Leadership Dilemmas in a Family Business - … · failure of family businesses, which are dilemmas...

UNIVERSITY OF MANCHESTER

MANCHESTER BUSINESS SCHOOL

LEADERSHIP DILEMMAS IN A FAMILY OWNED

BUSINESS

RANA AMER SAEED

This Project report/dissertation is submitted in partial fulfilment of

the requirements for the degree of Master of Business

Administration

DUBAI, UNITED ARAB EMIRATES

JULY 2011

Leadership Dilemmas in a Family Business

By Saeed, Rana Amer

DECLARATION & STATEMENTS

DECLARATION

This work has not previously been accepted in substance for any degree and is not

being concurrently submitted in candidature for any degree.

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Date: ____________________

STATEMENT 1

The dissertation being submitted in partial fulfilment of the requirements for the

degree of MBA.

Signed: __________________

Date: ____________________

STATEMENT 2

This dissertation is the result of my own independent work/investigation, except

where otherwise stated. Other sources are acknowledged by footnotes giving explicit

references. A bibliography is appended.

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Date: ____________________

STATEMENT 3

I hereby give my consent for my dissertation, if accepted, to be available for

photocopying, interlibrary loans and for electronic access, and for the title and

summary to be made available to outside organisations.

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Date: ____________________


By Saeed, Rana Amer

Acknowledgements

To my two previous family owned employers who through various stages of my

career made me think of why such resourceful companies not able to perform as well

as they should and why these family leaders not listening to professionals who are

only talking the industry best practices?

I am utterly grateful to my project supervisor, Mr. Andrew Brown, for navigating me

through this project’s labyrinths.

Sincere thanks to my friends who participated in providing their opinion through my

questionnaire and my very special gratitude to my mentor, Tariq Khan, for guiding

me through such valuable reference material, which primarily formed foundation of

my project.

Most of all to my family, who endured with me through this project compilation by

letting me disappear into my study den for months rather than accompany them for

their recreation times.


By Saeed, Rana Amer

ABSTRACT

The context of the study is to analyse various transitional leadership roles in a family

business with respect to not only developing family management capabilities but also

acquiring external management resources to lead the firm through various phases of

business growth in view of the varied risks at each level of growth. However, this

family leadership and non-family management combination produce varied results

depending upon how the Family Leadership make decisions and the extent of

delegation of authority to the management.

With the assistance of research and academic work carried out and complemented by

real life examples, I aim to analyse probably the most relevant aspect of such massive

failure of family businesses, which are dilemmas faced by the Family Leadership to

bridging Management capabilities & resources gaps and developing competitive

strategies in line with business and market environment, especially in accordance with

with the growth of the business. Another aspect of the study will aim to analyse how

successful family businesses survived and grew through a process of developing

family leadership and management capabilities and resources and gradually

integrating family members and the next generations into the management to add

value rather than creating nuisance values. There is also the cultural aspect which

drives family businesses from different regions of the world to retain control and

management of their businesses through generations, whereas, some cultures believe

in creating family offices and differentiate between family affairs and business

matters.

We will refer to a lot of research and analysis work to establish my project’s main aim

of family leadership dilemmas and limitation in order to relate them to the statistical

results of 80% family business not surviving to 2nd

generations (Gersick et al 1997).

There will also be direct input through a questionnaire to assess opinion of people

who have experience of working with the family businesses as employees or

consultants and will correlate their input to our findings. The cultural preferences and

behaviours play significant important role determining how the family leaders manage

their businesses and succession planning of business ownership and its management.


By Saeed, Rana Amer

We will also analyse with reference to various regional family businesses, how such

cultural preferences affect the family leaders in their decision making.

Our findings in each section, particularly Chapter 4, aim to assess how these aspects

make a family founder’s or incumbent leader’s decisions making subject to the family

oriented dilemmas which, if not overcome or manage in timely and rationally, do

create insurmountable dilemmas by these leaders. Our findings will lead to

conclusions of why, how, where and what can be the consequences to the business

where leaders do not overcome these dilemmas and still make decisions in view of the

family relations and family considerations. Whilst, analysing demons which destroy

family businesses so extensively throughout the world, we also draw parallel of some

very successful family businesses through generations and what did they do

differently to be an exception to an overall statistical rule.


By Saeed, Rana Amer

List of Figures and Table

Page No.

List of Figures

1. The Founder’s Dilemma to Choose between Control of

Business or Financial Gains 19

2. Flow of Functional Flow within Three desired pillars of

a family business 31

3. The “three circle” Model of Family Business 36

4. A Common 1st Generation Family Business Organization

Structure 38

5. An evolution of 1st generation Family Organization structure 39

6. A “FIT” for a balanced Organizational Design 41

7. The “Three Circles model” – Structure and Planning 43

8. Multiple Roles of Family Members Creating Conflicting

Signals to the Founder 53

Table of CEOs of some of the most successful Family Businesses 65


By Saeed, Rana Amer

CONTENTS Page Number

Declaration and Statements 2

Acknowledgement 3

Abstract 4

List of Figures & Table 6

Chapter 1 Introduction

1.1 Statement 8

1.2 Background & Context 10

1.3 Aims & Objectives 12

1.4 Methodology 13

1.5 Purpose & Perceived Value 15

1.6 Overview 16

Chapter 2 Literature Review 17

Chapter 3 Overview of the Family business

3.1 Definition 27

3.2 History 28

3.3 Structure 30

3.4 Culture 31

Chapter 4 Dilemmas of Family Business Leadership

4.1 Leadership and management in Family

Business Organization Design 35

4.2 Family Business owners’ Leadership and

Management Style and their decision-making 44

4.3 Family Business Leadership and the

Competitive Environment 48

4.4 Family Business Sins – Getting out Alive 52

4.5 Grooming Leaders within Family – Succession

Planning 55

4.6 Professionalizing family business through

inducting non-family leaders 62

Chapter 5 Project Wrap up, Conclusion and Inferences 71

Bibliography and Appendices 76


By Saeed, Rana Amer

Chapter 1 - Introduction

With more than 70% global businesses are either family owned or family controlled

and a lot of them are being managed by family leaders as well. These family

businesses played the pivotal role in developing economies of the developed countries

like USA, Europe and Japan. With the balance of the world’s economy going to tilt

towards the BRICKS emerging countries and the Middle East, another chapter of

family business contributions is being drafted as these countries are even more

dependent upon businesses owned by the families. Will the leaders of family

businesses of these emerging countries learn from the experiences of family business

leaders of the developed countries or they will still be experiencing dilemmas of being

family business leaders where family considerations tend to prevail over business

objectives? We hope that destiny of the family businesses of these emerging

economies is better than the developed countries where only 1 out of 5 family

business survived to 1st generation. We will analyse these dilemmas in ensuing

chapters to assess how some these dilemmas happen and how the family business

leaders can overcome them.

1.1 Statement

The oldest form of business is sole proprietorship business by and generally referred

to as “Founding member name & Sons (William & Sons)”. With growth of business,

corporate needs justify setting up partnerships and limited liability companies and

thus family businesses evolve. Family corporations have been and are still a

dominating form of businesses all over the world as per some statistics as follows:

65%-80% of all business globally are family owned businesses; (Gersick et al

1997) UK 2/3rd

businesses are family owned – (Westhead 2006) and US 70%

companies are family owned (Gersick et al 1997)

40% of Fortune 500 companies are either family owned or managed (Gersick et al

1997)


By Saeed, Rana Amer

Top 100 family owned companies have combined revenue of $3.75Trillion and

employee more than 13.5Million people. The largest family owned company is

Wal-Mart with $379Billion revenue and 2.1Millin employees and the 100th

company on the list, Reyes Holdings LLC, has revenue of $10Billion and

employees 8,700 people (Pearl, J. A. and Kristie, L., The World’s Largest 100

Family Businesses, Family Business Magazine, February 2009, P1)

USA is home to 33% of the global family owned businesses but only 4 US

companies are in top 100 companies in the world. Only 4 South Korean

companies are in the list but all of them are in top 14. Germany 15% and France

12% of the global family owned companies. (Pearl, J. A. and Kristie, L., The

World’s Largest 100 Family Businesses, Family Business Magazine, February

2009, P1)

Wall Mart, Cargill, IKEA, Reliance, Tata, Kingdom Holdings, McGraw Hill, etc,

are some of the largest family owned companies.

Caterpillar and Schlumberger are two major family owned companies converted

into public companies

Out of 212 start-ups that sprang between the late 1990s and early 2000s, most of

the founders surrendered long before their companies went public; by the time

venture is 3 years old, 50% of founders were no longer CEO; in year 4, only 40%

were still in corner office; and fewer than 25% lead their companies’ IPO.

(Wasserman, N (2008), The founder’s DILEMMA, Harvard Business Review,

February 2008, – P103-106).

Family Firms are uniquely positioned to provide the “right” directions to the

increasingly scam-ridden corporate world. (Adams et al 2002). Some positive factors

that position family firms distinctively are efficacy of family teams, positive customer

perception of family ownership, willingness of family members to sacrifice for the

firm, trust among family members, and the family’s commitment to integrity and

reputation (Brokrow 1992).


By Saeed, Rana Amer

In the background of the above facts, it is apparent that family owned and managed

businesses are backbone of economy globally. However, only 1/3rd

of all family

businesses survive to 1st generation and only half of such companies survive to the 2

nd

and later generations. What is the primary reason of such failures of family owned

and managed businesses? Whilst going through so many literatures it seems that two

factors are dominant:

1. Failure of family leaders to differentiating family interests from the

business interest whilst making critical and strategic decisions; and

2. Failure of family leaders, especially, the founders, to bridge knowledge

and management skills gap between family management and that required

in the competitive business environment.

The above are definitely dilemmas, which family leaders have been facing and most

of them failed to manage these dilemmas and consequently lead their family owned

and managed companies to their eventual demise.

1.2 Background & Context

I have also been indirectly exposed to many family owned businesses which are

predominant form of business in the Gulf Region due to capital market being in its

infancy stage. In the author’s experience most of these family owned and managed

businesses have leadership crisis for one or other reason and, therefore, none of the

Gulf businesses are among fortune 500 companies. During my professional career, I

happened to work for three family businesses and lived the excitement and challenges

of seeing them going through various stages of family business evolution. I wish to

give below a brief account of these family businesses:

Schlumberger brothers started an oilfield service business in 1926 and made

Schlumberger Limited the largest oilfield service company in the world. During the

process, developed its resources and capabilities by delegating control at right time

and also diluting their ownership through IPO in 1962 to ensure supply of required

liquidity. (SLB – (NYSE) - Source: (www.wikipedia.org)

A family owned conglomerate in Dubai which had diversified from trading of agro

commodities to food processing units, banking, real estate and constructions to

http://www.wikipedia.org/


By Saeed, Rana Amer

shipping and joint ventures into various business enterprises. This business has been

going through a very critical stage of inducting 2nd

generation into business and

managing their expectations within overall interest of business. Upto time of my

project, it has been a very bumpy ride for 1st generation family leaders who are the

senior most executives in all businesses.

A privately owned real estate development company which three members of an

interlocked community, started in 2002 in Dubai and became a market leader in

development of ultra luxurious residential developments within 5 years. However,

after touching their peak, the business deteriorated rapidly within next 3 years.

In my last two assignments to work as CFO of family owned and managed

businesses, I went through a real life struggle to impress upon the founders to manage

the business in line with the demands of the competitive business environments and

bridge gaps in the resources and capabilities of business accordingly. It is in light of

these experiences in respect of the following aspects that context and idea of this

project assignment evolved:

Governance

Why the business owners who are not professionally trained to manage such growth,

still insisting to keep making managerial decision within family? Should not they

handover the business to professionally trained managers and restrict their roles to the

corporate governance?

HR Assets’ Management

Professional management is generally de-motivated due to either lack of growth

opportunities to executive jobs held by family members who may not be competent

enough to manage these positions or continuously experiencing their ideas and

recommendations being turned down by the family executives or they have to follow

instructions from the family executives to carry-out plans which in their professional

opinion are not in the best interest of the company.


By Saeed, Rana Amer

Risk Management

These family owners make critical decision from their gut feeling rather based on

strategic business plans and in view of business risk management processes and

without considering sensitivities and scenario planning.

Resources and Capabilities Gap

Many business growth and other strategic decisions are made without properly

analysing if business is fully equipped with appropriate resources and capabilities of

assets, HR, financial resources, etc.

Therefore, the context of this project is to analyse only a specific and exclusive aspect

of family firms who face leadership issues due to dilemmas faced by them as result of

family business ownership, involvement of family in the business, not letting

professional management running company to cope with the competitive

environment, lack of family governance, succession planning and clear guidelines of

each family member’s involvement in the business and hence making decisions not in

the best interest of business but perhaps satisfying one of the above dilemmas.

Consequences of these dilemmas faced by family leaders can be critically damaging

for the business and can be avoided by bringing professional business leaders to run

business and restricting family involvement in business to providing strategic visions,

family values, long term business plans and, where required, diluting ownerships by

providing required finance for the business.

1.3 Aims & Objectives

I will aim to analyse specific aspects of the family business leadership to address the

following themes in order to reach some conclusions and also identify subject matter

for further study and assessment:

Theme 1 – Professional management provides the kind of leadership required by the

Family Firms to overcome leadership dilemmas faced by these firms


By Saeed, Rana Amer

Theme 2 – Even though some family members are competent enough and trained to

assume leadership position, it is wise, to avoid other family conflicts, to let non-

family managers to continue providing business leadership.

Theme 3 – By delegating business leadership to non-family management, business

growth is faster and family can provide strategic leadership to grow business diversity

and providing initial leadership there.

Theme 4 – Bringing new capital in business also bring new form of leadership both

in the board as well as management where external forces result in business being

institutionalized to better face competitive environment.

Theme 5 – Analysing cultural differences between Western and Eastern, especially

Middle East, impacting behaviour of family businesses towards various issues tackled

in this project.

Overall objective of this project is an attempt to correlate and corroborate through

various other sources, to analyse why family leaders make decisions which destroy

their own companies?

1.4 Methodology

As supported by various data on family businesses around the world and their

contribution to economies of countries, extensive theoretical and practical work has

been carried out to analyse and establish facts about different aspects of family

businesses. Such massive contribution to the global economies and still almost 3 out

of 4 such family businesses, despite certain cost leadership and management

advantages, could not survive beyond second generation. What is one single factor,

which cause such business disintegration at such massive scale?

During my personal engagement directly with two family owned and managed

businesses (FOM) and indirect interactions with many other FOM businesses, I

observed that one of the major reasons for inefficiencies of these businesses have

been various family related dilemmas which influenced the head of family to make


By Saeed, Rana Amer

decisions in view of the business considerations only. These leaders had to knowingly

make decisions which might have addressed his family sensitivities but could have

been different had he taken these decisions based on the business realities. Such

dilemmas faced by family leaders could have been avoided had there been non-family

professional management or these businesses had family offices separate from the

business management. It so happened that during my job with these FOMs, I observed

actions contrary to business interests, like appointment of non-suitable siblings to

senior jobs, allowing unsecured credits to family members, etc. I also experienced

many actions by leaders which were not based on professional due diligence and after

considering related risks due to emotional and sensitive family associations. I also

experienced how a team of non-family professional management had conflicts with

the family run Boards and shareholders and these conflicts eventually resulted into

these professional either quitting or compromising their professional judgements.

Unfortunately, I personally experienced family owners total disregarding the strategic

and business planning suggestions by non-family management and also ignoring

warnings in respect of matters where risk management have been compromised to

satisfy emotional and family related sentiments and consequently business suffered

huge losses. I will relate such personal experiences in this study to complement

findings from the literature review on various leadership dilemmas which eventually

cause severe damages to business and/or made these FOMs lack competitive ability in

their markets.

My above practical experience was further augmented by the literature review in

Chapter 2, where various studies also pointed at or establish my personal experiences

as to the challenges faced by family leaders (Chittoor 2007). Such literature review

highlighted various aspects of family businesses which impact leadership crisis and

decisions making so hard and complicated in FOMs.

