Professionalizing family businesses: being willing and able to let go

31 December 2014

31 December 2014


Professionalizing family businesses is a topic that has come into the spotlight in recent years. The issue arises both within the family businesses themselves and within their immediate environment with advisors, banks and accountants. This also often makes the connection to external managers or directors hired by the family to professionalize operations. It is often not clear what is meant by professionalizing. And it even suggests that family businesses that do not professionalize are amateurish. In this article, I address this issue, as well as the role of an external director and finding the balance between, on the one hand, doing business with passion and drive, and, on the other hand, overshooting the mark in professionalizing, possibly resulting in a procedural and bureaucratic organization.

Three different ideologies: entrepreneurship, paternalism and professional management

Companies can be run from different “ideologies. In family businesses, all three occur, often at the same time.

From the ideology of entrepreneurship, the entrepreneur is primarily focused on seeking and finding opportunities in the market (often intuitively). Entrepreneurial families are innovative, creative and take risks to achieve their (personal) ambitions. The company with its employees is at the service of the entrepreneur’s or family’s entrepreneurship, and is agile and above all executive. The organization’s main goal is to realize the entrepreneur’s ideas, not to come up with their own. Decision-making and control is top-down and intuitive. Employees are judged primarily on their commitment and loyalty to the company and family. The majority of 1st generation family businesses are run from this ideology. And there is nothing wrong with that. Without passion and drive from the entrepreneur and support from the family, many businesses would probably never have been created and grown.

Figure 1

In addition, the ideology of paternalism is recognized. It has many similarities with the ideology of entrepreneurship. Realizing the entrepreneur’s ambitions is also important in paternalism. The biggest difference, however, is that for these family businesses, protecting the family is the most important thing. The company serves the family. The family director sees his company and employees as part of the family, with himself in the role of pater familias. The adage is often, “I know what is good for you.” These companies are often managed top-down, with employees not expected to come up with new initiatives on their own.

The ideology of professional management is based on contractual agreements, rational decision-making and delegation of authority and responsibility. Followers of this ideology believe the importance of:

A clearly communicated “dot on the horizon.

Giving responsibility to employees to gain ownership,

keeping processes orderly and predictable

This ideology is taught in business schools and universities and is the leading ideology at multinational companies. Besides the belief in rationality and delegation, this ideology is also applied for practical reasons: the business becomes too large (in size, geography or complexity) to be adequately managed by a single person. With that, there seems to be a relationship between company size and ideology. However, even smaller companies can and are run from the ideology of professional management.

Professionalizing from reason

Professionalizing the family business is usually triggered from external parties, such as clients, the advisory board or supervisory board, from the auditor or the bank. Pressure on financial results can also be a trigger to professionalize. Bringing in outside managers or executives is often a first step. They are expected to bring in expertise and experience in professional management. Professionalization is thus a rational process.

However, my recent research shows that on an emotional level, the family director often does not want to professionalize at all. Indeed, the family’s great fear or allergy is that the company will slip into a bureaucratic, inflexible enterprise where family values and identity disappear. Another (unconscious) fear is that outside managers will steer too much on the big picture and not pay enough attention to details that are or were essential to the company’s growth. Finally, the theme of psychological ownership plays an important role: the business is an essential part of their lives, it is their child. Handing over their child to an outside manager is particularly difficult and particularly requires a great deal of trust in him or her.

In particular, professional managers who strongly believe in the ideology of professional management usually have no awareness of these aspects and look at the company and the family in a process-oriented and rational way. Therefore, it is not surprising that many family businesses have (had) bad experiences with external managers. However, the same study shows that there is also a group of outside managers who do possess the qualities to be successful within the family business.

The essence of professionalization

Professionalizing has become a catch-all term and has several descriptions. See Figure 2.

Figure 2

Commonly cited negative elements in professionalization are rationalizing and formalizing operations. Where the family director usually leads the company from intuition and experience, an external “professional” manager will make decisions based on concrete steering information (Key Performance Indicators) or business cases. In addition, achieving predictable and standardized processes, procedures and consultations is the basis and sometimes even the goal of professionalization. By the way, these are also elements that the next generation in the family business often pays attention to. After all, they can draw much less from experience and intuition than the previous generation who have been running the company for decades. From this perspective, professionalizing is a way to get a grip on the business without (having to) know all the “ins and outs. However, a pitfall is that the company can slip into rationality and procedures, becoming bureaucratic and internally focused.

Two other elements of professionalization are at least as relevant:

attracting professionals and

Being able to delegate responsibilities to managers

As the business grows, specialized or specific expertise will often be required, for example in marketing, supply chain or finance. Professionals who specialize in such a specific field demand a certain responsibility. Precisely because they are not generalists, it is necessary to clearly state what their area of responsibility is and what their goals are. That touches directly on the theme of delegation. The most important and, for family businesses, the most difficult theme of professionalization is the ability and willingness to delegate. By this is meant that predetermined or agreed upon:

What the responsibility of the external manager/professional is,

that within this responsibility he has the freedom to make his own interpretation and choices and

the family also stays within the agreed-upon framework.

A study by Marta Berent Braun (Nyenrode, 2010) shows that family businesses where owners delegate (in the context of Responsible Ownership Behaviour) show a more positive development of profits than family businesses where the family mainly shows involvement.

From different psychological perspectives, delegation is very difficult for family directors (and also for their successors):

it feels like letting go of one’s own child;

it can be difficult to give external managers room to make their own (and thus possibly different) interpretation within their responsibilities;

feeling of losing grip (creating fences by the external manager);

facing up to certain past decisions that may not have turned out to be the right ones after all.

The discussion between family directors and outside managers then often involves not the rationality, but the emotion of being able to let go. In this discussion, in response to the family’s attitude, the external manager will often try even harder to delineate and formalize his responsibility. As such, the discussion between family and non-family does not sufficiently address what is going on “under the water”: the fear or allergy of professionalizing and letting go.

Some practical tips can help you successfully professionalize with the help of external managers:

Deliberately discuss with each other both the rational considerations to professionalize and the emotional fear or allergy to bureaucratizing. Just discussing this can take a lot of cold out of the air.

Ensure that the family director and the outside manager(s) have brief (informal) contact daily to discuss potential issues. Don’t wait until the next formal consultation. This is especially important the first year.

Discuss the topic of delegation: from the ideologies of entrepreneurship and professional management, the key difference is the ability and willingness to delegate. Discuss not only the rational side, but also the emotional side. Many outside managers do not realize that delegating for the family director feels like letting go of your child.

Also discuss the topic of entrepreneurship: what is the role of the family in this, how can you secure entrepreneurship in the company, and what do you require of employees in terms of entrepreneurship?

Learn from each other: the family director can teach the outside manager the finer points of the business, and the outside manager can teach the family director the positive effects of delegation. The challenge is to make the unconscious knowledge and experience conscious. Compare this to explaining how to learn to ride a bike.

This first article on “Professionalizing Family Businesses” provides an overview of the breadth of the topic of professionalization within family businesses. The second article will delve deeper into seeking, and finding, the balance between entrepreneurship and professionalization. A number of concrete tools will be given to get started on this practically.