Will your company follow the dodo bird?

The culture of a successful family business can be a powerful asset—or it can block vision.

By James E. Barrett

Family business owners usually talk proudly of their firm’s “culture.” Stories are told and retold to emphasize a value, a desired behavior, or the importance of a principle. The culture of a successful family business is an important intangible asset; it may even have commercial brand value. At times, however, culture, like a thick hedgerow, can block vision and make needed change impossible.

The dictionary definition of culture is one thing:

Culture (n.): Development or improvement by education or training; enlightenment or refinement resulting from such; civilization, way of life, customs, folkways, habits, life style.

But to obtain a reading on a family company’s culture, an experienced management consultant checks six potentially vulnerable points: nepotism, paternalism, development of key people, performance standards, board composition, and management rigor. A weakness in any of these areas suggests weakness in the whole. When two or three of these areas are soft, the alarm bells should be going off. Let’s take a look at each of these six indicators of cultural vulnerability:

 

Nepotism

The word often is misdefined, misapplied, or poorly understood. From the dictionary:

Nepotism (n.): favoritism conferring offices; patronage bestowed due to family relationship and not merit; patronage, partisanship, partiality, bias, prejudice, injustice, inequity, unfairness.

Nepotism is one of the easiest indicators to check. Even when executives in a company are resigned to preferential treatment for family members, and determined to be quiet about it in the interests of harmony, they often can’t help mentioning it in interviews with a consultant.

Incompetent family members create extra work for others in the organization. They are a continuing source of seething resentment. Yet those who understand the many real values to society of the family business don’t really object to nepotism per se. They understand the importance of family commitment to the business. What causes the slow burn is favoritism combined with incompetence or nonperformance. The competent family member who lacks commitment and can’t be relied upon as a team member is an object of quiet scorn. Sometimes, not so quiet.

 

Paternalism

A paternalistic environment arises naturally in a family business. The family truly cares about its employees and looks after them in ways that most businesses do not. Heartwarming stories of the family’s generous support of employees in crisis become part of company lore.

The dictionary definition of paternalism is not so complimentary, however:

Paternalism (n.):the practice of a person in authority of managing or regulating the affairs of individuals, like a father dealing with his children. Synonyms: benevolent despotism, indulgently overbearing, direction, surveillance, oversight.

So while one side of the coin is genuine caring, the other side is control. Few people like to be controlled. There’s a long history of well-meaning entrepreneurs whose employees turn out to be both grateful and resentful—for example, the workers in company towns, who had their housing and other needs taken care of but were otherwise exploited. A cadre of grateful but resentful people will not be motivated to charge ahead and make the company No. 1 in its industry and markets.

It is not necessary to run a paternalistic shop in order to care for employees or maintain a family environment. One effective tool, for example, is a good 401(k) plan that helps employees secure their futures but leaves them in control.

 

Career development

People develop in their careers at different speeds and may change directions as they mature and acquire experience. The conventional wisdom today is that a person can have two or three careers and a half-dozen employers during several decades. Many family firms are hostile to this workplace trend. The consultant who asks managers of a family business about turnover, training, or bringing people into the senior ranks and key jobs often encounters defensiveness.

Too often, family firms expect to handle all the challenges of today’s competitive markets with the people they have on hand, perhaps bolstering their skills with some additional training. The usual justification: “We prefer to have someone who understands our culture.”

Well, that’s nice, but if they are re-engineering the company, or updating the order-processing system, or trying to keep up with fast-changing technology, they may need to go outside to find someone really competent to manage that effort. By all means, put that person on a team that includes long-time employees. But don’t use “the culture” as a reason to stall the planned change.

 

Performance standards

Most family firms regard turnover of key employees as a problem and work hard to avoid it. Someone who joins the firm as a manager, or in another key job, is generally expected to stay with the firm for life. The trouble is that key employees can become underperformers who stay around for more than a few years, and sometimes are tolerated for decades.

