business, or even to pass reins of the business to the next gen.

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Matt Knight  11:22

Okay. So even if he had that ownership and that control, it was not enough?

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Vikas Mehrotra  11:27

Exactly. And for a while, at the moment, he doesn't, but for a while, he had ownership, significant material ownership, in Microsoft, 

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Matt Knight  11:35

Yep. 

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Vikas Mehrotra  11:35

And so if you are using ownership as a definition of family firms, you would have classified Microsoft as a family firm, for sure. We are challenging that notion. We are saying the familyness part goes beyond simple ownership. So I'm going to add two more things here. One, as I said, I want to measure embeddedness, and our sort of first proxy for that is how many family members are involved. And if it is more than one, it is a sign of embeddedness. If you have multiple family members, multiple being a number more than one, it is more likely to be a family firm. 

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Matt Knight  12:16

And do they need to be working in the business, or could they be on the board?

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Vikas Mehrotra  12:20

It could be, either could be, it could be, either could be on the board. It could be in managerial positions. And the second thing we add, a second variable we add here, is succession. There has to be a second gen, okay, a next gen, a next generation. And it could be in evidence, or it could be by intent. One of the two has to be there. There has to be a specific, well specified intent that you want to pass on the business to the next generation. Or this should be in evidence by looking at Bill Gates progeny in in the saddle at Microsoft, that would say, Yeah, this looks like a family firms, because Gates Junior is there. 

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Matt Knight  13:04

Okay, interesting. So let's maybe go dive in on this real world example a little bit more. So you talked about Microsoft, I think you, you know, in a conversation we had earlier, you said, like in 2004 it would have been a family business by some definitions. And then there's another, maybe another firm that we can compare it with, like Casio.

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Vikas Mehrotra  13:23

Right. 

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Matt Knight  13:25

You know, why does one count as family on paper? And the other is, you know, actually has that dynasty in practice.

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Vikas Mehrotra  13:35

So those are very good examples that you chose, Casio and Microsoft. In the case of Casio, it was started by four brothers with eponymous names, Casio brothers. So and these four Casio brothers, they started the company way back in the 1950s so from the beginning, there was this, multiple family members involved in that business, and even over time, ownership did dilute, which happens literally all over the world. Anytime you're growing your business, if you're financing that growth by equity, your equity will, by definition, dilute. And that's something we see all over the world, and it happened to Casio as well. So by the time you come to you know, 50 years later, the ownership of the Casio family is now minuscule, almost insignificant, and yet they are involved in running the business through the second and third generations. 

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Matt Knight  14:38

Okay.

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Vikas Mehrotra  14:39

So they do qualify as a family firm. In that regard, there is a next gen, there is multiple family members, and there is control through boards and so on. 

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Matt Knight  14:51

Yeah, but it's maybe complicated, because they might not meet that traditional ownership threshold.

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Vikas Mehrotra  14:56

Yes. So that's the second type of your 100% Like that leads to the second type of bias. The second type of bias is you're under counting certain firms like Casio, because if you just use ownership, they don't look like family firms. Because ownership is minuscule. It's below some arbitrary threshold that you might choose. On the other hand, 2004 Microsoft, Bill Gates, ownership is above that threshold, and you are over counting family firms by counting Microsoft as one. So there's these two biases, an over count and an under count. And our five pronged proposal to use a five pronged definition of family firms tries to minimize these two over counting and under counting biases.

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Matt Knight  15:42

Okay, so would you have to hit a threshold in every single one of them? Or could you get like, enough points in three out of five to meet your definition in that threshold? Or, how would that work?

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Vikas Mehrotra  15:54

So what we are saying is that the most important part of family firm is what distinguishes them from non family firms, and we are proposing to put even more emphasis than you put on ownership, on things such as succession intention, succession practice and embeddedness. These two are more important for us than the how much ownership does the founder have, or founders heirs have in the continuing business,

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Matt Knight  16:22

That makes sense. So if we can maybe go a little bit further on that succession, part of that succession motive, I think you've talked about this also as, like the Achilles heel, what are maybe some of the signs that you could see in the next generation, in a certain dynasty of families, that would maybe indicate that there might be a crash or some problems coming in this succession.

