Board Table Or Dinner Table?
6th May 2017 Nick Quinn, The Leadership Factory
Examination of the way that decision making takes place in the family firm.
“…nepotism isn't too bad, as long as you keep it in the family.” John F Kennedy
Family Businesses at their best can be brilliant - they are focussed, flexible, light on their feet and great at making decisions. They can also be great at changing decisions - unexpectedly.
“Good Morning everyone. Charlie and I had a long discussion over lunch on Sunday and we have decided the strategy agreed at the last management meeting isn’t right, so we are going to take the company in a new direction.”
Sound familiar? These sorts of situations are all too common with family businesses; for example, unilateral business decisions taken out with business hours or decisions made with something other than profit in mind. That is not say that they are wrong, but it is frustrating for non-family when decisions reached with other team members are put aside in an apparently arbitrary manner.
"Respect me, Respect the Family." — Don Vito Corleone, The Godfather
'A Family Business' is a generic term covering a wide range of businesses large and small, which together form a significant and important part of our nation’s economic base. Family Businesses by their very nature are influenced heavily, sometimes exclusively by family individuals, this is the strength of such a company but it can also be its weakness.
What characterises a Family? Family relationships can be complex and often have to cope with a wide range of emotions from love, care, support to jealousy and even conflict on occasions. Family members may disagree with each other but if anyone threatens the family it closes ranks and protects its own. In essence criticism becomes personal and can be interpreted as an attack on the family.
At the centre of the family is Mum or Dad, who always know what’s best, always acting in the best interest of the family, making the decisions and telling other family members what to do (more often than not to keep them safe).
Sometimes, this family dynamic can be reproduced in a family business, with the head of the family at the centre of everything, making decisions without consultation and adopting a telling (autocratic?) style of management. This style can be highly effective and isn’t always something to discourage, but it does need to be understood.
Whether the family business is first or fourth generation, the unquestionable issue is that to the family, this is more than just a business; it is legacy, an extension or expression of the family and what it stands for. What you do to the business you do to the family. The family has more than just money invested in the company and so it perhaps understandable that they take things personally or make decisions which may not seem to be taking advantage of all of the available opportunities.
When is Profit not the most Important Consideration?
Executive officers in most companies understand that profit is the guiding principle in making decisions and they expect to be judged on financial objectives; family firms often have a slightly different set of rules. Family firms often use non-economic factors (as well as economic) to make crucial decisions which may have significant impact on the company. For non-family members, economic factors can be perceived as less important in the grand scheme of things. That is not to say that money is not important, it’s just not the most important.
Many of these factors can be grouped together under a term which is rapidly becoming accepted as important in family firm research: socioemotional wealth. In simple English all this means is factors other than economics, i.e. return on investment or profit. What is clear is that, for many family firms, there is a multitude of complicating factors which they use to make crucial decisions within the business. Berrone et al (2012) have carried out some research which distils the key components of socioemotional wealth. They have isolated five factors that have a significant impact on the decision making process of family firms:
Family influence over the business
- Identification with the firm that carries the family’s name
- Emotional attachment
- Social/community ties
The family’s influence of the firm is often carefully guarded with family members occupying key executive positions and owning the majority of the shareholding. This serves to dilute the impact of non-family members who may seek to focus on traditional factors such as return on investment or profit. This of course doesn’t stop family members from disagreeing with each other, but then again that’s family! The impact of the family influence extends to strategic decisions, often taken over much longer time frames than in non-family firms. It is clear that even if return in investment is modest in the short term, if the decision has better longer term impact for the family then this may be a significant consideration.
In family firms which bear the family name, the identification of family with firm becomes almost inextricably psychologically linked. This may see the family eschew potential financial rewards, such as bringing in new investors, to ensure the family remain the dominant part of the company. The family may also bask in the reflected glory of being associated with the firm and derive greater benefits than simply wages or other tangible perks. This may further impact the decision making process in terms of financial return.
The attachment of the family to the firm is not simply limited to the name but also to the concept of family in general. Thus family firms can often be expected to adopt a paternal/maternal approach the company culture. This approach would see employees as part of the family and would socialise the relationships with suppliers and customers.
The emphasis would be on long term relationships based on social ties rather than purely transactional ones. Employees would benefit from a more stable approach to governance as part of the family, even though the familial tie may be more akin to cousin than sibling. Family firms often have a higher than average number of long serving employees as a result of the paternal approach. The family firm also often has stronger than average ties to the local community, sometimes because the family’s standing is tied to that of the firm.
Of course succession is also an important factor. Succession may not always be based on the 'best man for the job' approach but rather on a nepotistic basis which sees sons or daughters take key roles over seemingly more qualified non-family members. More often than not, this is more than just giving one’s offspring a job, it is often more rooted in a desire to extend the family’s legacy through the generations and, as such, is often indistinguishable from the emotional attachment and identification with the family name.
The concept of socio-emotional wealth may help non-family members to understand some of the decisions that family firms take and at least helps them to come to terms with decisions that are taken and objectives that are set.