Often the weak link is not the employees but the managers. They have not defined what good performance is, haven’t communicated it, don’t measure it, don’t establish expectations. The tolerance of underperformance may reflect management underperformance or guilt at exercising authority.

It is no favor to employees to permit sub-par performance to continue. Help them to perform by giving them training and by insisting that the managers give them proper supervision. If an employee is otherwise an agreeable part of “our culture,” this will be a good investment for the company.

If training doesn’t work for some employees, help them to leave. Let them go to work where they can be more successful and have pride. A strong family culture handles these transitions with care, with dignity, often with love. But it handles them.

 

Board composition

One reason family business boards generally are weak is that the leaders lack a good understanding of what an effective board can do. Lèon Danco’s books and articles on this subject have resulted in major strides for hundreds of firms. But that’s among tens of thousands. Inertia is a factor in other family businesses, as is the strong desire of many CEOs for undisputed control.

The CEO who will not submit voluntarily to private peer review is in danger. Clients of mine who fit this category (still a majority) continue to commit multimillion-dollar errors which are preventable. They are not dumb, and they certainly work hard. Still, we all have blind spots, we all have egos, and many of us have to get through a mid-life crisis of some sort.

The boards of some family companies look like the dining room of a geriatric center. Too many seats are warmed by totally unqualified relatives, token outsiders, and people with potential conflicts of interest (subordinates or paid professional advisers). Looking over this less-than-stellar lineup, customers, employees, competitors, and strong outsiders invited to serve on the board curl their lips in contempt.

 

Management rigor

Rigor (n.): accuracy, exactness, precision, meticulousness, care, conscientiousness, discipline, sternness.

All these words should come to mind when describing the management of a family business. Management rigor does not have to lead to inflexibility, harshness, or cruelty, as people sometimes imagine. Management rigor mixes very well with kindness, recognition, care, concern, and benevolence.

Management flabbiness, on the other hand, is evident in meetings that avoid addressing tough subjects, and in the collection of operating numbers that are meaningless, unreliable, too late, or not compared against industry benchmarks. Lack of rigor also shows up in the way people problems are handled, the absence of quality standards, and a planning process so informal or undisciplined as to be useless.

Consultants get a surprisingly detailed and accurate picture of a company and a family by assessing these six areas of potential vulnerability. Although some people marvel at how we do that, the process is simple: We listen carefully, and we observe (see box below).

Of course, business owners seeking clues to their company’s culture can do the same. Indeed, another sign of cultural health may be whether the leaders cultivate good habits of listening and observing, which may be the key to species survival.

 

With this issue of Family Business, James E. Barrett joins Lèon Danco, Ivan Lansberg, and Marcy Syms as a regular columnist. Barrett heads the family business management practice of Cresheim Management Consultants in Philadelphia. His previous contributions to the magazine include “Good Health is Good Business” (Winter 1996) and “Surviving Creative Destruction” (Winter 1997).


Tuning in to family cultures

What’s Often SaidWhat They May MeanWhat I Wish I’d Heard
“The firm has always been headed by a ___ (insert family name).”Blood over competence and commitment. We hope one of the family members will qualify.“The next CEO will be the right person for the job.”
“We grow our own folks here; we haven't had to go outside much.”No key players are bringing vital ideas and needed know-how.“All key players had real accomplishments elsewhere first.”
“We take care of our long-time folks, especially family.”Prisoners are accumulating somewhere in the building.“When folks no longer fit, we help them to retool or relocate.”
“Turnover is low. We don't lose anyone we don't want to lose.”We don't have anyone worth stealing or brave enough to leave.“We devote resources to developing our people. We'll lose some, but the others make us money and give us bench strength.”
“The board is made up of family members.”Board meetings feature avoidance and smoothing ruffled feathers.“The outside directors really challenge the CEO. They're good. Their compensation committee and business reviews are effective.”
“Management is fairly informal. We all know one another well.”Competing ideas are not examined rigorously.“We get along well but the place is managed professionally.”

-- J.B.