We will also analyse with reference to certain studies on the cultural aspects

(Hofstede, 1991) how various cultures also influence leadership of family businesses.

USA tended towards short-termist, while Netherland was the most long-termist

European nation (Hofstede, 1991), thereby, supporting the fact that more US family

owned businesses invited outside shareholding through private or IPO offerings and

also more inclined towards bringing non-family management in the Board and the


By Saeed, Rana Amer

operational management. In comparison, many European and Asian companies prefer

to keep shareholding and executive leadership within family.

In view of diversity of topic, a questionnaire was developed to solicit point of views

of different people who have been engaged at some time and at some levels with the

FOM businesses. This questionnaire (Annexure 2) entails in simple terms major

contributories of either success or failure of family businesses, which the respondents

were engaged with. This questionnaire is distributed to at approximately 25 people

from various industries and backgrounds with one common factor that they all have

worked with FOMs at some part of their career. An analysis of their responses should

complement my assertions on the leadership issues in FOM businesses.

Lastly, we will seek to assert from some available data how some family businesses

followed the best practices in the best interest of business and not only made

tremendous growth but also sustained their family legacy in generations. They not

only managed to separate family, ownership and business and thereby, able to keep

the values of the founders within business but also promote these values through

diversification of business across segments and geographies.

Based on the experiences, studies and literature review, we will aim to conclude this

study by identifying how a family business leadership can complement family,

ownership and business resources to overcome these dilemmas and extend success of

this triangle of overlapping factors.

1.5 Purpose and Perceived Value

The purpose of this study for me was to analyse leadership experiences I faced whilst

working for family firms and in light of others’ experiences and material available on

such subject. This will assist me to understand such challenges in depth to enable me

to provide more clear direction to any other family business which I am most likely to

join in my preferred job location of the Gulf Region.

This study may also provide value to FOM businesses like my previous employers

who in fact endeavouring in the best of intentions to provide leadership for their


By Saeed, Rana Amer

family business but fail to comprehend that this will eventually make them vulnerable

to competitive demands and may lead them to make mistakes which other 2/3rd

global

family firms’ owners and leaders made.

I also wish to expose myself to as much material as possible to educate myself on

dynamics of the family firms, their ownership, family and business issues, leadership

peculiarities and probable solutions to these challenges and best practices adopted by

successful family firms. This knowledge should assist me in case I take up

consultancy to family firms as the Gulf Region is predominantly a family business

region.

Overview

This project will aim to identify how family leaders can make decisions in the best

interest of the business whilst protecting the family dynasty and ensuring its

protection and growth through next generations. By doing so they will avoid

dilemmas, which they face owing to the family legacy and pressures and,

consequently, follow in the footsteps of some of the most successful family dynasties.

Although, not all inclusive, the study will identify the areas, some of which might

have caused failure of some companies in my experience and based on the literature

being referred in the study.


By Saeed, Rana Amer

Chapter 2 - Literature Review

The family business from any single study and evaluation aspect is so vast and so

many management studies, papers, magazines, books, thesis, theories, journals,

research papers, biographies, etc, are available. Although, I wish to restrict my review

of material to the family leadership only, there are so many related and allied aspects

leading to the family leadership topics. Therefore, I also referred to some academic

studies which provides input of philosophies and structuring of family business

ownership, control, family conflicts, family inheritance, hierarchies, family

management, role of dynasties, cultural aspects of family business environments, etc.

so far as they all lead to resulting in family leaders to make choices and decisions.

Primarily, my review and reference of available management and academic literature

is classified into directly and/or indirectly related dilemmas which the family leaders

face while making decisions and consequently, a lot of these decisions lead to the

family business demise, as well. Many of the literature I referred may address more

than one leader dilemmas and, therefore, overlapping of reference material is possible.

However, the overall angle and view to refer, the available material has been to assess

how the above variants ultimately lead to the family leadership, which in almost 80%

of cases, could not save their family businesses from going into oblivion.

Leadership and management in Business Organization Design in Family

Business

The most important dilemma faced by family businesses has to do with distinction

between owners and managers than between the family and businesses ((Tagiuri

1980). Therefore, “the three circles model” emerged i.e. Ownership, Family and

Business to ensure that family business leaders do not have to face dilemma of

making decisions influenced by family constraints rather than business specific. The

family businesses due to evolution of initial non-developed family business into

ownership, family and business triangle create conflicts for leaders to be focused on

decisions based on one of these three circles. A family leader’s decision (mostly the

founding parents or eldest kids) face dilemma to make leadership decisions for

business and instead making decision based on his family relations and ownership

structure. (Gersick et al, 1997)


By Saeed, Rana Amer

It is unfortunate that the sensational family business failures sometime overshadow

the beauty of successful family enterprise. When they are working well, families can

bring a level of commitment, long term investment, rapid action and love for the

company that non-family businesses yearn for but seldom achieve. Leiben & arbeiten

(to love and to work – Sigmund Freud) are powerful foundation for a satisfying life.

The family businesses are actually made up of two overlapping subsystems: the

family and the business. Each of these two “circles” has its own norms, membership

rules, value structure and organizational structure. Problem arise because the same

individual have to fulfil obligations in both circles e.g. Family heads reluctance to

implement the most rational distribution plan due to conflict in his desire as parent (to

treat each offspring equally) and as a business owner (to consolidate control in one

successor). (Gersick et al 1997)

When founders ship the first products, they are making end of an era. At that point,

leaders face a different set of business challenges. The ventures require to building

capacity for larger volume, finances become more complex and the founder/CEO

need to depend on finance executives. The organization has to become more

structured, and the CEO has to create formal processes, develop specialized roles,

and, yet institute a managerial hierarchy. The dramatic broadening of the skills that

the CEO needs at this stage stretches most founders’ abilities beyond their limits. Yet

the Founder facing another dilemma to either keep control for more financial gains or

vice versa. (Wasserman, N. (2008) “The founder’s Dilemma”, Harvard Business

Review, February 2008”, p. 103-106)


By Saeed, Rana Amer

Fig. 1: The Founder’s Dilemma to Choose between Control of Business or

Financial Gains

Well Below Potential Close to Potential LIT

TLE

Failure Rich

CO

MP

LE

TE

King Exception

Financial GainsC

ontr

ol over

com

pany

Source: Wasserman, N. (2008) “The founder’s Dilemma”, Harvard Business Review, February

2008”, p. 103-106.

Doud Jr. E.A. (n.d.) describes four Stages of evolution of family business – Stage 1

where everything is ploughed back into business to stage 4, where the financial family

that has sold a successful business and is now investing the proceeds in other ways.

Successful family businesses can last for generations as good solid Stage 2

businesses. Getting out of family business alive means avoiding the trap that often

snares the owners of stage 1 businesses, thereby, giving it a chance to get to stage 2..

Family Business Sins and their impact on Business Leadership

When key managers are relatives and siblings, their traditions, values and priorities

spring from a common source. Spouses and siblings are most likely to understand

each other’s spoken preferences and hidden strengths and weaknesses. However, the

same intimacy can work against the professionalism of executive behaviour.

Authority may be harder to exercise, roles in family and business can become

confused, business pressure can overload and burnout family relationships. When they

are working poorly, families can create levels of anger, tension, confusion and despair

that can destroy good businesses and healthy families amazingly quickly. (Gersick et

al 1997)

A family business member may wear a hat of either owner, family member, manager

or just an employee with each role has different perspective, role and responsibilities.

A family business leader, either founder or descendent, will have to deal with these

roles for other family members. A leader of family business, when faced with a


By Saeed, Rana Amer

decision, should ask him that what does good business practice dictate that I do?

(Fleming 2000)

Family Business owners’ Leadership & Management Style and their decision

making

Schumpeter (1934) and (Duhaime 1984) mentioned that the Emotional Value will

drive the reluctance to give up ownership and control of business. The owner-

managers tend to value aspects like challenge and social status related to their

ownership stake. In addition, emotional benefits have been found to distort

managerial decisions. Divested business units for which owners or managers felt

some attachment induced, at least partly, by emotional benefits deteriorated to

unprofitability before divestment. Therefore, since emotional aspects seem to prevent

more timely decisions, thereby, inducing economic loss, they have an economic value

in themselves and affect willingness to accept. (Zellweger 2008).

Dyer’s 1986 study concludes that out of 5 family leadership styles, participative,

referent and expert style contributes to the positive outcome for both family and

business and high level of employee’s commitments and satisfaction. However,

Autocratic and Laissez-Faire/Mission style of leadership produce negative outcome

for business, family and employees’ satisfaction and commitment. (Sorenson 2000)

Greiner (1972) stimulated a most helpful introduction to issues of growth in small

business. His simple argument suggested periods of growth punctuated by periods of

crisis. The first of these crises was the crisis of leadership. Indeed it appears that

informal management and leadership practices are the most effective in emergent

businesses. Clearly, there is a need for more formal management and leadership

practices as the business grows and it is at this stage that the entrepreneur’s fear and

problems with delegation may have a detrimental influence on development. We have

very little empirical understanding of how the transition from “heroic” lone

entrepreneur to entrepreneurial team occurs: in essence, how is the crisis of leadership

addressed? (Cope 2011)


By Saeed, Rana Amer

Benefits and disadvantages co-exist for family involvement in ownership and

management. The positive effect of family managers running company does not

compensate for:

o Disadvantages driving from a non-monetary goal orientation

o Cost driving from need to solve conflict among family members

o Impossibility of enlarging the company’s social and intellectual

capital through the employment of non-family members.

Family involvement in ownership (FIO) and Family involvement in management

(FIM) can create benefit or disadvantages for company competitiveness. In case of

FIO, advantages out-perform disadvantages to affect the performance whereas, FIM’s

negative effects outweigh the advantages. FIM brings about negative effects on

financial performance due to general lack of professional competencies of family

members, the barrier to increasing social capital and orientation towards non-financial

goals. (Sciascia 2008)

Family Firms likely to handle risk differently than other types of firms, partly because

management and ownership are not separated. Family Firms’ risk taking is influenced

by its ownership and governance structure. With common ownership and

management, family firms are more vulnerable to self control problems and family

managers have the authority and legitimacy to pursue what they perceive as being the

best option. The logic suggests that managers in family firms have less control and

understanding of the risk that they are taking. Naldi, et al ( 2007)

Family Business Code of Conduct, Family Constitution and Grooming

Leaders within Family

The family businesses are made actually made up of two overlapping subsystems: the

family and the business. Each of these two “circles” has its own norms, membership

rules, value structure and organizational structure. Problem arise because the same

individual have to fulfil obligations in both circles e.g. Family heads reluctance to

implement the most rational distribution plan due to conflict in his desire as parent (to

treat each offspring equally) and as a business owner (to consolidate control in one

successor). Gersick, et al (1997)


By Saeed, Rana Amer

Succession is a process, not an event. Hence, factors that manage succession as a

well-planned process, such as appropriate procedures for selection of successor,

nurturing, development, and training of the successor. Morris, et al (1997), and

corporate governance mechanisms and structures are positively correlated to effective

succession. (Elstrodt 2003)

Quoting example of Dabur Group of India (http://www.dabur.com) - It was not

practically possible to accommodate each interested family member in an executive

position. Dabur made the transition from a family-owned and managed group to a

family-owned and professionally managed group in 1998 by handing over the

management of its flagship company to a nonfamily CEO. The family members

assumed an active governance role and have created a family council, which acts as

the primary communication channel between the family and the management and

provides the long-term direction to the group. Dabur has utilized the mechanism of

the Family Council in keeping the interests of the fifth generation family members

separate from the business interests. (Chitoor 2007)

Fiedler (1996) said that Leadership does matter for business success, and it is vital for

family businesses, for three reasons. First, family firms may have different goals than

do publicly owned companies in that nonperformance-oriented goals, such as

employment for family members, may take precedence over the goal of growth and

profitability (Chrisman1997). Second, when compared to nonfamily firms, family

businesses have greater potential for long-term conflict among involved actors.

Morris, et al (1997). Finally, the process of leadership succession is far more

important for family firms than it is for nonfamily businesses because of a stronger

link to firm survival (Rubenson1996). Chrisman (1998) categorized into six groups;

relationship to the incumbents, relationship to other members of the family, family

standing, competence, personality traits, and current involvement in the business. As

such, they found integrity and commitment to the business as the most important

characteristics. (Carter III 2009).

Family Business Leadership and the Competitive Environment

In order to stay competitive in the business market, the two most prevalent types of

planning that occur within family businesses are strategic planning and succession

planning. Studies shows that family owned businesses which engage in planning are

http://www.dabur.com/


By Saeed, Rana Amer

likely to perform better than those that do not engage in planning. Advisory Boards

are a potentially important tool in the management of family businesses. The role of

the board of directors differs in family business from non-family business.

(Blumentritt 2006)

Family Firms’ risk taking is influenced by its ownership and governance structure.

Agency Theory also proposes that equity ownership influences managers’ risk taking

propensity. Necessary but risky strategic decisions, such as international expansion,

the launch of a new product or committing resources to R&D, are postponed due to

concerns about safety of the family wealth. With common ownership and

management, family firms are more vulnerable to self control problems and family

managers have the authority and legitimacy to pursue what they perceive as being the

best option. The logic suggests that managers in family firms have less control and

understanding of the risk that they are taking. Naldi, et al (2007)

Specific aspects of the ownership and management of private family firms that are

expected to be associated with superior firm performance and citing of non-financial

company objectives. Closely held companies with little outside influence may exhibit

an organizational serving culture and a focus on non-financial objectives. The quality

and experience of the family managerial labour pool may not be able to fulfil the

range of specialist managerial functions that a competitive growing and complex firm

require. (Westhead 2006)

The owners’ and managers’ goals for the business may or may not be the same as its

Key Success Factor. In this case the owner-manager’s goal and the Firms KSF would

be in conflict. Obviously, if the KSF of a business are compromised too much by an

owner-manager’s goals, the company will suffer and could fail. Owners and

managers, unfortunately, are often not aware when their personal goals for the

business are in conflict with the KSF of their business. (Davis 2001)

Entrepreneurs face a choice, at every step, between making money and managing

their ventures. Those who don’t figure out which is more important to them often end

up neither wealthy nor powerful. Founders are usually convinced that only they can

lead their start-ups to success. “I am the one with vision and desire to build a great


By Saeed, Rana Amer

company. I have to be the one running it”. Many entrepreneurs are overconfident

about their prospects and naïve about the problems they will face. Founders’

attachment, overconfidence, and naïveté may be necessary to get new ventures up and

running, but these emotions later create problems. (Wasserman 2008)

Conflict of Interests between Family members and family owners and

Professional Non-Family Top Management

The unity and commitment are significant strengths of family business. Non-family

directors improve shareholders commitment. The existence of conflict between

shareholders and top management and the manners in which the family business settle

them, determine the degree of convergence of their respective interests and objectives.

In summary, the management and governance structure, the ownership structure, and

the decision making process are critical elements in family businesses because they

affect the goal and interest conflict between shareholders and management. (Vilaseca

1999)

Nonfamily CEO can have positive impact on business when he is in a position to

influence strategic decisions. Information Asymmetry and bounded rationality will

increase possibility of non-family managers to act in their own interest over interest of

owners. Non-family managers must be involved in strategic management and apart

from senior positions must have presence in the Board. (Chrisman 2003)

Hall (2008) analysed perhaps one of the most important aspect of family business

nonfamily management, that is, cultural competence. A new nonfamily CEO has a

dilemma to keep interacting with previous family leadership to develop the cultural

competency at the risk of not implementing his plans or never interacting with them

and be accused of scarifying family norms and value for financial growth. Therefore,

We propose an extension of meaning of professional management with what we call

cultural competence, defined as understanding of the family’s goals and meanings of

being in business, that is, the values and norms underlying the reason for the family to

be in business.

