Sample Business Paper on Impediments of Professionalizing Family Firms

Impediments of Professionalizing Family Firms

The modern business world is dynamic, and the high rate of globalization has intensified competition, which has created a need for family businesses to professionalize to boost their innovativeness that is essential for survival. Family firms are enterprises that the founder, spouse, or children control all or majority of the ownership and at least one family member is actively involved in the management. Professionalizing a business entails the establishment of processes and structures that support innovation and diversification to facilitate the achievement of the organizational objectives (Pricewaterhouse Coopers, 2014, p. 11). Despite the benefits and urgency for professionalizing a firm, most family firms are reluctant to professionalize due to trust issues between relations and non-relations, the feat of losing control as well as the stiff competition for highly talented professionals. Additionally, the lack of a clear succession plan hinders the professionalization of family companies due to their limited mortality that lowers the expected job security of potential professionals. Family companies are unlike non-family companies because the management of the household and business is equally essential to avoid conflicts that lead to corporate failure.

1.1 Inability to Attract Professionals

The demand for skilled professionals is highly competitive due to the immense need for strategic leadership especially risk management. Family and non-family companies need professionals to enhance their competitiveness and attain market leadership in their respective segments, which requires professional leadership. The average tenure of CEOS in the Fortune 500 companies is five years illustrating the high turnover of professionals as well as the risk of losing talented employees to rival companies (Pricewaterhouse Coopers, 2014, p. 15). Moreover, the family firms face stiff competition from established companies that enjoy higher brand recognition, thus attractive to talented job seekers.

The high demand for managers with a proven record of accomplishment compels family firms to increase the monetary and incentive-based remuneration schemes to attract professionals. This increases the staff costs that lowers the cost effectiveness that is detrimental to the family firms because globalization has intensified price competition (Abraham, Konings, and Vanormelingen, 2009, p. 15). Thus, the high remuneration expense for professionals inhibits the integration of skilled talent in the management of practitioners.

Besides the stiff competition, family firms are prone to internal conflict among relatives that stifles the entire company due to the strong link between the ownership and management of the firm. Family businesses are personal and objective decision-making is quite difficult compared to non-family companies (Pricewaterhouse Coopers, 2014, p. 14). The high frequency and likelihood of family conflicts threaten the survival of the firms since most feuds end in corporate failure. The high threat for the going concern of a business discourages professionals since job security is a key concern for employees.

Family members are actively involved in the management of the firm that interferes with the performance of the roles of the professionals, demotivates them, and consequentially lowers their performance. Professionals require reasonable autonomy and the threat to their independence lowers their desire to work for family firms. A survey by Pricewaterhouse Coopers indicated that 49% and 66% of the global firms and U.K family companies respectively are concerned about their ability to attract and retain professionals in the short-term (2014, p. 6). This underlines the difficulty of recruiting and retaining professionals.

1.2 Fear of Losing Control

The control of family firms by members of one family is high compared to the non-family companies due to the absolute or high shareholding by the relatives. The high concentration of the ownership of the household firms implies that the shareholders have great negotiating power in the management of these firms. The founders of 1st generation companies are often the managers of family enterprises and the delegation of managerial responsibilities to professionals is unwelcome. Furthermore, the shareholders are actively engaged in the management of the company including the board of directors.

Any attempt to employ independent directors is resisted by the relatives because they fear that the resultant decisions by external leaders shall reduce their influence in the company. Additionally, family firms in developed nations are proud of their nature, and 68% strongly identify with the enterprise illustrating the need to retain control in the firm (Ernst & Young and Kennesaw State University, 2014, p. 12). The founders and successors, value the legacy they leave in the company and do not appreciate outsiders, qualified or not, who purport to steer the company away from the legacy goals (Salvato, Chirico, and Sharma, 2010, p. 324). This creates resistance to professionalize a family firm resulting in the low representation of professionals in global family firms.

The family members significantly rely on the annual dividends that discourage them from hiring professionals that may opt to retain earnings and lower the dividend payout to expand the company. A study by Pricewaterhouse Coopers notes that sensitive issues, such as the rivalry between the founding father and the son, mar the management of family enterprises that complicates the professionalization especially when the professional is a non-relative (2014, p. 15).  Therefore, the internal struggle for influence and benefits in family companies creates resistance to professionalize despite the need for professional management of family enterprises.

1.3 Rigidity

Family businesses are inflexible because they value the legacy that inhibits the adoption of professional practices.  The founder considers the enterprise an extension of himself and a device for personal gratification. This creates a form of rigidity because the founder is unwilling to adopt changes that significantly deviate from the core business. The founder undergoes many challenges to transform the business into a success that creates strong determination leading to a narcissist organizational culture. Narcissism is a psychological problem where one feels vulnerable to losing something resulting in egoism and self-admiration (Miller, 2014, p. 2). Although narcissism is beneficial because it allows the founder to create relationships and manipulate stakeholders, it becomes detrimental when ingrained in the organizational culture (Miller, 2014, p. 4). It makes the founder and subsequent generations believe that they alone know how to run the business better, which hinders the ability to adapt to changes and divest the non-performing business units (Konig, Kammerlander, and Enders, 2012, p. 420).

