Management: Family businesses need outsiders

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Management books and courses deal almost entirely with the publicly owned and professionally managed company. Yet most businesses are owned and run by family members, including some of the world's largest companies.

If the family-managed business is to survive, let alone prosper, it must stringently observe the following rules:

Family members working in the business must be at least as able and hard- working as any unrelated employee.

In a family-managed company, relatives are always 'top management', whatever their official job or title. Mediocre or lazy family members are therefore - rightly - resented by non-family co-workers, and respect for top management and the business as a whole rapidly erodes. It is much cheaper to pay a lazy nephew not to come to work than to keep him on the payroll.

DuPont, controlled and managed by family members from its founding in 1802 until professional management took over in the mid-1970s, grew into the world's largest chemical company.

It prospered as a family business because it faced up to this problem. All male DuPonts were entitled to an entry-level job in the company but if they were later not thought likely to be top management material they were eased out.

Family-managed businesses, except for the smallest, increasingly need to staff key positions with non-family professionals.

The demands for knowledge and expertise - whether in manufacturing, marketing, finance, research, or human resources management - have become far too great to be satisfied by family members alone, no matter how competent they may be. Once hired, these non-family professionals must have 'full citizenship' in the firm or they will not stay.

The first people, perhaps, to realise this were the Rothschilds, who - two centuries after a coin dealer began to send out his sons to establish banks in Europe's capitals - are still among the world's premier private bankers. Until the Second World War, they admitted only family members to partnerships in any of their banks. But during the 19th and early 20th centuries, whenever a non-family general manager turned 45, he was given a huge severance payment and set up in his own banking firm.

The DuPonts, around 1920, found an even better method. While not appointed to top management jobs, non-family members in key positions were given 'phantom stock' - participation in profits and capital gains without diluting family ownership and control, a still popular solution.

No matter how many family members are in the company's management, and how effective they are, one top job must be filled by a non-relative.

Typically, this is either the financial executive or the head of research - the two positions in which technical qualifications are most important. But I also know successful companies in which this outsider heads marketing or personnel.

Before the situation becomes acute, the issue of management succession should be entrusted to someone neither part of the family nor of the business.

Even the family-managed business that observes the first three rules tends to get into trouble, and often breaks up, over management succession. It is then that what the business needs and what family members want collide.

Typical are two brothers who built a successful manufacturing business, working together for 25 years. Now reaching retirement age, each pushes his own son to head the comany. The brothers become adversaries and eventually decide to sell out.

There is only one solution: entrust the settlement of the succession issue to an outsider.

This role was played successfully by an accountant who was the outside auditor of a medium-sized food retailer since its founding 20 years earlier.

But it is usually much too late to bring in the outsider when the succession problem becomes acute. Family members have taken positions and have committed themselves to this or that candidate. Moreover, succession planning needs to be integrated with financial and tax planning. Family- managed businesses, therefore, should try to find the right outside arbitrator long before the decision has to be made.

Sixth- or seventh-generation family businesses such as Levi Strauss and the Rothschild banks are quite rare. When they reach that stage ownership has become so splintered that the family members will often want the company to be sold or to go public.

However, maintaining the family company is usually the best course for the second or even third generation. Often it is the only course, as the business is not big enough to be sold or to go public.

And it surely also is in the public interest. The economy needs entrepreneurship.

Unfortunately, the family-managed business that survives the founder - let alone one that still prospers under the third generation of family management - is still the exception.

Far too few of these businesses accept the one basic precept that underlies all of the rules outlined here; both the business and the family will survive and do well only if the family serves the business. Neither will do well if the business is run to serve the family.

The author is a professor of social sciences at the Claremont Graduate School in California.

(Photograph omitted)