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Vikas Mehrotra  16:25

There are, well, it's well established that typically, family businesses do not last beyond the third generation. That's well established. But that's also true of non family businesses. If you look at the length of time the average firm on the New York Stock Exchange stays listed on the exchange, you'd be surprised to know that the median is seven years. That means the 50% chance that you are de listed in less than seven years. So family firms have a bit longer time frame that they stay listed. But nevertheless, you're right. The succession is the Achilles heel of family firms, because, by definition, you're looking for successors in the pool of your own heirs, and that cannot be globally optimal. By definition? 

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Matt Knight  16:44

Yep. 

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Vikas Mehrotra  16:57

That means you're leaving smarter people who are not related to you, yeah, from that succession pool.

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Matt Knight  17:48

So this takes us into a pretty kind of fun area of your research that I really enjoy, that you know definitely goes beyond North America there. But let's maybe talk about some of these alternatives to succession, and let's maybe dive into that Japanese one that we talked about at the beginning. So you found in some of your research that adopted heirs will actually outperform blood errors within Japanese family businesses. What drives that? And is there any part of that that we could maybe bring into North American family businesses without feeling kind of weird about it. 

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Vikas Mehrotra  18:25

So, now, yes, let me just rephrase rather recap what we found in that study. We were looking at post war Japan. So let's make that clear. The time frame is post war Japan, and we are looking at succession practices that involve on occasions, not too rare, but on many occasions, choosing an outsider as the next heir by adopting that outsider into the family. And in all of our sample cases, this adoptee was a male Okay, so what was the purpose of this? Often the purpose is, the founding family doesn't have a male heir, 

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Matt Knight  19:14

Okay 

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Vikas Mehrotra  19:14

So they choose an outsider, like, for example, the Suzuki family, after mentioned, have done in almost half the cases, the outsider was chosen. Also marries a daughter of the founding family. 

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Matt Knight  19:29

The adopted heir would? 

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Vikas Mehrotra  19:31

Yes, okay, and this was very uncomfortable for when in occupied Japan, which is a small period during which Japan was run by General MacArthur after the war. So at that point, the question becomes, what do you achieve by adopting this person into the family versus employing the same person as a professional manager, which is more COVID? One in the West. And I suspect what the difference here is what in the family business literature is often referred to as agency problems. If you're an outsider as a professional manager, your interests may not be 100% aligned with that of the founders. You may pursue your own self interest. But if you're adopted into the family, almost by definition, we are ruling out that sort of an agency. You're no longer an agent. You are now a principal in that business. You're now an owner of that business.

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Matt Knight  20:35

Yeah, and maybe just simplify that a little bit for conversation as well. So like, the agency side is looking at, you know, a family business, you know, they want to go long term, so they're looking at multiple generations in terms of value for the family firm, where CEO is going to be compensated, you know, in short term performance over probably three to five years. So that's the issue that we're that they're that they're looking at there, right?

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Vikas Mehrotra  20:58

Yes, in fact, we actually measured that. We looked at the tenure of professional CEOs, which is in the ballpark of seven years, versus family CEOs, including adopted sons, which is closer to 18 years. 

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Matt Knight  21:12

Interesting. 

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Vikas Mehrotra  21:12

So it's you're right. There's a longer term horizon for family heirs, including adopted heirs

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Matt Knight  21:21

And is the performance better?

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Vikas Mehrotra  21:22

Performance is not as not compared to the founders, but when you compare the adopted sons to the blood sons, it is superior in terms of ROA, for example. However, it is hard for us to impute causality there. It could be a selection bias that you are choosing known high performers into the role. So it's hard for us to say if, if you randomly picked an adopted person, would that person performed the superior I don't think we can answer that question. All we can say is that the person who was chosen as the adopted heir. They were chosen probably because they were already high performers. So it's not surprising that they continue to be high performers. 

