Contrary to popular perception that large corporations are led by professionally qualified managers, who do so with an objective, detached mindset, giving all stakeholders’ interests paramount importance, most businesses worldwide are owned or managed by families.
This or that debate
The debate of ownership vs. management is as old as the hills. While there have been many outcomes, the popular conclusion has been that ‘objective-professional’ management is superior and more preferable to families being part of management. This was based on the assumption that ‘families’ give preference to their own interests, at the cost of other stakeholders and may not have the competence to manage the firm once it grows in size.
There is a famous saying: that in family managed businesses, ‘the first generation creates, the second generation sustains and the third generation destroys the value’. In my view, this is an unfair comment.
Sustaining superior performance over time has been an eternal challenge for any organisation, be it Fortune 500 firms, religious orders, non-governmental/not-for-profit organisations or even political outfits. How many of the so-called ‘professionally’ managed companies have delivered a decent performance consistently over 60/75 years? It is unfair to judge family managed businesses by a different benchmark.
Family managed business cons
Family managed businesses have a lot of issues for sure.
Nepotism tops the list. Son succeeds father, and competency is secondary. Grooming of the next generation is generally found wanting. Power is completely centralised in many cases, leading to a complete absence of dissenting views. Systems and processes are generally compromised. And these manifest in many different ways.
However, one must keep in mind that such malaises afflict ‘professionally’ managed firms too. Also, all family owned businesses are not automatically managed by family members. Many such businesses have a professional management team running the firm, and have independent boards.
The pros
It is a somewhat different scenario in India. Many leading firms are managed at the top by family members, even when the family’s stake is low. Indians seem to put a lot more faith on family to run the firm optimally, and for good reasons.
Because a family member will typically think long term. They know that a short term compromise will come back to haunt them later and as they see themselves holding the mantle for a long time , they find balance between short-term and long-term decisions. A professional CEO’s average tenure in USA is about three years. When a significant proportion of his/her remuneration is tied to quarterly EPS, why would they bother thinking long term?
A family member as CEO also worries about brand, as often, the brand name and family name are interconnected. Further, family members invest emotions into the business, while a professional manager can be detached and unemotional. And if you’re looking for business longevity, emotional investment is important.
Because of all these points, strategising for family managed businesses is a different kettle of fish. The emotional involvement, blood-over-merit, informal interactions, long term and short term balance necessitates tweaking of the strategy process, that is used for big corporations.
The big plus is that families are far more entrepreneurial and quick in decision making, when compared to ‘Professional Managers’.
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