This article is the first installment of a two-part series on Professionalizing the Business Family.

Last March 25, 2021, I wrote about “Professionalizing the Family Business Owners,” which took on the challenges of founders or owners in the perspective of the Three-Circle Model of the family business systems.

Being in family business consulting or advising carries a certain need to get insights from other practitioners.

In our case, in Premier Family Business Consulting, it is reading the latest research on families in business. One of these research done by the Family Firm Institute or FFI is about ownership.

FFI released a report about “Professionalizing the Business Family” focusing on The Five Pillars of Competent, Committed, and Sustainable Ownership authored by Claudia Astrachan (Lucerne University of Applied Sciences & Arts, Switzerland), Fabian Bernhard (Edhec Business School, France), Anneleen Michiels (Hasselt University, Belgium), Torsten Pieper (University Of North Carolina At Charlotte, USA), and Matthias Waldkirch (EBS University, Germany).

The report focuses on family professionalization.

Before we go there, we need to understand the concept of professionalization or professionalizing in the context of families in business and family businesses.

The report articulates the goal ultimately of professionalization is to ensure functional and long-lived ownership and entrepreneurship for the family.

For this goal to be achieved, the family has to be unified and functional, a competent and effective decision-making body, providing value to the enterprise through their relational, emotional, and financial commitment and resources.

A Practitioner’s Perspective

There has been a lot of depiction about family firms for decades among management researchers. The FFI report mentioned some of these depictions and a lot of them had been around for some time:

• There’s a long-standing tradition that family firms are generally unprofessional organizations.

• Some are actually advocating that owners of the family business should step back to allow non-family professional managers to assume management of the enterprise.

• As we gain more understanding of successful professionalization in different family firm types, we come to realize that extensive professionalization or formalization may not be appropriate or even needed.

• Empirical evidence suggests family enterprises when they grow in age and size benefit from more formalized processes and structures while others exhibit very little success.

• Here’s an observation that seems to be common to both the family and the family enterprise: Formalizing processes, structures, and relationships (for example by means of family protocols or family constitution) turns out to not have a direct correlation to family longevity.

The last observation actually runs counter to a lot of long-established beliefs among practitioners that families with different goals and needs, should rely on a breadth of formal mechanisms to guide decision processes, lessen conflicts, and control the degree of influence the family bears on the business.

In our experience, having a family constitution, by itself will not ensure unity nor guarantee a more secure ownership protocol. In fact, there are families that request templates of the family constitution so they can do it themselves as if it is the answer to all their family challenges.

You can get any lawyer to draft the family constitution but it will not bring all your intentions in alignment with your values or your goals of longevity.

We have a program we call the Family Enterprise Planning or FEP that has the framing of the family constitution as one of the key processes.

Take note: one of just many critical processes.

There’s this belief that having a document like a family constitution will ensure there is a basis for a family to make decisions or to enact policies. What most don’t realize (including lawyers) is that the process and the experience of framing the family constitution, more than the document itself is the whole point of the exercise.

The process is important because it provides the family the opportunities to come together to articulate their intentions, their desires, their fears, their misgivings, their vision of the future in an environment facilitated by a professional.

The dynamics of the interaction help individual families discover something about themselves, make them appreciate who they are, and in so doing bring them closer.

The family constitution as a document must reflect the family agreements, the articulation of family core values, the acknowledgment of what is important to them, and therefore a manifestation of their unity.

Unity, common understanding, and shared values must exist first before the actual framing of the constitution.

By getting a lawyer and drafting a constitution without the process that unifies the family and articulates their unity, the document becomes a tool to impose the intention of a few members not only on the rest of the immediate family but also the next generation.

Insights from the Research

So what does the new data tell us about owning families based on new analysis?

Now here’s some interesting insights:

1. The efficacy of any effort towards professionalization will depend on the owning family characteristics such as:

• a unifying goal
• a set of shared values or the absence thereof, and
• level of commitment and cohesion

• The informal or formal approach to governance is only effective if it takes into account the family’s idiosyncrasies.

• Generic or what may be referred to as “off-the-rack” solutions providing little customization may offer little or no value in the long-term and may, in fact, be harmful to the owning family.

• Mechanisms towards professionalization that are poorly aligned or even “over professionalization” can deepen existing conflicts, impose rigid processes and structures on the next generation, and may not appropriately reflect the family’s goals and values.

Take note of the reference to the professionalization of the family as a unified, functional, competent, and effective decision-making body. Value is provided through “their relational, emotional, and financial commitment and resources”.

This implies that unity and competence are not to be achieved by professionalization, but are actually ingredients or prerequisites for professionalization to work.

Does this mean that a dysfunctional family cannot make a family constitution work?

A constitution in a dysfunctional family will actualize the underlying need for control of dominant personalities in a family and may lay the groundwork for conflicts that may threaten the very survival of the family and the business.

The most important thing to note is that even functional families will have struggles in their daily living.

What differentiates them from a dysfunctional one is their ability to talk about these challenges, support each other because of shared values, and are can adjust and change accordingly.

Being Competent in Ownership

Did you know that there isn’t much systematic research looking into identifying competence that contributes to family ownership performance?

It is a bit surprising how little attention is given to acquiring ownership competence in the family considering how much effort and time are spent on educating professional managers.

If you really look at it, family unity and even longevity may be the true measure of ownership performance. Ownership competence supports the desire of the owning family to retain control over their thriving family business.