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Matt Knight  22:09

Interesting. And did you look at all? And this is maybe way too narrow, but like, my brain just went there for some reason. But like, the connection between, like, you know, people who married into the family and then became CEO, versus people who became CEO and then married into the family.

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Vikas Mehrotra  22:25

In all cases, they were first adopted, okay? So they don't become CEOs, and then you're adopted. You're adopted first, okay, including the possibility of marrying the daughter of the founding family.

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Matt Knight  22:41

The new sister?

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Vikas Mehrotra  22:42

Yes, it's not a sister, because you're not related by blood. But then the CEO position comes later, you're being groomed as one, for sure. That's the reason you adopt it. 

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Matt Knight  22:58

Okay? And do you know, like, what kind of timeline is there in there? Is there an average? 

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Vikas Mehrotra  23:04

The average timeline? We didn't look at it, but I can, I can, I can speculate on that by saying that the average age of the adoptee is 26 years old. 

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Matt Knight  23:14

okay

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Vikas Mehrotra  23:14

And the average age of CEOs, there's almost like a threshold in Japan, 50 seems to be a number 50 years old. Then below that, you have a less lower chance of being CEO. And then above that, there's a jump in probability. So if you measure that, then I would say it's almost a couple of decades. Yeah, 

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Matt Knight  23:35

Yeah. That's fascinating, okay. And then the other kind of cross cultural perspective that you went into a little bit was around, like arranged marriages as a continuity tool, and kind of looking at that role and in how and governance or control of a family firm. 

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Vikas Mehrotra  23:53

Again, the issue with arranged marriages is similar to what we talked about with the adopted sons. And that, we suspect is not limited to Japan. That could be more common, for example, in South Asia. It could be more common in family businesses in South Asia, or maybe in other parts of the world as well, that the adopted, or rather, the marriages, are sort of more likely to be arranged between or amongst family businesses in order to either to expand networks or to keep sort of the control within a small group of families interesting, so that could be different motives there. Now, having said that, we also noticed that the occurrence of arranged marriages has steadily declined over time, and our data ends in the 20th century. So if you were to repeat our study in this century, we suspect the incidence of arranged marriages would be. Significantly lower today, at least in most parts of the world, outside of South Asia. 

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Matt Knight  25:06

and kind of from either of those two succession models. And you know, from other play from other countries that you looked at, what can we learn in North America?

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Vikas Mehrotra  25:15

What we can learn from North America is that, in many cases, our family businesses here are either looking at a family pool of their own heirs, or, for example, in the case of Canadian Tire, you look at a professional manager who comes in. So the control is still in the hands of the founding family, but the CEO position is offered more widely to do a selection pool that involves non family members. So that is what we call a family firm, were the control resides in the hands of the founding family, but the management CEO position is professionally managed by a non family member. 

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Okay, so what's the advantage of that? Obviously, it's pretty obvious that the advantage is, you are looking at a global talent pool rather than a talent pool circumscribed by genetics, right? So clearly, what's the disadvantage? Disadvantage we also noted earlier is in terms of what we call agency costs, that this is still an agent, not a principal, where the family member is an owner principal. So that's where the trade off occurs. What can we learn here? What we can learn here is that if you want this outsider CEO to sort of behave, more like a family member, more long term orientation and all of that, then perhaps one way to do that is to provide incentives that are more allied with that of the founding family. And we see that already. We see most CEOs today are paid in equity linked packages. Okay.

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Vikas Mehrotra  27:00

Okay, yeah, that's pretty, pretty good takeaway then. So we're gonna, we've covered some kind of deeper academic territory here. I'm gonna shift gears a little bit to get to know you a little bit more still. And this is what kind of a newer thing that we started on the podcast that's just rapid fire questions. So I'm gonna give you five questions. I want really short, tight answers, like one word, five words, like, not very, not very much, maybe 10 words if you, if you really want, no more than that. Okay, so you ready? Sure, yeah. So first one, one myth about family businesses that you wish would disappear.

