From the local to global scale, family businesses play a critical role in today's economy. They pay 62 percent of all wages in the U.S., account for 50 percent of the country's gross domestic product, and create 78 percent of all new jobs (Johnston, 2004). Contrary to popular assumptions, family businesses are not restricted to mom-and-pop operations. In fact, 37 percent of Fortune 500 companies are family owned, and 60 percent of publicly listed companies are family controlled (Johnston, 2004). Family businesses do have some peculiarities that allow for challenges and opportunities which require special attention. For example, the failure of family business transfers, the 'handing down' of the business to the next generation, is well documented; about 30 percent of family businesses survive to the second generation, and fewer than 13 percent survive to the third (Jurinski and Zwick, 2002).
An additional challenge family-owned businesses face is that family members may not be brought into the business with the same expectations of performance placed on an outsider. This may create what non-family members perceive to be a family 'clique' and result in high turnover among non-family members. Because blood really is 'thicker than water,' this phenomenon leads to discrepancies in much more than performance expectations. For instance, the discussion around family member talent, fit and other qualifications are often secondary. Finally, emotions and conflicting roles can greatly hinder objectivity and create a 'tunnel vision'-like syndrome for family members. This can very easily suppress the effectiveness of talent expression, which leads to further frustration and other undesirable dynamics. Given these complexities, the organization, instead of providing structure and consistency, can become a collection of reactionary decisions that prevent it from operating at sustained excellence.
Model for Family Businesses
Any effective organizational model, family business or otherwise, must include structural components and dynamic interactions among areas with related complexities. Since its founding 20 years ago, Talent Plus has studied over 30,000 leaders, many of them in family-owned businesses. In fact, Talent Plus has worked with over 40 families with net worths of over $10 million dollars each, helping them integrate family members into their business or helping them to pursue other opportunities. In Talent Plus' Relational Model for Family Businesses, five components relate to one another simultaneously: the leader, family, people, organization and external environment. Misalignment in any one component will ultimately affect the effectiveness of all components. Any family business consultant must address these components both individually and holistically.
Family Business Relational Leadership Model
The leader is the stimulus for deep-seated change, whether it is fixing what is broken or improving upon what is already working well. The family leader must be the point of intervention and the facilitator of interactions among these simultaneous different components of the family business model. This facilitation can and often should be subtle.
Truly effective leaders of family businesses can be compared to catalysts. A catalytic process, by definition, causes change in chemical reactions without itself being changed or altered. In the case of the leader as a catalyst, the leader will — and must be able to — adapt to the change taking place within each component, but their direct influence will be less obvious. The inherent subtlety of a catalytic style of leadership is necessary to a family business environment as the dynamics of the relationships in such an organization require the leader to lead within what may at times become challenging relational dynamics.
How a leader navigates these relationships will depend on their own leadership style. At base, leaders' styles are a function of their talents, their set of innate or natural abilities. Every individual has the ability to perform with near-perfect results in some capacity. This ability is each individual's area or areas of talent. What makes a family leader effective is that they have matched their unique set of talents to the way in which they relate to family members, those they lead, the organization they lead, and the environment in which they lead.
Family members often play multiple roles (e.g., parent, spouse, president). This reality in itself creates dynamics that are unique to the family business. In any organization, an individual's personal and work life will influence one another. This is certainly the case in a family business. Every business success is a family success, and every business failure can be perceived as a family failure. If maintaining healthy family dynamics and running a successful business are significant undertakings exclusive of each other, combining the two successfully takes intentional discipline. After all, what good is it to achieve a successful business at the expense of the family?
The successful family leader will maintain the family relationships so important to family businesses while managing the talents of the members of the family. The term 'talent management,' as it is typically used, refers to a leader's practice of creating and managing a skilled work force for the organization. In contrast, successful family leaders do not manage talent; they develop it. When a family leader develops the talents of those they lead, they place family members in roles for which their talents are suited. In addition, they proactively engage in developmental activities matched to the individual needs of each family member. The result of these activities is a family business in which there is harmony between each family member's talents and the mission, vision and goals of the organization.
