Let the Family Build (And Then Let The Professionals Run)

As a business matures, it is essential to bring in people with experience, and for a founder to assume that his or her child is the most knowledgeable person out there is fundamentally flawed.

By
Opinions expressed by Entrepreneur contributors are their own.
You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

In the early 2000s, I was working on a project for a large family business in the Middle East, and in a matter of a few months, I had advised the owner’s son to take a break from the company and gain industry experience outside. Fast forward a decade- and I now sit on the board of that company, at the request of the very same man. Lesson number one: people appreciate honesty. Lesson number two: family members aren’t always naturally equipped to run family businesses beyond the startup phase. 

Shutterstock

As the CEO, the son of the owner of the Middle Eastern conglomerate was preventing the company from reaching its potential, with his decisions losing the company large sums of money. It wasn’t a question of intelligence or capability; he simply wasn’t ready for the job, and he lacked the kind of experience that only the outside world can offer. So, the decision was made that he would leave, and work for a competitor in another geography. Now, he’s back, and he’s one of the best CEOs in his field. 15 years ago, the company had money, but not management. Today, it has both, and when it comes to running a business, these are the ingredients that matter. It is a simple formula, but unless an organization is professionally run, it’s impossible to achieve/ attract good people and investment.

Professionalizing is futureproofing First, let’s be clear about what professional looks like. It means proper governance guidelines on how the business is run. It means regular board meetings. It means official and transparent hiring policies, with remuneration based on documented performance evaluation. Crucially, it means family members are treated -and compensated- in exactly the same way as employees hired from outside.

Owners should only receive additional financial benefits in the form of dividends or value appreciation. Going further, being professional involves developing a clear organization structure, key performance indicators, and a succession plan that offers a vision for the future. The bottom line: at professional organizations, everyone knows how they are compensated, what they’re doing, why they’re doing it, and what’s next.

Without these components, family companies face a lose-lose situation. If they stick to the family-only approach, their success will diminish with each passing generation. In fact, research from Arthur D. Little shows that by the fourth generation, less than 5% of family-run businesses globally remain operational without professionalizing. Meanwhile, if they decide to hire from outside, the absence of clear governance, evaluation processes, and opportunities for progression will ward off the best talent. Or, if they do manage to secure a strong candidate, limiting their potential will be a costly waste of ability.

You can’t pass on passion Of course, running a company professionally is not the only success factor. Why did Amazon and Google initially become successful? It’s not necessarily because the founders were professional, but because they were passionate. Uber is a particularly interesting case, and one that demonstrates the virtues of both passion and professionalizing.

The co-founder of the ride sharing platform, Travis Kalanick, turned out to be a public relations liability, and he was eventually voted off the company board- a sign of professionalism in action. Yet, without Kalanick, there would be no Uber. It is not realistic for a startup to be “professional,” and there is a valid reason why most successful new ventures are founded by young entrepreneurs. What gets a startup off the ground is enthusiasm, belief -even obsession- and in this sense, a family set up is often the best way to begin. The problems come later.

When a mother or father starts a company, it is built on passion, but it is a stretch to assume that their children will be passionate about the same topic. They may have been educated abroad, they may be wealthy, and while they might be passionate, they will almost certainly lack the same kind of drive and motivation that it took to first build the business. So, while family members can make perfect founders, it is almost inappropriate for the second generation to remain solely in charge.

Related: Jobs 3.0: How You Can Prepare For The Future Of Work

The outsider perspective As a business matures, it is essential to bring in people with experience, and for a founder to assume that his or her child is the most knowledgeable person out there is fundamentally flawed. Of course, a family member can be passionate, but that passion is often better channelled through the role of board member than executive decisionmaker.

On the board, a family member can still hold a position of seniority and offer valuable input, without responsibility for running the business day to day. That should fall to professional managers, and the advantages of hiring from outside the family are manifold. First, they are free from the complexities of family dynamics. Professionalizing in the Middle East, and other parts of the world where respect for seniority runs deep, can be particularly tough.

A young family member -even if they were the company CEO- would find it extremely difficult to challenge an older relative, making a professional working relationship almost impossible to achieve. Second, an outsider is more likely to prioritize the business over personal performance. For a hired professional, demonstrating the ability to grow a business is valuable curriculum vitae (CV) material and a ticket to career progression. By contrast, family members aren’t going anywhere. 

The winning formula The prevailing advice, however, is not to eradicate “family” from family business. Quite the opposite: by professionalizing, families can protect their reputations and ensure their hard-earned legacies live on. What’s important is reaching a happy medium, where family and external employees work in harmony for the good of the business. 

One Saudi industrials giant is a case in point. When I started advising the multi-billion-dollar conglomerate, family permeated every level– and it still does, but with external involvement in all the right places. After a period of consultation, the founder decided to replace family with professional managers across the group’s 20+ businesses. He also insisted that each professional manager be given shares in the company, thereby providing similar incentives that family members would be offered.

Meanwhile, as owner, he retained the power to make swift and important decisions, with input from family members where it matters. If finances are to go by, the strategy is paying off. This industrial giant, witnessed more than 50% growth in net income year-on-year for the last five years. Family business is the backbone of Middle Eastern economies, and by professionalizing, they can make sure it remains that way- not just for this generation, but for many more to come. 

Related: Migrating Your Business To A Cloud? Here Are Five Mistakes You Need To Be Wary Of

Thomas Kuruvilla

Written By

Thomas Kuruvilla is the Managing Partner of Arthur D. Little Middle East.