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Vikas Mehrotra  27:32

Okay, one myth about family businesses that I think would disappear. Where would I start?

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Matt Knight  27:41

Let's, we'll go to the next one. Okay, go back.

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Vikas Mehrotra  27:42

I'm thinking, there's so many. I'm thinking, 

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Matt Knight  27:44

Yeah, okay, okay, what do you love most about being Dean? And what do you like least?

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Vikas Mehrotra  27:52

What I love most about being dean is the ability to sort of work with a large group of people collaboratively. I think the dean is part of a team, and that, to me, has been the best part about is this my second year as dean, is the ability to work collaboratively with a group of people whose all of whose interests is allied, is aligned with improving the Alberta School of businesses, standing for students, for businesses, for the community.

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Matt Knight  28:25

And what do you like least? What don't you want to do about the role or what? What if you're - when you go back to being a professor, what are you going to be like? I don't have to do that anymore.

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Vikas Mehrotra  28:35

The seven o'clock breakfast would be a lot of okay? 

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Matt Knight  28:39

And then if you could have dinner or breakfast at 7am - maybe we won't do that one - with any family business leader past or present. Who would it be?

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Vikas Mehrotra  28:52

I would choose some of the Japanese family business founders, for example, the Toyota family,

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Matt Knight  29:01

yeah, good choice. Okay, complete this sentence. Kind of like the first question, maybe, but the biggest mistake a family business can make is

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Vikas Mehrotra  29:12

Succession.

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Matt Knight  29:13

Yep, nice. And then best piece of advice that you've ever received about leadership.

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Vikas Mehrotra  29:22

Best piece of advice for leadership is it should never be about personalities. It should be about objectives and goals. 

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Matt Knight  29:31

So thanks for playing. We'll have to work on the 10 the 10 questions, or the 10 word answers, maybe, but maybe I need to refine my questions a little bit too. But let's get back more into kind of control and family enterprise a little bit. So we've done some work that looks at families who retain control but have minimal equity. 

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Vikas Mehrotra  29:51

Yes. 

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Matt Knight  29:52

How do they do that? Like, what kind of governance levers or things like that, do they lean into what's most important?

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Vikas Mehrotra  29:58

So a good example would be. I just mentioned Mr. Toyota himself, of the Toyota group, Toyota Motor Company group, and their ownership in Toyota Motor Company is minuscule. It is not even, doesn't even show up on the top 10 owners of the company anymore. Okay, so And yet, when the company was in need of some sort of a restructuring to help them get out of they were 20 years ago. They needed some help. They were stuck in under performance, and they needed help. 

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So at that time, it was managed by Toyota CEOs. Were not related to the Toyota family. They were professional CEOs, okay, but when they needed someone to turn the company around, they looked back into the family pool and they asked Mr. Akio Toyoda to come back as CEO. So clearly, the name Toyota mattered, and Mr. Akio Toyota came back at the helm of Toyota and turned it around into the biggest car company in the world today. How? Why did they look at this? Part of the reason is that what we have seen is that companies that have the same name as the founding family tend to have this deeper connection versus family firms that have a different name from the founding family.

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Matt Knight  31:34

it's more more embeddedness, almost.

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Vikas Mehrotra  31:35

More embeddedness, almost. And that again, leads to this, this desire by the founding family to do more for that business.

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Matt Knight  31:45

It was, this maybe isn't a fair question, but it was that Mr. Toyota was adopted? 

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Vikas Mehrotra  31:50

No, not adopted, although back in the 1930s Toyota Motor Company started off as actually a sewing machine company. And back then, when the choice was between two heirs, one adopted, one, not the adopted heir was chosen to run the motor company division, but that was almost 100 years ago, yeah. 

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Matt Knight  32:18

Okay, so from that, and maybe we talked that familyness or that embeddedness really helps there. But when an outside investor or maybe employer ownership, like we've seen a couple of times on this podcast with companies like Cantiro or Vets, how do these control levers need to evolve? You know, what other things should families or investors or whoever look at from that control mechanism to help with success.

