Effective Leadership in the Family Business
By Craig E. Aronoff, Otis W. Baskin
Palgrave Macmillan Copyright © 2011 Family Business Consulting Group
All rights reserved.
Family Business Leadership Is a Unique Proposition
Loretta, a daughter who succeeded her father as the CEO of the family's business, has tried to emulate his decisive, autocratic way of running things. After all, wasn't it his style of leadership that made the business the success it is today? But instead of moving forward, the business seems to be going sideways. Some of the key employees seem frustrated, and Loretta's siblings act resentful and spiteful. Her brother, a co-owner, recently snapped at her. "You think you're Dad just because you got his title?" he said. "Well, let me tell you something. You may try to imitate him but that doesn't mean you are him."
"In some ways, Dad had it easier," Loretta thinks. "He was the founder and the only owner. People did what he said, without question. And he didn't have any shareholders to second-guess him."
Leading any business is difficult. But leadership in a family business is a far different challenge than leadership in any other kind of business. That's because family firms are more complicated. In other businesses, a leader is concerned with only one system: the business organization. However, family firms are unique in that they involve three systems: the business, the family, and the ownership. All three systems are interrelated and interdependent, and each is in need of its own leadership. Furthermore, leadership becomes more difficult with each succeeding generation as the family and the business grow larger and more complex and as the number of owners, often all related to each other, increases as well.
This book is aimed at helping business-owning families understand and implement the extra dimensions of leadership that family firms require. It will be especially useful to you if you have leadership responsibilities in a business-owning family or in the business itself, if you are parents preparing the next generation for leadership, or if you are among those who aspire to leadership. Others who will find this book helpful include non-family executives in a family firm, family business advisors, and family members and owners not in overt positions of leadership but who may nonetheless provide informal leadership or offer support to leaders by being good followers.
What is leadership anyway? In our view, leadership means the ability to create a way to move forward, and to be able to inspire others to follow a designated path. The capacity for stimulating movement in a particular direction is another way to define it. It does not always involve moving an organization toward that goal. Sometimes leadership is required before you even have a goal, and leadership may be provided in the direction of determining a goal.
Leadership, as we see it, is about action, and so this book is about action. It is focused on making things happen and getting things done—"pulling the trigger" of actually leading. Although two chapters address preparation for leadership, this book as a whole is less concerned with developing the potential to lead than with the process of leadership itself and ways to improve it. In a sense, this is a how-to book aimed at helping people exercise effective leadership in family businesses and in business-owning families.
As a reader, you can expect to gain three important things from this book:
1. Appreciation for the fact that different people have different gifts and abilities and therefore what works for one leader may not work for another.
2. Recognition that business environments change and leadership must be prepared to respond to those changes.
3. An understanding that families and ownership structures also change over time and leadership must be able to meet the needs that such changes present.
You will also learn how the demands of family business leadership differ from those of non-family businesses. You will be given tools for sharpening your leadership skills and, if you are at the point of beginning your career, you will find tips and strategies for gaining the credibility you need to put yourself on the path to leadership.
As you read these pages, you will also discover how crisis presents opportunity for leadership, how some people lead without appearing to lead at all, and how to earn the right to lead. And, you will learn ways to overcome many of the impediments to leadership. (Sometimes the biggest impediment is you!)
If your family's business has been successful, it's only natural to want to continue and build on that success. It may be tempting to continue to do things as they were done in the past because that's what built the success in the first place. However, success in the past does not guarantee success in the future. As the business environment changes and as the family and ownership structures change with each new generation, leadership, to be effective, must also change. This does not mean that "change for the sake of change" is effective leadership. The ability to "hold a course in turbulent times" can also be a sign of successful leadership. But we must acknowledge that change is the primary challenge faced by all leaders.
An Assortment of Able Leaders
People tend to focus a lot of attention on succession in a family business—that is, who in the next generation will succeed to the top leadership position. This is important, but it can be too narrow a focus, especially if being named the successor CEO is viewed as "THE prize" and the CEO is venerated more than other family members.
The fact is that, unless a family opts to have a team of co-CEOs, only one person can become the chief executive in a business. Fortunately, however, where family businesses are concerned, there are many other extremely significant opportunities for leadership.
