That is the question that Stanford University economist Nicholas Bloom, Harvard Business School professor Raffaella Sadun and London School of Economics professor John van Reenen seek to answer.
In the World Management Survey in 2011, they studied thousands of medium-sized firms in 20 countries, from management practices in operations to monitoring and incentives. Scores ranged from 1 (poor) to 5 (outstanding), which were found to correlate to productivity, profitability, growth and survival of the family business.
Some results were not surprising. Businesses with some of the top scores have private equity or dispersion of ownership. Those with some of the worst scores are run by government.
The surprising results revolved around family businesses, which scored unevenly. Those run by non-family, outside CEOs garnered good scores. But those run by a family member (especially the eldest son) ranked low.
Why? Promoting only from within the family narrows the pool of talent and frustrates skilled non-family employees.
“Imagine if we selected our Olympic team members from the sons and daughters of those who had won medals two decades ago,” say the researchers. “Sure, there is some genetic component, but it is rather unlikely that the best person for the job inevitably is a family member.”
The researchers cite the Carnegie effect, after the US industrialist Andrew Carnegie, who, like Warren Buffett (see “World’s fourth richest does not spoil children,” March 14, 2014), gave away most of his riches to non-family members. Carnegie said that if his sons felt they would inherit everything, then they would not work hard.
“The firm’s share price and profits usually take more of a tumble when the company is handed from the founder to his eldest son, relative to an outsider,” say the researchers. “Studies of CEO succession also suggest that sons who become CEOs usually have poorer college results and are much younger than other CEOs.”
Exceptions come to mind, of course.
In the Philippines, Lance Gokongwei and Michael Tan, children of tycoons, were top performers in school, a testament to their parents’ expectations for them to succeed on their own terms.
The researchers agree.
“There are many excellent family firms. Nevertheless, [our findings] are a salutary reminder that passing on the running of the business to the eldest son may not be the soundest business move. Family owners should at least consider the alternative of bringing in some professional outside management. Keeping things in the family can be bad for the wallet as well as the welfare of the next generation.”
How to professionalize
Professionalizing the family business is easier said than done. This decision is not taken lightly.
For one, non-family members need not just to understand, but also to empathize with, the vision-mission and culture of the family business. They arrive with specific expertise, but to be effective, they need to be sensitive to the nuances of the business. Good professionals are not caught up in family conflicts, but they need to be aware of family dynamics.
“Professionalizing family business management is an evolutionary process that affects every family business interested in sustainable growth,” Nadia Chauhan, joint managing director of Indian food giant Parle Agro, tells “India Times.”
“It can be done in the following ways: decentralizing functions and empowering the managers to make decisions or handing the business over to a professional management team, whichever works the best. In both the cases, the professional management team or managers hired for different functions need to understand the vision, mission, beliefs and culture of the organization. The basic philosophy, values, goals, basic work routines and expectations of customers, vendors and other business relationships need to be re-evaluated as well.”
“Because of the complexities, the professionalization process is best accomplished over a protracted period of time,” she adds. “It should be an evolution and not a revolution.”
Start by analyzing the responsibilities of current leaders. What do they lack? Where the business will be in five or 10 years? How about threats and opportunities, strengths and weaknesses?
The best time to start professionalizing is when your business is not yet in crisis. Take your time and analyze as many options as possible, looking for professionals who are not only skilled, but who also fit well with your family.
Next Friday: Meet enterprising owners of pet food businesses.
Queena N. Lee-Chua is on the Board of Directors of Ateneo de Manila University’s Family Business Development Center. Get her book “Successful Family Businesses” at the University Press (tel. 4266001 loc 4613, e-mail msanagustin@ateneo.edu.) E-mail the author at blessbook.chua@gmail.com.