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How To Professionalise A Family Firm

13th May 2016 Jeremy Hazlehurst, Business Family

There comes a stage in the life-cycle of a family business when it has to become more formalised, referred to as a process of professionalisation, and is usually seen to involve the appointment of non-family managers.

Opinion is divided over whether this is a good thing, in a business that remains family-owned.

One school of thought argues that non-professional managers bring with them “agency” problems, meaning that the interests of the family and non-family diverge. The managers typically want to maximise profit, for example, while the family might be interested in being sustainable, or treating employees well. After all, their name is above the door. This leads to confusion, tension, and underperformance.

Others say that the presence of non-family managers is a positive thing, as they bring in expertise and prevent the owners from making self-serving – or overly altruistic – decisions that might be detrimental to the firm.

Why this confusion? A new paper entitled The Effect of Family Business Professionalisation as a Multidimensional Construct on Firm Performance published in the Journal of Small Business Management by Belgian academics Julie Dekker, Nadine Lybaert, Tensie Steijvers, and Benoît Depaire argues that it is because the whole notion of family business professionalisation is misunderstood. The academics write:

Most empirical studies tend to operationalise the concept in an oversimplified manner. That is to say, the mere presence of an external, non-family manager suffices in order for the entire company to be labelled as a professional family business, and thereby disregarding all other features.

Professionalisation is all-too-often seen as a “binary” thing. Studies which do that will find it hard to understand the effect of professionalisation on a family-owned business because they:

Might overlook the possible linkage that this feature has with other dimensions of professionalisation. 

To shed some light on the real impact of professionalisation on family firms Dekker et al identified five aspects:

  1. The development of financial control systems
  2. Non-family involvement in governance system
  3. The introduction of formalised human resource control systems
  4. The decentralization of authority
  5. Top level activeness, for example increasing the number of board meetings

They then studied how these affect firm performance, in terms of annual return on assets, at 523 Belgian family-owned firms, and found that the presence of financial control systems and an increase in top level activeness seems to have no significant effect on family firm performance. However, non-family involvement in governance systems, better HR systems and the decentralisation of authority, did.

In fact, the results were dramatic. A one standard deviation increase of non-family involvement in governance gave rise to a 33% increase in performance relative to the average performance of the firms sampled, decentralisation to a 23% increase, and HR improvements a 20% increase.

As the authors wrote:

This indicates that, if a family business wants to positively affect its performance through professionalisation, the company should concentrate on diminishing family involvement in governance systems, increase the usage of human resource control systems, and decentralize organizational authority.

Just as interesting as this is the fact that more financial control systems and increased board activity did not increase performance. This suggests two aspects where the traditional family business way of doing things works best.

For some family firms, the informal approach to finance which uses informal social ties might work well. As the academics write:

Introducing formal financial control systems requires many coordination challenges in which family firms might fail.

Likewise, for early-stage, entrepreneurial family firms more board activity might be counterproductive.

If the firm is family managed and has the tradition of discussing business matters around the kitchen table, it may be that this is the most suitable environment to discuss the relevant issues for that type of firm,

write the authors, while adding that in later stage businesses with a diffuse ownership, a more formal approach might be better. But what about the question of the non-family CEO? To understand the impact better the academics analysed the inter-reaction of the aspects of professionalisation. They discovered that – unsurprisingly – non-family management has a positive effect when authority is decentralised. Non-family managers

should be provided with sufficient amounts of control and decision-making authority in order for them to work effectively. If externals are hired into a family company, but are still bounded by an authoritarian family owner, the professionalisation process might not unfold to its full potential.

That might seem obvious. Perhaps more surprisingly, they also discovered an interreaction between the amount of non-family involvement in governance systems and the use of financial control systems. Counterintuitively,

non-family involvement has a significant positive effect on firm performance when the amount of financial control systems is average or below average. The trend line indicates that the positive effect of non-family involvement on firm performance decreases as the amount of financial control systems within the business increases.

It is not obvious why this happens, but maybe it is because when financial affairs are managed informally, the professionalisation that a non-family manager brings has a large beneficial effect: a little bit of structure sensitively applied could help the family attain its aims. 

Evidently, these interreactions are complicated. But the upshot of this study is clear: that there is little point bringing non-family expertise into a family firm if the environment is not right. To put it another way, professionalisation is not simply a question of personnel, it is a question of culture.

About the Author - Jeremy Hazlehurst is a journalist and author and owner of Business Family.  This article first apperared on Business Family and has been reproduced with their permission.

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