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  • Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 2/5/2014

When and how should you separate ownership from management in your family business? 

Separate ownership from management
On January 15th 2014 I spoke at an entrepreneurship conference in Amman, Jordan, organized by KPMG. The opening speaker was a well-known Jordanian business leader who runs a large family-owned group, now in the 2nd generation. He shared with the audience his journey in growing the family business with his father, after his return from abroad with a few years of professional experience and an international MBA. His main message was about the importance of separating ownership from management and how difficult that is to achieve in family business. His journey and that of his family business is similar to the journey of many business families throughout the world. Inspired by this speech, I would like to discuss in this article the value of separating ownership from management and the process family business leaders can follow to accomplish it.

Separating ownership from management is not a natural thing in family business. The founder usually builds the business from scratch, decision by decision, investment by investment, in a tightly controlled approach that is exercised over long working days during many years. For him or her, ownership and management are tightly linked and the reason for the success of the business. For all the employees of the company, the founder is the natural leader and the source of inspiration, values and authority for the business.


But with success naturally comes growth, and growth brings business complexity and increasing demands on the founder’s time. The founder is more likely to trust blood ties than contracts and thus, over time, is likely to involve the family members in the business, maybe the brothers, often the sons or daughters, and, perhaps later, the cousins. A tightly knit group of two or three family members starts controlling the expanding business.


However, over time and if the business is going well, management demands will likely continue to increase. This puts pressure on the family members who tend to respond by working harder. They start fearing losing control of the situation which makes them more hierarchical in decisions and more insulated than before. The pressure of the business is relentless and the work-life balance suffers further. However, changing the situation and delegating to professional outside managers takes time, expertise, trust and financial controls, all of which are in limited supply. The easiest solution is to keep on going, working a few more hours per day to keep everything moving and under control. Does this sound a familiar situation?


The problem is that family business leaders soon become the bottlenecks for the development of the business and risk insularity and weakening the business they created. Perhaps the best solution, as explained by the Jordanian family business leader, is to try to force yourself to scale back your growth ambitions for 2-3 years, to create the time and mind-set to separate management from ownership. That requires first cultivating a strong second line of managers, while professionalizing the family business by creating standard process and financial controls for all key activities. These processes and controls help to create clarity for all employees, prevent them from always going to the founder as the key source of authority, and empowers managers to assume fully the roles they are given. In this process, some old-time employees may feel frustrated by what they see as the increased bureaucracy in the business. This is a natural process of business evolution – new and younger people will arrive, refreshing the business with new blood, diverse views and open minds.


Over time, the family business leaders can start stepping back from operational responsibilities and assume fully their role as owners. That involves setting the strategic vision for the company which guides investment decisions, clarifying the balance between dividends and re-investments, and defining clearly the value and culture of the family business. This needs to be done with check and balances on family control because old habits of operational involvement are hard to change. It is thus helpful to create a professional board with a few independent members who can bring new perspective and expertise. The family business leaders should now be fully-engaged owners of the business, no longer managers.


This creates an opportunity for the family business leaders to devote more time to the growing family and start managing better the family affairs – writing a family constitution that defines the aspirations of the family and the rights and responsibilities of family members, as well as the rules for involvement in the family business or of supporting entrepreneurial initiatives of the next generation. It may also be the time to build a family office to oversee the family investments, as well as a family foundation to professionalize the process of giving back to society.


Naturally there are challenges in this process. One key challenge is keeping the entrepreneurial spirit alive in both the family and the business.


Regarding the family, third generation members often feel very comfortable and safe, as they were not part of the hardships that founding generation members went through, and second generation members witnessed as they grew up. At times the third generation may need to be pushed to excel, to develop a career outside the family business at first, either through management positions or entrepreneurial endeavors. This should be a pre-condition for getting engaged in the family business later.


Regarding the business, professional management and codified processes are important but they may kill the entrepreneurial spirit that was at the foundation of the business success. To try to avoid this, fast track processes need to be set up to support new business ideas and promote experiments. Failures that are small in cost and rich in learning should be allowed and not frowned upon, so that managers do not become afraid of trying new initiatives. This is perhaps the trickiest balance of all.


In summary, I have outlined above a typical process that many family businesses go through in their path of growth and sustainability. I hope this is useful for family business leaders to better diagnose their current situation, have a guide for business governance, and keep the harmony between family and business that is at the core of any successful business family.

Filipe Santos

Filipe Santos
Filipe Santos is Associate Professor of Entrepreneurship at INSEAD. He is the director for the Maag International Centre for Entrepreneurship and the academic director of the INSEAD Social Entrepreneurship Initiative.
 

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