(Dyer, 1986) saw professional management as the “rational alternative to nepotism

and familial conflicts that plague a family business” He argued that professional (non-


By Saeed, Rana Amer

family) management typically leads to new leadership pattern “because of the very

nature of professional manager”, and new strategic development routes for the family

firms, in particular towards growth and expansion”. Beyond financial considerations,

the family business exists for perpetuating family value and unity…these values are

so important that anything, or anyone that interrupts this fragility could send the

family business into chaos. (Astrachan 2002).

A new CEO acquires cultural competence gradually by developing an ability to view

the situation from the perspective of other dominant actors, which in most family

firms are the main representatives of the family. This is done both consciously and

unconsciously and the ability to do so is the result of socialization processes. (Blumer

1969; Mead 1934).

Family involvement in ownership (FIO) and Family involvement in management

(FIM) can create benefit or disadvantages for company competitiveness. In case of

FIO, advantages out-perform disadvantages to affect the performance whereas, FIM’s

negative effects outweigh the advantages. FIM brings about negative effects on

financial performance due to general lack of professional competencies of family

members, the barrier to increasing social capital and orientation towards non-financial

goals. (Sciascia 2008).

Individualistic Society – less driven by social constraints and non-financial aspects of

the ownership stakes that would build attachment. Collectivistic culture – Owners

operating in collectivistic culture will display a higher emotional value to their

ownership stake. (Zellweger 2008)


By Saeed, Rana Amer

Chapter 3 – Overview of Family Business

In many of our most productive countries, like the United States, Germany, Spain,

and China, to name just a few, families control up to 90 percent of the businesses and

contribute more than 50 percent of the gross domestic product. The family businesses

may not be small anymore, but they are still around and they playing a large role in

the world economy. (Leaver 2009).

Li Ka-shing’s, being the richest Asian (Flannery, R. (2012), “Asia’s Richest man, Li

Ka-shing Sees Modest Market Gain in ‘12” Forbes Asia Magazine, March 29 2012)

through his family empire Cheung Kong Holdings, brought about such fundamental

entrepreneurial changes in China and holds the key to China. His family owned and

managed business has redefined business in Hong Kong and China. Being the second

richest economy in the world, China is destined to define the drivers of the global

economy and its many family owned businesses will play a key role in the world’s

business growth in next couple of decades by which time China is expected to become

the largest world’s economy (Arends, B. (2011), “China to Become the World’s

Largest Economy by 2016-So?” http://econospeak.blogspot.com/2011/04/china-to-

become-worlds-largest-economy.html, 13 March 2012) with $19 trillion by 2016.

The success stories of Indian family owned businesses have been astonishing with

likes of Tatas, Ambanis, and Mittals have been among richest in the world due to

phenomenal success of their businesses. The family run companies in India are not

just your typical mom and pop businesses or corner stores. In addition to the small

and mid size businesses, the big publicly traded companies are family run as well. The

BSE Sensex is the major Bombay stock exchange in India. “About half of the top 30

companies on the BSE Sensex are controlled by their founding families” (Leaver

2009). Mukesh Ambani’s Reliance Industries owns, among many other businesses,

the world’s largest oil-refinery. Mittal Steel Company N.V., is one of the largest steel

producers by volume and turnover. Tata Group has become such international

business name with Tata Motors buying from Ford Motor in 2008, such legendary

car brands like Land Rover and Jaguar and at the same time producing the world’s

cheapest car, the Nano.

http://econospeak.blogspot.com/2011/04/china-to-become-worlds-largest-economy.html

http://econospeak.blogspot.com/2011/04/china-to-become-worlds-largest-economy.html


By Saeed, Rana Amer

3.1 Definition

Any instance in which two or more people from the same family work together in a

business that at least one of them own” a simple definition of a family business

(Fleming 2000).

Researchers use an operational definition of a family firm by a family’s involvement

in the business: ownership, management, and trans-generational succession. Chrisman

(2005) distinguished the component-of-involvement approach from the essence

approach. According to the essence approach, family involvement is not sufficient to

define a family firm; the family involvement must result in certain behaviours that

render some distinctiveness to the family firm.

Chua (1999) defined a family business as “a business governed and /or managed with

the intention to shape and pursue the vision of the business held by a dominant

coalition controlled by members of the same family or a small number of families in a

manner that is potentially sustainable across generations of the family or families.”

This definition clearly distinguishes family ownership from family management and

governance. Therefore, a family having a controlling ownership in a firm may choose

not to be involved in operational management, but through its ownership and

governance, may exercise influence on the management in strategic decisions such as

management succession, shaping of long-term vision, values, and so forth. We

consider such a firm to be a family firm. This in turn leads to two primary categories

of FOBs (family-owned businesses) - family-owned & family-managed businesses

and family-owned and governed but professionally managed business – thus

separating ownership from management. (Chittoor 2007).

In summary, a family business is a business in which one or more families have

significant controlling ownership and significant commitment towards the business

survival and longevity. However, a family business can have owners from outside

family and the business may be managed by non-family managers but either way,

according to Gersick, et al (1997), the people involved feel the difference. Family

business owners are well aware of how different their role is from that played by

shareholders in companies owned by many public investors. Employees in family


By Saeed, Rana Amer

businesses know the difference that family control makes in their work lives, the

company culture, and their careers. Marketers appreciate the advantage that the image

of a family business presents to customers. And families know that being in the

business together is a powerful part of their lives.”

Adams (2002) believe that family firms are uniquely positioned to provide the “right”

direction to the increasingly scam ridden modern corporate world. Brokow (1992)

Some of the positive factors that position family firms distinctively are efficacy of

family teams, positive customer perception of family ownership, willingness of family

members to sacrifice for the firm, trust among family members, and the family’s

commitment to integrity and reputation.

“ A firm is said to be family owned when family members own sufficient voting

shares, or occupy sufficient place on the board of directors, to determine the

appointment of the general manager or chief executive. A firm is said to be family

controlled when the general manager is a member of this family. The definition of the

family ownership implies that the ownership of a significant minority stake by a

single family does not necessarily qualify a firm to be a family firm….the

stake….must be large enough to block any rival coalition of shareholders. The

definition of family control refers to family members occupying key positions in

management. (Casson 2000).

3.2 History

Private ownership of enterprise has been a hot topic for many centuries. Aristotle’s

Politics and Plato’s Laws and Republic had much to say about the role of private

ownership in the creation of the ideal state. Debates over inheritance laws and

customs have been well documented in the cultural history of societies are varied as

medieval Europe, ancient China, and the colonial Americas. One central premise of

the Communist Manifesto was abolition of private ownership and inheritance

(especially of work enterprises). At the same time, capitalistic economies were

witnessing the dramatic expansion of the business-owning middle class and

introduction of public shareholding. Even theology has addressed private enterprise,

as in the papal Encyclical of 1891, which found divine justification for the family’s


By Saeed, Rana Amer

right to “the ownership of profitable property” and “its transmission to children by

inheritance”. (Gersick, et al 1997)

When an American hears the words, “family run business,” or “family owned

business” it elicits feelings of nostalgia and brings up imagery of a typical 1950s

“mom and pop” shop. The cute downtown convenience store owned by husband and

wife, the mechanic’s shop passed from father to son, or the diner inherited by cousins.

There is a widely spread thought that America has seen the end of family owned

business and the warm, friendly environment, has been replaced with cold and

impersonal chains. This could not be further from the truth. “In many of our most

productive countries, like the United States, Germany, Spain, and China, to name just

a few, families control upto 90 percent of the businesses and contribute more than 50

percent of the gross domestic product” In India, this holds even more truth than in

many places. The phrase “family run business” induces an entirely different response

than in America. Family run businesses are synonymous with big business, as well as

small and mid size business, and mostly synonymous with success. (Leaver 2009).

The concept of Hindu Undivided Family or Hindu Joint Family goes back to the

ancient India where all property is held together by all family members and head of

the family makes all decisions. A lot of major Indian businesses are family owned

business and their creation goes back to nineteenth century, such as Kirloskars family

which was established in 1888 or the Birla family whose founder was a freedom

fighter against the British colonial empire of early nineteenth century. (Leaver 2009)

According to the Family Business Magazine (Kristie, L. (2008), “The World’s Oldest

100 Family Businesses”, Family Business Magazine, (September 2008), Pg. 1-20)

the oldest family company, Kongo Gumi, a Buddhist Temple construction company

was founded in 578, the Japanese company Houshi Onsen HoushiOnsen, an inn-

keeping business and founded in 718, were the oldest family businesses. Similarly,

French Vinery Company, Château de Goulaine was founded in year 1000. There are

many companies from Italy (Pontificia Founderie Marinelli, 1000) going back earlier

than 1200 and German companies (Hotel Pilgrim Haus, 1304) as old as 1300. The

oldest UK company, John Brooke & Sons dates back to 1541 and US oldest family

company, The Orchard of Concklin, goes back to 1712.


By Saeed, Rana Amer

3.3 Structure

The structure of most of the family businesses are similar in the beginning though

its evolutionary structure may differ depending upon how the founder or

incumbent family leader structure the business in view of preferences with respect

to the ownership, family and business. Some families insist on keeping full

ownership of the business and, accordingly, develop the business model around

that structure like many Indian and Middle Eastern families, where despite

availability of and, need for, capital, family will not let go of their ownership.

Whereas, many family businesses in USA will either bring in angel investors or

venture capitalist or go public, thereby, encashing their equity. Similarly, another

form of structure with respect to ownership is to keep management within family

members and structure the family business accordingly where family has full

managerial control, such as Du Pont family, which own substantial ownership

interest in the company but also present in its management and policy making, as

the family leaders always have attitude that the firm was managed for the family

and the family was to manage the firm. The modern successful firms have

different structure where they may or may not own or/and control the company,

but they let professional managers run the business within overall guidelines and

values defined by the family.

Family business is considered, on average, to be not very long-lasting. Relatively

quickly, in two or three generations, the entrepreneurial and family firm is supposed

to evolve into a managerial, public company or to disappear, given the difficulties

for the single family in managing a growing and complex activities. The so-called

‘Buddenbrooks effect’ (the third-generation dearth of entrepreneurial skills

resulting in the decline of the firm) has been extensively investigated, and resulting

evidence challenges the ‘three generations paradigm’. (Colli 2003)

In the United States and most other Western economies, we estimate that about 75

percent of all family companies are majority owned by one person or by a married

couple; we categorize them as Controlling Owner family companies. Around 20

percent of all U.S. family companies are ownership controlled by Sibling


By Saeed, Rana Amer

Partnership. Finally, we estimate that around 5 percent of family companies are

Cousin Consortiums” (Gersick et al, 1997)

In his book, Generation to Generation, Gersick et al, (1997), defines ownership

structure of family business as:

1. Companies controlled by single owners (Controlling owner)

2. Companies controlled by siblings (sibling Partnership)

3. Companies controlled by a group of cousins (Cousin Consortium)

It is very important to note that ownership and control are not alike. In some

jurisdictions like USA, a single ownership of 10%, may give a control to that

shareholder of a public company. Therefore, a structure of family business is

referred to as majority shareholding in one of the above ownership structure. The

structure of family firm from ownership, family and business point of view can

vary as all these aspects can be held with same family or two of them are kept

within family members and management can be delegated to non-family

members.

Fig. 2: Flow of Functional Flow within Three desired pillars of a family

business

Corporate Board –

with family non-

family

representation

Non-Family Business

Management, CEO and his

executive team

Family Council

Family

Shareholders


By Saeed, Rana Amer

The above structure is in line with the three circles model introduced by Gersick,

et al (1997). Based on my detailed discussions in the ensuing paragraphs, the

three circles model adaptation by family firms in their business structure have

helped them to prolong lives of the family firms to avoid impact of the

Buddenbrooks effect for deterioration of family firms by third generation.

3.4 Culture

It is established as result of analysis of the family businesses around the world that the

social and geographical cultures have played a significant role in business,

organization, ownership, management, longevity and perception of family businesses

around the world. The organizational and behavioural cultures have impact on the

family business management and control as it will affect the emotional values which

the family owners as well as the employees demonstrate towards the business owners.

Individualistic Society – less driven by social constraints and non-financial aspects of

the ownership stakes that would build attachment. Collectivistic culture – Owners

operating in collectivistic culture will display a higher emotional value to their

ownership stake. (Zellweger 2008).

If we analyse the report by the Family Business Magazine (Kristie, L. (2008), “The

World’s Oldest 100 Family Businesses”, Family Business Magazine, (September

2008), Pg. 1-20, we find that they are mostly either Asian or European companies.

Many of the oldest Asian companies are among the most prominent in the world, such

as, Sumitomo Corp. of Japan (1630), Merck KGaA of Germany (1668), Tata Group

of India (1868), etc., whereas, the oldest and the most prominent US family business

is Cargil (1865). This shows a pattern of preserving family ownership and

management by the Asian and European businesses compared to US where family

businesses once grow beyond certain size generally get out of the family control.

There are not many Chinese or Russian old family owned businesses as communism

discourages private ownerships.

When we come to the Middle East, family business is predominant form of business

as the capital markets and stock exchange are not very developed to cater for the

public holdings. Moreover, legislations in most of the Gulf countries do not allow


By Saeed, Rana Amer

share ownership by non-nationals. Therefore, family owners, which are mostly still

under the influence of the founders, not only have almost complete ownership but also

have absolute management control, where induction of the family members and next

generation is based on very unstructured induction process. With the tribal culture still

very much part of the society, appointment of non-family executive is still based on

the tribal affiliations and/or trust due to long association of such managers with the

family. With the oil discoveries, these Arab countries have gained a lot of wealth, but

the governments are still ruled by Monarchs who had assumed leadership at time of

freedoms from colonial occupations and major business houses evolved from the

initial tribal hierarchies at the time of freedom. The concept of handing over

management of the companies to non-family professional management is at infancy

stage and process of setting family offices to create distinction between ownership,

family and management is still a long way to go. These Middle Eastern families are

going through a maturity process and may be able to overcome their cultural

influences to avoid the sins which many western family businesses committed and

ultimately perished before they reach the second generation.

Such cultural sensitivities in Middle Eastern and most of the Asian countries have

resulted in high scores in High Power Distance and Masculinity and low scores in

Individualism and Uncertainty Avoidance, indices defined by Dr. Hofstede, G (1973).

Similarly, North America and most of the Europe has a reverse pattern of cultural

behaviours compared to the Middle East, Africa and Asia. These dimension which

differentiate cultures, also reflect leadership pattern of the family businesses in these

cultures. This fact is further complimented by analysing the fifth index introduced by

Dr. Geert Hofstede; the Long Term Orientation. Many family businesses in Asian and

Middle Eastern countries have high scores in Long Term Orientation index reflecting

long term commitments and respect for traditions. This makes them reluctant to

change which a competitive environment and professional management will bring to

the family businesses.


By Saeed, Rana Amer

Chapter 4 - Dilemmas of Family Business Leadership

With such astronomical contribution of family owned businesses to the world

economy, it is a big loss that economical value generated by such businesses is not

sustainable over medium to long-term periods. Among other probable factors, we

identify one major factor for such chronic crisis and, which seems to be common in

almost all struggling family owned and managed businesses worldwide, to be a

leadership crisis. As a student of business management, we have studied many aspects

of a modern day business, which it has to adopt to be successful in this global market

age, including, managing and developing human resource capital, competitive

strategies to survive and flourish in globally local economy, marketing strategies for

product and market growth, risk management strategies, corporate finance strategies,

business compliance and risk management strategies, and above all leaders who try to

manage all these resources in harmony to steer the company towards achievement of

corporate goals. Such CEOs use all these corporate resources more productively and

efficiently than the competitors and must ensure that capabilities and resources

available to him are sufficient for the corporate business environment and its planned

growth. We have also observed many such CEOs still making mistakes and errors of

judgement and cause failure of some of the great corporate like, Leehmans Brothers,

Enron, K-Mart, ABN Amro Bank, etc. Even such professionally trained and

experienced leaders with a team of internal and external advisors, still make error of

judgement and cause their companies such irreparable losses, let alone the family

business leaders who at times assume such positions merely due to their owner family

affiliation rather than having competitive qualification and experience. In short, it is

the leader, who makes ultimate difference in making a corporate a great organization

or a mere historical reference for case studies of the great corporate failures.