Simply put, these are the members of the organization. They are the basis of what happens, and without them the organization cannot exist. Most important, they are each a complex system in their own right with unique combinations of talents, skills, experiences, personal goals and vocational aspirations. The objective of the leader must be to understand each person and help them move toward their goals and the goals of the organization simultaneously.
As with their responsibilities with family members, the family leader is responsible for managing the talents of the employees in the family business. Successful leaders of family businesses make selection decisions on the basis of the natural abilities necessary to succeed in particular roles within the organization, they place employees in roles for which their talents are suited, and they proactively engage in developmental activities matched to the individual needs of each employee.
Family-owned businesses are not simply organizational structures and business processes; they are the holistic contexts in which people work. By 'context' we mean the culture within which the work is done; the mission, vision and values claimed by the organization; the unwritten norms and mores of the work force; and any other social forces operative in the work environment. It is imperative that the leader of the business recognize and orchestrate the dynamics of the organizational environment to facilitate the simultaneous success of individuals and the organization.
Given the extent to which the organizational environment can impact individual and organizational success, the family leader's primary responsibility is to ensure alignment of the organizational environment and the talents of family and non-family member employees. This is accomplished not only by ensuring employees' talents are matched to their roles but by ensuring that the organizational structure is matched to the talents of the work force. Traditionally, organizational structures (e.g., reporting lines, hierarchy, or positional authority) have evolved around production activities or services rendered.
Matching organizational structure to the talents of the work force involves aligning these same structural elements not only to what the organization does but to the talents of those who do the work. This may involve creating a matrix structure in which the talents of the work force permit cross-functionality, or it may entail self-managed teams. However, it is essential that the determination of the structure of the organization be based on both what the organization is attempting to accomplish and the individual talents of the work force. It is the responsibility of the family leader to create the appropriate organizational environment given their own talents as well as the talents of family and non-family members.
The External Environment
Family businesses exist within a larger environment. This external environment is composed of economic, competitive and political forces, to name only a few. The effects of any or all of the external forces that may operate on a family business must be managed by the leader. When these forces present opportunity, or begin to negatively affect the organization, it is the responsibility of the family and business leader to manage the business's relationship with the environment.
When a family business is structured around the talents of the leader, family members and work force, it is able to withstand external forces because it is by nature flexible, nimble and able to respond to environmental demands more quickly than organizations structured around products or services. By structuring an organization around people and their talents, the products, services or delivery of the products and services can be more quickly altered to meet the demands of the current external environment. This allows family businesses to meet market demands more quickly than competitors whose organizational structures are based on what they do and not on who does the work.
The strength of any family business lies in the relationships that exist among family members. These relationships create a common bond that allows members of the business to trust one another and to work in an environment in which they feel supported and accepted. When the business succeeds, the family succeeds as well. However, as has been described above, it is the relational nature of a family business that also makes it complex and, at times, difficult to manage. As Talent Plus' Relational Model for Family Businesses suggests, there are multiple components, all in relationships with one another, which must each be taken into account. The complexity of creating a successful family business cannot be overstated.
Ultimately, however, the Relational Model for Family Businesses suggests that the leverage points in improving the performance of a family business are people, both family members and non-family members, in the form of talented employees and leaders. The leader is, however, the most important force for impacting the performance of the work force and of the organization. In addition, the leader is primarily responsible for responding to environmental demands. Impacting the leader's performance is a matter of understanding their individual talents and how those talents may be best utilized as they manage their relations with family members, those they lead, the organization they lead and the external environment in which the business resides. It may be seen, then, that it is essential that the family leader has an accurate understanding of their own talents, as well as the talents of family members and other employees whom they lead. This understanding can be gained through Talent Plus' structured interview process followed by individualized leadership development coaching with Talent Plus' leadership consultants. Through these engagements, leaders learn best practices to enhance the relationships detailed in the Relational Model for Family Businesses.