Growth progressively slows down at family-owned businesses after the founder steps down. If you are the 2nd or 3rd generation of a family business, how can you reverse that reality?
In a 2018 study, PwC found that in the first generation of a family business, 42% of family businesses have double-digit sales growth. By the fifth generation, of those that make it that far, only 22% have double-digit growth — and 48% are in the single digits.
Risk aversion, market changes and poor succession planning can play into the reasons for this. But in its research, Gallop found that when a business’ growth has slowed or stopped, the family should realize their culture is likely constricting growth.
According to W. Gibb Dyer, Jr., academic director of the Center for Economic Self-Reliance in the Marriott School of Management at Brigham Young University, who has studied family business leadership, small family business typically fall into one of three types.
As you read the descriptions, think about which type characterizes your family business.
Paternalistic Culture: The leaders are all family members and retain all power and authority, They make all the key decisions. Pro: decisive strategy. Con: may inhibiting the company’s ability to change and it reduces the pool of successor candidates.
Laissez-Faire Culture: Certain nonfamily employees can make key decisions but family members still reign and employees are expected to achieve the family’s goals. This is the most common type.
The Participative Culture: Inclusive of non-family membership in the leadership ranks. It’s very rare to find this culture, even though family businesses often aspire for this because it is most amenable to growth, change and non-family talent.
Moving from a Paternalistic or Laissez-Faire culture to a Participative one isn’t easy, but one that needs to be made if strong growth is to be sustained, the Gallop authors maintain.
Here are a few takeaways:
Step one is to have a conversation about with company with the family management — and be brutally honest. Some questions to ask: What does the founder’s legacy mean to family members? How far from the founder’s plan can executive family members comfortably stray? Does the family truly trust its future with outsiders? Is risk aversion part of the culture? What really needs to change, if anything, for the company to grow?
To lay the groundwork for a Participative Culture, consider the kinds of training and development employees and managers get. Do you promote from within? Be sure there is a genuine on-ramp for non-family members into management and a loving off-ramp for family members whose talents lie elsewhere, according to the study.
To be sure, that dignified off-ramp is a tough road to navigate. Those under-performers may also be owners of the company, and of course family relations are at stake. Experts have suggested several tactics, including first trying to shift the under-performer’s role and responsibilities and have them report to a non-family member. Still needs to go? Perhaps the family member could contribute in an advisory role with the company.
Next, the company leadership needs to make sure this participative culture is embedded in its systems, policies and processes and supported throughout the company, the Gallop authors said. “Family members have to agree on the processes, policies and metrics — but processes, policies and metrics will only help the company grow if the family supports them. And that can only happen if the leader is committed to culture change.”
Jerry Haar, a business professor at Florida International University’s College of Business who has studied family businesses. suggested family businesses should have some non-family members on their advisory boards and they should consider putting in a non-family member in the chief operating officer role.
Having an inclusive culture does not mean that you need to lose what makes family businesses special.
Not only can they be, well, like a family, but “you have the speed and agility in decision making because you have a shorter chain of command. You can make decisions very, very quickly,” said Haar, executive director of FIU Business’s Office of Executive & Professional Education, in an earlier interview.
He adds, “A family business is something you pass on like an heirloom from generation to generation.”
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