There is much confusion in most business families about what to do with non-contributing family members. The only way of ‘taking care’ of family seems to be by keeping them in the business. However negative or incompetent people have a disastrous effect on the morale of others, especially when they are themselves seen as powerful by association with the family. I am not talking about someone who misappropriates funds or does something dishonest. I am talking about someone who is not competent in business and does not produce results. If that person had been a professional, he would have been sacked without question. But if he is a family member he is usually shifted around from one job to another. All that is achieved is that his attitude spreads. The fact that the only reason he still has a job is because of his family’s name on the door, is not lost on anyone. That such a situation will in the long run destroy the whole business and consequently the whole family will suffer, is something that is conveniently ignored, most often because the family has no process to confront each other constructively. Consequently family members have a different status in the business no matter what their designation may be and no matter what the official line on career progression may be. The fact remains that the family member has lifetime employment and his family is looked after, no matter whether he is productive or not. Family members acquire even more significance because they are seen as most ‘loyal’ and ‘trustworthy’ as they are ‘insiders’ while professionals are seen as ‘outsiders’ and so by inference less ‘trustworthy’ and ‘loyal’. The organization collects obedient disciples who may well be great at implementing instructions but not much else. Mistakes are treated as failures at best and crimes at worst and are punished. Consequently all intelligent people avoid making mistakes in the only sure way, by taking no initiative or risk.
Once again social traditions outweigh good business processes with attendant consequences.
Defining 4 Critical Parameters
There are 4 critical parameters that any family business that wishes to transform itself from being person-led to becoming process-driven, must define. It is essential that all these parameters are clearly thought out, defined and the criteria made public. It is the lack of clear definitions that leads to claims of nepotism from one branch of the family and discrimination from another. When these four parameters are clear, it preempts a lot of internal conflict and clears the muddy waters and promotes transparency in all dealings.
· What does it take to enter the business?
· How is success measured and rewarded?
· How is succession determined?
· On what conditions can a family member be asked to leave the business?
What does it take to enter the business?
Business success is a skill, not a hereditary trait.
Ask, “Is our business an aspirational place for high potential employees who have multiple choices? Or a parking lot for those who have no choice? Do young professionals in various disciplines who are wooed on campus by major corporations choose your company over others?” GE for example has been ‘Most Preferred Employer’ for decades even though it is not in the top three salary payers in the United States. People join GE with the same state of mind as they go to Graduate School; to get training and experience which will enhance their market value. The working atmosphere, the collegiate partnership and the challenges that working for GE provides are so stimulating that most stay on, many for their entire careers, like Jack Welch did. Those who leave do so after making significant contribution and become ambassadors of GE worldwide. GE gets a huge amount of business from ex-GE people who are working in different companies. It is no accident that GE has provided the highest number of CEOs to American business. Ask, “What value do we add to those who work for us?” That is the key to attracting and retaining the kind of talent that you need achieve your goals. Like most things this is not an accident. Success is never an accident. It is the result of planned, intelligent effort.
Entry criteria for family members
Who can enter? How must they enter? What must they do to prove themselves worthy?
The first challenge is to set entry criteria for family members to enter into the business. In most families it is a default setting that all male members will enter the business. In some countries youngsters in business families seem to be allergic to education and enter the business immediately after leaving high school. Given that they are youngsters with little maturity and often an inflated sense of self importance, the results are not pleasant or useful for anyone, least of all for the youngsters themselves. Some families are more mature in this.
They insist that the youngster first finishes his tertiary education and then joins. In my view the best way to ensure that you get the best is to do the following:
1. Change the default setting and make a job in the family business an aspirational achievement that has to be won not merely inherited. Make it clear from the outset that the family and the business are two different things. That though family members will naturally enjoy their share of profits as shareholders but for those same profits to keep accruing the business has to be managed well. That is a skill, not a genetic factor. So only those who can prove that they are ready to contribute can enter the business.
