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Family Business 3e, ERNESTO J. POZA
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19 November 2014
Family businesses play a very important role in the economy. In the United States, for example, a third of all Fortune 500 companies are family businesses (Poza 1). In most cases, entrepreneurial businesses become formally become family businesses after founders hand them over to family members. Despite the numerous negative stereotypes relating to family businesses on issues such as nepotism and mismanagement, many of them have cemented a clear record of outperforming non-family businesses. In many cases, these businesses bring in non-family members in order to benefit from unique talents and skills. The aim of this paper is to provide advice on family businesses being managed by both family and non-family members. It also “best practices” of successful family businesses.
Both family and non-family members have a critical role to play in the management of a family business. Family members who are in the management team serve to provide insights into the family dimension as far as the running of the company is concerned. One the other hand, non-family members bring into perspective a broader outlook of the company’s competitiveness within the market as well as the adaptations it should make to maintain its competitive edge in the industry.
Many family businesses face numerous challenges. They are normally shrouded in secrecy. Moreover, some of the family members at the head may lack adequate business knowledge to run a large corporation. These challenges may create a situation where a family member’s commitment to the business is low and its continuity is threatened. In many cases, these challenges arise because of family members’ attempts to retain the founding culture that may be in support of autocratic leadership. At the same time, these companies struggle to remain flexible in order to be able to remain ahead of the competition. This puts family members in a dilemma; they tend to be torn between retaining a culture that is representative of the family heritage or adapts to changing market conditions. Regardless of the route, the family business takes, it also faces the ever-present problem of managing the expectations of various stakeholders, notably relatives, unionized workers, and non-family employees (Poza 31).
The management of the family business by subsequent generations of family members and non-family managers is normally influenced significantly by the practices of the company’s founder. Many founders tend to hide information on profit margins, market share, and cash flows. Yet the new managers need access to financial statements detailing all this information to enable them to make sense of the direction the business has taken over the years. If this information is not divulged, the succession process may be jeopardized; it may be impossible for younger family members to become effective successors.
In situations where the new managers within the family have access to the information, cooperation with non-family managers is essential. The effectiveness of the succession strategy greatly determines the savviness of the new family members in terms of making decisions regarding which non-family members to trust with the information. The managers who hail from the founding family must understand what the information means in terms of their ability to retain control over all management activities as well as control over market share. They must be able to figure out a worst-case scenario where a non-family manager all the requisite information, resigns and moves across to a competing firm. Such a situation may have far-reaching consequences for publicly traded companies that are family-controlled. For this reason, cooperation between family- and non-family managers is required.
Non-family managers also have a critical role to play in maintaining efficiency in the company’s operations. There is a tendency by non-family managers to ignore family members who are not actively involved in management. With time, the understanding of the business by these members starts to wane. Failure to put into consideration the contributions and perspectives of family members may trigger feelings of inequity. This may have long-term consequences in the form of conflict between the founding family and the non-family management over overall control of the business.
The importance of managers who are part of the founding family should not be overlooked. In most cases, family members are overlooked because of the stereotype of inefficiency. On the contrary, these managers can provide a lot of assistance to the company by shedding light on how the family fabric is intertwined with corporate culture. Such elaboration enables non-family members to be on the lookout for areas where conflict with family members may arise. Such a manager understands how different family members interact vis-à-vis their aspirations for the business. This way, he acts as a link between the family and the business.
Unlike the business environment, the family environment is an embodiment of a very close-knit group-level phenomenon. Any mistake that a family member does is attributed to the entire family and not the individual. This means that the sense of responsibility for the business is higher among family members than among non-members. This means that it may be better to include more family members at the higher levels of the company’s management hierarchy.
The benefits of the group-level phenomenon become more evident in times of change. The transition from one family member to the other as the head of the company is in most cases likely to be smooth-sailing. In contrast, it is more challenging to steer a transition process involving two non-family members. This is because there is no element of interdependence between the predecessor and the successor. For this reason, the outgoing CEO may fail to take care of all issues that the successor may want to have ironed out simply because of the feeling that his attachment to the company has come to an end. In contrast, an outgoing family-member CEO will always belong to a similar group (family) with the incoming CEO. Thus, it is in his best interest to ensure that all management structures are in place and that the new CEO has been briefed about the company’s structures and strategies. The family members who are involved in the handover of the business leadership position perceived a sense of shared interest because of the tendency to see the company as an extension of family life.
There are three best practices that most successful businesses portray. The first one entails teaming a non-family CEO with a family chairman. The second one involves allowing independent outsiders to have considerable influence on the board of directors. The last one is the professionalization of management. Teaming a non-family CEO with a family chairman enables the family business to maintain a balance between the enduring family orientation and the all-important outside-world perspective.
Allowing independent outsiders to have some influence on the board of directors enables the company to adapt to a changing business environment. It provides the family members with an opportunity to examine a wide range of alternative routes in the quest for change management. The independent outsiders can enable the family managers to make sense of the world of business, thereby enabling the business to retain its competitiveness. Family businesses that bring on board independent outsiders tend to survive even after the death of the founders because the outsiders can easily use the existing instruments of succession to facilitate a prompt transfer of ownership to new family members.
Lastly, professionalization enables the family business to acquire skilled, knowledgeable, and experienced professionals (Poza 100). Family business owners should give adequate room for professionals to do their work. Similarly, family members involved in the running of the business should themselves endeavor to become professionals in their work. This will enable them to understand the metrics, scorecards, and benchmarks that should be set and ways of evaluating and revising them based on the value that is added to the company.
In conclusion, the interaction between family and non-family managers is crucial for the success of a family business. This interaction can help family-controlled corporations embrace a culture of transparency and professionalism. Such interaction is particularly important in the areas of management succession as well as the resolution of family conflicts arising from business operations. The three best practices that all family businesses should strive to promote to be successful include professionalism, teaming of a non-family CEO with a family chairman, and allowing independent outsiders to have considerable influence on the board of directors.
Poza, Ernesto. Family Business (Third Edition). New York: Cengage Learning, 2009. Print.
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