Article: Professionalizing growth oriented family businesses

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Professionalizing growth oriented family businesses

The success of organizations with dynamic relationships depends on the quality of professionalised management it has
Professionalizing growth oriented family businesses
 

Lack of exposure and confidence in outsiders affect the quality of professionalisation

 

Democratic professionalisation is found to be a good blend of familiness and professionalisation, particularly for rapidly growing firms

 

Family businesses are unique in many ways, particularly in India where family members get involved in operations very actively. In a typical mid size family business, there are two sets of key stakeholders, the family and the business managers. In several growth firms, there are non-family owners too. The structure of relationship changes as the business grows, with divergent forces influencing the destiny of the organization over a period of time. The quality of leadership required to adapt the organization to match with the key success determinants is not always easily found. As a result, many firms with inherent potential to grow suffer and fall prey to the negative effects of the multiple forces.

The success of such an organization with dynamic relationships depends on the quality of professionalized management it has. While the term professionalization means doing the right thing the best way in tune with the long term purpose of the organization, and well understood by most, questions about who to decide what is best for the organization are not addressed appropriately. Besides, the transition of an organization from a “one – man show” to a “team show” is not easy. Let us discuss why the organizational transformation is challenging, and what family growth firms can do to manage it.

Factors influencing Professionalisation

Organizational decisions have to be objective and judgment unbiased for sustaining growth. For this to happen the quality of organization structure, systems and processes have to be of high, and person independent. There is clear demarcation of roles and responsibilities at all levels, and there are mechanisms to address decision issues of an undefined nature. Businesses that start with good governance practices such as treating business and family as two separate entities with different sets of critical success factors find the growth transition fairly smooth.

While the process of delegation of operational responsibilities to non-family executives is not too difficult, that of entrusting greater decision making powers is not at all easy. Such empowering as the organization grows big is the essence of professionalisation. Those who successfully manage such a change grow big.

This is not easy to accomplish because of the divergence in the priorities and intensity of the stake holding forces operating on a firm. There are a number of factors directly and indirectly affecting professionalisation of a family business; these are not always relevant in a non-family business context. For instance, appointment of a brother as a top manger may tantamount to finding a business solution for a family problem. At the same time, there are plenty of Indian cases of family businesses entrepreneurially transforming their businesses, even in the face of competition and globalization.

The combined effects of these factors on a growth firm are at least two:

‘Whom to trust’ dilemma: Often this is about confidentiality or business secrets, but a more important concern is about handing over responsibility to someone who may not have the same level of passion. Many family entrepreneurs believe, and rightly so, that non-family professionals may not have the ownership feeling that they have. The ownership feeling is critical particularly in times of crisis and when major decisions are taken.

‘Let go’ blues: Family CEOs believe that they are the best people to run the business, and in most cases have not experienced working with high quality managers at close quarters who have the capability mix that they think is necessary to manage. Hence, lack of exposure and confidence in outsiders affect the quality of professionalisation.

This phase involves the CEO working with two or three sets of people without always having a clearly articulated mandate that is required for a rapidly changing organization. Roles and responsibilities keep changing to match with the emerging business opportunities. Sometimes the number of stakeholders also goes up around this time, making it much more complicated.

The ‘No Man’s Land’ symbolically represents areas of expectation and responsibilities not clearly defined. For instance, it is fine to expect a CEO or an Executive to take “initiative”, but the challenge for both the Family and the CEO is to keep clarifying the implied areas and levels of “initiative” to be shown. Similarly, when a CEO promises to a non-family executive “full freedom” to operate, often it is understood differently by the people involved depending on their previous experiences. Many growth firms get into trouble by recruiting top notch professionals without checking out their “cultural” suitability to work in the specific organization. However, managing the ‘No Man’s Land’ is not too difficult if the people concerned know each other and share a lot in common in terms of values, temperament and vision.

Hence family businesses are normally comfortable having people they have known for long time to be involved in major decisions whether they are the best to do so. Several family businesses that have grown rapidly have able and “known well” people as part of an executive board/ committee. Here we find a blend of professionalism and familiness. Relationships make it easy for discussion to be without any hidden agenda, with everyone working towards a common goal – business decisions for family prosperity and image. This “chemistry” in relationship is fundamental, particularly during a period of change in the DNA of the organization.

In essence, while professionalisation is often perceived as decision making using systems and processes, the challenge is different in family controlled businesses. Professionalisation has to be holistic covering a number of areas as shown in Figure 2. A close look at the family controlled growth firms in India would show that there are broadly three categories of professionalized organizations.

Centralized Professionalisation

In such companies, all critical decisions are taken by the Family CEO with the help of trusted long term associates with excellent business management capabilities. This “executive board” meets informally with extended family network supporting the relationship. This model fails when the quality of this team of “loyal professionals” either do not have the required capabilities or develops cracks in relationship for whatever reason.

In such organizations, there is an informal organization structure that ensures that “non – family” professionals deliver operational commitments. Most CEOs outside this inner circle network are task oriented without much influence on the strategy of the organization which is top driven.

Democratic Professionalisation

Many fast growth family businesses belong to this category. These firms, often with the first and second generation of the family in leadership, tend to move the family members to strategic positions as their businesses grow, leaving operational profit responsibilities with non-family executives. They involve non-family executives in strategy making by following clear planning and control systems. They tend to have high quality board of directors, consisting of a mix of loyal friends and truly independent directors. The family members continue to be vibrant and entrepreneurial by spearheading growth through expansion and new projects.

The presence of high quality, ”no nonsense” independent directors provide a smooth bridge between family and non-family executives and restricts / avoids interference of family members in the operations of the companies. In other words, they facilitate management of the “No Man’s Land”. They also help family CEO redefine their role as strategists and distance themselves from day-to-day operations. Family members need mentoring support for their transformation. In several cases, the independent directors help families understand the changes taking place in the organization and ensure smooth relationship among members. They help families address the challenge of influence the factors exert as shown in Figure 2. In essence, the presence of a good board helps family businesses manage the process of professionalisation quickly and smoothly. Such directors are able to provide objectivity in decision making without any bias in judgment, two key qualities of a professional.

Puritanian Professionalisation

Some organizations have distanced the family entirely from operations, except at the board level; none of the family members get involved in their activities. Such families believe that what is good for the business is good for the family. They believe that family members are not necessarily the best operating executives, and want to avoid dragging family dynamics into the business. Such organizations have strong board with independent directors that keeps high level of objectivity at all levels.

No hat fits all

There are other combination of elements of professionalisation and family involvement possible, depending on the context. In the Indian context, Democratic Professionalization is found to be a good blend of familiness and professionalization, particularly for rapidly growing firms that need high degree of entrepreneurial energy to grow. This model addresses both the ownership and governance concerns of the family and business. In any case, both family and non-family executives have to understand the landscape of professionalisation before choosing the model that fits them the best.

Topics: HR Metrics, Culture, Entrepreneurship, C-Suite

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