Introduction to Professionalization
As a family business grows, it faces challenges that directly lead to an increased demand for professionalization of Management. In fact, in most cases, professionalization becomes necessary for family businesses to survive. Bringing formality, merit, and expertise into the business becomes important when a family business transitions from an entrepreneurial stage to a more mature stage.
We touched upon 4 specific challenges that could seriously hamper a business’ quest for professionalization in part 1. Our article on hiring non-family members deals with a part of the problem but challenges like sibling rivalry, employing spouses, nepotism, and entitlement have the potential to directly prevent a family business from harnessing its full professional potential. To manage these challenges, the family business must evolve and change the ways of working and doing business. In this article, we provide some actionable insights in the form of best practices to ensure an effective and smooth professionalization exercise.
Best Practices
- Formal Reward System: The business should adopt a formal reward system that lays down the various criteria that have to be met in order to receive any bonuses, increments, rewards, perks and achievements. This instills a feeling of fairness among all family and non-family employees but more importantly, it ensures that siblings don’t have a perception of parental favoritism.
- Having separate functional areas: Siblings can be made to work in different departments or functional areas depending on their skill sets and core competencies. This may eliminate the feeling of disruptive competitiveness among siblings. It is important to encourage them to find the right department and build their own area of professional expertise.
- Reporting to a non-family member: Siblings can be made to report to a non-family senior employee. In family businesses, it’s never a good idea to have one sibling report to another sibling or both siblings reporting to one or both parents. It is important to create a divorce between family and professional work to ensure that the perception of any sort of favoritism or influence is eliminated.
- Clear growth path and compensation plan: A clearly laid out career growth plan for any role and equal opportunities for both siblings should be ensured early on. No matter what path they choose, there should a fair plan. As they grow into same role or different roles, there should be a fair assessment of their contribution, skill sets, responsibilities. The compensation should be directly linked to this assessment only. No other factors should influence this decision. Using compensation and gifts to control siblings should be avoided at all costs. Compensation related conflicts can lead to the biggest issue in a family business, especially between siblings. A fair and realistic plan to deal with this is necessary.
- Plan for splits: A family business should plan ahead and have clearly laid out policies for a divorce or split. The plan should have specific procedures that have to be followed in case of a divorce. All the policies and implications should be discussed with the respective spouses before bringing them into the business and an agreement should be signed. This will protect the interests of the family business as well as the spouses. It will also avoid conflicts and issues later on.
- Standard Setting: As we have discussed in our earlier articles, there is a very thin line between family and business. Issues from personal life tend to affect professionalization. This is especially the case while working with spouses. It is therefore imperative to explain all the rules, regulations and policies to the spouses before hiring them. It is also important to discuss the mission and vision of the business and explain the expectations from the role. The idea is to have that the spouses realize that in the business setting, he or she is just another employee. It is also important to respect the sanctity of the professional roles and the hierarchy. Avoid sharing sensitive information that they are not expected to know. Again, the key to ensure long-term survival to set the standards and lay down clear rules. This will help in avoiding conflicts and managing expectations.
- Clearly defined roles and a fair work dynamic: Employing a spouse affects the business, employees and the family. This is especially true when the husband and the wife are in leadership positions. In such cases, the lines between family and business become blurry and the roles overlap. The confusion and lack of clarity makes it extremely difficult for all stakeholders of the business. As we discussed in our first article, the husband usually is the boss on paper while the wife makes all the important decisions. Not having clearly defined roles and responsibilities can lead to some serious conflicts. It is therefore important to establish the roles and responsibilities of the spouses early on. This should be clearly communicated to all employees and stakeholders. Conflict of interests or discrimination while hiring a spouse should be avoided at all costs. All the necessary rules should be followed, and information should be disclosed. A fair and even professional work dynamic should be created to manage conflicts and to set expectations.
- Eliminate Dissatisfaction: Nepotism in a family business is neither good nor bad. In fact, in most family businesses nepotism is considered acceptable. The only issue here is that family businesses also have external non-family stakeholders who invest their own money into the business. The idea of promoting nepotism or the complaint of nepotism in such cases, can be extremely harmful for a business and its external stakeholders. Promoting blood relations over meritocracy in hiring, compensation, succession, etc. should be avoided. It is extremely difficult to manage discrimination in a family business, but the feeling of dissatisfaction of non-family employees can be taken care of. All non-family employees should be informed early on that certain family members will have a separate professional career path for obvious reasons. They are being groomed to take over the business in the future and their career path will be extremely different from that of non-family employees. If this is done in the right manner, the knowledge and clear expectations take away the feeling of dissatisfaction. Here, it is also important to communicate and let family members know that even though they might have different career paths, they cannot overthrow the chain of command or override the authority of non-family members.
- Eliminate inter-family nepotism: Discrimination within family members should be avoided at all costs. In terms of benefits, compensation, responsibilities, growth, succession, etc. all family members should be considered equal.
- Professional Performance Reviews: Family businesses should have guidelines for regular performance reviews which reinforce the idea that being part of the family may get someone into the business, but they have to perform, sometimes at a higher standard than non-family employees. Nothing speaks as loudly as results. All family and non-family employees should be equally accountable. The compensation, bonus, rewards, etc. should be directly linked to the performance reviews. This will inculcate a sense of fairness and help owners deal with family and non-family employees legally.
- Give responsibility from an early age: Teach the children of the family the importance of working hard and give them responsibility early on. The idea is to make them realize the importance of money, hard work and the consequences of not being up to the task. Have regular discussions about the goals of the business, the satisfaction, the hard work that goes into building a business and the challenges of running the business. Having healthy discussions about the business and its values will be extremely helpful. This will make the children realize that a lot of dedication and hard work is required to operate the business. It can also stop them from having feelings of entitlement later on in their lives.
- Mentorship: Personal development and mentorship become extremely important in a family business. Having someone teach the children the tricks of the trade and the necessary professional skills can only be a positive for the business. To eliminate entitlement, it is for the best for parents or siblings to remove themselves from the picture. Having an unbiased mentor for training, skill development, personal and professional development, discipline, etc. is extremely important.
- Let go: We discussed in our first article how senior members of the family business feel entitled to continue in leadership positions and find it difficult to let go of these positions. These leaders are usually not open to change and are extremely risk averse. They are not up to date on the latest technologies and are stuck in the old ways of doing business. This is extremely harmful for the health of a business. It is therefore imperative for the company to have clear guidelines to determine the timeline for succession. There should be a clear plan for the next generation to take over the business and for the current generation to give up control. The exit plan of senior employees should be communicated in advance. This allows to current generation with enough time to prepare for the responsibilities and the pressure of running the business. The bottom line is the senior leadership should understand the importance of letting go and allow the young generation of leaders to take over. It can be extremely difficult to give up control, but it is a critical step for the long-term survival and success of the business. The business should have appropriate plans in place to ensure a smooth transition.
Navigating through these challenges for an effective professionalization exercise requires careful planning and smooth implementation. If done in the right manner, it could elevate a business and its strategy. Dealing with nepotism, entitlement, hiring of spouses, and sibling rivalry in a way that helps the health of the business and advances the goals of the business is vital for long-term survival. Following the best practices to deal with the challenges ensures that the business is well-prepared to make big decisions on time. It also strengthens the commitment of all employees towards the business and creates an ecosystem of consistent performance and a fair work dynamic in professional work.
Also Read: Employee Stock Option Plans (ESOPs) – A conceptual Briefing
