4 months ago
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Is your family-owned business, FOBs, informed by a family-first or a business-first philosophy?
Responses to this question ranged from “family-first” to “business-first” to “half and half”.
What does it mean to be a family-first versus a business-first family-owned business? In the final analysis, does it really matter for owners to know if their family businesses are family-first or business-first?
Researchers in FOBs seem to believe that it is important from both the strategic and operational perspectives.
There are distinct features of family-first and business-first philosophy to FOBs. Therefore, it could serve managers and directors well to understand these features.
This will help them to manage and govern accordingly.
Researchers are inconclusive on the effect on profit and the overall success of family-first FOBs being managed and governed as business-first FOBs, and vice versa.
However, there seems to be more certainty in the view that the probability of having optimal output increases when FOBs are managed and governed in accordance with the characteristics associated with the family-first or business-first philosophy.
Also, it must be noted that each of the two approaches taken must be executed within the requisite guardrails of the governance structures of FOBs.
The difference between family first and business-first FOBs is related to how the desires of the family and the needs of the business are prioritised. For example, in family-first FOBs, issues and concerns of the family are usually intertwined with those of the businesses.
On the other hand, in business-first FOBs there is usually a clear line of demarcation between operations of the businesses and family-related issues and concerns.
Family-first philosophy
The family first philosophy of FOBs places emphasis on the needs of the family over what many consider to be best and possibly most productive for the businesses.
The line between issues affecting family and those affecting business is blurred. FOBs with this philosophy view employment and other benefits from the business as a birth-right and not as something that needs to be earned through qualifications, prior work experience or by merit.
The philosophy does not necessarily mean that businesses should be sacrificed for the sake of the family. The family-first philosophy places a premium on having and maintaining a healthy family network and keeping the family together.
With a family-first mentality to business, the owner is willing to suspend, within reasonable time, the needs of the business and attend to the needs of the family.
The purpose of the business is to serve the family. However, the founder’s family-first philosophy to life must not be conflated with a family-first philosophy to business; the former does not necessarily translate to the latter. The sample of metrics in the ensuing paragraphs provides addition insights to the family-first philosophy of FOBs.
Employment: There is the tendency to have an open-door policy for all family members, with little regard for academic and other qualifications. In some cases, there is also the rule that family members must occupy critical positions such general manager and financial controller. However, it is argued that this approach to employment can lead to a negative effect on the business in cases where there is a misfit.
Compensation: Usually there is the case of having equal pay for family members employed in the business, regardless of their experiences or performances. That is, compensation is not necessarily distributed based on position, education, ability, or performance.
Leadership: Leadership is usually based on seniority in family, regardless of merit or qualifications. One effect of this is children who consider themselves to be better leaders than their parents to either leave the business or remain in the business with little interest in the affairs of the business.
Resource Allocation: Resources owned by the business are used for personal needs, such as offering loans to family members., buying houses and cars for family members. This can lead to continuous conflict between family members and a non-family manager, especially in cases when there is no documentation or clear communication of this ‘rule’, and non-family members believe that they are not getting their “fair share” from their labour.
Decision-making: There is the tendency for decision-making to be unilateral and concentrated with senior family members, or the owner. This can be disastrous for the business in the absence of family governance structures such as family assemble and family council.
Succession: Leadership succession is usually confined to members of the family, with preference usually given to senior members of the family, even in cases when family members do not have the requisite qualifications or skill sets. However, with this mentality, succession in many cases becomes a moment-in-time rather than a process over period of say two to three years.
Profit: In the absence of strict guidelines, a large percentage of the profit is used to meet the needs of the family. While one can argue that there is nothing wrong with this, the question that must be answered is: how wide is the circle that encompasses family.
Business-first philosophy
For the business-first philosophy, the best interest of the business is considered the priority. Usually, there is a set of boundaries between family-related issues and concerns and those of the business and systems are put in place to prevent or minimise the intertwining of the two. FOBs with a business-first philosophy believes that each generation is responsible for itself.
That is, while generation transition forms part of the process, each generation should establish its own modus operandi of the business. With this approach to business, employment, business succession and access to business resources are not tied to birthright.
Usually, there is less family unity and family gathering because of the strict adherence to issues and concerns of the business. However, FOBs with a business-first philosophy have been found to have a longer business survival. Using the sample of metrics referenced under family-first philosophy, the ensuing paragraphs give additional information.
Employment: This is usually guided by a qualification-based employment rule, with equal opportunity given to family and non-family members. That is, there is no special treatment for family members, other than having a family employment policy outlining the requirements regarding education, work experience and other important employment metrics. There is usually the guideline of employing the brightest and best to fill all positions.
Compensation: The business is guided by the principle of a merit-based pay based on having the requisite work experience and job performance.
Leadership: Leadership is granted to the right person, family or non-family, based on merit and qualifications. That is, there is no added advantage to family members in the leadership structure of the business. This provides a sense of comfort and fairness to non-family employees.
Resource allocation: The resources of the business are used for business purposes only, with separate family reserve fund used to meet the needs of family.
Decision-making: Decisions related to the business are not confined to senior family members. Usually, all the relevant levels of in the business form part of the decision-making process, based on the defined governance structure, such the executive committee.
Succession: Leadership succession is not confined to members of the family. The most qualified person is given the nod. This means that the position of CEO or any other senior positions in the business is opened to both family and non-family members.
Both the family-first and business-first philosophical approaches are pervasive across the FOBs landscape. It is important to understand the pros and cons of both family-first and business-first philosophies of FOBs. Seeking to manage and govern without a full understanding might be tantamount to grappling in the dark.
Does your family business align with the family-first or a business-first philosophy? Are the operations of your business consistent with the philosophy of your business?
Why is this important? An understanding and appreciation of your family’s approach to business and the role of familiness in business can minimise the potential for conflict with negative consequences.
More anon!
Lawrence Nicholson, PhD, is a senior lecturer at the Mona School of Business & Management, University of the West Indies, author of Understanding the Caribbean Enterprise: Insights from MSMEs and Family-Owned Businesses and a director of the RJRGLEANER Communications Group.
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