How to Establish Authority in a Family Enterprise

In a family-owned business, it can be tough for the next generation to take the reins — or even to take an active part in running the operation.

Vincent Chok By Vincent Chok on 15 February 2019

On one hand, everyone expects them to. On the other hand, though, employees, board members, contractors and others can assume that they’re in the role simply because they have the right last name.

How should business-owning families overcome this?

Some of the work falls to the family and leadership team already in place, some to the incoming executive.

The extant leadership team can help by creating clearly-defined roles, establishing effective communication and separating business from family affairs.

The incoming executive faces other challenges: she must establish professional legitimacy, proving that she is competent in the role; demonstrate capacity within that role; and nurture trust in stakeholders.

Define professional roles

Many family businesses develop ad hoc leadership structures defined by family roles, and shaped by events and exigent requirements. People who began doing a task because no-one else was available to do it twenty years ago are often still doing it; areas of responsibility and authority (and accompanying perquisites) are often not as clearly delineated as in traditional executive positions.

This can be corrosive for incoming executives who are also members of the family, because it leaves professional requirements vague; how can performance be assessed if the criteria aren’t known? Without an independent assessment of an executive’s performance, according to known criteria, nepotism will seem more likely in the eyes of colleagues and stakeholders.

Establish effective communication

It’s vital to establish formal communication channels where requirements and concerns can be stated clearly and accountably.

Family businesses have an even greater requirement for clear communication because the personal and professional are so often intermingled, and the emotional pressures of family life bear on professional activities. These can make it more difficult to address issues around executive performance, business governance, and anything else that involves strong emotional reactions.

Such "inside-the-family problems tend to be ignored in management books, consultant’s reports, and business school courses," observed HBR’s Louis P Barnes and Simon A Hershon in 1976. "Ignoring these realities," the pair went on to caution, "can be disastrous for both the family and the company."

Having a forum where both family and non-family stakeholders can clearly address these issues is vital to establish the authority of incoming executives, especially from within the family.

Divide business and family matters

In family-run businesses, it’s not unusual to find a single individual at the helm; usually, this person will be head of both the family and the business. They may be used to being deferred to and obeyed. Informal family roles may bleed over into business activities, so family members typically regarded as good communicators may find themselves assigned communication roles or activities because of their family role rather than because of demonstrated professional competence.

If this happens with incoming executives, it’s bound to stoke mistrust and resentment, making it more difficult for that executive to find her feet. So it’s vital that the family clearly demarcate family and business affairs and reduce cross-over as much as possible. Like communication and role definitions, these solutions can’t come solely from the incoming executive; they must come from company leadership and from the owning and operating family.

Establish professional legitimacy

The incoming executive’s trials begin with the requirement to establish professional legitimacy. This is easiest if she is a graduate of a well-regarded business school and has performed a similar role elsewhere: if she has made a horizontal move, from VP Sales at FairHold Inc to VP Sales at RightYield, her family’s firm, she’s likely to have little to prove — especially once she hangs her MBA certificate on her office wall.

But if she’s made a jump of several organizational levels, and doesn’t have the educational background to support her claim, she’s likely to be viewed with suspicion and mistrust. It’s vital to establish that she’s there on her abilities, not her surname, as soon as possible. (And it’s vital, too, that it be true.)

Demonstrate capacity in the role

Moving into her family’s business, the incoming executive must demonstrate her ability to perform her new role. This is difficult to do if assessments are not transparent and fair, so the family can facilitate this with the methods outlined above. Once she starts actually performing a clearly-defined role and hitting targets everyone can see, that and not her lineage will quickly become her most important characteristic.

Nurture trust with stakeholders

Family-owned and/or operated businesses still have multiple stakeholders; shareholders, employee unions, other family members, senior leadership, partners, and others. "Yet," says Ivan Lansberg in HBR, "my research suggests that corporate scions usually ignore or greatly underestimate stakeholders. They don’t realize that, particularly after they are formally anointed as CEOs, they must establish their credibility with and authority over these spheres of influence." (Of course, this is true for other roles too.)

It’s crucial that incoming executives avoid this effect as much as possible, and instead look to build positive relationships with stakeholders, based on trust.

Dr Lansberg goes on to recommend that incoming executives who are also family members take the time to establish bona fides before seeking to shake things up or to enact grander visions. Under-promising and over-delivering, demonstrating the capacity to set and meet modest goals with low-risk methods, help to build a foundation of stakeholder trust on which more ambitious efforts can later be based.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

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