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The Role of Company Culture in Sustaining a Family Business

By Candace Coleman, CultureWise Content Manager

Family businesses spanning successive generations have existed for centuries, from farms, to trades, to shops, to specialized services. “Mom-and-pop” enterprises operated by a few relatives are the emblems of this kind of company, but not all family businesses are small. The scale of these operations can vary from “Jones & Son” to multi-million-dollar corporations.

And taken in aggregate, they saturate the business market. According to the U.S. Bureau of the Census, about 90 percent of American businesses are family-owned or controlled. In addition, these operations account for half of the nation’s employment and Gross National Product. In an era where large, bureaucratic companies dominate the news, family businesses sit quietly at the head of the table.

The Inner Workings of a Family Business

As with any family, family-run companies are complicated. The intricacy stems from the blending of two systems: the business itself and the people related to each other who run it and work there. In addition, family members who have a stake in the company but aren’t staff create more layers of complexity.

Familiarity, shared values, and trust can give family members running a business a significant advantage. But conflicts can flare up with the overlapping of familial and company roles. These pros and cons affect every decision, from daily operations to long-term goals.

In particular, family businesses grapple with two primary issues:

  • Relatives interacting as staff
  • Succession planning

If they want to prevail beyond one or two generations, these nuclear organizations must find ways to manage these challenges.

When Family Members are Coworkers

Usually, only a few people create a family business. Their shared vision, principles, trust, and understanding form the heart of the company. As the enterprise builds steam, they may begin to bring other family members who adhere to and want to maintain what the founders launched. But the wider the family circle, the harder it is for the company to maintain that equilibrium.

Family businesses can be comprised of combinations of relatives in various business positions. The composite can include spouses, parents and children, in-laws, extended family, and multiple generations with roles that range from CEO to intern. How they interact personally and professionally often dictates the level of success the organization can achieve.

UNQUALIFIED RELATIVES

Relatives who become part of the family business, but lack the qualifications, pose a problem. Regardless of how much the company means to them, they limit its progress and are poor brand ambassadors. And both related and non-family staff resent these underperformers in the organization.

A strict policy of only hiring people with legitimate qualifications to fill existing openings can help a company avoid such problems. But this tactic won’t work unless leadership applies the policy without exception. Qualifications should be non-negotiable.

But not every subpar family staff member is a new hire. Company leaders already dealing with relatives who can’t pull their weight should work to find win-win solutions instead of living with a bad situation. For example, they might offer additional training to help the individual develop a useful talent. Or both parties could work together to identify a compassionate off-ramp that is in everyone’s best interest.

DISRUPTIVE RELATIVES

Even family members with appropriate skill sets can disrupt the company if their behavior clashes with the prevailing work culture. And once hired, family members are difficult to terminate, even if they negatively impact the morale of those around them. Companies that stick with a toxic employee, whether they’re related or not, often lose other talented team members as a result.

Without specific measures in place, it can be difficult to know how a family member will act until after they’re on board. So company leaders need to be proactive to prevent potential bad fits. The most effective way to do this is by formally defining and reinforcing the culture they want in their organization.

Building Company Culture

In the beginning, the culture of a family business mirrors its founder’s spirit. Close relatives who initially join the company are usually compatible with “the way things are done around here.”

But as the organization grows, alignment with the originator’s ideology and work ethic can become less distinct. And the original culture can change dramatically with the introduction of extended family and younger generations. A diversity of perspectives can greatly enrich an organization, but only if everyone shares the same standards.

A leader can create a blueprint that can be used as a hiring barometer by intentionally developing their company’s culture. The first crucial step is identifying and defining the employee behaviors that will preserve and promote the company.

When these behaviors are spelled out, it’s much easier for the leader and relative seeking employment to determine whether they’ll sync with the organization and can be successful there. Without that kind of transparency, the leader is more likely to act out of sentiment, allowing family ties to blur good hiring judgment.

Family Legacy and Succession Planning

Proud founders often envision their family businesses enduring through the decades. But if the past two years have taught us anything, it’s that circumstances can rapidly change. To be resilient, family businesses must not only develop a strategic continuity plan. They must also have a straightforward course of action for who will be next in line to lead.

Working out who will take the reins in a family operation can be more complicated than one with a strictly business hierarchy. Delicate family dynamics might explain PwC’s survey finding that only 34 percent of family-owned companies in the U.S. have a solid succession plan. There are various reasons that founders or current leaders are reluctant to formalize this critical part of a business plan:

  • They don’t want to feel like they are relinquishing control
  • They don’t feel their successor is ready
  • They have few interests outside of the business
  • They wish to maintain the identity they’ve nurtured through work

Still, for family businesses to last longer than one or two generations, it’s critical for family business leaders to make succession planning a priority. As Amy Castoro and Fred Krawchuk, the authors of the Harvard Business Review article “Plan a Smooth Succession for your Family Business,” point out:

“The lack of a transition plan can create havoc for a family business when, for example, a founder suddenly suffers a medical limitation that impairs their ability to function optimally, or the next generation throws in the towel because they don’t feel included in the future growth of the business.”

Castoro and Krawchuk go on to outline several essential points to help families effectively transition to new leadership:

  • Strike a balance between control and collaboration.
    Control and power issues exist in every organization, but they’re even more difficult in a family business. Establishing a timeline for the transfer of responsibility and determining the criteria for decision-making authority can alleviate some of this tension.

  • Embrace the next generation’s perspectives
    During the pandemic, many members of family enterprises focused on how their shared values will impact their company’s legacy. Including the next generation in discussions about applying these values to future endeavors helps generate effective succession plans.

  • Bolster intergenerational solidarity
    Engaging family members with the business at a young age can lay the foundation for a successful transition. Many family businesses that succeed at passing the torch plant seeds early. They don’t wait until the next generation is grown before actively discussing and creating opportunities for them to interact with the organization.

  • Embed high-trust behaviors
    Effective succession hinges on trust. Author Charles Feltman divides trust into four areas in The Thin Book of Trust: An Essential Primer for Building Trust at Work: sincerity, reliability, competence, and care. The best transition plans involve ways to build each area so leaders can ultimately transfer power with confidence.

  • Co-design standards for readiness
    Perceptions about preparedness to lead can vary significantly from an existing leader to one looking to assume the role. Having an in-depth conversation about specific standards people must meet to step into the top role will help manage expectations and avoid misunderstandings. Early planning and ongoing preparation are also vital.

Agreement about the value of the company’s culture is one of the key elements in a successful transition of control. The change is much smoother when current and future leaders are in solidarity about the behaviors that should guide the company. As time goes on, different people will assume leadership roles. But the culture is the thread of continuity that will bind and preserve a family company for generations to come.