ISSUES AND PROBLEMS IN FAMILY BUSINESS
Family business are often criticised for their lack of professionalism in dealing with environmental complexities more efficiently. Intervention of family in the business affects business-like responses to various situations of opportunities and threats. As a result, more and more family businesses are getting into trouble. Problems that most of the family businesses get into are: conflicting business and family norms; rivalry among family members, professionalisation and problems of continuity. In the past, these problems have led even the most successful enterprises into severe problems causing sometimes to collapse of business enterprises. Each of these issues and problems is discussed here:
Business vs. Family
Family businesses very often face this unique dilemma to make choice of alternatives that is best for the business against the family norms. Given this choice, decisions are very often made in the interest of the family and not business. Values, norms and principles of the family are incongruent with that of business. This leads the family business to operate under the normative ambiguity. Human resources and growth opportunities are adversely affected due to this conflict. With regard to human resources, family management due to its obligation towards the family select, promote and compensate, its family members and relatives considering the relation as a major criterion.
The family norm is to provide help to its relatives by way of giving them employment. They have to very often hire an incompetent relative against a professionally competent non-relative candidate.
Compensation is determined on the basis of the position of the relatives in the family and their needs whereas the business norm is to compensate according to one’s merit and competence. Even in the case of appraisal, family members are appraised on the basis of their standing in the family
Training and development of employees is done as per the needs of the organisation. But, in family business, it is often done on the basis of need of the family members for their own development.
Because of certain family norms or principles, a number of growth opportunities are lost. Family principle is not to have outsiders meddling in family affairs. When the growth opportunities need raising of extra capital through equity financing, the family may decide not to go for equity financing as it means loss of freedom of family in the business. Such sacrifices in the interests of family may weaken the organisation and make it more inefficient which in turn threatens survival.
Rivalry among Relatives
A number of family members of varying age and relationship participate in the family business. They very often clash with each other because of conflict of interests. This causes the breakdown of communication and creates barrier to organisational integrity.
The founder’s relatives occupy top positions in the family business. The rivalry starts right from father to son and spreads soon among brothers and other relatives. The father-entrepreneur normally considers his business as an extension of himself and only source of power. Despite his being consciously aware of the need to groom his son to ultimately take over the business, he never gets down to delegate the authority to his son. S/he does not even share necessary information with him nor consult him while making important decisions. He very often presumes his son to continue to follow traditional styles of management and resist any change in the organisation initiated by his/her son. The son, on the other hand, feels confused when he gets to know a number of decisions already implemented by his father contradicting his future plans. S/he feels that he is not fully equipped with required level of authority to bring in changes in the organisation. He starts feeling that his father is too protective and does not trust his ability. This rivalry often leads to infighting within the organisation.
The brother to brother rivalry is equally intense in family businesses. The rivalry is caused due to their anxiety to prove their mantle better than the other. Competition with each other often amounts to pull each other down at the cost of the organisational resources. The rivalry further gets complicated when other members of the family directly or indirectly favour one of them. This further leads to the complication as one of them carries the feeling of unjust and undue favouritism. Under such circumstances, a few family members can even take actions which may lead the firm into disaster.
Rivalry among relatives often leads to factional decisions that spring up in the organisation as the non-relative family starts choosing family members with whom they want to be identified. Many a time, non-family employees do not want themselves to be involved in a family fight until it is restored. This can paralyse the working of the organisation.
Such rivalries are the peculiar phenomenon which obviously arise owing to clashes of interests and ego. The organisation becomes directionless. Even the founder becomes helpless to resolve such conflicts as every member tries to defend his/her action. Slowly the business moves towards unstability and finally becomes sick
Problem of Continuity
Every family business has to face the problem of continuity or succession when the original founder retires or dies. There has to be someone to take the charge of the business to ensure continued inheritance to the next generation. It has been noted that even the most successful business firms have suffered a setback due to improper succession or non-availability of competent successors. In the U.S., it is estimated that only 30% family owned enterprises continue to exist in the second generation and only 15% in the third .