You are probably already familiar with the three-circle model of family business shown in Exhibit 1. This widely used model illustrates family business as three overlapping systems—the business, the family, and ownership. People can fit into any one of these systems or into all three. You might be a family member but not a shareholder or an employee of the business. Or you might be both an owner and a family member but not work in the business. You might be a non-family executive in the business and also own a small stake in the company. One of the great features of this model is that it demonstrates how complicated life can be in a family business or business-owning family. If, you are in the center segment—meaning you are a family member and an owner and you work in the business—you will find yourself playing many roles. Sometimes you will be asking yourself which is the appropriate role in a given situation. "Do I act as an uncle here? Or as my niece's boss?" The model can help you focus on the proper role.
Particularly relevant to the topic of this book, however, is that the circles make it clear that there are three systems needing leadership talent, not just the business. The ownership system and the family also need good leaders. Let's take each system one by one:
The business needs a CEO and other senior executives to develop strategy and move the business forward. Leadership in the family business requires knowledge, experience, good judgment, interpersonal skill, and credibility as they relate to the business and business decisions.
As generations progress in family businesses, leadership becomes a team approach with no one saying, "I am the boss and you will do what I tell you to do." Instead, a group of siblings or cousins says, "We are a team of executives. Each of us is here not because of our last name or because of who our grandfather was, but because we have prepared ourselves to be here, because we're motivated to be here, and because we bring skills and talents representing specific disciplines within the world of business. We have worked together to develop a common vision and a common strategy and we are working together to implement that in the best possible way for the benefit of all our constituencies."
With such a team, one family member might be CEO, another might be CFO, and still another might be a senior vice president heading up sales or production. The executive team is likely to also include key non-family executives. Critical to their success as a leadership team are their credibility—based on knowledge, skill, and experience—and their commitment to leading for the benefit of all involved, not just for themselves.
Although the words "leadership" and "management" are often used interchangeably, we believe there are some important differences. Leadership needs to be focused primarily on vision and on strategy that will fulfill or attain the vision. As we said in the introduction, leadership means creating a way to move forward.
Management is more concerned with implementing tasks that need to be done. It is more about control. It implies organization; leadership does not. Leadership can be messy and chaotic.
It is a rare and wonderful manager who also has leadership capabilities. Managers can be leaders and leaders can be managers, but the two abilities don't necessarily go together.
For the sake of simplicity, however, we'll use the term "management" when we're referring to the running of the business.
Often overlooked is the fact that the family needs leadership too—not just a "head of the family" but multiple leaders who can focus on meeting the family's needs as a family. Moving the family forward as a cohesive unit that gives management and the business the vital support they need is a key function. The family provides many rich opportunities for leadership, especially for family members who have talent, who wish to be involved in the family, and who wish to maintain a meaningful link to the business without actually working in it.
Family leaders play roles that run parallel to those of business leaders. If you're in business leadership, your role is to advance the business. If you're in family leadership, your goal is to advance the family. Family leaders build family unity by nurturing relationships among family members. As the family moves into the second, third, and fourth generations, family leaders frequently articulate the shared values of the family. In so doing, they create opportunities to build and display the family's culture—its belief in philanthropy, or its commitment to do good in the community. Family leaders also deal with and help resolve family conflicts and family crises.
In family businesses, family leadership is often informal and unrecognized. Even though it is often perceived that the business leader is also the family leader in the first generation, the reality is usually somewhat different. The founder, typically male, focuses mainly on the business and on providing opportunity and wealth for the family, while his wife, though she may have duties in the business, concentrates primarily on the family and maintaining relationships among its members.
There's no law that says the individual who serves as the business leader also has to serve as the family leader. In fact, it's probably better if separate people fill these roles. In the second generation, one sibling may rise to leadership of the family while another is viewed as the leader of the business. As the business and family expand, the family may establish a more formal family council with specifically designated leadership. The family council deals with the many issues of the family as separate from the business but also of the family in its relation to the business, such as developing a policy governing the employment of family members or a family mission statement. Committees and task forces may evolve. The family may establish a family office to manage its investments, or create a family foundation to oversee its philanthropy. The family should hold regular family meetings that deal with issues of the business and family but also give family members an opportunity to have fun together, cementing their relationships. Family meetings strengthen family members' perceptions of themselves as a family, and wise leaders will see to it that such gatherings are funded in a way that does not pose an undue financial burden on some family members.