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Vikas Mehrotra  32:48

So control typically resides in boards, and what needs to evolve in off for family businesses in particular is the ability to tap a wider pool of talent in the governance boards, and often that proves a bit more difficult for family firms than it is for non family firm, and that's where there is a lackling in terms of board skill matrices compared to non Family firms. So how do you address this skill matrix on a board for family firms? The choice is, clearly, you need to get what we call independent directors on the board with a diverse set of skills, and that is where family businesses need to focus a bit harder on. Can they attract this diverse matrix of talent on the boards as successfully as a non family business can. 

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Matt Knight  33:45

Okay, so just really going outside the family and getting more independent directors to be involved.

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Vikas Mehrotra  33:51

Absolutely. 

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Matt Knight  33:52

Yeah, we've had that conversation with a couple of firms, like little potato companies really big on that, and some other ones that we talked to on this podcast are really big at how they get strong, independent boards so good to see that they're doing some of the right things there. So looking maybe beyond governance into more, broader economic trends, I want to explore a little bit more about how family businesses are positioned for the future. So you've warned a little bit about, you know, the rising contracting costs that are making supply chains more and more risky for family businesses and non family businesses. How are family firms uniquely positioned to kind of solve this problem through I think it was like more vertical integration or renewed vertical entry integration.

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Vikas Mehrotra  34:35

So that's a really good question, and that the relevance of this question is perhaps more today than it was, I would say, a year ago. And you can see why this is all of a sudden, we have seen the global supply chains being put under the kind of stress that at least I haven't seen in my lifetime. 

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So what this. Really means is that, whereas even five years ago, even one year ago, if you're a family business, you could focus on the knitting, exactly the little thing you're doing, and rely on a supply chain spanning the world to basically get you all the inputs you need, and vice versa, and also the all the outputs on the output side as well. All of a sudden, that's under stress now. 

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So now, all of a sudden, it becomes more important for families to have connections with other families that tries to have a plan B, so that, in case I have disruptions in my existing supply chain spanning the globe, I have a plan B, and that plan B is where vertical integration comes in, something that you would not have considered earlier. Now you want to say, Okay, I need to have my own sources of inputs, my own connections. Instead of relying at arm's length contracting. I need to now internalize that, even though I know it's a bit more costly for me to do that, I'm now looking at risk. I'm not looking at cost alone. I'm also trying to manage risk at this point.

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Matt Knight  36:11

And can you think of any kind of examples to illustrate that?

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Vikas Mehrotra  36:15

So let's say you are assembling some gadget here in Edmonton. Now you could have relied last year on all aspects of that by procurement from all the way from Panama to Peru to Hong Kong to wherever. And now you're saying, Okay, I could continue to do that, but I also need to look at families within Canada and see, could I have some new connections with families in my own space, in my own industrial space, in my own vertical industrial space, so that in case my supplier in Peru is not available. I have a plan B, what kind of contracting I need with the available vertical supply chain, value chain in Canada, that, again, depends on the cost benefit of looking at this. Do I need to have a long term contract? Do I need to have a vertical integration, which means that if the uncertainty about a long term contract is so high that I'm better off simply buying that supplier, then I should consider that.

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Matt Knight  37:33

Okay, interesting, nice. So let's maybe Fast forward to, you know, even further in time, 2030, hopefully, hopefully Trump's not in a third term then. But we're seeing, you know, logistics inflation is the new norm. We're seeing more and more risk in supply chain, more and more need for that, vertical integration, things like that. How does the average mid market family firm? What does their value chain look like?

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Vikas Mehrotra  38:01

Then the value chain is going to look like, very different from today. Today, you just like, I say, just focus on what bit of knitting the value chain now might extend, not just procuring your own knitting material, but maybe even having your own sheep farm to get the necessary material for that. 

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Matt Knight  38:22

Good job taking that analogy further.