Family Business ownership creates a special set of privileges and challenges. Family

business owners face many of them alone every day; balancing the interests of the

family against those of the business; grappling with the CEO’s divergent roles as

parent, manager, and shareholder; and planning for the future of both the business and

the family. Any of these challenges, if poorly met, can sink a family business. (Ward,

1991)


By Saeed, Rana Amer

In the same scenario, a leader of family business perhaps face more challenges since

in addition to all the above leadership prequalification traits to succeed in the modern

day business environment, he or she has to also face various pressures from within the

family. This makes a family business leader’s task much more difficult than a public

limited company and unless he/she can exercise options of regularizing family

business in professional manners, business faces severe and real threat of

disintegration. These challenges pose many contradicting dilemmas to a FOM leader,

some of them we will be discussing in ensuing chapters though in a larger frame,

these can be classified as follows:

1. Failure of family leaders to differentiating family interests from the

business interest whilst making critical and strategic decisions; and

2. Failure of family leaders, especially the founders, to bridge knowledge and

management skills gap between family management and that required in

the competitive business environment.

The above two major factors are further elaborated in the following chapters in the

form of succession planning, bringing non-family professional management in

business, regularizing family business code of conducts, etc.

4.1 Leadership and management in Family Business

Organization Design

Gersick et al (1997) in their book “Generation to Generation – Life Cycles of the

Family Business”, had highlighted issues facing family businesses in developing

their organizational designs. They say that “Treat the Business Like a Business,

the Family Like a Family, and Ownership with Respect.”

The three-system model by Professor Renato Tagiuri and John A. Davis in early

1980s during their work at Harvard Business School, was further elaborated by

Gersick et al (1997) into a three-circle model as follows:


By Saeed, Rana Amer

Fig. 3: The “three circle” Model of Family Business

The job of a CEO is different when the vice president in the next office is also a

younger sister. The role of partner is different when the other partner is a spouse

or a child. Spouses and siblings are more likely to understand each other’s spoken

preferences and hidden strengths and weaknesses. Most important, commitment,

even to the point of self-sacrifice, can be asked for in the name of general family

welfare. However, the same intimacy can also work against the professionalism of

executive behaviour. Lifelong histories and family dynamics can intrude in

business relationships. Authority can be harder to exercise with relatives. Roles in

the family and in the business can become confused. Business pressures can

overload and burn out family relationships. When they are working poorly,

families can create levels of tension, anger, confusion, and despair that can

destroy good businesses and healthy families amazingly quickly. (Gersick, et al

1997).

Family business evolve its design from inception through its growth and time

during which the founder of a family business will introduce its family into

business due to business need, protecting family business or providing economic


By Saeed, Rana Amer

stability to its family members. However, with family growing, the role of family

evolves from owner-manger to owner-family-managers and further to family-

managers when cousins or in-laws relatives are also inducted in the business.

Such organization design further evolves when non-family managers are inducted

due to specialization of business. A typical three circle organization design of

family business emerges. (Gersick, et al 1997).

With the three circles organization design existing in the business, the complex

dynamics exist when family interest and business interests attempt to co-exist.

The run-of-the-mill challenges faced in a world in which family and business

overlaps include:

1. Do I hire my child because he/she needs a job (family thinking) or because

my child is really qualified for an opening we need to fill (business

thinking)?

2. When a child of mine is underperforming in the business, do I treat

him/her as I would any employee (business thinking) or the best qualified

candidate – family or not (business thinking)

3. Who should be the next leader of this business? My first-born male child

(family thinking) or the best qualified – family or not (business thinking)?

4. Do I pay family members at market according to their performance

(business thinking) or use the business to make sure they have enough

income to support the life style I think they deserve (family thinking)?

5. How do we balance the interests of owners who work in the business (and

are more likely to support reinvestment policies) and those who do not

(and are more likely to want dividends).

Getting to answers that help the family balance the interests of the business, those

of the family, and the personal needs of each family member is a lifetime

challenge. Doud, Jr (n.d.)

Besides the decisions by a founder to design the firm’s organization structure with

involvement of family members, a founder of a family business has at times

difficult choices to make with respect to maintaining control of business but

letting go opportunities to grow business and add value through external


By Saeed, Rana Amer

The

Founder as

CEO and

Chairman

Head of

Finance –

One of the

family

members

Head of

Operations

– One of

the family

members

Head of

HR – One

of the

family

members

Head of

Business

Developme

nt – One of

family

members

Head of

marketing

– Non-

family

Head of

Investment

&

Corporate e

Finance –

One of

family

members

Head of

Legal –

Non-family

Head of

Other

Business

Segments –

family/non-

family

member

participation. Such decisions will influence the organization design of the firm as

keeping control will let the founder to keep CEO position and liberty to fill all key

positions of his choice and also decide on their roles and responsibilities within

the organization hierarchy. A typical organizational chart of such organization in

my experience looks something like:

Fig. 4: A Common 1st Generation Family Business Organization Structure

With or without family members as one of the head of function/s, we may keep

adding more subordinates’ positions but organizational structure will remain flat

and everyone is reporting to the Founder as he wishes to keep the full control. In

one of my previous assignment with a family business, the group CEO has 34

direct reports. Any HR consultant will say that such organizational structures are

destined to fail, as CEO is always operational and micro-managing the business

even if he/she works more than 12 hours a day and will hardly have time to plan

future strategies in view of the market realities. Besides CEO, the roles and

responsibilities of various head of businesses are so overlapping due to either

family members being head of function or everyone else, seeking direct guidance

from the top. Consequently, blame culture flourish and CEO yet again spending

hours and hours to manage conflicts not to mention managing relationship

sensitivities as one of the guilty parties can be a sibling.


By Saeed, Rana Amer

Another evolution of this organizational design looks like this:

Fig. 5: An evolution of 1st generation Family Organization structure

As one can see that the above organizational structure is a recipe for conflict as

family members are heading group functions and will have natural rivalry. The

Founder is once again trying to satisfy his family members’ desire to lead certain

functions but still keeping some function within his direct control. This kind of

hierarchy will generate direct competition among siblings as each of them will

like to glorify his position as pivotal to the organization and will blame other

function head whenever there are failures. Moreover, certain functions report

directly to the CEO who is the Founder of the company and will find it almost

impossible to align objectives of these functions with the other group of functions

headed by his family members.

Another very major flaw in such family business organization is lack of holistic

accountability where business objectives are assigned to a CEO who develops his

organization in line with the business plans prepared in bottom-up approach and

then define the objectives of whole organization as top-down, thereby, clearly

defining job roles and accountabilities for each positions. Moreover, based on the

The Founder as CEO

and Chairman

Head of Finance –

Non-family

Head of Operations –

One of the family

members

Head of HR –

Daughter

Head of Business

Development – One

of family members

Head of Marketing –

Non-family

Head of Investments

Corporate Finance –

One of family

members

Head of the

Corporate Strategies

– One of the family

members

Chief Operating

Officer - the eldest

Son

Chief Finance Officer

& Head of

Investment - Son

Head of Supply

Chain – One of the

family members


By Saeed, Rana Amer

extent of responsibilities, authorities are delegated to each position to achieve its

individual and group objectives. In short, an organizational structure and

hierarchy design of any successful organization should be based on its strategic

business plan which, if Dr Robert S. Kaplan and David P. Nortan concept of the

Balanced Scorecard is followed, must provide seamless flow of work flow from

bottom to top, with top leadership having full view of organizational functions

and their accountabilities. “The Balanced Scorecard is a Strategic Planning and

Management system to align business activities to the vision and strategy of the

organization, improves internal and external communications, and monitor

organizational performance against strategic goals”. (Kaplan, et al 1992)

With the above scenario, a family business leader has to face many dilemmas,

which may relate to his options to induct family members in business with or

without their qualification and thereby scarifying some competitive edge. His

position is at cross-roads when the family management conflicts are not based on

the business requirement and primarily reflect power struggle within the family

members. The organization structure is not structured in view of the strategic

planning to achieve long term goals and its structure is on the contrary designed to

accommodate various family members and their relational sensitivities.

Another dilemma, which a family leader faces due to the above organizational

design, is risk of losing competitive edge that a professional functional head will

provide to the organization is lack of risk assessment procedures, which should

work holistically throughout organization and are structured as required by the

business environment. Such family business organizational designs will also

disregard cultural insensitivities whilst defining organizational hierarchies. Many

scholars have studied and established impact of cultures on organizational

behaviour, such as, masculine v/s feminist culture, individualistic v/s collective

culture, extent of power distance, uncertainty avoidance (Hofstede 2005). An

organization design based on family preferences does not generally follow these

cultural sensitivities, which affect performance. Moreover, an individualistic,

lower masculinity index, lower power distance society like USA is less likely to

accept family based organization compared to Asian, Middle Eastern and African

countries. Therefore, a lot of top family owned US companies has more non-

family management than family members. This cultural attitude of not accepting


By Saeed, Rana Amer

non-family leaders result in loss of many high potential leaders who get frustrated

and leave to join competition as they can never grow beyond a point of corporate

ladder which is reserved for the family members.

Lorsch ( 2001) defined the Goal of Organizational Design, as achieving a high

degree of fit between tasks, employee’s characteristics and management methods,

as follows:

Fig. 6: A “FIT” for a balanced Organizational Design

Jay W. Lorch (2001), “Note on Organizational Design” Harvard Business School case No.

476-094

The goal of organization design is to achieve a high degree of “fit” between: (1) the

tasks an organization needs to perform, (2) the characteristics of the employees and

(3) the ways in which employees’ work is managed. These three factors are called

Design Factors. When Tasks, Employer Characteristics and Management Methods fit

well, it means that they are consistent, congruent, compatible and mutually

supportive. The owners’ and managers’ goals for the business may or may not be the

same as its Key Success Factors (KSF). An owner-manager may want to use the

company to gain social status in his community. The goal may have no direct

relationship with the business’ KSF. Obviously, if the KSF of a business are

compromised too much by an owner-manager’s goals, the company will suffer and

could fail. Owners and managers, unfortunately, are often not aware when their

personal goals for the business are in conflict with the KSF of their business. Once

the tasks have been identified and you have employees with approximately the right

TASKS

MANAGEMEMT

METHODS AND

LEADERSHIP

EMPLOYEES CHARACTERISTICS

FIT


By Saeed, Rana Amer

skills and values for these tasks, you must still guide these employees to do their jobs

in an appropriate manner. The first and perhaps the most obvious management

method is organization structure: grouping people together to perform work, deciding

who will report to whom and devising ways for individuals and work groups to

coordinate their activities. (Lorch 2001)

Many successful family business have structured the organization management and

leadership design at 1st generation stage as proactive tool to avoid family conflicts

happening at stage 2, where 2nd

generation, cousins and in-laws are also competing

for family management and leadership positions. As we will further study in ensuing

sections, the less than 20% fortunate family dynasties surviving to the second

generations, adopted a family design to bring necessary professional management in

the organization besides setting up the corporate and advisory boards comprising non-

family professionals. The role of the family is restricted to providing vision, family

values, long term goals and professional leadership where appropriate, otherwise,

successful family business are involved in the businesses only through family offices

and family holding company boards.

Typically, a family business should introduce a structure as early as 1st generation’s

entry into business, to ensure that the founder does not have to face dilemma of

induction of various family members into business, with or without, required

qualifications. Based on our above analysis, a structure similar to the one in Fig. 2

above should be introduced whilst the founder is still CEO. In this structure, the

Business is given independence to run under leadership of a non-family CEO and his

team, which is also primarily non-family except where due to unique business

requirement, a family member should head any function, like IT patent or R&D.

Family choose within themselves a Family Council which provides business with

long term macro vision, family values and governance, through, the Corporate Board

which also have some non-family board members to filter family instructions or

ambitions which may not be in line with the business strategies. Similarly,

shareholders, both family (in majority) and non-family, provide the board with their

vision and other matters regarding compensation and dividends for the family

members and setting up separate funds for new entrepreneurial ventures by the family

members .


By Saeed, Rana Amer

Gersick, et al (1997) in their book, Generation to Generation, Life Cycles of the

Family Business” has articulated the above structure in line with their “three circles

model”:

Ownership

Business Family

Fig. 7: The “Three Cirles model” – Structure and Planning

Source: (Gersick et al, 1997) in book “Generation to Generation – Life Cycles of the Family

Business”)

Structures

Shareholder Meetings

Board of Directors

Plan Plan

Estate Plan Strategic Plan

Plans

Continuity Plan

Contingency Plan

Structure

Management Development

Team

Plan

Management Development

Plan

Structure

Family Council

Plan

Family Plan


By Saeed, Rana Amer

Gersick, et al, (1997) describe their three circle family business model into

Ownership Dimension, Family Dimension and Business Dimension and their

overlapping responsibilities and obligations towards each dimension. This model has

been followed by many successful family businesses and is working in generations.

4.2 Family Business owners’ Leadership and Management Style

and their decision-making

It is a very interesting to study the Leadership and management style of family

business owners and managers since the psychological factors which drive their

decision making are different from a non-family leader and manager, such as,

ownership of business, emotional attachment, family relations with other business

managers, possessiveness, family protection, succession planning for next generation,

social status, etc. Therefore, a family owner’s leadership style should essentially be

different from a non-family leader or manager due to different feelings and belonging

to the organization. A family leader could be more benevolent at time as he may

consider contribution by employees personally for His organization or perhaps act

very authoritatively as he may consider all employees working personally for him

rather than the organization, or behave very suspiciously about actions of non-family

managers as being very possessive about the organization. It is also generally

observed that the family business leaders tend to be more secretive about the macro

business directions and related decisions and tend to share this information only with

the business leaders and managers who are either owners or belong to the family. A

term “family secrets” is commonly known in the business history where certain kind

of related responsibilities are shared with only family members.

Traditional Leadership Theories and style of exploitative authoritarian, Benevolent

authoritarian, Consultative and participative (Likert 1961), along with the behavioural

traits like, Autocratic Democratic or Laissez-faire, apply to family leadership though

they are again influenced by the above psychological factors. These emotional

attachment to business driven by its ownership and perception as family dynasty,

affect many aspects of the family leadership and management. I was personally

subject to a situation where one of the family members who was inducted in the

business, misbehaved with the non-family manager. However, the family CEO spared


By Saeed, Rana Amer

his son saying that his family ownership provides him a psychological mindset to

behave like an owner rather than a manager of the company. Such behaviour by the

family member and attitude of the family leader affected the motivation of non-family

employee. In another situation, where the top management made a presentation to the

Board comprising all family members and lead them to the most logical and risk-

versed decision, the Board did not agree to the recommendation as it may affect their

social standing within the community affecting the family name.

It is the emotional attachment to the business which restricts family business owners

to give up control of the business to non-family professionals even though this fact is

rarely acknowledged by the family leaders. There are many examples where the

family agreed to delegate control to the non-family professional management but

made indirect procedures or control systems which make such management to fail so

that family can regain control of the organization saying that no one can manage the

business better than the family leaders themselves. During this process, the family

inflict economic loss to organization in shape of hiring, compensation payment and

termination cost besides cost of time and business loss during this process. Such

emotional benefits of family leadership have been found to distort managerial

decisions. Divested business units for which owners or managers felt some attachment

induced, at least partly, by emotional benefits deteriorated to unprofitability before

divestment. Therefore, since emotional aspects seem to prevent more timely

decisions, thereby, inducing economic loss, they have an economic value in

themselves and affect willingness to accept. Duhaime (1984) and Zellweger (2008).

