Family-owned businesses or FOBs are the bedrock of any economy and can be a lucrative opportunity for anyone especially if you happen to be a member of the family that owns said business. However, anyone who has ever lived in an Asian society like Singapore for any period of time will most likely be familiar with what is known as the “third-generation curse”.
The third-generation curse refers to the belief that a large majority of FOBs tend to fail after being run successively by three generations. While this may seem to be hearsay passed down from old entrepreneurs, the numbers do show, as seen from a study of 100 firms conducted in 2017 by KPMG and CPA Australia. The results show that 13 percent of family businesses only survive until the third generation, after which they fail.
Hence, a growing number of stakeholders in FOBs are increasingly aware of this matter and are taking steps to overcome this so-called curse. A study conducted by PwC in 2014 reported that “succession planning” and “the need to professionalize” were rated as the top challenges faced by family businesses.
Both of these challenges stem from the fact that FOBs tend to be run by first or second-generation business owners who believe in absolute control. Consequently, effective HR management is forced to take a backseat which makes moving forward difficult. In this article, we look to address why professional HR management is crucial to effective business growth and succession.
As any HR professional will tell you, people are the true asset of any organization and this applies doubly for FOBs. Thus it is unfortunate that family businesses are far from meritocratic and oftentimes a certain bias is present.
This can be seen in the employment of relatives to leadership or management positions within the organization or the hiring of an employee based solely on family connections, not talent. Oftentimes in this situation, the HR department is seen to be acting in a passive manner and has little to no say in the hiring process.
Consequently, this without a doubt will have a negative effect on non-family employees and will only serve to demoralize and discourage them. In the long term, this will leave the organization with a cadre of sub-standard employees with no interest in career progression or growth of any kind. Hence it should come as no surprise that the organization will find itself lacking talented employees of any kind.
Rather than hiring employees based solely on family connections, family members or senior managers in FOBs need to recuse themselves from the hiring process and instead leave it in the hands of the professionals. When HR professionals are given the autonomy to make hiring decisions based solely on merit, this will naturally attract talented and skilled candidates to the organization while also promoting an atmosphere of healthy competition.
Along with this, the management team in a FOB should work with the HR department to identify employees qualified for promotion based on merit alone. This means recognizing both family and non-family employees on merit alone and rewarding them accordingly which will undoubtedly send a strong message to all employees.
An unwillingness to relinquish control and a fear of change is one of the main reasons why FOBs oftentimes struggle or even fail to pass on the business to a new generation. This is because FOBs tend to be dominated by either a founding member or several senior family members who maintain an iron grip on the business and demand submission from all those around them.
This lack of professionalism essentially guarantees a high turnover of staff and an absence of company loyalty. Such occurrences are commonplace in a surprising number of SMEs in Malaysia and Singapore where employees are managed directly by business owners and family members. As business owners often feel that ownership entitles them to unprofessional behavior, temper tantrums, and verbal abuse are a daily part of work life. Hence, in the long run, many SMEs will find themselves struggling to retain quality staff.
To combat such a situation, implementing an independent and fair HR department will ensure that employees are treated with respect. HR professionals will be able to introduce an element of professionalism to the workplace where verbal abuse and unprofessional behavior are not tolerated. This sets a standard of behaviour for all staff regardless of affiliation which can go a long way in cutting down on employee turnover.
However, change needs to come from the top and senior family members should embrace such an approach if they are looking to build a more professional workforce.
As mentioned above, some more traditional family businesses actively discourage input from employees and instead enforce conformity among non-family members in the business. In such cases, management and decision-making remain the sole purview of family members in the business.
Such an antiquated mindset can stem from simple arrogance i.e. refusing to believe that employees are competent enough to make their own decisions to outright fear i.e. a fear that employees may become too “smart” for their own good. Rather unfortunately, this style of management and mindset ensures that the organization will be doomed to working solely with yes-men or women i.e. employees who are only capable of completing laborious and repetitive processes that require no input whatsoever.
As if surrounding oneself with yes-men and women was not bad enough, this approach also prevents the organization from improving its own processes and will definitely result in stagnation and eventual irrelevance. This is because employees are not given any incentive whatsoever to solve problems or develop critical thinking skills as their default response falls under “wait for the boss before we do anything”.
In stark contrast, when equipped with the right tools, a well-organized HR department will help the management team identify employees who have the potential for further development and in turn groom them to become leaders within the organization who will bring value to the organization. Identifying and grooming qualified candidates within the organization will encourage existing employees to build up their skills as well in order to progress in their careers while providing the organization with a reservoir of talent.
Managing a family-owned business is without a doubt a tricky affair with many added pitfalls for the unwary. However, with an HR management system from IQDynamics, you can easily add value to your organization by changing the way your employees are managed.