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Vikas Mehrotra  38:24

I'm exaggerating, but you see where this would go then.

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Matt Knight  38:27

Okay, so really like more and more reliance and that in the future, having to see that.

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Vikas Mehrotra  38:33

Within, within your own space, within and you can define space as a province, as a country, but defining space as a globe is no longer something to be taken for granted.

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Matt Knight  38:46

Okay, interesting and given kind of that complexity. How do you think business schools need to be doing things differently, maybe to prepare some of those family business leaders,

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Vikas Mehrotra  38:57

Business schools need to - we are very lucky. We have ABFI at the business school, one of the best business institutes in the world. What we need to do is have this ABFI connect more with family business institutes in other universities across the world, and that way, we share our own knowledge, what we learn, and we learn from what they bring to the table. We need to have conferences that are more on a regular basis with these institutes across the world. We need to interact more with the industry that we are in, as well as have our own group of family businesses in the city interact with family businesses in Vancouver, Toronto, Frankfurt and so on.

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Matt Knight  39:42

Okay, so it's both that, you know, that collaboration kind of within our local value chain and local ecosystem of partners and business families, but also extending that out to the global scale.

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Vikas Mehrotra  39:54

Yes. 

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Matt Knight  39:55

And you know, if this deeper collaboration with business families and academics, um. Is kind of that, that answer, and it's something we're already doing at ABFI but what's kind of the next step we should do to show that we're that we're serious and not just aspirational.

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Vikas Mehrotra  40:09

Well, the next step would be to actually have formal arrangements with other institutes in other universities have programs where faculty can visit each other's institutes. Obviously, some of this requires a new source of funding. So clearly, we are aware of that, and one of our priorities right now is to look for creating these endowments that make these things happen in the future.

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Matt Knight  40:37

Awesome, cool. So maybe going, you know, taking that global perspective and kind of what we need to do as academics home and kind of more into our backyard after studying family businesses everywhere. What? What makes Alberta family businesses unique?

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Vikas Mehrotra  40:55

Well, first of all, there are common factors for Alberta family businesses that we have in common with family businesses in Germany, for example, what makes us unique is the space that we inhabit here. In terms of, for example, the two biggest industrial spaces here in Alberta would be agriculture and energy. What makes us unique is that now we are seeing commonalities between energy, agriculture and different spaces, different industrial segments, through the application of analytics. What is a common factor now? And I think we are the beginning of the, sort of this is a dawn of the analytics era. You hear all about AI, but we don't know where this AI arc will land in five years time. All we know is that it's going to be a big arc. It's going to be transformational.

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Matt Knight  41:53

Huge. Yeah.

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Vikas Mehrotra  41:53

So that's what's going to be unique. We are uniquely positioned, as compared to many other parts of the world in taking advantage of these analytics that are available to us, we are very lucky to have both, certainly in Edmonton, to have these analytics tools, through companies like Amii AltaML and so on, to take advantage of this coming era of data driven decision making.

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Matt Knight  42:23

And how do you see AI and data driven decision making fit in with those definitions that you have around family business.

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Vikas Mehrotra  42:32

So the definitions are one way to our our proposal to identify what exactly family firms are in terms of data driven approaches, the idea is that if you are looking at, let's say you're a soybean farmer, and you have very much an intention to pass on that soybean farm to the next gen so now you are, by our definition, you look like a family firm. What needs to happen to make the next gen and the next gen after that keep involved in the family business, is some plan for growth, and that plan for growth today, as I mentioned earlier, is highly reliant on what sort of analytical tools do you bring to the table? 

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And in today's world, a soybean farmer is no longer, you know, my grandfather, soybean farm is totally different. I can have sensors on every soybean plant and upload all the data on like, a minute by minute basis. So I can have literally micro irrigation, if I choose, across my entire farm. My farm is not a 200 acre or a 5000 acre farm. It is now a 5 million pixel farm. I'm looking at each part of the farm as a pixel. 

