Culture and evolution of family firm

31/10/2022 1 By indiafreenotes

Family businesses are known for their strong, distinctive cultures cultures that are often heavily influenced by the vision, style and values of the founder and carefully maintained through the generations. These cultures bind employees to a common cause and foster loyal and stable workforces. If managed well, a strong culture can prove to be a major competitive advantage for a family business seeking to attract and retain the best talent in order to achieve sustainable long-term goals.

A strong culture can also be a liability. In an ever-changing business environment where digital transformation and business model disruption is inescapable, every family business must examine whether its culture is fit for purpose. The good news is that company culture can be measured and actively managed, enabling leaders to grasp new opportunities and take their organizations along with them.

Spencer Stuart has been advising family businesses on their leadership and talent needs since its founding more than six decades ago. Now more than ever we see culture as a differentiator in the businesses we work with. But as family businesses grow, embark on a new strategic direction or respond to the many external forces of change, they must invest in both understanding and managing their culture. It is a mistake to believe that culture should be fixed and unchanging. A business with an entrenched culture is vulnerable when the ground starts shifting around it.

Family businesses are generally very good at articulating their purpose. Purpose is an increasingly critical factor in attracting and retaining talent; it defines what the business is doing to improve the lives of others, how its products or services benefit the community or society at large. Purpose infuses day-to-day work with greater meaning; it resolves to convert effort into something that transcends the pursuit of profit and acknowledges the interests of stakeholders.

Family values

Values are the glue that binds the family, the business and its employees. They usually reflect the founder’s philosophy and act as a guide to “the way we do business”. Sometimes they are enshrined in statements of ‘core values’ that are frequently referred to in company communications and that underpin day-to-day decision-making.

Changing the culture

Whereas values are constant and provide the underpinnings of a family business, culture is necessarily more pliant; it is a catalyst for performance and yet it must evolve over time. The company culture needs to be able to adapt in line with a changing strategy. Since every company has to revisit and upgrade its strategy (with increasing frequency and urgency in the current climate), it must also devote time and energy to examining whether its culture is up to the task of delivering on the strategy.

Even the best laid strategic plans will go to waste if the organizational culture is not aligned to the changing context, realities and goals of the business. When alignment is missing, culture eats strategy for breakfast, as the saying goes.

Towards a learning culture

Organizational transformation tends to accelerate during a crisis. Change programmes that might have taken years under normal circumstances are being implemented rapidly, an obvious example being the mass shift towards working from home caused by the coronavirus. One of the disadvantages of deeply embedded cultures with their long-established ways of working, habits and behaviours, is that they can be found wanting during a period of upheaval. Unless, that is, they also have a bias towards learning agility.

Evolution of family firm

The first stage, entrepreneurship, is when the family aspect first provides an advantage over non-family companies. In getting established the family is often the chief provider of labour and therefore more devoted to the company’s success. During this stage some firms may also finance through the family, better aligning costs and benefits.

In the growth stage the company focuses on increasing its market share, bringing new and innovative products to market, expanding into other regions or geographies, increasing capacity, and attracting additional financing.

Family businesses are commonly viewed as being risk averse but the Credit Suisse data indicate otherwise.  All survey respondents have expansion plans, with small family businesses focusing on increasing capacity while larger ones are expanding into new countries and industries.

Family dynamics can play a large role in governance. Public firms may face agency costs if the interests of owners and managers are not properly aligned but the costs can be avoided in family firms where the owner-manager has more at stake.

However that doesn’t mean family businesses are immune to governance issues. They might result from things like favoritism towards other family members or failure to deal with discipline, but the company should have mechanisms in place to deal with such possibilities.

Succession is the final hurdle in the family business life cycle and it is when family relationships can be a problem. It is particularly challenging in the transition from first to second generations, when sibling disputes can override good sense.

Generation based:

Generation 1 family business advisors are typically professionals who have a good career track record and have been an “inner circle member” that allows him or her entry to the family and the business. This entry is based on trust developed over a period of time. The GEN 1 advisor will know the entire inside of the family on all matters. In fact, he or she may learn many things over a period of time that even family members do not know. The scope of entry is decided by the family (primarily by the patriarch) and the boundaries are defined. This practice, however, can result in an intervention that is limited in nature and tends to be biased to a great extent.

Generation 2 family business advisors are those who have educated themselves in family business management (very few in number), but who, however, have limited exposure to working with the family. Their acceptance is, therefore, often limited and challenged. The hurdle for them is that they are more professional then the trusted advisor. They are more academic in nature and require endorsement for acceptance. Either they come from domain expertise or from a behavioral domain. Behavioral domain people bring in a dimension of the so-called “spiritual.” Spiritual does not mean they are religious an evolved spirituality is nothing but “inner excellence.” If an advisor comes from the expertise domain, his or her advice to the family is more on the business side rather than the family circle side. If the advisor comes from the spiritual domain, his or her comfort zone is more on emotional challenges and not as much on business progression.

Generation 3 advisors are those who have been working in the family office of the family business and have gained adequate knowledge about the subject by the virtue of this experience. Theirs is a practitioner’s approach but in a limited space. There are very few family business advisors who bring a holistic value to a family business, addressing all three circles.

One of the key things missing in India is a fully functional institution that offers end-to-end consulting/advising services in family business management. While the Big 5 are making an attempt, most of them are skewed to wealth management, business process re-engineering, Next Gen development, legal etc. A holistic approach is missing. One needs to understand that an individual cannot be an expert in all areas. It’s the ability to source the right people for the right intervention that makes the advisor effective. This is where he or she builds credibility. The individual continues to be the confidant.

In the western world some of the most successful family business advisors are members of family businesses who have themselves gone through the ups and downs mostly from third, fourth or fifth generations and have developed adequate academic expertise to bring a structure to their approach. They are more believable as they come from the same fraternity. In the days to come we may see the same phenomenon in India as well.

Spirituality, or “inner excellence,” is timeless and ageless. It transcends all religion. The core of any family’s existence in the Indian context depends on how much the family is spiritually anchored. It becomes extremely important to transfer the spiritual capital in very structured ways.

Many families have given a greater respect to the spiritual practice imbibed by their ancestors and that has kept them going. When tapping the spiritual consciousness of each family member in the family business, results emerge that are completely different and phenomenal, minimizing differences and conflicts and creating greater alignment among the family members. Raising spiritual consciousness helps family members align the family and business purposes, ensuring perpetuation from generation to generation. Practicing spirituality beyond the religion holds the family together a better anchor.

Last but not least, the family business field has soft and hard components. The hard part is apparently easier to handle. The soft part is emotional. Hence anybody who has experience in handling emotional issues (psychologist, counselor, astrologist, spiritual guru, etc.) feels he or she can contribute and make a difference. Unfortunately, there is an element of gullibility in family members, especially in moments of desperation, where logic has not been able to serve the purpose and when a one-dimensional approach leads to skewed diagnostics and makes things complicated. Dependency on such one-sided approaches create a “confession chamber of the church” to the family.