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The Professionalisation Of Family Businesses

The Professionalisation Of Family Businesses


Many family businesses struggle to provide space to management professionals, often resulting in politics and conflicts among stakeholders.


Family businesses are defined by share ownership patterns and management control resting within a single family. It is no secret that family businesses have dominated the Indian markets.

 

Family businesses begin their professionalisation journey by bringing non-family members into management roles as they scale up. Family firms are often classified as per their scale, ranging from micro to small, medium and large. Literature indicates that micro and small organisations benefit the most from professionalisation. According to a study by Chen, Chittor & Vissa (2020), family CEOs in India get paid more than professional CEOs.

 

This article explores the challenges encountered in the professionalisation of family businesses and the role of HR in resolving the issues.

 

What Triggers Professionalisation In Family Businesses?

 

The following are some of the reasons for taking the professionalisation route:

 

1. The absence of a legal heir or the next generation showing no interest in continuing the business. The owner realises that for the firm to survive, s/he needs to bring in professionals to manage it. In some cases, the owner may look for a merger with a giant conglomerate and reduce his/her stock ownership.

 

2. The legal heir goes overseas for management education and, upon returning, wants to bring professionalisation into ways of working. S/He realises that outside talent must be brought in to manage the scale for the business to grow manifold.

 

3. The family owner realises that for the firm to scale up and attract investors (for a future IPO), employing management professionals will provide greater credibility and bring superior performance.

 

4. Regulatory requirements—for example, SEBI guidelines—are mandating the founder CEO to take a non-executive role on the board and bring in a management professional as CEO.

 

Irrespective of the reason for embarking on a professionalisation journey, the challenges faced during the transition are immense. Many family businesses struggle to provide space to management professionals, often resulting in politics and conflicts among stakeholders.

 

Attracting Outside Talent For Management Roles

 

Family businesses of smaller scale have difficulty attracting talented professionals. Professionals may be hesitant to join firms in the early stages if the owner has made no significant investment in developing their personal brand. At times, the firms may suffer from a poor reputation, an internal feud between family members, and an inconsistent employer brand image in the market.

 

Typically, family members rely on “word-of-the-mouth” recommendations from their immediate community or extended family. The over-reliance on community members can be seen in selecting vendors/suppliers, filling key management positions, board members’ constitutions, etc.

 

Furthermore, there is a reluctance to pay higher salaries to management professionals (who come from MNCs) because it may disrupt internal parity. The family owner may become sceptical and begin to question the “ROI”/value-addition of the role being compensated more.

 

Ironically, studies have shown that the same standards are not followed when determining the family CEO’s own performance pay. The high compensation of family CEOs is unaffected by poor firm performance and is disproportionately boosted by superior firm performance.

 

Controls And Decision-Making

 

Though professionals may be offered “management roles”, the true litmus test is the actual controls (financial, decision-making) they are given. Without significant executive powers provided to the role, the professional may underperform because s/he would have to rely on the family head for approvals. Moreover, the employees know where the real power lies and may resort to shortcuts (approaching the family member directly) to obtain approvals.

 

As the professional formalises the business by introducing systems/ processes, the prior relationship-based ways of working come in direct conflict. Family businesses often have key positions (sales, finance, procurement) guarded by persons trusted by the family. With the implementation of governance and controls, there may be pushback on the need for these areas to be regulated. At times, family owners may be siphoning off capital from the business, which becomes complicated with the entry of management professionals.

 

Culture And Ways Of Working

 

Employees working in family businesses often experience a paternalistic culture where the family head is worshipped and revered. The employee places their trust in the owner to manage their career and personal milestones (life, death in the family, etc.) and becomes part of their extended family. The family members may have informal ways of working and making crucial business decisions (e.g., conversations over the dinner table). If the heir is being groomed to take up a larger business portfolio, other employees may feel a sense of nepotism.

 

When a non-family professional joins a family business, s/he brings systems/processes and structured decision-making methods with them. Imagine preparing a formal business case for a new product launch (when earlier it was a five-minute conversation with the owner over lunch). As relationship-based ways of working become more formalised, this transition is a critical step for the business.

 

At times, long-tenured employees may band together against the nonfamily professional to present him/ her in a poor light in front of the owner. The professional may have to tread carefully in balancing the political equations of existing employees who are close to the family owner. At times, the existing feud between the ownership structure of the family business may affect the professionalisation journey of such firms.

 

How HR Can Enable Management Professionalisation

 

The owner primarily shapes the culture of a family-run business. As the trigger for professionalisation arises, HR needs to develop a change agenda and facilitate settling of the management professionals in the following ways:

 

1. Create a business case for attracting high-quality management professionals by seeking personal commitment and efforts of family members in hiring. Increase the diversity of the talent pool by looking beyond the immediate community references.

 

2. Develop a set of values and principles for running the business, transitioning from anecdotal reactive decision-making to more structured principles/guidelines for determining business decisions and judgments.

 

3. Make room for management professionals to operate with requisite controls and decisionmaking authority. Define robust governance mechanisms and financial controls to help management professionals to be more effective. Bring in a third-party external auditor for checking financial accounts, internal process controls, and so on.

 

4. In the event of conflicts with family members or prevailing low trust environments, HR needs to provide a platform (or enable through external facilitator) for resolving such disagreements. Management professionals typically despise working in such a hostile environment and usually end up quitting. The role of executive coaching for family owners becomes crucial in handling such transitions. An expert coach can help the family owner change their deeply ingrained belief systems, enabling them to transition to a more professional setup.


Reference:

Does nepotism run in the family? CEO pay and pay-performance sensitivity in Indian family firms (https://onlinelibrary.wiley.com/ doi/10.1002/smj.3263)

 

Shivin Tikoo is heading Organization Development at Mahindra and pursuing Ph.D. in Organization Behaviour from XLRI. His areas of interest include HR strategy, EVP and change management. Shivin is based out of Mumbai and can be reached at [email protected] Views are his own.

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