In maintaining unity, letting go of any family member perceived to be working against the family can be one action that a family may have to take as a decision-making body.

Unfortunately, the report shows it is not a lack of awareness that is the bane for the family, it is the lack of willingness among family owners to make a concerted action to tackle the issues they clearly consider to be important.

It appears that most business families at the moment lack the interest or foresight to sufficiently dedicate their resources to educate their family in successfully discharging or performing their present and anticipated ownership roles.

So what makes a competent family owner?

The FFI report identified four categories constituting competent ownership:

1. Family Competence

Family competence refers to the family’s and the individual family member’s ability to contribute to family functionality and efficacy. Founders or owners must acquire this competence because, without a profound understanding of the underlying family dynamics, they will be unable to pick up and interpret why family members act and react the way they do.

• Business Competence

The competence that enables the ownership group to guide and oversee management, makes strategic decisions, and provide important resources to the business; and the individual family members to effectively perform their ownership and/or business role(s).

• Self Competence

Self-competence pertains to the family’s and the individual family member’s ability to support individual family members’ personal development and growth.

• Contextual & Zeitgeist Competence

Regards the family and the individual family members’ ability to adequately deal with specific challenges and advantages arising from family characteristics and the business context, and to recognize opportunities and mitigate challenges related to societal, political, regulatory and other developments.

I agree with a lot of the insights and conclusions of the report since it validates a lot of what we already know in our practice. Premier Family Business Consulting advocates what we call the “Legacy of Love” as an outcome of one of our programs, the Family Enterprise Planning.

This program has a specialized module just on ownership and the conclusions we are drawing from the results of the research confirm a lot of our assumptions when we design our program on ownership including the focus on ownership competence.

Being Committed to Family Ownership

Individual family members have a way of connecting to the family and the business enterprise on different levels and in many different ways.

For individual family members, cohesion is driven primarily through either financial or emotional means and emanates from either the business enterprise or from the family.

Cohesion refers to how well members of the family are connected with each other and is a significant determinant of family commitment and functionality. Functionality here is linked to the ownership competence we just mentioned above.

Torsten Pieper of the University of North Carolina at Charlotte, and one of the authors of the FFI report, introduces a cohesion model to help understand the different family cohesion layers and describe the several measures in increasing cohesion towards the family and the enterprise.

The cohesion model presupposes that a lot of family members experience cohesion through multiple dimensions, meaning they react to several varieties of cohesion-creating measures.

Our practice has experienced these cohesion dimensions during the course of facilitating the process of unity called Family Culture Building.

My own exposure to this process has made me understand why the framing of the family constitution should not be done by legal practitioners without proper training on family dynamics.

If you want to know more about Family Culture Building or Family Enterprise Planning just contact us through our website for free consulting time.

While the report showed the relevance of cohesion in family commitment to ownership, the concept of Psychological Ownership refers to the emotional and cognitive attachment an individual family member feels to the business.

Even if the attachment has no legal or factual basis, ownership perceptions have been found to have a great impact on the family’s motivation and behavior, and their sense of identity.

So what’s the significance of this in drawing ownership commitment from family members?

These findings have significant implications not only for the family but also for us who are practitioners in family business consulting or advising.

For families in business, even family members with minimum or no ownership at all (such as the young ones representing the next generation) can have psychological ownership affecting attitudes and behaviors.

Making Ownership Sustainable

So how do we make family ownership sustainable?

The report suggests that informal and formal governance structures and relationships in the family and the business be in place or nurtured.

It appears from the results of the survey on which the report was based, whether governance structures or relationships are formal or informal it should be grounded on specific core values.

Informal ways of managing and guiding the owning family oftentimes come from the founder’s imprint on the enterprise and most often are passed on to many generations, rooted in the family core values.

Another tool owning families can use is storytelling and role-modeling. The way founders and elders carry themselves or how they conduct themselves in the presence of family members proved instrumental in understanding and learning expectations, values, and norms within the family.

Recounting and retelling the behavior of founders or predecessors forms a legacy that provides a template or framework for desirable behavior serving as informal control within the enterprise.

Mechanisms representing formal governance do not lead to longevity by themselves.

In our own practice, a family constitution can be one mechanism for formal governance but adherence to this mechanism will only be effective if it is a result of a professionally facilitated process and completed as a result of consensus and collegial decision.

This mechanism can lead to sustainable ownership if supported by a governance structure within the family called Family Council and in the enterprise in the form of the Board of Directors.

We have a service that can put the governance structures in place called Building Effective Governance or BEG. In this service, we assign a senior consultant to sit in the family council or the board of directors (on in both), to coach the family on how to manage the conduct of meetings and how to arrive at a decision on certain contentious matters.

The survey results provided very insightful information. The many conclusions are good material for reflection for founders, family members, and practitioners in family advising.

If you want an opportunity to get more insightful discussions in a live event, join us in an exciting conference we are cooking up. It’s a 2-day event jump packed with discussions about families in business.

A convergence of many topics from 16 speakers coming together for more than a thousand participants across Asia.

Before you go, I’m inviting you to the Asian Family Enterprise Excellence Conference (AFEEC).

It’s happening this June 2021!

REGISTER NOW!

Let me tease you a bit with the video below…

Virgilio “Toy” Paralisan is the Executive Director for Operational Excellence of Premier Family Business Consulting, the only family business consulting firm in Southeast Asia providing holistic services that integrate the family and business system.