Unfortunately, the founder has almost no choice in the selection of the successors. The successors are selected on the basis of blood relationship no matter how competent the successor is in running the business. In fact, in most of the cases, the prospective successor is ignorant of business experiences and does not possess entrepreneurial abilities. Further, the inexperienced successors often start from the top and therefore remain unaware of dynamics at lower and middle levels.
The outgoing entrepreneur generally tries to groom his/her successor through informal on the job training. Such training has limited benefit to successor as the process of learning is unsystematic and inconsistant owing to the protective nature of the entrepreneur.
Many a time, succession is unplanned and therefore in the event of death or early retiring of the founder, the eligible successor is chosen to run the business. In such conditions, the successor is not psychologically prepared to take the charge of the business. A few family members or relatives take undue advantage of the situation and try to mislead or misguide the eligible successor.
Apart from the problem of the choice of successor, the process of succession itself is complex. The founder considers the enterprise as his own ‘baby’. Despite his awareness of the need of handing over the charge to the next generation, he keeps hanging on to it. Even after his/her son being in the business, he does not delegate the power and continues to take important decisions. As a result, the son feels overshadowed and frustrated. The successor and the founder continue to resist each other’s actions on matter concerning any change.
In the case of the second or third generation successors, when there are more than one eligible successor in the family, the distribution of assets and activities of business becomes difficult. It often results in split. If not efficiently handled the business get paralysed for want of proper settlement.
The successors often lack credibility in the organisation as blood relation has been the sole criterion. Employees often resist their authority. Efficient and loyal employees feel threatened and therefore start quitting the enterprise. Suppliers and bankers might also withdraw owing to unstable situations created by the takeover by the newcomer.
Successors are not able to replace the leadership of the previous entrepreneurs. They are often resisted for any initiation of change in the organisation.
Because of the peculiar problem of succession, even the most successful business have suffered serious setbacks.
Professionalisation in Family Business
It is argued that the family business system is desirable at the stage of enterprise initiation and survival. But when the business starts growing, it is desirable to replace family management with professional management. The traditional value oriented family management may clash with economic goals of growth. In the wake of increased competition and complexity, the traditional organisational structure and decision-making system is more vulnerable. Family businesses very often are not adaptable to the requirements of modern industry and technological changes. Need of growth and modernisation call for adoption of professional management in family business.
Professional management consists of a team of managers whose primary occupation is providing management service without having any substantial ownership stake. Professional managers are hired for their expertise. A team of professional managers performs the function of entrepreneurship and management of the firm. The team holds key position in the firm on the basis of technical competence. Professional management is expected to achieve excellence in building a human, physical and financial resources, and capture new opportunities of growth with professional approach through research and development.
Looking to the need for professional skills to cope with growth, every family business has to consider whether to adopt professional management or not. The family managers often resist this alternative on the ground that family will have no control over the management to protect its interests. They will not be able to help their relatives by way of providing jobs in the business. The family wants to maintain its own image in society by way of following certain socially desirable values. The family members feel that the family’s image will be adversely affected.
A few family businesses which have introduced professional management have not been able to cope with the transition problem. Family members continue to keep certain key positions with them. The family members make all critical decisions. Professionals are hired in the capacity of technical advisers only. They are not given full charge of the management of the firm. As a result, professionals remain largely ineffective in the organisation. Even cases where professional management has taken over, family members continue to interfere in the working of managers by virtue of ownership right. The performance of professionals is greatly hampered because of non-cooperation and lack of acceptance on the part of the family.
Family businesses are not able to respond competently to changes in environment owing to their inability to adopt professional management practices. Because of inadequate supply of professional managers, many family businesses cannot have professionals. Family businesses are vulnerable to the increasing complexity and competitiveness in the market owing to their lack of professionalism.
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