Sorenson (2000) analysed the contribution of leadership style and practices to family

and business success. Whilst analysing a family culture study in by Dyer (1986) who

concludes that out of 5 family leadership styles, participative, referent and expert style

contributes to the positive outcome for both family and business and high level of

employees commitments and satisfaction. However, Autocratic and Laissez-

Faire/Mission style of leadership produce negative outcome for business, family and

employees’ satisfaction and commitment. According to Dyer (1986), the most

prominent type of family business culture is paternalistic. In a paternalistic culture,

relationships are arranged hierarchically. Family leaders retain all key information

and decision-making authority, and managers closely supervise employees, giving


By Saeed, Rana Amer

subordinate little discretionary leadership. The Autocrative leadership best describes

the management behaviour in this type of organization (Hunt 1978). A second type of

culture is called participative. This type of culture is relatively rare. Relationships tend

to be based on trust and be group oriented; status and power are minimized. All

employees are viewed as resources of information and problem solving. Performance

evaluation criteria are applied universally to family and nonfamily organization

members. The growth and development of all employees is important. Participative

leadership describes the type of management behaviour in this culture. Dyer (1986)

labels the third culture laissez-faire. Here, management defines the mission and goals

for the employees and expect employees to be proactive in pursuing them. However,

employees are given wide latitude. A high level of trust exists and authority is

delegated to lowest level decision makers. These behaviours are consistent with

description of laissaz-faire leadership with one exception – the leaders in this type of

family business define the mission or goals for employees. (Sorenson 2000).

This study also endorses my observation and experience of certain family businesses,

where the leadership and management style is either paternalistic/authoritative or

Laissaz-faire where the family owners define mission and goals of employee rather

than market forces to define mission, goals, strategies and tactics i.e. a bottom-up

business planning process where market share targets should define the resources and

capabilities required to achieve realistically attainable targets in view of the market

competitiveness environment. Therefore, Dyer (1986) determines that participative

leadership is rare in family businesses, whereas, family leaders define mission and

goals for employee which may be driven by the family emotional values. Sorenson

(2000) carried out a study covering 59 businesses to establish relationship between

family business leadership and achieving desired outcome. He established the desired

outcomes as financial performance, family outcome, employees’ satisfaction and

employees’ commitment. His study concluded that only participative leadership style

contributes positively to all these outcome whereas other leadership styles contribute

to only a few of these four desired outcomes. So here is another dilemma faced by a

family leader that his family drivers do not let him to adopt the most successful

leadership style for achieving the desired results for the business and family alike.


By Saeed, Rana Amer

In an organic evolution of family business, a founder encompasses all functional

requirements of business. As Cope (2011) identified that at a micro-stage the

entrepreneur is more than just a leader. He/she is also a marketer, a sale

representative, a public relations officer, a financial controller and so on, occupying

numerous roles and wearing different hates simultaneously. As the organization

grows in size and complexity, with primary functions delegated, then the entrepreneur

should evolve into a primary leadership role. Hence, it could be argued that

entrepreneurship increasingly becomes a distinct from of leadership during the growth

process and highlight many challenges associated with building such leadership

capability: Indeed it appears that informal management and leadership practices are

the most effective in emergent businesses. Clearly there is a need for more formal

management and leadership practices as the business grows and it is at this stage that

the entrepreneur’s fear and problems with delegation may have a detrimental

influence on development. (Kempster 2010). Greiner (1972) stimulated a most helpful

introduction to issues of growth in small business. His simple argument suggested

periods of growth punctuated by periods of crisis. The first of these crises was the

crisis of leadership.

Due to involvement of family in business, leaders tend to be authoritative and/or

running the business from family point of view. A lot of contradicting approaches

may be taken by the family leaders which a non-family leader or managers may not

have taken as perspectives are differing. Family Firms likely to handle risk differently

than other types of firms, partly because management and ownership are not

separated. Family Firms’ risk taking is influenced by its ownership and governance

structure. With common ownership and management, family firms are more

vulnerable to self control problems and family managers have the authority and

legitimacy to pursue what they perceive as being the best option. The logic suggests

that managers in family firms have less control and understanding of the risk that they

are taking. (Naldi et al, 2007).

In conclusion, leadership and management style of a family owned businesses are

driven primarily by family considerations and perspectives, which may not be

desirable in view of the competitive environment in which the business is operating.

A family leader may delegate authority in a more participative cultural business


By Saeed, Rana Amer

environment but then the roadmap i.e. business plan is not purely business driven and,

therefore, non-family management team may not be successful even though they have

authority and independence to pursue goals defined by the family owners. In one

such personal experience of working for a family owned company, the family Board

totally rejected the business plan developed by the non-family professional

management based on the market realities, available resources and capabilities, and

the competitive environment. The family Board arbitrarily set revenue, market and

profit growth targets, which were not realistically attainable. It was obviously an

unconscious attempt to ensure that the non-family management should fail and

business control may come back to the family. In view of such management and

leadership styles, the family leaders tend to be very operationally active at micro

level, which does not allow them to plan the business at holistic and macro level

resulting in losing to more focused and visionary competition.

4.3 Family Business Leadership and the Competitive Environment

A family owned and managed company’s primary objectives are not different from

any non-family private firm. The primary objective is adding value and making profit.

The extension of primary objective includes expansion, market leadership and brand

building. Further elaboration of primary objective will include production, human,

social and business development objectives. However, the critical key success factor

(KSF) remain same for any profit oriented firm, otherwise, such firm can not survive

in the competitive business environment. Family business may differentiate them in

developing their competitive strategies like cost leadership and differentiation of

focus (Porter 2009). However, these competitive strategies are generic in nature and,

unless family firms do not have such competitive differentiation, their growth and

perhaps survival in their respective industry, and market are vulnerable to

competition. There are few questions all family firms’ owners and managers should

ask when setting to structure the business strategies and structuring:

What are primary objectives and key success factors of a successful firm;

Are these objectives common in family as well as non-family businesses;

What makes family businesses vulnerable to survive in its competitive market;


By Saeed, Rana Amer

Should family owners let non-family management make firm decisions since they

are not bound by the family and ownership specific limitations;

Will the firm with higher family control more likely to make it un-competitive;

and

Why family leadership do not make decisions required for the business survival in

the competitive environment and let family preferences take precedence.

In an interesting real practice, Fleming (2000) gives example of U.S. military where

family members are not allowed to serve in the same military unit. What is connection

to the family business? Every business can be thought of as an army engaged in a life-

and-death battle in its own market place. There are offensive and defensive moves,

attacks, counterattacks, pre-emptive strikes – and casualties. You do not want an

entire family wiped out because its business is defeated in the market place battlefield.

Family businesses get into trouble because the family system does not always allow

the business system to do what’s required for the business to succeed or, sometime,

survive.

Many successful family businesses have non-family directors on the board of their

companies and some family businesses do hire services of non-family directors on the

advisory board. These non-family representations bring the required objectivity in the

strategic and macro decision making process for the business in view of the

competitive environment due to the experience and outlook which these non-family

advisors bring to the family business. The two most prevalent types of planning that

occur within family businesses are strategic planning and succession planning.

Studies shows that family owned businesses which engage in planning are likely to

perform better than those that do not engage in planning. Advisory Boards are a

potentially important tool in the management of family businesses. The role of the

board of directors differs in family business from non-family business. (Blumentritt

2006)

We have studied in the preceding sections that it is highly likely that a family leader

may take certain decisions due to his/her family constraints and preferences but such

decisions may expose the business to excessive risk, such as, market or product

expansion beyond business resources and capabilities. Family Firms’ risk taking is


By Saeed, Rana Amer

influenced by its ownership and governance structure. Agency Theory (Jensen 1976)

also proposes that equity ownership influences managers’ risk taking propensity.

Necessary but risky strategic decisions, such as international expansion, the launch of

a new product or committing resources to R&D, are postponed due to concerns about

safety of the family wealth. With common ownership and management, family firms

are more vulnerable to self control problems and family managers have the authority

and legitimacy to pursue what they perceive as being the best option. The logic

suggests that managers in family firms have less control and understanding of the risk

that they are taking. (Naldi et al, 2007)

Another critical aspect which makes a family business less competitive is its

organization structure, organizational work flow, organizational capabilities and

organizational motivation. Many family businesses have key functional and

leadership positions filled by the family members who are holding these positions not

on merits and due to their family affiliation. These appointments create organizational

silos (Fig. 4 & Fig. 5 above) and prevent an organization to seamlessly function in

achieving organizational goals. Firstly, these silos do not allow organizational

integration and harmony to achieve common goals or rather create many functional

conflicts. Secondly, functional leaders are not equipped with required training,

education and experience to successfully lead their function in pursuit of their

function as well as corporate goals and even worse is that, due to family affiliations, a

family leader may not be able to enforce accountability on these functional leaders.

This capability gaps at time is the biggest competitive disadvantage of a family

business. The specific aspects of the ownership and management of private family

firms that are expected to be associated with superior firm performance and citing of

non-financial company objectives. Closely held companies with little outside

influence may exhibit an organizational serving culture and a focus on non-financial

objectives. The quality and experience of the family managerial labour pool may not

be able to fulfil the range of specialist managerial functions that a competitive

growing and complex firm require. (Westhead 2006)

With family taking precedent over business, many decisions are made by the family

leadership to protect, grow and feed family irrespective of their conflict with the

business success factors. The owners’ and managers’ goals for the business may or


By Saeed, Rana Amer

may not be the same as its Key Success Factor (KSF). In this case the owner-

manager’s goal and the Firm’s KSF would be in conflict. Obviously, if the KSF of a

business are compromised too much by an owner-manager’s goals, the company will

suffer and could fail. Owners and managers, unfortunately, are often not aware when

their personal goals for the business are in conflict with the KSF of their business.

(Davis 2001)

Entrepreneurs face a choice, at every step, between making money and managing

their ventures. Those who don’t figure out which is more important to them often end

up neither wealthy nor powerful. Founders are usually convinced that only they can

lead their start-ups to success. “I am the one with vision and desire to build a great

company. I have to be the one running it”. Many entrepreneurs are overconfident

about their prospects and naïve about the problems they will face. Founders’

attachment, overconfidence, and naïveté may be necessary to get new ventures up and

running, but these emotions later create problems. (Wasserman 2008). Many family

businesses do not realize when they actually cross the line of inability of in-house

resources and business capabilities to enter next stage of their business growth. They

either require external capital in form of angel investment or venture capital as many

banks will be reluctant at this stage of family business to lend them money. This

decision is a critical stage in life of a family business as the founder or incumbent

leader should give up part of ownership to non-family owners, which means he/she

will not have absolute control though he may be much richer (Fig. 1 above).

Similarly, at some stage, a family leader has to acknowledge the family limitations to

provide the business with the leadership required in view of the business environment.

This means many changes in ways the family have been managing the business,

including, loss of many old time employees, change in processes, new markets,

suppliers, etc.


By Saeed, Rana Amer

4.4 Family Business Sins – Getting out Alive

Chittoor (2007) presented a case study of one of the oldest Indian family dynasty,

Modi Group. This group committed many of the sins which family businesses are

exposed at as early a stage when the Founder has full control of business though 1st

generation is just entering the business. If we analyse some of these sins from parental

psychology point of view, it is evident that some of the sins which we are going to

analyse in following paragraphs are instinctive response by the founder to protect the

family even though these decisions may be harmful to business per see. Similarly, a

lot of actions taken by the next generation are also influenced by the human

psychology where sibling and cousin rivalry at time take over all logics. In most

situations, you’re deemed to have a mental illness if you have a multiple personalities,

yet if you work in your family’s business you’re forced to have multiple identities and

people expect you to be sane. But how sane can you be when you are forced to

embody at least two of four separate and distinct identities, and each of these

identities creates conflicting demands (Fleming 2000). In medical terminology this

psychiatric state of mind is called the Dissociative identity disorder (DID) also known

as multiple personality disorder in the ICD-10 (Classification of Mental and

Behavioural Disorders, World Health Organization) and is a

psychiatric diagnosis whose essential feature, according to the Diagnostic and

Statistical Manual of Mental Disorders (DSM), is the presence of two or more distinct

identities or personality state that recurrently take control of behaviour.

(www.wikipedia.com).

http://en.wikipedia.org/wiki/World_Health_Organization

http://en.wikipedia.org/wiki/Psychiatry

http://en.wikipedia.org/wiki/Medical_diagnosis

http://en.wikipedia.org/wiki/Diagnostic_and_Statistical_Manual_of_Mental_Disorders

http://en.wikipedia.org/wiki/Diagnostic_and_Statistical_Manual_of_Mental_Disorders


By Saeed, Rana Amer

Fleming (2000) has described these roles in the following figure:

Fig. 8: Multiple Roles of Family Members Creating Conflicting Signals to the

Founder

Multiple Hats That May Be Worn

Family

Member Manager

Each has

a different:

Perspective

Role

Responsibility

Owner Employee

Source: Fleming, Q. J., “Keep Family Baggage Out of The Family Business” (2000)

Fleming (2000) further describes some examples of this family baggage, which may

affect objectivity of decisions by the founder or family leader. In a symbolic

language, these baggage include emotions like, “We’re One Big, Happy Family”,

“They May Have Become Adults, but they’ll Always be My Children”, “You are Not

Loyal to This Family If You Insist on Being Selfish”, “Father Knows Best” and

“Maybe It Will Go Away If We Ignore It”. He describes the essence of this Baggage

as ”We Have Seen the Enemy, and He is Us”. All of this family baggage makes a

founder’s decision making very subjective with the family considerations being

preferred over the business considerations. These kind of situations can only be

avoided when business decision making is left to a non-family leader who is also

empowered and authorized to make independent decisions within an overall

parameters set by the family by Board or Council with respect to long term vision,

family values, extent of risk taking and governance rules to ensure business reflects

family vision, ethics and morality.


By Saeed, Rana Amer

In short, a founder faces multiple dilemmas to preserve interest of his family whilst

still managing affect of such family interests on business. This task may not be

manageable by the founder or family leader since relational sensitivities will not let

him to take such actions and more he tries more intense resistance he will face from

family. Such situation will lead to power struggle, which will be very complicated, as

every family member wearing different hat, will act differently, such as, family-

owner, family-manager, owner-manager, family-non-owner, non-family-owner, etc.

A family business member may wear a hat of either Owner, Family Member,

Manager or just an Employee with each role has different perspective, role and

responsibilities. A family business leader, either founder or descendent, will have to

deal with these roles for other family members. A leader of family business, when

faced with a decision, should ask him that what does good business practice dictate

that I do? (Fleming 2000). The family businesses are actually made up of two

overlapping subsystems: the family and the business. Each of these two “circles” has

its own norms, membership rules, value structure and organizational structure.

Problem arise because the same individual have to fulfil obligations in both circles

e.g. Family head’s reluctance to implement the most rational distribution plan due to

conflict in his desire as parent (to treat each offspring equally) and as a business

owner (to consolidate control in one successor). (Gersick et al, 1997).

When key managers are relatives and siblings, their traditions, values and priorities

spring from a common source. Spouses and siblings are most likely to understand

each other’s spoken preferences and hidden strengths and weaknesses. However, the

same intimacy can work against the professionalism of executive behaviour.

Authority may be harder to exercise, roles in family and business can become

confused, business pressure can overload and burnout family relationships. When they

are working poorly, families can create levels of anger, tension, confusion and despair

that can destroy good businesses and healthy families amazingly quickly. (Gersick et

al, 1997).

A founder or family head must face these dilemmas and decide at a right time to

segregate family interests from business interests and introduce separate leadership at

both fronts which are the most suitable, trained and experienced to not only take care

of each segment’s growth and well being but also complement both segments. A


By Saeed, Rana Amer

business leader must not take excessive risks to ensure family wealth is protected and

the family leader ensures that enough earning are re-invested into business rather than

taking excessive dividends, so that business is never short of required cash flow which

is bloodline for any business survival. Chittoor (2007) gave a very effective case

study of one of Indian family dynasty, Dabur Group, which successfully split the

family and business interests with the business being led by professional leaders

whilst family is managing business through family council. The next generation gets

the seed capital from the Family Council to explore new entrepreneurial adventures to

grow the business for future family generations. This way the family managed to keep

the family sins out of business and Dabur Group not only survived the global

competition but also consistently growing revenues and profitability generations after

generation.

To summarize, the most of the family sins are real and can actually cause business

mortality. It is up to the family leader to ensure he overcomes these dilemmas at right

time to ensure prevention of these sins happening during his time or thereafter.