Many business-owning families focus their attention on the transition of leadership in the business without thinking of what will happen in the family when the current family leaders are no longer present. For example, will the siblings continue to value family relationships when Mom and Dad are no longer around? Will the family business continue to benefit from family unity? Whether in support of family or of business, family unity requires good family leadership.
Too often, in our experience, people in the family system go along for the ride instead of stepping up and providing leadership. Yet it's incredibly important for virtually everyone in the business-owning family to be looking for opportunities to make contributions. When family members seek opportunities, they usually appear.
Suppose, for example, that you accept an assignment to serve on a committee to develop policies about the employment of next-generation family members in the business. You may not be the CEO of the business, family council chairman, or even head of the committee. Nevertheless, if you take your role seriously and take an active part in the committee's work, you have a tremendous opportunity to be a constructive force in the family for generations to come. Your actions may include doing thorough research, or visiting other family businesses to gather valuable information. That's leadership, too.
At almost any family meeting, you'll have an opportunity to provide leadership by saying, "Here's an issue that we need to deal with." When you pay attention, make yourself knowledgeable, prepare yourself to be able to recognize opportunities, say something when an opportunity presents itself, and are prepared to invest the time, effort, and energy to resolve the issue, you are providing family leadership.
We have known family leaders, often members of the senior generation, who because of their experience and credibility take on difficult and sometimes thankless tasks because they know it will help the current or next generation succeed. This "Servant Leadership" often occurs without titles or other forms of personal acknowledgment in families.
The ownership system needs leaders in the form of a chairman of the board and other directors who bring the needs of all three systems together and who guide the business in accordance with the wishes of the owners and the values of the family. What board leadership does is move the assets of the family forward in relation to moving the family forward. It has a foot in each of the other two arenas—family and business—and needs to have a great deal of understanding about both of those systems. On the family side, the board's leadership should be related more to the values and the goals of the family for the business rather than on relationships within the family. On the business side, it means translating family goals and values into forms that allow holding management accountable for performance that represents the best interests of the owners.
We have often said that chairman of the board is a real job and a real leadership challenge. It shouldn't be used as a means of putting an aging CEO out to pasture. Frequently, family businesses combine the roles of chairman and CEO, but we think there is wisdom in separating the two responsibilities. For one thing, the CEO already has his or her hands full running the business. A separate individual serving as chairman can give full attention to the leadership of an active board representing the interests of owners in a way that a CEO cannot.
What do boards do? As stated in Letting Go: Preparing Yourself to Relinquish Control of the Family Business, "An excellent board provides strategic oversight, evaluates corporate and top-executive performance, represents and relates with shareholders, serves as a resource to top management, protects and enhances the company's assets, and fulfills legal requirements." Ideally, a board will not only consist of some key family members but will also include at least two or three talented business leaders from outside the family and its business.
One of the most valuable leadership roles the chairman and the board can play is to build shareholder loyalty, awareness, and cooperation and to encourage the notion of "patient capital"—the family owners' willingness to leave their funds invested in the company so that long-term business goals can be met. To be successful, ownership leaders must stay in tune with what shareholders are thinking, what they see as important, and what their needs are.
In one unfortunate situation, a second-generation CEO we'll call Jarvis ran the business as if it were his, failing to take into consideration the needs and desires of the two nieces and a nephew, all in their twenties, who had inherited shares from their deceased father (Jarvis's brother). Jarvis also chaired the board, which was made up of family members—his two sisters and his mother—who tended to go along with what Jarvis wanted.
Jarvis deprived the third-generation shareholders of information about the business, implying that they were not capable of understanding it. And, because they were not on the board, they had no part in the decision making. They received only a trickle in dividends. None of the third-generation worked in the business.
Understandably, these young shareholders grew more and more frustrated and began to make a fuss. "What are you doing with our inheritance?" they asked their uncle. "Why aren't we getting more money out of this?" They began to badger their aunts and grandmother until finally, there was so much rancor that the only thing family members could agree on was to sell the business. And that was a shame, because the business had been very successful and Jarvis had actually done a good job of running it. (Continues...)
Excerpted from Effective Leadership in the Family Business by Craig E. Aronoff, Otis W. Baskin. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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