Should Family be Employed in the Family Business?

Should Family be Employed in the Family Business?

by Craig E. Aronoff, Ph.D.
Co-Founder and Principle of the Family Business Consulting Group

A large, well-known, successful family business’s fourth generation was hard at work developing the policies and processes that would help them continue their legacy.Issues related to governance, wealth, philanthropy and leadership were the subject of task force reports.The group embraced its mission and the process with fervor.

The specific matter on the table dealt with a family employment policy.The idea was to develop a process that would maximize the probability that the family’s best and brightest would lead the business in the future.One cousin, the head of one of the company’s divisions, interjected a new thought:perhaps the business would be better off under family control but without family employees.Perhaps rather than encourage family involvement, we should discourage or even ban family members from seeking careers in the business, he posited.

The comment caused immediate and strong reactions.Some said, in effect, “Heresy!”Impassioned rebuttals were launched immediately by several family members both with and without careers in the business.Objections raised to family careers largely fell into three categories:we should have the best executives without reference to family relationship; family employees create certain distortions in managerial systems that have negative consequences, especially as it relates to other employees; and because some family members may experience frustration of career goals, the family faces pressures and disappointments they might be better off without.This family sensed a great responsibility to preserve its legacy, so there was no inclination to sell out–just a question of opting out of being employed.

Family employment and managerial leadership are usually seen as great opportunities and heavy responsibilities for families owning businesses.Several threats and problems can grow from indiscriminate family employment.For example, family employment and leadership can concentrate power in family hands leading to autocracy and a lack of accountability.Indiscriminate hiring and promotions of family business members can destroy standards and morale, and ultimately, the business itself. This family business long ago adopted such problems’ best antidote:a strong board of directors with powerful outsiders.

On the questions raised by the group:

Does commitment to maintaining family leadership preclude access to the best executives in the industry?

It is amazing how often “the best in the industry” turns out to be a member of a family with a substantial legacy in that industry.And since such people already work for their own family businesses, the most likely way to get the best may well be to “grow your own.”Actually, it is not so surprising to think that families with multi-generational legacies in a given industry should produce the best people. Family culture and lore as well as preparation from birth, can produce leaders with tremendous capacities.

Having family executives, however, still does not preclude attracting superb non-family key managers.Outstanding executives seek impact, access, involvement and reward–all of which can be offered in great abundance in a family firm.

Will family employment upset managerial systems and discourage other employees?If the family is insensitive, arbitrary or overwhelming, the results can be very negative.This question is probably best answered by appreciating family employment as a privileged opportunity rather than as a right.Set the bar very high for entry.Focus on how family members prepare themselves to make great contributions to the business for the betterment of all.Require substantial and relevant education and experience but provide support as a family for members who choose to commit themselves to leadership of the family business.

Family employment policies should clearly reflect the family’s high standards for itself.Many families, for example, make it clear, at least within the family, that higher expectations are applied to family members than to other employees.Some families restrict the number of family members in top executive slots or in any given area within the company.We often find such policies to be quite successful.

The family’s proposal was to establish a committee of high level family and non-family executives to oversee the progress of family-member recruitment, selection, promotion and development with concern for the progress of individuals and the organization.This family correctly realized that thoughtful, attentive management of the process is the key.

Concern was also expressed that other employees resent family involvement.In reality, employees on balance often prefer family ownership, especially responsible and circumspect ownership.Unless they become abusive of their privileges or parasitic by failing to add value, family owners are usually perceived as stabilizing forces who maintain the organization’s life forces of values and capital.

Finally, those proposing the family no longer be employed in the business spoke of pressure and potential for pain.If one’s aspirations are first cultivated by the family and then crushed by that same family, the impact can be for life.The agony can impact parents and children and lead to conflict among kin — with far-reaching consequences.

This point cannot be refuted nor is it amenable to company management policies.Clear communication of both family values and the reality of the career development process minimizes the likelihood of irreparable damage–but some degree of disappointment and competition are highly likely.On this point, families can only determine for themselves the relative impacts of benefits and costs.Most families view employment and leadership opportunities as a key benefit of ownership.Indeed, some view the lack of interested and able family executives as a clear sell signal.But some consciously separate ownership from management, preferring to hire operators to run their enterprises and viewing themselves more as asset managers.

As we’ve reported in previous Advisors, agency theory has received significant empirical support.Research has clearly shown that when ownership and management are more closely aligned, better performance likely results.Our own experience supports this conclusion.More important, however, is the connection provided by active and responsible family management which allows the business to build on the family’s strengths and the family to build on the business’s strengths.The benefits of this process don’t come without commitment, effort, responsibility, and risk.But then, nothing good does.In our view, the ability of families and businesses to interact constructively may be the greatest benefit of family business to the family, the business and society.

This article appears with permission from Family Enterprise Publishers.