This was the perspective provided by Prof. S Sriram on the process of professionalizing Family Run Businesses (FMB’s) @ CRS 2013.
Some facts around Family Managed Businesses (FMB’s):
- Nearly all firms start as family businesses. No firm on earth started out as a corporate.
- 33% of S&P listed companies still have 1 family member onboard. Globally, 70 to 90% of GDP comes from family run businesses.
- FMB’s are more stable during economic recessions. When compared against non FMB’s on profitability parameters – they tend to outperform, especially during downturns in the economy. However, during the uptick in the economic cycle, they also grow slower than their non FMB counterparts. This is a function of the inherent conservative DNA and focus on capital preservation.
“Family Managed Businesses are more stable and profitable during economic recessions, but they also grow less during economic upturns.” – Prof S Sriram, Great Lakes.
Professionalization: The word “Professionalization” has different meanings. In many cases, FMB’s believe that if they get an outside CEO they have “professionalized”. In other cases the word is applied to any structure which separates ownership from management. However, we believe that Professionalizing is a mindset and an attitude – it’s about how you think and take decisions. It has nothing to do with ownership / management or structure (i.e. whether the company is a private or Public Sector Company). “How objective you are in decision making determines how professional you are.”
“How objective you are in decision making, determines how professional you are” – Prof S Sriram, Great Lakes.
Why companies professionalize: The usual motive is to deal with the pressures introduced by growth. Growth vs control is the classic dilemma that family businesses face especially, because in India, not only are 80% of businesses family owned, they are also privately held. Some businesses look at the listing process to introduce not only external capital but also governance. Making a company list-worthy usually involves bringing in an external ‘professional’ CEO – this is one of the popular definitions of ‘professionalizing’.
Challenges: Key challenges are around success planning, “letting go” and finding a convincing answer to the question “Why professionalize?”.
Succession planning: 15% of FMBs globally survive to the 3rd generation. The biggest challenge is therefore succession planning and management – i.e. changing from an entrepreneurial mindset to a managerial leadership mindset. This change is evidenced when the decision making process moves from individualized to a data based, consensus making decision process.
“We believe that the definition of a professional entity is one which places the interest of the consumer and the organization above self-interest. The decision maker may or may not be the owner of the company. This is easier said than done”.
“The challenge of ‘letting go’ – at its simplest level is answering the question of “What am I going to do with my time, now that I am no longer actively managing the business?”” – Prof S Sriram, Great Lakes
“Letting go”: Once the owners professionalize the second challenge is about ‘letting go’ – at its simplest level its answering the question of “What am I going to do with my time, now that I am no longer actively managing the business?”. Any attempt to professionalize will not work unless there is a concrete answer to the above.
“Why professionalize”. Often this is the biggest challenge to starting the process. While the usual answer is “scale is the tipping point” – most entrepreneurs chose control over growth. The internalized, often un-articulated reason is also because they believe that “if something isn’t broken, don’t fix It”. In other words, scale can be subverted to control.
“The unarticulated reason for not professionalizing is that many entrepreneurs believe that scale can be subverted to control” – Prof S Sriram, Great Lakes