4.5 Grooming Leaders within Family – Succession Planning

Despite professionalizing the business through induction of non-family leaders, it is

so critical for a founder or family head to keep grooming members of family to

assume role of future leaders for sustainability of family business and its growth for

future generations. These leaders are groomed for the purposes of understanding the

family business, family culture, developing management skills to lead the corporate

boards or family council, provide strategic vision to professional non-family

management and ensure its compliance through monitoring. A family leader though

not actively involved in operational business issues but they are the one who are

leading the business through the board of directors, whose one primary task is to

select the right team for the business and then setting up realistic KSFs for the

business. Unless these family leaders do not understand the business and its

environment, they cannot realistically provide strategic vision to the management

team. In one of my experiences whilst working with a family business, the family

brought a very professional and competent management team so that the family

should restrict themselves to business governance through the corporate board.


By Saeed, Rana Amer

However, the Board gave such unrealistic targets and KSFs to the management team

despite presentation of realistic business plans prepared in light with the business

environment, that the team was totally de-motivated from the beginning of the year

realizing that these objectives are not achievable. Furthermore, the Board also refused

to provide the business leader, with required resources and eventually the business

deteriorated worse than before and the whole management team has to take the blame

for failure and quit. This was happened as the family did not groom next generation as

leaders and managers to understand the family business environment and new family

generation members eventually made immature decisions to sabotage a decision in the

right direction made by the founder towards separating family from business, in

accordance with advice of the globally renowned consultants. Additionally, a family

business must diversify to ensure its growth beyond the initial business model set up

by the founder in accordance with the innovations and advancements in the family

business segment. These family young leaders may lead new start up businesses and

play the role of founder to replay the cycle of family business evolution. Moreover,

there are many examples where family member has been very successful as the CEO

of company because he has been able to alienate family sentiments from business and

due to his knowledge of business and loyalty of team, performed as well as any non-

family leader could have been. Based on my analysis of various global family

businesses’ leadership, there are many family led successful businesses, such as,

Rothschild, Braun and Kingdom Holdings.

In case the timing of succession is not synchronized with the successor’ abilities, a

family leader may face very intense issues to tackle as successors will want their share

whilst they are not yet ready to assume those responsibilities. With the parental and

family responsibilities, the founder has to make decision to induct the family

members in business prematurely. Fleming (2000) has suggested the model, which

proposes a stage in a family business when a leadership succession should happen to

avoid severe conflict within family and which may destroy the business. Once the 1st

generation enters the business to get on-the-job experience and their abilities

improving, these three phases happen as follows:

The Grooming phase – The first milestone - Grooming - was reached shortly after

the second generation entered into the family’s business. In a well-run family


By Saeed, Rana Amer

business, the Grooming Phase represents a period when the first generation (i.e., the

people on power) are actively grooming the second generation (i.e. the would-be

successors) so that they will possess the skills needed to take over the business.

The Succession Phase - During this phase, an interesting thing happens: the abilities

of the second generation overtake and slightly surpass those of the first generation.

There is no specific date when succession must occur, but it is best performed

sometime within this phase.

The Conflict Phase: Conflict occurs because the second generation sees that the

abilities of the first generation – those still in power – are diminishing while their own

are strong and still increasing.

Similarly, Doud, Jr, E.A. of Doud Hausner & Associates (n.d.), refers family business

evolution in four stages: Family businesses have the potential to move four stages of

evolution that can take their owners from Stage One where everything they have is

plowed back into the business, to Stage Four where the financial family that has sold a

successful business and is now investing the proceeds in other ways. But for most of

us it really isn’t about getting to Stage Four. Successful family businesses in this

country can last for generations as good, solid Stage Two businesses. ‘Getting out of

the family business alive’ means avoiding the trap that often snares the owners of

Stage One businesses, thereby giving it a chance to get to Stage Two. The best

approach to ensure family business continuity is to move the business into Stage Two

in the evolution of family business and wealth long before founder starts to slow

down.”

Succession is a process, not an event. Hence, factors that manage succession as a

well-planned process, such as appropriate procedures for selection of successor,

nurturing, development, and training of the successor and corporate governance

mechanisms and structures are positively correlated to effective succession (Chitoor

2007). Quoting example of Dabur Group of India - it was not practically possible to

accommodate each interested family member in an executive position. Dabur

(http://www.dabur.com) made the transition from a family-owned and managed group

to a family-owned and professionally managed group in 1998 by handing over the

http://www.dabur.com/


By Saeed, Rana Amer

management of its flagship company to a nonfamily CEO. The family members

assumed an active governance role and have created a family council, which acts as

the primary communication channel between the family and the management and

provides the long-term direction to the group. Dabur has utilized the mechanism of

the Family Council in keeping the interests of the fifth generation family members

separate from the business interests. (Chitoor 2007).

Leadership does matter for business success (Fiedler, 1996), and it is vital for family

businesses, for three reasons. First, family firms may have different goals than do

publicly owned companies in that nonperformance-oriented goals, such as

employment for family members, may take precedence over the goal of growth and

profitability (Chua 1997). Second, when compared to nonfamily firms, family

businesses have greater potential for long-term conflict among involved actors

(Morris et al 1997). Finally, the process of leadership succession is far more

important for family firms than it is for nonfamily businesses because of a stronger

link to firm survival (Rubenson 1996). Chrisman (1998) categorized (leaders traits)

into six groups; relationship to the incumbents, relationship to other members of the

family, family standing, competence, personality traits, and current involvement in the

business. As such, they found integrity and commitment to the business as the most

important characteristics. (Carter 2009).

A founder or family-head must start succession process at an early stage and clear the

role of his successor as to the family business evolution strategy, its long-term vision,

family values, role of non-family professional manager in the business, separation of

family ownership from management, proposed role of family owners and members in

the family business, family charter and constitution, family council and corporate

board’s role and responsibilities. If such clarity is not instilled by the founder to his

successor, then a lot of ambiguities will happen within the family members and also

between family and the non-family management team. The succession planning may

sound very simple but if not handled carefully and skilfully by the family leader, it

may open a Pandora box and family feuds and conflicts may destroy the whole family

business (Chattoor 2007). The succession planning is definitely one of the dilemmas

for the family leader since he has to pick the most suitable candidate rather than the

eldest male offspring. In my experience with one of the local family conglomerate,


By Saeed, Rana Amer

the ageing family leader changed his mind about his successor every time his

previously appointed successor failed in managing business. Each replaced family

leader will then creates his own little group of siblings sympathetic to him. The cost

of all this repeat experiences of appointing successor was many times more than the

cost of an external consultant, which the family leader could have hired to lead them

to systematic process of succession planning and passing on the family leadership to

his successor with minimal family conflicts.

In their study, Carter (2009) highlighted some steps in a successful succession

process. To start with positive Parent-Child relationship; the incumbent family

business leader may encourage the successor to enter the family business in several

ways, through positive shop talk (Handler 1994) or by facilitating part-time or

summer employment for possible successors (Barach 1988). Once the successor joins

the family business, a smooth working relationship between the founder and the

successor facilitates the succession process. Similarly, family business succession is a

series of events, rather than a single event, that takes place over an extended period,

perhaps as long as 20 years (Handler 1994). Conflict is common among leaders in

family firms, but a good working relationship between the predecessor and the

successor is vital to any transfer of power (Cabrera-Suarez et al, 2001). The

incumbent must be willing to let go of the control of the business (Dye, 1986). The

incumbent must delegate responsibility and allow the successor to make decisions and

mistakes (Handler 1990). Some incumbent refuses to train or coach their chosen

successor, thus resorting to a type of undermining behaviour, whereas some owners

simply envy their children (Morris et al, 1997). Some first-generation leaders search

for mistakes in their successor and thus create reasons to fire them (Lansberg 1988).

Still others act as if they are immortal and need no successor (Bjuggren 2001). One

major problem in the succession process involves the need of the successor to acquire

the predecessor’s knowledge of the business to maintain and improve the performance

of the firm (Cabrera-Suarez et al, 2001). Dyke et al (2002) viewed the process of

succession as being analogue to a relay race, with success dependent on four factors:

sequence, timing, baton-passing technique, and communication. Sequence involves

the process of educating the successor to ensure that he or she has the needed

leadership skills and business experience to manage the company. Timing is the

effective passing of leadership from one generation to the next. Baton passing


By Saeed, Rana Amer

involves the attention to details in the succession process. Communication comprises

the respectful information exchange between the incumbent and successor. Finally,

the process of succession involves trust between the incumbent and succession

generations (Handler, 1990). In the process of succession, parents take some risk

trusting that their children will perform honourably and successfully in the family

firm (Barach 1995).

Leadership is the process of influencing the activities of an organized group in its

efforts towards goal setting and goal achievement (Stogdill 1950). Leadership does

matter for business success (Fiedler 1996), and it is vital for family businesses, for

three reasons. First, family firms may have different goals than do publicly owned

companies in that non-performance-oriented goals, such as employment for family

members, may take precedence over the goals of growth and profitability (Chua

2003). Second, when compared to nonfamily firms, family businesses have a greater

potential for long-term conflict among involved actors (Morris et al, 1997). Finally,

the process of leadership succession is far more important for family firms than it is

for nonfamily businesses because of a stronger link to firm survival (Rubenson 1996).

I have observed some of the fiercest conflicts happening in family businesses where

the succession was not planned by the founder properly with respect to timing and

training of his successor and he also did not plan properly for the induction of the

successor within the family so that his successor is accepted by the family when the

baton is passed on to a new family leader by the founder. I have been working in the

Arabian Gulf Region where businesses are primarily owned by a few big families

who had these ruling opportunities at the time of independence of their countries from

the colonial rules as they had special privileges being the tribal leaders. Due to their

religion and tribal traditions, the most of these leaders practice polygamy having

many children from different wives. In such cases, many a time cultural customs

decide the successor who is the eldest male son from the first wife followed by his

younger brother and so on until there is no more male offspring from the first wife.

This succession sequence is then followed by the male children from other wives in

seniority and many a times the successor, who was the eldest child of the first wife,

may decide to appoint his own eldest son as successor to the family leadership,

thereby, igniting a family feud. There are examples where the country rulers intervene

in such family businesses and settle their succession problems by providing mediation


By Saeed, Rana Amer

and at some time even splitting the family business among brothers. “Abdulla Al

Futtaim, estranged brother of mall mogul Majid Al Futtaim oversees family's auto

assets, which he received when Ruler of Dubai Sheikh Mohammed bin Rashid Al

Maktoum brokered split between feuding siblings in 2000

(http://www.forbes.com/lists/2010/10/billionaires-2010)”. In 1985 after a heart attack

Dhirubhai (founder of the Reliance business empire) handed over the Reliance empire

to his sons Mukesh and Anil. After his death, the group was split into Reliance

Industries Limited, headed by Mukesh Ambani, and Reliance Anil Dhirubhai Ambani

Group (Reliance ADAG), headed by Anil Ambani.

(http://en.wikipedia.org/wiki/Dhirubhai_Ambani)”. With much more history of

entrepreneurial experience, Europe and North American family businesses’

succession are managed in much more methodical and structured manners and,

therefore, many European and North American families are thriving even after many

generations due to wisely managing succession planning through consultation,

advisory and assistance of the professional business leadership. It can be established

that many family businesses which survived through generations, were able to

manage succession planning at an early stage of family business growth and plus they

decided at right time to dilute family ownership through IPO or private placement

and/or delegating business management to non-family professionals. This enabled

them to fully concentrate on family matters of succession, diversity, family value

preservation and keeping a long term vision of their family businesses.

http://www.forbes.com/lists/2010/10/billionaires-2010

http://en.wikipedia.org/wiki/Reliance_Industries_Limited

http://en.wikipedia.org/wiki/Reliance_Industries_Limited

http://en.wikipedia.org/wiki/Mukesh_Ambani

http://en.wikipedia.org/wiki/Reliance_Anil_Dhirubhai_Ambani_Group

http://en.wikipedia.org/wiki/Reliance_Anil_Dhirubhai_Ambani_Group

http://en.wikipedia.org/wiki/Anil_Ambani

http://en.wikipedia.org/wiki/Dhirubhai_Ambani)


By Saeed, Rana Amer

4.6 Professionalizing family business through inducting non-family

leaders and the conflict management

A family business grows from an initial entrepreneurial venture by the Founder to

commercially competitive size corporate where competitors start seeing the business

as a threat. The Founder sets up KSFs of his business and runs it as per his rules,

policies and practices and, since the business has been steadily growing, he/she

assumes that his style of running the company, leadership style, management of all

functions and financial management are better than others. It is not common that such

Founders and even the 1st generation fell for this misconception that their business

management is actually giving them an edge over competition so they tend to be

inflexible. Their initial business venture’s success also gives them an illusion that

their entrepreneurial and gut-feeling decisions are beyond any justification by

business management principals, especially, risk management principles which are

actually telling them to stop running so fast to build a family empire. However, they

do not realize in this race that they have long crossed stage 1 of their business growth

and stage 2 pre-requisites are not within their comprehensions nor they have

developed enough resources within their business to bridge this capability gap.

This is where they face their first taste of competitive leadership inabilities within

their organization. However, it is proved through study by many scholars and many

family business dynasties that many family leaders will still live in denial stage and

keep repeating mistakes or rather commit bigger mistakes and, eventually face the

ultimate fate of being non-competitive in the market. This is a scenario where family

business has not entered the stage where family conflicts start due to cross allegation,

as that would be the final nail in already disintegrating business empire where various

family-owners claim their piece of family empire, thereby, act as catalyst to downfall

of the family business.

Contrarily, there are many examples where the family businesses realize at an

appropriate stage their limitations in respect of required professional resources and

capabilities to match their growing business market competitiveness. In his article,

Chitoor (2007) has given example of an Indian family dynasty, Dabur, which replaced

all family CEO with non-family professional CEOs at a right time in 1990s when


By Saeed, Rana Amer

India was opening its huge economy to non-Indian global companies. These

professional CEOs who has appropriate experience and exposure to global businesses,

provided necessary capabilities to the business which has since been growing steadily

despite severe competition from global businesses.

When founders ship the first products, they are making end of an era. At that point,

leaders face a different set of business challenges. The venture requires to build

capacity for larger volume, finances become more complex and the founder/CEO

need to depend on finance executives. The organization has to become more

structured, and the CEO has to create formal processes, develop specialized roles,

and, yet institute a managerial hierarchy. The dramatic broadening of the skills that

the CEO needs at this stage stretches most founders’ abilities beyond their limits.

(Wasserman 2008). There are very few examples where the Founder of the company

remained CEO for long time, such as, Steve Jobs, Bill Gates or Michael Page.

However, it is interesting to know that most of these CEOs are 21st century leaders

who have already accepted the notion of new leadership styles of the distributed

leadership or the transformational leadership. According to Wassermen (2008),

“When I analysed 212 American start-ups that sprang up in the late 1990s and early

2000s, I discovered that most founders surrendered management control long before

their companies went public. By the time the ventures were three years old, 50% of

founders were no longer the CEOs; in year four, only 40% were still in the corner

office; and fewer than 25% led their companies’ initial public offerings. Other

researchers have subsequently found similar trends in various industries and in other

time periods.” Although, the same principle may not apply in some cultures other than

North America, such as, Japan, India and some part of Europe where the Founders

and next generation continue to closely lead their companies as their preference will

be to hold control of the company rather than encashing the already achieved

successes by bringing in angel investors or venture capitalist or simply going IPOs

where it is economically viable, in which case new board members will bring in new

management to steer the company towards extended growth which was envisaged by

the investors when buying the company. However, such decisions of diluting controls

are based on prudent insight by the family owners who realize that “their financial

resources, ability to inspire people, and passion aren’t enough to enable their ventures

to capitalize fully on the opportunities before them. The trade-off of letting go control


By Saeed, Rana Amer

of family businesses provide businesses with required resources and capabilities and

actually make the Founder rich (Wasserman 2008).