2. For that they need to be able to do two things: the same as anyone else who wants to be hired: get a great education and get some good worthwhile experience in some good place. Insist that the scion of the family goes to a top notch college and gets a great specialist education. Let him stand on his own feet for that. Don’t buy the seat for him. While he is there don’t give him any preferential treatment. Let him stay in the regular college hostel and go around on a bicycle or whatever is the norm with other students. That way he will learn social skills and make some good friends along the way. Many rich fathers give their sons their own apartments and buy them expensive cars and then wonder why the kid fails in the exams.
3. Keep a tight control on all expenses and focus on studies and hard work. Nobody ever died from working hard and neither will your beloved child. Remember that he has to return and inspire respect. Nobody respects a soft little pussycat that couldn’t make it on its own without holding its father’s hand.
4. Once his education is over, let him join the biggest, meanest, leanest and toughest multi-national in the world and work for 5 years. 7-10 years is even better. That is the minimum time needed to get some worthwhile experience and learn the business. He will still be under 30 when he comes back. This will give him an idea of market competition, give him a standing on his own merit and if he is smart he will be able to pick up some neat tricks on the way. This way he will get a real-time international experiential education at no expense to you. He will also build a network that will come in very handy later in life when he is working in your company. Once he has his experience then invite him back. Don’t force. Invite. If he does not accept immediately then he is the one you want. Then induct him into the company and give him some real freedom and responsibility.
5. Another even better way is to challenge him to start a new business. Let him present a business plan to you. Offer to finance him and then help him if he needs any help. If he succeeds you just helped create some more business for your family. If he fails, well that is the fee for his education. Analyze the learning; ensure he learned his lesson and ask him to give you a new business plan.
How is success measured and rewarded?
Success is not a matter of opinion. It is a measurable fact.
The credibility of any measurement is in its uniformity. Only if everyone is measured on the same standard does the standard become trustworthy. If you have one standard for employees and a lower standard for family members, then you are only lowering the dignity of your own family. People don’t respect those they consider less than themselves. And that is what family members will become if they are rewarded according to a less exacting and rigorous standard of measurement. I am amazed at the number of family business people who actually recommend that family members should have lower standards than professionals that the family employs. I can only assume that they are not thinking when they say these things. For how anyone with even a single digit IQ can say something like this is beyond me. When family members succeed on the same standard as everyone else they acquire high prestige and people will willingly follow them when they become leaders. Create a performance culture of measuring results. Everyone and everything should be measured and the family must set the example. If I had my way, I would set higher standards for family members that for outsiders. My logic is that this is precisely what the original founder did. The founder earned respect because he was clearly superior. Why anyone imagines that this logic changes from the 2ndgeneration onwards is something I can’t understand.
It is essential to ensure that everyone is measured on the same standard. A rigorous and objective performance appraisal system is essential. In principle this consists of goal setting by mutual dialogue at the beginning of the year. Followed by ongoing measurement as the year progresses. And then assessment and reward at the end of the year. Making it a collaborative process enhances both transparency and trust and people feel empowered to know that they are working to achieve the goals that they set themselves. The feeling of being imposed on from above is eliminated and a high level of commitment is achieved. Rewards must be linked to contribution, in terms of annual bonuses and profit sharing schemes.
Annual increments must be uniform to take care of inflation. All rewards must be based on current contribution and in relation to it. Senior management including family members must be measured on how they add value to the vision, how they are able to reinvent strategies and how they display structured ways of risk taking. For family and top management this can be a done by peer rating on a 360° basis. This is not about passionate speeches in favor of grandiose schemes. It is about the rigor to convert a dream into a strategic plan that can convince critical peers to commit resources to it.
It is important to differentiate between the dividend that family members receive as a result of the business doing well and individual performance based rewards. For performance rewards there must not be any differentiation between family and non-family professionals. Performance rewards are for performing. All those who perform and meet the criteria of success must get the same reward. As a family member the individual will also be entitled to whatever dividend the family gives its members at the end of the year. That has no bearing on his or her individual performance.