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That's how our data driven approaches can do. That's where the intergenerational aspect of the family firm comes in, that you now are training the next generation, not necessarily on the farm, but you're training these next generation at universities who are now getting all of the tools from data driven approaches to bring back to the family. 

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Matt Knight  44:13

Okay, so it kind of helped to reinforce both that embeddedness and then also the kind of the succession motive.

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Vikas Mehrotra  44:19

And the attractiveness of coming back to the family business. Often, what happens is, I'll give you one my own, very close friend of mine, who has grown this family business from nothing to reasonable sized business. The trouble he's having in succession is that his children, both his daughter and his son are not interested in that bit of business. They are interested in something different, something that's more current to them, having this ability to have analytical approaches that is driven by the most modern tools available to us through AI, for example, will open new doors to retain the new generation into the family business who might otherwise not be interested. 

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Matt Knight  45:06

Yeah, yeah. 

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Vikas Mehrotra  45:07

Like, I'm not interested in growing soybeans, but I am interested in applying analytical techniques to the soybean farm.

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Matt Knight  45:15

Yeah, yeah. No, that's fascinating, awesome. So maybe to wrap up. We'll go more into some of these other like, bigger picture implications, things like that. So if you could kind of wave a magic wand of some sort, what kind of public policy barrier or thing like that, would you try to remove to help family businesses thrive over the next decade?

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Vikas Mehrotra  45:38

Something that I've thought about this is removing existing barriers for family businesses to form secure supply chains within a country, for example, within Canada and here in everyone today is talking about inter provincial trade barriers. Our first task here would be, what exactly are these inter provincial trade barriers? Are they affecting goods? Are they affecting services? Are they affecting both? To what extent are they affecting small family businesses? 

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And once we try to understand that, then I can connect small family businesses all the way from Prince Edward Island to Vancouver Island, but unless I understand what these barriers are, that would be difficult to do. So if I have a family hair salon in Nova Scotia, am I allowed to come to Alberta and cut hair? I don't know the answer to that question. So the first task in front of us is to put on the table what these inter provincial trade regulations and barriers are, and then try to dismantle them, piece by piece by piece. In a sense, we have a crisis in front of us. We shouldn't let this crisis go to waste. 

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Matt Knight  47:00

Yeah, and that connects really nicely, nicely to your previous point around, how do we make sure we build those relationships within the local community and have, you know, those value chains extend to support the business families around us? Yes, yeah. Nice. So what kind of piece of research, or, you know, information or insight that you took from some of the work that you've done on family businesses, has kind of stayed with you the longest.

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Vikas Mehrotra  47:27

So the family business research that we are doing, what has stayed with me the longest is the ability of family businesses to manage succession. That, as I said, that is the Achilles heel, and that is, to me, the biggest takeaway from this whole literature is, how do families do that? And we need to understand more of that. I need to, maybe we need to do new research in understanding different succession models that family firms have across the world and how they manage to minimize this risk succession based risk.

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Matt Knight  48:02

Yep, no, that's definitely a good, good point of something that is hugely impactful for business families and also a great opportunity for research. So maybe a little bit more kind of mainstream. What business book I like to ask this on the podcast for just about every guest has kind of shaped the way you think the most?

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Vikas Mehrotra  48:22

What business book, the most recent one I read is the business of prediction, or using AI from the group in Toronto at the Rotman School. And that is eye opening if you are in any business, family business or non family business, what you need to know is, where is this new AI revolution taking us? What is the - we are in the business of prediction at the end of the day, how is the business of prediction changing using these new tools and techniques? That's where some of the new books that we're reading are helping,

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Matt Knight  49:02

yes, and definitely, lots of advice and learning opportunities for business families already in this episode. But what's kind of you know, what advice would you give to business families trying to kind of balance that legacy with innovation and AI and relentless change?