In an organic evolution of family business, a founder encompasses all functional

requirements of business. As Cope (2011) identified that at a micro-stage the

entrepreneur is more than just a leader. He/she is also a marketer, a sale

representative, a public relations officer, a financial controller and so on, occupying

numerous roles and wearing different hates simultaneously. As the organization

grows in size and complexity, with primary functions delegated, then the entrepreneur

should evolve into a primary leadership role. Clearly there is a need for more formal

management and leadership practices as the business grows and it is at this stage that

the entrepreneur’s fear and problems with delegation may have a detrimental

influence on development (Kempster 2010). Though, many families tried to develop

their successors from within the family members, in many cases, the genesis of the

problem is the non-availability of family members who are adequately trained in

management or too many family members of a large family chasing a few key

management positions available in the group. It is preposterous for any family to

presume that it will continue to produce the best management competencies within the

family or that it can match the external market in competence. If a true meritocracy

were to be followed, as many family businesses profess to so, then it is only inevitable

in the long run that the management of the business is professionalized and

management separated from ownership. Also, hiring professional managers for the

top jobs lends flexibility to correct any mistakes quickly (which can otherwise have

an adverse impact on the business) which is not easy if family members are chosen

for the position. (Chittoor 2007). I have compiled an analysis through research on

corporate web sites or other sites, of some really big and successful family businesses.

The criteria of choosing these companies were primarily to have a representative

sample of successful family businesses from old and new era to cover multi-

generational businesses, their sizes, geographical diversity to assess cultural

preferences, types of businesses and activities and their current ownership structures.

The expected outcome prior to the research and study of these family businesses, was

to see whether or not these family owners have retained the ownership and the top

management or diluted their ownership and handed over management of their


By Saeed, Rana Amer

companies to non-family managers. The conclusions out of 14 family businesses

selected, are as follows:

10 businesses (71%) have non-family CEOs;

9 (64%) family businesses have diluted their ownership by going public. I did not

attempt to establish the extent of ownership dilution;

North American and Western European companies are public companies,

whereas, Asian, Middle Eastern and Atlantic European companies prefer to stay

private. One of Middle Eastern company, the Kingdom Holding, though public,

has only divested 6% of equity.

Out of 4 businesses having family CEOs, 2 are Middle Eastern, 1 (Rothschild) is

private banking and 1 (Braun) has non-family CEOs for subsidiaries.

Table of CEOs of some of the most successful Family Businesses

An overview of some great Family Dynasties and Their Current Leadership

Family Business Activity Structure Country Since Generation CEO

Rockfeller Standard Oil Company Oil & Gas Public USA 1863 3 Non-Family

Michelin Michelin Tyre Tyres Public France 1880 3 Non-Family

Porsche Automotive Auto Public Austria 1931 2 Non-Family

Bombardier Airplanes Private Public Canadian 1942 1 Non - Family

Planes

Rothschild Private Banking Banking Private UK 1790 Not known Family

Braun Medical Equipments Medical Public Germany 1839 3 Family

Pictet Bank Financia Services Banking Private Swirtzerland 1805 Not Known Non-Family

Barilla Pasta Food Private Italy 1877 4 Non-Family

Ferragamo Salvatore Farragamo Fashion Private Italy 1920 1 Non-Family

fashion accessories Retail

Tata Rattan Tata Group Various Public India 1868 2 Non-Family

AlGhurairs Group of companies Various Private Dubai 1965 1 Family

Oeri/Hoffman Roche Pharma Public Switzerland 1896 6 Non-Family

Kingdom Holding Kingdom Holdings Various Public Saudi Arabia 1979 1 Family

Samsung Samsung Electronics Various Public Korea 1938 1 Non-Family

Based on the above analysis, it is evident that after a certain level of growth, family

businesses should consider bringing professional non-family management to take the

business to the next growth phase. In the above success stories the family businesses

successfully grew due to either diluting their ownership to bring necessary financial


By Saeed, Rana Amer

resources to business and/or handing over the operational leadership to non-family

professional management.

In a very effective study, Chittoor (2007) have studied three Indian family dynasties

to prove impact of professionalization of the family business through induction of

non-family leaders. Their study establishes that two out of three selected businesses

handed over business management to non-family CEOs and structured family

leadership involvement through setting up the corporate board or family council,

which acted as the primary communication channel between the family and the

managers and provided the strategic advice, governance and long-term direction to the

group.

Where the family owners persist with the management of the business even if it has

grown enough to require professional competencies, which are not available within

the family, they expose the business to market, industry, human resource, financial

and governance risks. Due to emotional and psychological reasons, the family owners

and managers will be tempted to grow products or markets through over-leveraging

businesses when they should be consolidating their previous growth. Similarly, to

protect the family and their future, the family owners and managers may even attempt

to be too cautious to take calculated risks to grow when the market is growing and,

thereby, missing opportunities to grow as much as competitors. These actions or non-

actions are taken because of family owners’ emotional attachment, which mostly

make them believe that no-one knows the business more than the owners and they

must make all decisions in an overall interest of the family. This attitude in many

times, make them vulnerable to the market forces, which are the only realities in

business survival and growth. “Family involvement in ownership (FIO) and Family

involvement in management (FIM) can create benefit or disadvantages for company

competitiveness. In case of FIO, advantages out-perform disadvantages to affect the

performance whereas, FIM’s negative effects outweigh the advantages. FIM brings

about negative effects on financial performance due to general lack of professional

competencies of family members, the barrier to increasing social capital and

orientation towards non-financial goals. (Sciascia 2008).”


By Saeed, Rana Amer

Based on our above discussions and analysis, it is a fact that family businesses, which

complement their businesses with the outside professional leadership and

competencies are better placed to survive and grow compared to businesses which

insist on keeping all owner and management control within the family. The next step

following introducing non-family professional management in business is to induct

them to family values and visions and let them align them to their business planning

process. It can be a very sensitive and critical stage since conflict between

owners/family with non-family professional management can harm the businesses and

may result in the whole professionalization process being ineffective and a complete

failure.

One of the most significant steps in evolution of a family owned business is to accept

that the family do not possess the necessary skills, experience and exposure to be able

to provide necessary leadership and management to the current stage of family

business. In other words, the family is willing to forego part of control of the family

business through diluting their shareholding and letting new shareholders bringing

new directors and participate in the decision-making. Alternatively, the family

leadership may decide to bring a new non-family CEO who will present a new

medium to long-term plan to the family in line with the initial guidelines as to the

family vision and values. Thereafter, the CEO will form a new team replacing

complete or part management team which may have been working with the family for

long time and have their confidence. In some cases, the family may decide to dilute

their ownership as well as management control and restrict themselves to providing

long-term vision, values, governance and overall strategies. This is a very critical

stage as many conflicts are likely to arise whilst the family is letting non-family

professional taking over their so-called “my baby”. In case the family stay on as CEO

or keep holding other authoritative functional position, they are tempted to interfere in

the overall business strategies, as they may perceive them detrimental to the family

interest or the business. It is normal tendency in a family business going through such

transition to stick to either CEO position or keep one for the family members as head

of the research or strategy function to protect family secrets or family vision. In one of

my experiences of working with an agro-commodity manufacturing FMCG (fast

moving consumer goods) business, the family owners delegated management to a

totally new management team but kept the procurement with one of the family


By Saeed, Rana Amer

members as its function head. It so happened that procurement policy was not aligned

with overall business plan and company made losses on many big orders primarily

due to either wrong price budgeting or compromised quality of raw material. This

started a war of allegation for setting responsibility for losses between CEO and head

of procurement and consequently the family board sided with their man and CEO and

his full team has to leave. “Nonfamily CEO can have positive impact on business

when he is in a position to influence strategic decisions. Information Asymmetry and

bounded rationality will increase possibility of non-family managers to act in their

own interest over interest of owners. Non-family managers must be involved in

strategic management and apart from senior positions must have presence in the

Board. (Chua 2003)”. Similarly, one of the conflict factors is presence of old

employees who may have been disguising their in-competencies as loyalties to the

family. Their existence in the business depend upon proving this loyalty to the family

and, in doing so, they play role of spies on the new management and criticise their

decisions as the most of their previous set ups and structure are being modified or

completely replaced, which make themselves very defensive about their previous

performances. Therefore, it is very important that the family must plan extensively

when making such transition but must provide the new management complete

authority and independence of making strategic decisions and corporate changes,

within overall guidance by the family board in respect of their values, vision and

mission. Moreover, whenever there are conflicts between family shareholders and

non-family management, there must be a conflict resolution and conflict management

procedures, so that such conflict may not result in complete de-motivation of new

management team nor it should result in a complete u-turn by the family on their

decision to professionalize their organization which is a right decision. “The unity and

commitment are significant strengths of family business. Non-family directors

improve shareholders commitment. The existence of conflict between shareholders

and top management and the manners in which the family business settle them,

determine the degree of convergence of their respective interests and objectives. In

summary, the management and governance structure, the ownership structure, and the

decision making process are critical elements in family businesses because they affect

the goal and interest conflict between shareholders and management. (Vilaseca

1999).”


By Saeed, Rana Amer

Another vital aspect of such transition is sensitizing new management to the family

culture and their values. It is very delicate processes where family keep involvement

with the new management until they are fully conversant with family culture and

value and there are chances of interference of family into management decision

making. However, if family kept itself fully distant from management to let them

fully independent, there are chances of new management making some vital

decisions, which may be against the family culture and values. Hall (2008) analysed

perhaps one of the most important aspect of non-family management, that is, cultural

competence. A new non-family CEO has a dilemma to keep interacting with previous

family leadership to develop the cultural competency at the risk of not implementing

his plans or never interacting with them and be accused of scarifying family norms

and value for financial growth. Therefore, Hall (2008) proposed an extension of

meaning of professional management with what he called cultural competence,

defined as understanding of the family’s goals and meanings of being in business, that

is, the values and norms underlying the reason for the family to be in business.”

(Dyer, 1986) saw professional management as the “rational alternative to nepotism

and familial conflicts that plague a family business” He argued that professional (non-

family) management typically leads to new leadership pattern “because of the very

nature of professional manager”, and new strategic development routes for the family

firms, in particular towards growth and expansion”. Beyond financial considerations,

the family business exists for perpetuating family value and unity…these values are

so important that anything, or anyone that interrupts this fragility could send the

family business into chaos. (Astrachan 2002). From this point of view, a new CEO

acquires cultural competence gradually by developing an ability to view the situation

from the perspective of other dominant actors, which in most family firms are the

main representatives of the family. This is done both consciously and unconsciously

and the ability to do so is the result of socialization processes. (Blumer, 1969; Mead,

1934).

Based on a regression analysis on data drawn from 620 privately held family firms in

Italy, Sciascia (2008) suggested that in privately held firms the positive effects that

previous literature associates with the presence of family managers do not appear

strong enough to compensate for the disadvantages deriving from a nonmonetary goal

orientation, nor do they compensate for the cost deriving from the need to solve


By Saeed, Rana Amer

conflicts between family managers and the impossibility of enlarging the company’s

social and intellectual capital through the employment of nonfamily managers.” It is

therefore, an established fact that at certain stage of family business evolution, it is in

the best interest of the family and the business that non-family management should

assume control of the firm business and family should restrain itself to providing

macro vision governance and family values to the non-family top management and

should concentrate on effectively managing succession planning of ownership.

However, it is perhaps the biggest dilemma for a founder to let go control of his/her

baby to a non-family CEO due to all apprehensions he/she has about anyone else’s

ability to look after his/her company, especially, someone from outside the family and

where he is not passing on the reins of his legacy to someone other than his own

blood. However, this is a dilemma, which a founder must face and manage as this

single decision will determine longevity of his family dynasty.


By Saeed, Rana Amer

Chapter 5 - Project Wrap up, Conclusion and Inferences

Prior to summarizing the project discussions, I wish to analyse results of

responses to my questionnaire (Appendix 2), as majority of the respondents who

has experience of working for the family businesses, seem to conclude and

support the reasons discussed above and which are likely cause of failure of so

many family businesses.

Summary of Response to the Questionnaire

A summarized response to the questionnaire (Appendix 2) prepared to seek

feedback from a sample of professionals whom have worked in family businesses

of all sizes and nature, has been as follows:

General Question

Yes No No-Response

% % % Did family owners change KPIs or goal post

midway through year? 58 17 25

Was compensation of professional management

based on owners discretion? 67 8 25

Did owners follow Management by Objectives

(MBO) Approach? 17 67 17

Was compensation of professional management

linked to results achieved? 17 67 17

Was there any attempt by owners to follow divide

and rule policy to run the company? 42 33 25

Do you believe that owners’ involvement in

Business management reflects in Company’s

operating results? 58 08 33

Major vision and long term planning decisions are

made through structured Business Plan process? 17 67 17

Are family owners actively involved in the

management of company? 75 08 17

Family members are inducted in business through

structural training process and are not directly

given leadership roles? 08 75 17

Do you believe that family management is

providing leadership required by the organization? 08 67 25

Do you think your organization provide

Competitive capabilities against professionally and


By Saeed, Rana Amer

non family management competitive business 25 58 17

Top Three Advantages of Family Business:

The questionnaire presents 8 potential advantages of family managed business

compared to non-family managed business. Based on the highest scoring of three

individual advantages by respondent, results are as follows:

1. Decision Making 58% scored as top 3 out of 8 advantages

2. Lower Management Overheads 58% scored as top 3 out of 8 advantages

3. Succession Planning 43% scored as top 3 out of 8 advantages

Top three factors responsible for failure of family managed businesses

The questionnaire presents 6 potential factors responsible for the failure of family

businesses. Based on the highest scoring of three factors by respondents, results

are as follows:

1. Incompetent Leadership 57% scored as top 3 out of 6 factors

2. Lack of required resources &

Capabilities’ development 43% scored as top 3 out of 6 factors

3. Inadequate Management Skills

By family leaders 29% scored as top 3 out of 6 factors

Failure to motivate employees 29% scored as top 3 out of 6 factors

Lack of long-term vision 29% scored as top 3 out of 6 factors

Inference from Results and support to the Project Theme

Majority believes that primary factors responsible for the failure of family

businesses are incompetent leadership and lack of development of organizational

resources and capabilities, thereby, giving family businesses certain competitive

disadvantages compared to the non-family businesses or the family businesses by

non-family leaders. Majority believes that the family’s interference in the

business is primary through leadership as CEO and almost unanimous feedback

that involvement of family owners in business does affect the business results.

Moreover, family businesses induct next generations in leadership roles without

formal training.


By Saeed, Rana Amer

Project Wrap-up

The recent study by Professor Hidemasa Morikawa (2001) is an impressively

well-documented attempt to demonstrate the inescapable destiny of the family

firm, i.e. the alternatives of managerialisation or decay. In a chapter which

examines ‘family enterprise in Japan today’, he provides an impressive list of

entrepreneurial failures due to refusal to go public, to familialism and family

feuding and to failed leadership succession. As Morikawa (2001) concludes:

“My persisting view is that future prospects for family enterprises are not

optimistic. The first reason for my rather pessimistic outlook is that successful

family enterprises…are the exception rather than the rule. Also, even successful

family enterprises find it difficult to have continued success over long periods of

time owing to the problem of continually finding and training new and capable

top managers from within the family. The same problem exists to an even greater

degree with less successful family enterprises. These two issues…strengthen the

argument that family enterprises are intrinsically limited in their future

prospects.” Although, the position taken by Professor Hidemasa Morikawa in

respect of future of family businesses seems very pessimistic, this position may be

exclusive to the businesses in Japan. There are many success stories of family

businesses who have been in business for generation and growing as much, if not

more than, any non-family owned businesses (refer Table above). However, there

are certain aspects in these successful family businesses which many failed

companies lack. The top factor has been the family leadership which in view of so

many family and ownership related dilemmas could not make their businesses

competitive in their market place and despite realization of these factors, still

could not respond to the changes needed in management of their businesses.