The narcissism creates rigidity which inhibits professionalization because the owners are unwilling to change in response to variation in risk factors. A survey by Pricewaterhouse Coopers showed that only % of the UK firms believe that they are willing to take risks illustrating the high rigidity in family enterprises despite the urgency for increased innovation (2014, p. 9). The management may oppose the implementation of strategies that materially vary the enterprise from its core activities due to the high value the owners place on the legacy. Thus, narcissism creates rigidity, which hinders the professionalization of family businesses.

1.4 Nepotism

Emotional decision-making and nepotism hinder meritocracy in the family businesses that consequently inhibits professionalization. The feelings about responsibilities towards the family members significantly influences managerial decision-making leading to unprofessional recruitment processes. Bernard notes that the family enterprises face difficulty in the employment of relations because of complicated decision-making (2012, p. 1). The employment of relatives raises issues such as whether in-laws should be employed and the confusion whether the bloodline or business competencies and needs guides the recruitment decisions. This creates nepotism that discourages that employment of professionals outside the family (Nica, 2012, p. 199). Notably, the appointment of independent directors is unwelcome due to the fear of losing the control.

The family members have diverse expectations on the family business concerning employment, ownership, management, compensation, and use of business resources. This hinders professionalization because of the conflict between personal goals and business needs. Bernard states that the conflicting personalities and interests among the family members triggers endless conflicts that complicate the professional management because the skilled staff, especially outsiders, lack the capacity to manage the family and the company (2012, p. 1). Thus, the responsibility of the firm to the relatives causes nepotism which hinders professionalization and inhibits decision-making due to the conflict of interest between the personal and organizational goals.

1.5 Lack of a Succession Plan

Family firms lack perpetual existence and can fail due to the improper management of the transfer of leadership from one generation to the next. Pricewaterhouse Coopers notes that 87% of family firms in the UK lack a succession plan that is documented and discussed among the relatives (2014, p. 5). The process of succession has the potential of collapsing the business, and the current intergenerational gaps increase the risk of failure.  Pricewaterhouse Coopers states that the communication gap between the incumbent and upcoming generation complicates the succession (2014, p. 5). It also increases contempt among generations resulting in conflicts that bar the professionalization of family enterprises.

The delegation and transfer of responsibilities to the upcoming generations are chaotic due to the lack of a documented succession plan. The ruling generation does not invest in the future of the firm because it ignores the need to train the young members on leadership to facilitate successful transition when the founder retires or dies (Chrisman, Chua, and Steier, 2011, p. 1110). A NextGen survey by Pricewaterhouse Coopers shows that 18% of the upcoming generation feel unable to lead the family business while 9% think that they have taken responsibility too early (2014, p. 19). Thus, the lack of a succession plan hinders the professional management of family firm.

The ruling generation does not have a clear understanding of the wishes and capabilities of the upcoming generation. The incumbent generation thinks that the young ones want to take over the leadership while the upcoming generations may not be interested in inheriting it. Oullin, Bennedsen, and Fan state that 43% of Swiss firms lose the family business due to the little interest shown by the upcoming generation (2016, p. 1). This indicates that the lack of a succession plan hinders professionalization of family firms due to lack of training, misconceptions about the young generation and lack of interest in taking over the management.

1.6 Minimal Control by Outsiders

The founder and relatives control majority of the shares of a family firm while outsiders have minimal or zero shareholding. The management and shareholding is thus inseparable resulting in low agency problem. This is because the management sees no value in hiring independent directors and managers despite the conflict between the personal and organizational objectives. This hinders the adoption of best corporate practices such as the protection of minority shareholders and the separation of business from personal affairs (Stewart and Hitt, 2011, p. 61). The minimal control by the outsiders lowers the need for managerial oversight as well as the assessment of the performance of the directors. Thus, the ownership structure of family firms curbs their professionalization.

Despite the need and benefits of professionalizing, global family firms are reluctant in integrating documented processes and structures due to the fear of losing control to outsiders. Professionals avoid family enterprise because they are marred with conflict and rivalry among relatives that inhibits their performance, which lowers the ability of family firms to attract professionals. The founders and ruling generation value legacy and are risk averse, which deters the implementation of professional practices that deviate from the central activities.

2.0 Conclusion

Professionalization of family companies is more complicated compared to non-family businesses because emotional decision-making and nepotism influences the recruitment decisions that bars the employment of skilled workers outside the family. Family firms are also rigid that deters the adoption of professional practices that deviate the firm from its central purposes. The lack of a succession plan inhibits the training of the upcoming generation leading to poor management after the retirement of the incumbent leaders. Lastly, outsiders have minimal ownership of family firms that impedes the recruitment of independent directors despite their expertise due to the minimal need for oversight and independent management since the owners are the managers. Thus, complex issues inhibit the professionalization of family firms.

 

 Reference List

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