Professionalizing family businesses

Family businesses must introduce professional management to their companies if they want to expand and grow. However, the first step to professionalizing family business management is to prepare the company and guide it through a transition period.

Certain essential milestones have been generally accepted as bases for a company to evolve towards professionalism:

• Adequate formalized shareholders’ agreement, e.g., a family constitution

• Agreement on goals and objectives for the business as an investment, e.g., growth objectives, tolerable risk levels, returns expected, etc.

• Timely, accurate accounting information in a form that facilitates planning, operational decision-making and performance review, e.g., operating and capital budgets, regular key results reports , etc.

• Strong, coordinated middle management motivated by an incentive compensation plan that is geared to achieving performance goals.

It must be borne in mind that even prior to thinking of professionalizing a family business, families must first distinguish between business and family issues. Professional management can happen only if the organizational structure of the business firm is used to discuss and decide on purely business issues. The moment this same structure is used to discuss family issues, professionalism will be compromised and retarded.

Therefore, a Family Council as a forum for discussion of family issues is a necessary step to professionalizing the business. Corollary to this is the need for a Family Constitution which will embody the rules for running the Family Council.

Another prerequisite for the introduction of professional management is the acceptance of the principle of accountability by all managers, especially owner-managers. Essentially this means that all owner-managers must accept that they will be evaluated on the basis of the results of their performance. Their scope of authority and even their continuance in the business must be decided based on their performance alone. The notion that family members inherit the right to manage a family business is not comparable with the goal of professionalizing the management of the business.

In the article “Why You Should Have a Board” by Peter Davis, it says, “The directors serve to clarify the goals of the company, to articulate plans, to enhance communication among the owners, to build consensus for initiatives that might otherwise be contentious and divisive. The challenge for boards of family companies is not only to provide good corporate governance that is responsive to the needs of the company, but to recognize and deal with the pragmatic realities and idiosyncracies of the family owners.”

In today’s business environment, where all business firms must become globally competitive, the family business must realize that more and more it cannot survive without a real and functioning Board of Directors.

Once a Family Council is formed and a Family Constitution is written, then the family business is ready to be governed by a professional board even though it is still being managed by members of the family.

Owner-managers must be accountable to an individual or group for the consequences of their decisions. The ideal group for this function is a professional, active Board of Directors.

In most family businesses, the Board of Directors is a fictitious entity. The board minutes are often simply contrived documents written to satisfy the requirements of the Securities and Exchange Commission or the Bureau of Internal Revenue. Board resolutions are made whenever banks and other financial institutions require them and these resolutions are based on imaginary board meetings.

Families do not normally have a functioning Board of Directors. If the board is composed of only family members, then sessions are held informally since formal sessions are considered too bothersome and bureaucratic. If there are non-family members on the board, board meetings are rarely held, because family issues are considered taboo subjects not to be discussed in front of non-family members.

Even the so-called professional boards of family businesses serve mostly as an advisory board to the owners. They usually have little authority and seldom vote on major issues. They seldom fulfill the true function of a board, which is corporate governance.

Globalization and trade liberalization continue to change the competitive environment. In this environment, the owner-manager cannot continue shouldering total responsibility for the business. However, sharing this responsibility with a Board of Directors must also mean sharing authority with the board. This critical step of decentralizing authority as a transition to professionalizing the company is often the most difficult for an owner-manager to accept.

Family businesses go through a very difficult period of transition when they have gone beyond the founder’s direct influence but have not yet shifted to professional management. In the article by Donald Jonovic on “When to Start a Board of Directors,” it is observed that: “Some companies take longer to cross the threshold into professional management and size appears to have little to do with how quickly the transition occurs. Even large organizations can function for some time in this twilight zone.”
The reason for this is that typical entrepreneurs start out with tunnel vision, relying on dreams rather than rational analysis as a basis for decision-making. They rely on drive, adrenaline and persistence to remove all obstacles to their goals. An outside review by a board of directors by contrast is normally analytical, critical and questioning in nature. Obviously, this will be in clear conflict with the management style of entrepreneurs. To them, a board is a group of backseat drivers.

In the final analysis, the effectiveness of boards in family businesses is totally dependent on the desire of owner-managers to have competent persons on their boards and their willingness to accept the latter’s advice.

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