Starting a small business with a family is a natural first for entrepreneurs because of the accessibility and trust with relatives. However, family-owned businesses have their own set of challenges that we will explore today. My guest is Dr. Giacomo Laffranchini, an associate professor of management, here at the University of La Verne College of Business and Public Management. Dr. Laffranchini’s expertise is in the strategy and management of family-owned businesses here in the U.S. and abroad.
The challenges of managing a family-owned small business with relatives
The main challenge of a family business whether it be a small business or a professional organization is the coexistence of 3 subsystems: the family, the shareholder, and the management. Those systems overlap so you have family members who are also shareholders and are also involved in the management of the firm. The challenge is to instill in the organization some kind of discipline. So how can we keep the temptation of letting one of those 3 subsystems take over the rest of the business?
There is a sort of managerial fade, if you will, that adding family values or objectives as part of the operating strategy is bad or negative to the firm. This is far from the truth. The reality is that the main challenge is to keep the three systems in balance and make sure objectives are set up clearly when we engage in strategy formulation and implementation. All individuals clearly have in mind the ultimate objectives and what are drivers for measuring performance, regardless of whether they are family or non-family because the risk is that we overcorrect.
On one side we lean towards nepotism where we have stronger cohesion, strong leadership, and an over-perception of justice. All of sudden we are losing a valuable workforce, individuals who are talented but who are not going to apply to our organization or those who came are likely because they perceive a sense of injustice. If you have disengaged family members then you engage in what is known as “reverse nepotism” where you hold family members to higher standards to demonstrate that there is no nepotism and that there is a sense of fairness. That is detrimental too because they are putting an excessive burden on individuals who may or may not be interested in being part of the firm. Adding two sets of standards in an organization is never really a good thing.
Strategic Management
There are multiple ways depending on the size. The family businesses can create a “Family Council”. A family council is a group of individuals who are family member shareholders or actively involved in the firm. The family council has regular meetings to share objectives, aspirations, risk profiles, or desires of the firm. The family council can define policies pertaining to the liquidity of the business, wealth management, and family member involvement in the business. If we reach the status of “cousin consortium” where the owner becomes diluted among a very large group of family members, we will ultimately need to decide who is going to be involved and who will represent the family on the board of directors.
Other firms have successfully instituted a “family constitution”. They write a formal document in which we specify, very clearly, all those rules. As much as the family agrees to all the policies defined in the family constitution, that should take care of a lot of issues. These are suitable solutions for larger family firms, but for smaller family firms, there are simple techniques that could help manage family and non-family employees. One effective strategy is “Room Philosophy” where we define how we communicate in the context of family members and employers to employees. We prevent spillover in and negative emotion from the family sphere from contaminating the work sphere.
Succession Planning
Organizations, on average, are doing a very poor job succession planning, regardless of whether they are family businesses or not. Obviously, the group that should be more concerned with succession is family-owned. There are some successful steps that multigenerational family businesses take that we can share with you.
1. Establishing Goals and Objectives
You need to establish goals and objectives for not only the family but for the family wealth related to the business. There is nothing wrong with the original founder looking to retire and exit the business and heirs do not have the expectation of being involved in the business. The family should define a collective vision, goals, and objectives. There should be independent members of family counsel or the board to lay out those goals that lead to perpetuating family values and family legacy which can be a competitive advantage.
2. Decision Making
You need to establish a decision-making process. Who will define the successor? How is the successor being selected? How is the successor being trained and introduced in that particular position? In regards to the family constitution, there can be policies regarding competitive siblings. These are siblings who may head different divisions in the business (if it becomes larger) and the one that is the most successful in that aspect of the business may be the one most suitable to be in a leadership position of the organization.
3. Creating the Succession Plan
We then need to establish a succession plan and define a successor. You will then need to identify the active and non-active family members as you go through each generation. You need to define the requirements you expect to find in a leader within the organization. In parallel, you need to create a business and owner estate plan that will define how the family wealth will be managed and how it will be invested in other entrepreneurial activities.
4. Transition plan
Ultimately, you will need to create a transition plan in which there may be a partial overlap in the current CEO and the successor, where an heir or external manager, where is more likely to lead to successful succession. We are seeing more female successors who are more qualified than male heirs to keep on running the business. Sadly there is some bias when it comes to those decisions, but it is something that you should be very mindful of. Again, you shouldn’t be overly rigid on the interdependence of family members when you have no clear signal that suitable internal candidates exist.
Conclusion
Tools that are used in strategic management can be adapted to family businesses and don't need to be considered as “analytical tools” reserved for larger firms. Those tools can be simplified in a streamlined version that is applied to the context of small family businesses. The major accommodation that I would have for small firms is falling into the temptation that managing by exception and not having formalized processes is an appropriate way to go in light of the smaller scale of the business. All those tools are designed to “keep the family in check” if you will, and we are pursuing socio-emotional goals (non-financial) that family businesses expect to derive from the firm. These could be a source of competitive advantage. However, we need to have a balanced approach in doing so and pursue those non-financial objectives that are in line with the long-term survivability of the business.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
Comments
Post a Comment