Over 80% of all businesses worldwide are family firms (Gersick, et al, 1997). With

less than 20% Family Businesses surviving to first generation, it is obvious that the

process of building corporate resources and capabilities in line with the business

growth, fail in most of the Family Businesses. For one reason or other, Family

businesses cannot evolve to be competitive internally and externally, tend to lose key

personnel, corporate strategies are inconsistent and adhoc decision making by the

owners do not take care of risk management process. Family members are inducted in


By Saeed, Rana Amer

business prematurely with a notion that they can be trusted over the professional

management and this lead to further conflicts.

Finkelstein (2008), in his article “Why Smart Executive Fail”, describe “The

Seven Habits of Spectacularly Unsuccessful Executives”, as:

Habit #1 –They see themselves and their companies as dominating their

environment;

Habit # 2 – They identify so completely with the company that there is no clear

boundary between their personal interests and their corporation’s

interest;

Habit # 3 – They think they have all the answers;

Habit # 4 – They ruthlessly eliminate anyone who isn’t completely behind them;

Habit# 5– They are consummate spokespersons, obsessed with the company

image;

Habit # 6 – They underestimate obstacles

Habit # 7 – They stubbornly rely on what worked for them in the past

Based on our discussions in the past sections, we can see all or most of the above

habits in a family business founder or incumbent leader as they cannot distinguish

between the company and themselves. Such family leaders do think that they have

all answers and whatever they have done successfully in the past, will continue to

succeed irrespective of the market conditions and changes in the competitive

environment. Due to various dilemmas faced by the family leaders, their actions

reflect the above pattern of leadership and that may lead them to cause their

family businesses disintegration.

Barring cultural insensitivities and other exceptions, the majority of research

work, opinion of consultants’ result oriented projects and experiences of

professional working with the family businesses in various part of the worlds, the

primary factor for such mega failure of family businesses, is most likely to be

leadership crisis. The most of the family leaders, founders and next generation

leaders, could not get the family business out of the family to be able to provide it

with necessary resources and capabilities to perform at par with the non-family

businesses in the same market place and, consequently, disintegrate rapidly or


By Saeed, Rana Amer

over a longer period of time. Those family leaders, whom could face their

dilemmas and carryout the action below in time, ensure longevity of their dynasty

for generations:

Keep family baggage out of family;

Ensure three sides of the family business, the business, family and

ownership, are kept within their circles;

Provide required resources and capabilities as required by the business

irrespective of the ownership and/or family constraints, to remain

competitive in the business market place;

Ensure succession planning of family and ownership in view of the

structure and plans as per the three circle model; and

Provide business with professional leadership which is free from the

family and ownership compromises, support such leadership and let them

lead the business with empowerment.

Some of the great family dynasties, like Samsung, Rothschild, Caterpillar,

Ferragamo, Dabur, etc, are living proof of the distinctive edge of family

businesses if their leaders can steer them through these obvious but very

compelling constraints.


By Saeed, Rana Amer

Bibliography and Appendices

Andrea, C. (2003), “The History of Family Business, 1850-2000”, Cambridge, UK:

Cambridge University Press

Fleming Q.J. (2000), “Keep the Family Baggage out of the Family Business, Avoiding

the Seven Deadly Sins that Destroy Family Businesses”, Fireside, NewYork

Gersick, K.E. (1997), Davis J.A., Hampton, M.M. and Lansberg, I, “Generation to

Generation – Life Cycles of the Family Business” Harvard Business School Press

Welsh, J.F. and Byrne, J.A. (2001), “Jack: Straight from the Gut”, Warner Business

Books, New York

Doud Jr. E. A (n.d.), “The Family Owned Business – How to Get out Alive”, Doud

Hausner & Associates, The Consultants to Family Entreprises in Trasition.

Davis, J. A.(2006), “Reminders for Owner-Managers Regarding the Board of

Directors of Private Companies”, Harvard Business School, May 15, 2006,9-805-154,

Note as Basis for Class discussion.

Lorsch, J. W. (2001), “The Organization Design of Owner-Managed Companies”,

Harvard Business School, Note on Organization Design, “Harvard Business School

Case No. 476-094, February 2001.

Bower. J.L. (2007),”The CEO Within”Harvard Business Press Book Summary, 2005.

Bernhard, F. (2011), O’Driscoll, M. P., “Psychological Ownership in Small Family-

Owned Businesses: Leadership Style and Nonfamily-Employees’ Work Attitudes and

Behaviours” Group & Organization Management, SAGE Publication.

Blumentritt, Tim (2006), “The Relationship between Boards and Planning Family

Businesses”, Family Business Review, Vol. 19, Issue 1, p. 65-72

Carter III, J.J. (2009), Justis R. T., “The Development of Successors From Followers

to Leaders in Small Family Firms” Family Business Review, Volume XXII, no. 2,

June 2009, Pages 109-124

Chitoor, R. (2007), Das, R. “Professionalization of Management and Succession

Performance—A Vital Linkage” Family Business Review, Volume XX, no. 1, March

2007, Pages 65-79.

Cope, J (2011), Kempster S and Perry, K. Exploring Distributed Leadership in the

Small Business Context”, International Journal of Management Reviews, British

Academy of management, Volume 2011, Pages 1-16.

Chua, J. H. (2003), Chrisman J.J. and Sharma P., “Succession and Nonsuccession

Concerns of Family Firms and Agency Relationship with Nonfamily Managers” ”

Family Business Review, Volume XXVI no. 2, June 2003, Pages 89-108.

Ensley M.D. (2005) and Pearson A.W., “An Exploratory Comparison of the

Behavioral Dynamics of Top Management Teams in Family and Nonfamily New


By Saeed, Rana Amer

Ventures: Cohesion, Conflict, Potency, and Consensus”, Entrepreneurship Theory and

Practice, May 2005,Volume 29, Issue 3, pages 267–284,

Finklestein, S, (n.d.), “Why Smart Executives Fail; The Seven Habits of Spectacularly

Unsuccessful Executives”

Hall, A, (2008), Nordqvist, M., Professional Management in Family Businesses:

Toward an Extended Understanding” Family Business Review, Volume XXI, no. 1,

March 2008, Pages 51-69.

Kristie, L. (2008), “The World’s Oldest 100 Family Businesses”, Family Business

Magazine, (September 2008), Pg. 1-20

Leaver, L. (2009), “India 2010”, Family Research Report, Indian Family Business,

Make-up Research Report (December 2009)

Naldi, L. (2007), Nordqvist, M., SjŐberg, K. and Wiklund, J, “Entrepreneurial

Orientation, Risk Taking, and Performance in Family Firms” Family Business

Review, Volume XX, no. 1, March 2007, Pages 33-47.

Parada, M.J. (2010), Nordqvist, M. and Gimeno A., “Institutionalizing the Family

usiness:The Role of Professional Associations in Fostering a Change of Values”

Family Business Review, 2010, Published by Sage Publishing, Pages 355-372.

Sansom, I (2011), “Great Dynasties of the world: The Buddenbrooks effect”, The

Guardian, Saturday, 1 October 2011

Sciascia,S (2008), Mazzola, P, “Family involvement in ownership and Management;

Exploring Non-Linear Effects on Performance” Family Business Review, Volume

XX1, no. 4, December 2008, Pages 331-345

Sorenson R. L. (2000), “The Contribution of Leadership Style and Practices to Family

and Business Success”, Family Business Review, Volume XIII, no. 3, September

2000, Pages 183-200.

Sorenson R. L. (1999), “Conflict Management Strategies Used by Successful Family

Businesses”, Family Business Review, Volume XII, no. 4, December 1999, Pages

325-339.

Vallejo, M. C. (2009),”Analytical Model of Leadership in Family Firms Under

Transformational Theoretical Approach An Exploratory Study” Family Business

Review, Volume XXII no. 2, June 2009, Pages 136-150.

Vilaseca, A (1999), “Factors That Influence the Conflict of Interest and Objectives

Between the Non-Employed Shareholders and the Top Management Team”, The

1999 Family Firm Institute (FFI) Conference, Family Business: Strategies for the

New Millinium, Page 162-190.

Wasserman, N. (2008) “The founder’s Dilemma”, Harvard Business Review,

February 2008”, p. 103-106

http://onlinelibrary.wiley.com/doi/10.1111/etap.2005.29.issue-3/issuetoc


By Saeed, Rana Amer

Westhead, P (2006), Howorth, C.“Ownership and Mangement Issues Associated with

Family Performance and Company Objectives”, Family Business Review, Volume

XIX, no. 4, December 2006, Pages 301-316.

Zellweger, T.M.(2008), Astrachan,J. H., “On the Emotional Value of Owning a

Firm”, Family Business Review, Volume XX1, no. 3, September 2008, Pages 347-

363.


By Saeed, Rana Amer

Appendix 1 – Key Aspects in the Literature Review

Summarizing Referenced Literature into broader Family Leadership Aspects;

Format of tabulation taken from Chittoor, Das (2007):

Key Aspects in

Literature

Major Related

Literature

Key Emphasis

Leadership and

management in

Business

Organization Design

in Family Business

Gersick, K.E.,Davis

J.A., Hampton, M.M.

and Lansberg, I, (1997)

Doud Jr. E. A

Wasserman, N. (2008)

Davis, J, (2001)

The family businesses

are made actually

made up of two

overlapping

subsystems: the family

and the business. Each

of these two “circles”

has its own norms,

membership rules,

value structure and

organizational

structure

Authority may be

harder to exercise,

roles in family and

business can become

confused, business

pressure can overload

and burnout family

relationships

The most important

dilemma faced by

family businesses has

to do with distinction

between owners and

managers than between

the family and

businesses ((Tagiuri

and Davis – Harvard

1980). Therefore, “the

three circle model”

emerged i.e.

Ownership, Family and

Business.

The goal of

organization design is

to achieve a high

degree of “fit”

between: (1) the tasks

on organization needs

to perform, (2) the

characteristics of the

employees and (3) the


By Saeed, Rana Amer

ways in which

employees’ work is

managed. When Tasks,

Employee

Characteristics and

Management Methods

fit Well, it means that

they are consistent,

congruent, compatible

and mutually

supportive.

Family Business Sins

and their impact on

Business Leadership

Gersick, K.E.,Davis

J.A., Hampton, M.M.


Fleming Q.J. (2000)

It is imperative to

assess whether a

family business is a

“FAMILY Business”

or a ”Family

BUSINESS”. This is

important since same

business aspects will

have different drivers

in this distinction.

The family members,

whenever they do not

like some decisions,

will try to impose

family system on the

business and this is one

family baggage which

a family leader should

always keep out of

business

Unseen Trap – much

of the family business

Cope, J, Kempster S

and Perry, K. ((2011))

mortality springs from

owners who find

themselves unwittingly

trapped. They want to

transition the business

to the next generation,

but find it next to

impossible.

Family Business

owners’ Leadership

& Management Style

and decision making

Zellweger, T.M.,

Astrachan,J. H (2008)

Sorenson R. L. (2000)

Sciascia,S, Mazzola, P

(2008)

Emotional Value will

drive the reluctance to

give up ownership and

control of business.

. Four family business


By Saeed, Rana Amer

Naldi, L., Nordqvist,

M., SjŐberg, K. and

Wiklund, J (2007)

cultures are defined to

assess positive or

negative outcome for

business and family

where different

leadership styles are

demonstrated. These

cultures are

Paternalistic,

Participative, Laissez-

faire and Professional.

Family Business

Code of Conduct,

Family Constitution

and Grooming

Leaders within

Family

Gersick, K.E.,Davis

J.A., Hampton, M.M.


Chitoor, R., Das, R

(2007)

Carter III, J.J., Justis R.

T. (2009)

Family business

owners who have met

this conflict

successfully are who

invest time to create a

code of conduct.

Family Business

Leadership and the

Competitive

Environment

Blumentritt, Tim

(2006)

Naldi, L., Nordqvist,

M., SjŐberg, K. and

Wiklund, J (2007)

Westhead, P, Howorth,

C (2006)

Davis, J (2001)

Wasserman, N. (2008)

Many entrepreneurs

are overconfident

about their prospects

and naïve about the

problems they will

face.

Founders’ attachment,

overconfidence, and

naïveté may be

necessary to get new

ventures up and

running, but these

emotions later create

problems.

Closely held

companies with little

outside influence may

exhibit an

organizational serving

culture and a focus on

non-financial

objectives.

The owners’ and

managers’ goals for the

business may or may

not be the same as its

Key Success Factor. In

this case the owner-


By Saeed, Rana Amer

manager’s goal and the

Firms KSF would be in

conflict.

Obviously, if the KSF

of a business are

compromised too

much by an owner-

manager’s goals, the

company will suffer

and could fail.

Owners and managers,

unfortunately, are often

not aware when their

personal goals for the

business are in conflict

with the KSF of their

business.

Conflict of Interests

between Family

members and family

owners and Professional

Non-Family Top

Management

Vilaseca, A (1999)

Chua, J. H., Chrisman

J.J. and Sharma P.,

(2003)

Hall, A, Nordqvist, M

(2008)

Sciascia,S, Mazzola, P

(2008)

Zellweger, T.M.,

Astrachan,J. H (2008)

Individualistic Society

– less driven by social

constraints and non-

financial aspects of the

ownership stakes that

would build

attachment

Collectivistic culture –

Owners operating in

collectivistic culture

will display a higher

emotional value to

their ownership stake.

Non-family managers

must be involved in

strategic management

and apart from senior

positions must have

presence in the Board.

(Dyer, 1986) saw

professional

management as the

“rational alternative to

nepotism and familial

conflicts that plague a

family business” He

argued that

professional (non-

family) management

typically leads to new

leadership pattern


By Saeed, Rana Amer

“because of the very

nature of professional

manager”, and new

strategic development

routes for the family

firms, in particular

towards growth and

expansion”

Beyond financial

considerations, the

family business exists

for perpetuating family

value and unity…these

values are so important

that anything, or

anyone that interrupts

this fragility could

send the family

business into chaos.

(Astrachan, Keyt et al,

2002)


By Saeed, Rana Amer

Appendix 2 - Questionnaire for seeking Family Business

Experiences Leadership Dilemmas in a

family owned business

Name Designation

Company Service Years

Country Qualification

Item No. Question Yes No Answers/ Comments

1. Do you have experience of working for a family owned

company? If yes

1.1 What was your role in the organization?

1.2 What was the business of the organization?

1.3 What was the size of the organization and geographical

spread?

2. 2.1 Do family owners get involved in management of the

company?

2.2 In what capacity the owners were involved in

management?

Only as members of the BOD

Executive, like CEO, CFO

Executives and senior management

3. 3.1 Is your company a 1

st, 2

nd or 3

rd generation family owned

business?

3.2 Did family owners change KPIs or goal post midway

through year?

3.3

Compensation of professional management was based on

market surveys and not owners discretion?

3.4

Did owners follow Management by Objectives (MBO)

Approach or judge performance through no. of hours

spent in office?

3.5 Was compensation of professional management linked to

results achieved or inflexible irrespective of results?

3.6 Was there any attempt by owners to follow divide and rule

policy to run the company?

3.7 Was the objectives of the company set for:

Revenue growth

Profit growth


By Saeed, Rana Amer

Market share growth

3.8 Do you believe that distribution between ownership and

control reflects in the company’s operating results?

3.9

Major vision and long term planning decisions are made

through structured Business Plan process and not owners’

gut feeling.

4 4.1 Do family owners activity involve in the management of

company?

4.2

Family members are inducted in business through

structural training process or directly given leadership

roles?

4.3 Do you believe that family management is providing

leadership required by the organization?

4.4

Do you think your organization provide competitive

capabilities against professionally and non family

management competitive business

5

Rank the advantages of a family management business

compared to non-family business by scoring (1 to 8) with

1 being the least advantageous and 8 being the most.

A Decision making

B Lower management overheads

C Organizational Resources

D Organizational capabilities

E Leadership

F Succession Planning

G Employees’ Motivation

H Competitive advantage

6 What are the factors primarily responsible of failure of family owned business in order of score (1-6)

A Incompetent Leadership

B Inadequate management skills

,

C Family baggage in business

D Failure of employees’ motivation

E Failure to develop required resources and capabilities

required to stay competent

F Lack of long term vision


By Saeed, Rana Amer

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