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Vikas Mehrotra  49:20

So the relentless change bit is mostly the environment, and you have to know how to now deal with this, and the pace of change is only going to increase. So what this really means is that the family business today is not the same as what it was even 20 years ago, even 10 years ago. So you need to have a skill matrix that cannot have any missing pieces today. In particular, it can't have missing pieces on the data analytics side, and that is where I often see smaller businesses, particularly smaller family businesses sort of face a disadvantage compared to larger, non family businesses who have the tools and the resources to get on site with the new, fast, changing technologies and tools.

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Matt Knight  50:12

Nice, so before we wrap up anything you'd like to add, anything that you hoped I would ask you about that we haven't dove into?

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Vikas Mehrotra  50:22

No. I think this, we covered a vast territory here. So there was that question that you said, though, what was the question that?

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Matt Knight  50:32

Oh, that we were going to come back to. 

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Vikas Mehrotra  50:33

Yes.

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Matt Knight  50:34

Good reminder.

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Vikas Mehrotra  50:36

So I'm able to hack that one.

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Matt Knight  50:38

The myth about family businesses that you wish would disappear.

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Vikas Mehrotra  50:41

Yes. So the myth about family businesses is that shirtsleeve to shirtsleeve in three generations. I don't know to what extent you go from shirtsleeve to shirtsleeve in three generations. Is that a median number? Is that a modal number? Is that something that's true spatially is that something that's true temporarily for the 100 years? How has that changed over time? How is that longevity of family firms change over time? What are the factors that affect this longevity? These are the kinds of questions I think that new research should look into. 

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Matt Knight  51:18

Yeah, no. And that is an awesome myth to kind of get, get away from, because that initial study that that came up with that was hugely flawed and a lot of different ways. 

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Vikas Mehrotra  51:27

100%.

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Matt Knight  51:28

I think, was like 120 companies that were in the same industry, members of a same group in rural Illinois, like that was the that was what it looked

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Vikas Mehrotra  51:37

Yeah. And so we need to go beyond that. We need to have a larger sample to understand, to what extent is this myth based on reality, or to what extent this myth is simply and purely a myth.

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Matt Knight  51:50

Awesome, great, great to bring us back to that one that we missed. And thank you so much for your time today. I know you're really busy between you know, research commitments and teaching commitments and being Dean of the Business School, but thank you so much for this fascinating conversation. You've really helped me kind of see that there is no one size fits all model to kind of define a family business. And we really need to question how we're defining these businesses, and what's important in that definition as well, and that those kind of cultures and values and structure really shape how these family businesses endure and how they grow.

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 So that's kind of our tour today of kind of the global, you know, definition and trends and opportunities in business family, kind of a couple quick three takeaways is that, you know that definition matters. You know that dynastic attend, intent or not, we really need to look at what sets family businesses apart and what makes them unique. 

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Vikas Mehrotra  52:40

On, you know, culture being our toolkit, you know, whether it's from that Japanese son adoption to, you know, an Alberta based ESOP, those succession models need to fit the local norm, but they also need to adapt to think more about, how can we balance the short term and long term perspective and make sure that we don't fall victim of that, of that Achilles heel of succession, and lastly, that vertical integration, you know, is on the rise. We're going to see increasing supply chain costs as long as we go or, you know, for times to come. And it's really important to start to investigate, how can we become more integrated and more embedded and more connected and more collaborative with the people and family businesses in our area.

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Matt Knight  53:27

So this episode has been great. Thank you again, Vikas for your time and for all the support that you provide to ABFI, we definitely always support your leadership and your commitment to help us, whether it's with fundraising or, you know, support on with our signature event. You've always been very, very gracious with your time and support, and I want to thank you for that. 

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And if you enjoyed this episode today as a listener, please make sure you share it. You know, if you're struggling with that definition of a family business or your family business members might share this episode. You know, let us know what you think about the conversation. 

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And if you're looking for you know, more community and more collaboration in the family business space. Please connect with ABFI, whether it's on LinkedIn or social media or at abfi.ca and thank you all for joining us today, and thank you for listening for table talk. We'll see you next time. 

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Vikas Mehrotra  53:32

Thank you very much pleasure to be here.

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