Family Managers Versus Outside Managers in Your Family Business

Are you really opening senior management positions to the most competent candidates?

As your family business grows in size and business operations become more complex, three things become necessary:  1) a more formal management structure, 2) a decentralized decision making process, and 3) a qualified management body in order to deal with the complexity of the business and the more challenging day-to-day operations.

Unfortunately, many family businesses ignore the need for professionalizing their businesses and hold senior management positions exclusively for family members. Although many of these family members are skilled managers who add value to the business, often they are not qualified to perform such duties. Even in the cases where all family members are good managers, they may not have the specialized skills and expertise that the growing and more complex company requires.

Successful families in business understand that in the longer term, some family members may need to step down and be replaced by more professional and skilled outsiders in order for the business to reach its growth potential.

How to ensure you have the right senior managers ahead of time

Ensuring that your family-owned company has the right senior managers is a process that should start early, even as early as during the founder(s) stage of the family business. Some of the steps of this process are:

• Analyzing the organizational structure and contrasting the current and optimal roles and responsibilities (compared to peer companies) of each senior manager.
• Designing a formal organizational structure that clearly defines the roles and responsibilities of all senior managers. This should be based on the company’s current and future business operations’ needs.
• Evaluating the skills and qualifications of the current senior management based on the new organizational structure.
• Replacing and/or hiring senior managers.
• Decentralizing the decision-making process and approval levels, as necessary. Decision-making powers should be linked to the roles/responsibilities of managers and not to their ties to the family.
• Establishing a clear and fair family employment policy and making its content available to all family members. (see Sample Family Business Employment Policy)
• Developing an internal training program that allows skilled employees to be prepared for taking on senior assignments in the future.
• Establishing a remuneration system that provides the right incentives to all managers depending on their performance and not their ties to the family.

Think business first before family

If you are serious about your family business, pause and reflect:  who are you putting first–your business or your family? Mike Cohn in “Does your Company Put Family or Business First?” (The Business Journal of Phoenix) gave some elements of answers, when you decide to put your business first:

• Employment policy: instead of an open door policy for all family members, plan how only qualified family members can join the company in roles that fit their qualifications.
• Compensation: instead of an equal pay for all, develop compensations based on performance and responsibility.
• Leadership: instead of a leadership based on seniority, make sure leadership is earned to have “the best and the brightest” running the business.
• Business resources allocation: why would it make sense to use business resources for personal needs of the family (housing, cars, personal purchases, etc.)? You may, instead, use business resources strategically with a clear separation of business and family assets, clear budgeting and planning to enable the usage of earnings for growth initiatives or paid dividends.
• Training: moving away from a system where family members are assumed to intuitively learn best practices, you would want to recognize the need for formal training in order to equip relevant family members with the adequate skills to help grow the business.

For more information about the studies quoted in this article

• Consult IFC Family Business Governance Handbook
• Consult Mike Cohn, “Does your Company Put Family or Business First?” The Business Journal of Phoenix, January 2005.

Explore more resources about IFC Family Business Governance

1. How strong is your governance? Try out the Sample Listed Family Business Governance Self-Assessment Tool
2. Why it is important to start planning the governance of your family business
3. What governance is adapted to your family business growth
4. Is succession planning taboo in your family business
5. Roles and conflict resolution in your family business
6. Communication and conflict resolution in your family business
7. Setting up the shareholder policy of your family business
8. How to set up an effective board in your family business