THE MANAGEMENT INTERVIEW Manfred Kets de Vries – The hazards and hurdles for family firms

Statistics indicate that only about three out of 10 family businesses survive into the second generation, while about one in 10 survives into the third generation. Why do so few family firms succeed?
It’s true that family firms have high casualty rate, but remember lot of them are start-ups which fail for reasons unrelated to being family owned. For family firms which have been operating for number of years, the single greatest threat is poor succession planning. The hand-over of leadership from the founder-entrepreneur or current CEO needs to be managed as well-prepared process stretching out over time.

What other hurdles or pitfalls can derail family firms?
On the financial side the highest hurdle faced by family business – or any private firm – is limited access to capital markets. This presents its own set of problems in expanding the business.
Then there is the whole issue of family disputes that overflow into business, and this is very common. Some of these battles can get very nasty and have major impact on the company’s performance. Nepotism should also be mentioned in this context. It’s difficult to attract professional management when family members are milking the business, or there is tolerance of inept family employees. Compensation should reflect contribution and business logic should take priority over family reasons.

What key characteristics of family companies give them competitive advantage?
At personal level for family members there’s the perception of being in control of their own destiny, and the potential financial rewards.
At company level family firms have the independence to take long-term orientation, with little or no pressure from the stock market or from take-over risk.
The family culture can be source of pride, stability, strong commitment and motivation and continuity in leadership.
Oher key advantages can be willingness to plough back profits, greater overall flexibility and family members’ high degree of expertise in their industry or sector.

What challenges do family-owned companies face in attracting and keeping professional managers?
That’s often problem. Executive selection must be based on merit which means going beyond family members. Reward structures must be sufficient to entice professional management.

Are there management practices we’d expect to see in public company which are given less priority in family firm?
In most family firms it’s less likely you’ll find good corporate governance. This is especially true when the founder-entrepreneur is still running the business and maintaining tight control. It’s important to institutionalise certain governance practices such as the establishment of family council. Even more critical are the rules of succession planning: What’s the role of the present leader of the family firm in the succession process? Will he or she move out quickly or gradually? Will the current leader remain as an adviser? And on related front, how are family members to be selected for promotion?

Family-owned companies are often run by CEOs who are not family members. Do they need any special skills?
In family firm you need the complete trust of the family. You have to manage the family members carefully, and it would be usual for CEOs to allot up to third of their time for ‘family management’. This is similar to CEOs of public company who would spend large chunk of their time on stakeholder management.
The difference is that in family companies things can get very messy – terrible fights can occur. professional manager sits in the middle and tries to be neutral peacemaker, often wondering what the family members really want. If the professional executive is not clear on the owners’ expectations decision making can stall resulting in enormous competitive disadvantage.

We usually expect to see one of the owners’ sons assume the top job in family business. Are daughters featuring more often now in the succession process?
Women are getting more chances now than in the past to run family firms, in contrast to public companies where there are still very few women in senior executive jobs.
The psychological issues in father-son relationships can sometimes lead to estrangement. Usually fathers have an easier time with daughters, they are not as harsh on them, more forgiving, and with better bond it is easier to talk about succession issues. I believe there’ll be growing numbers of family businesses run by the daughters and granddaughters of entrepreneurs.

What are the succession planning issues when child is identified very early as the future leader of the family business?
In this case it’s long process begun in childhood to slowly prepare the child for his or her responsibilities. If children are exposed to the business as they grow up, they can be given greater responsibility as young adults. It’s also critical that they spend some time outside the family business – this is fundamental for building self confidence, otherwise they’ll wonder whether they could have achieved anything by themselves.
There should be careful consideration of whether it is wise to groom child for leadership many years in advance. There is no assurance they will be the best choice once the time comes, or even if they will want the job at that point in their lives.

Is truly independent board of family firm possible? Is there danger the board will only serve at the family’s whim?
There is that danger, but smart owner will see the board as strong centre of independence. First, board members need to have expertise in traditional board tasks such as CEO selection, investment decisions, strategy and safeguarding ethical and legal conduct. Beyond that, family firm boards are different from those of public companies because they play bridging role between the family and the corporate system. To do this they need knowledge of the dynamics of family life and its effect on the business. So they need to have an understanding of the relationship between the culture of the family and the culture of the company, and some empathy for the various family members.

You’ve mentioned the value of setting up family council. Can you elaborate on this?
It’s technique many families use. family council can play critical role in preventing the company from becoming casualty of family drama, while setting out an attainable vision for the company’s future. Younger family members should be involved in its formulation since they need to buy into the shared vision. Many business owners forget that the vision of the younger generation can be very different from their own.

The council should define the rules of the game for the whole family and set the goals that everyone shares. For example, how do family members see the company’s future? Are they aiming for continuity of family control? Or do they want to go public and give up family control? Do they want to sell the business? So the first task of family council is to decide what its members want to accomplish.
The council should also create mechanisms for resolving conflict. Establishing rules that apply to everyone helps to build trust. Rules would apply to issues such as dealing with non-active family members, cashing in shares, “shotgun” clause to ensure fair price in case of serious disagreements.
Family councils are good vehicles for discussions of key issues, but not necessarily for quick decisions. There needs to be dominant family member or coalition of family members to provide strong leadership otherwise the council can resemble election politics where compromise solutions prevail.

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