15 Jan 2014  Research & Ideas

Managing the Family Business: It Takes a Village

Is it better to lead a family business with one ultimate leader or a team? John A. Davis, an expert on family business management, kicks off a series of articles with a look at governance models.

 

Editor's note: This is the first of occasional columns on managing the family business written by Senior Lecturer John A. Davis. In this first of two articles, Davis discusses leadership models.

PART ONE: Global Norms and the One-Leader Model

A consistent finding about family business systems—the business, its owners, and the family in control—is that strong, long-term business performance also requires strong performance by the family and by the ownership group. You can't keep a family business performing well over many years just focusing on the business. Family unity, united ownership and ownership support of the business are just too important to ignore or take for granted.

We also know that strong performance of the business, the ownership group, and the family depends on the effective leadership of each group. This shouldn't be surprising: good performance of any group always depends, to a surprising extent, on capable leaders. If boards of directors of public, anonymously-owned companies didn't believe that leadership mattered so much, they wouldn't pay such huge salaries to their CEOs. (By the way, I don't think they are worth that much, but the point is: having the right leader does matter.)

Because there is not only a business, but also an ownership group and a family that need capable leadership, a family business system is much more complicated than other kinds of business organizations. Leading these systems is also much more complicated.

Family business systems have a number of formal leadership roles. The CEO and board chairperson lead the business and usually the shareholder group. Family council leaders, parents, and grandparents are the formal family leaders. These leaders don't make all the important decisions in these systems. Nor do they provide all the guidance. They don't allocate all the resources. But because they have considerable authority, influence, and control over resources, we rely on them to do their part in setting direction and guiding their group.

Because the performance of people in these roles is so important to the success of the family business system, we need to understand what capable leaders in family business systems actually do. I've spent much of my professional life figuring this out.

I've gotten to know a number of excellent family business leaders in my long career, along with some weak ones, and a couple of awful ones. To illustrate my profile of a great family business system leader, I'll use one of my favorite examples: Nelson Sirotsky, chairman of Grupo RBS, his family's world-class media company based in Porto Alegre in the south of Brazil.

I met Nelson and his cousin Marcelo Sirotsky at a seminar I led on family business management in Santiago in 1999. I've worked with their family business system ever since. Nelson, then CEO of RBS and also leader of his family branch, attended the seminar to develop plans for his family business system and to reconsider his own leadership role. As the program unfolded, Nelson came to new understanding. He realized that he needed to give more attention to his family and the owners, in order to keep pace with his tireless focus on the business.

What Nelson and his family accomplished over the last decade is very impressive. They recently celebrated Nelson's successful and smooth transfer of his CEO role at age 58 to his very capable nephew, Eduardo Melzer, 40. Nelson remains chairman of the board with clear responsibilities. RBS is stable and poised for more great performance. My colleague Vicky Bloch, a superb coach and advisor, helped them throughout this process. But much of this good work stemmed from Nelson understanding his role as a leader of the business, family and ownership group, and from his performing so well as a leader, including through the CEO transition.

Which brings me to a question I am often asked: "Is it better to have one ultimate leader of the family business system or a team of leaders?"

Unitary leadership vs. leadership teams

There are two basic models. A family business system can either consolidate leadership with one person, or it can choose two or more people to lead different parts of the system. Each model can work well, as long as it's clear and supported by the stakeholders. Both models have some potential weaknesses: unitary leadership can lead to excesses; leadership teams can be slow and hobbled with rivalry.

But there is no doubt that one model dominates. Having one person serving as the ultimate leader of the business, ownership, and family is the natural choice for most families (and most nonfamily groups) around the world.

The preference for one leader seems only slightly culturally driven; it's very common in Italy, for example, but only slightly less common in Finland-comparing two European cultures that couldn't be more different.

One-leader systems are also somewhat more common in younger and less complex family business systems; these systems are either in the founder stage or trying to emulate it. The parent-founder-business leader-controlling owner generally has most of the power in his or her family business system. As family business systems approach or reach the cousin stage, with diversified businesses and big ownership groups, as RBS now has, you find more systems having two or three leaders who lead different parts of the system and collaborate to keep the system united. Sibling systems have the hardest time working out who should have what leadership role and power.

"The one-leader model still dominates everywhere and at all stages"

With those few exceptions, the one-leader model still dominates everywhere and at all stages. Inertia keeps families in business wedded to it, and in some situations there are measurable benefits that tip the scale in favor of unitary leadership.

So let's take a closer look at this model.

Unitary leadership

The person chosen for this role is generally the business leader. In some cases, the family business system leader is the chairman of the family holding company and the clear leader of the family owners. In general, family business system leaders are the individuals with the most resources under their control; typically, they are middle aged or family elders. Effective ones are appreciated for their wisdom but are not necessarily liked by all their relatives. Leaders tell me that they have a gratifying but tough and often thankless job.

Many successful family business leaders tell me that they spend half of their time working to address family and ownership issues and to maintain unity. If the business leader tries to control too much of the power in the system, he or she will often weaken and destroy it. Even founders seem to understand this. At the founder stage, I often see the wife-mother wielding significant power over the familyand significant influence on her husband the founder, whom she advises.

That is why an accurate drawing of the one-leader model usually shows that the ultimate leader has strong deputies or allies helping to lead the business, family, and ownership group.

Recognizing the needs of his family business system 15 years ago, Nelson Sirotsky opted to maintain ultimate control but delegated much of the management of RBS to his star nonfamily EVP, Pedro Parente. Nelson shared leadership of the ownership group with his uncle and then chairman, Jayme Sirotsky (also an exemplary leader). Nelson also supported the family council and its leaders, who did much to organize and unify their large family.

It takes a strong ego to not only share leadership but also give credit to others as Nelson does. It's fair to say that no major change in the business, family or ownership group could have been made without Nelson's agreement, but also that others' support was needed for major programs or decisions to be approved. There were continuous conversations among the owners and family about important issues and these drove out consensus. Consensus never required unanimity but rather the feeling that the deliberation process was fair, combined with general agreement that the decision was the best possible course of action at any given time, given some reservations.

Through the last decade, what resulted at RBS was a decisive system with strong support for Nelson, the ultimate leader, by the family and owners. In successful family business systems with unitary leadership, you find that most important decisions are the product of a consensus process like this. The leadership model has now changed since Nelson moved to the chairman role and Eduardo Melzer became CEO: the collaboration between uncle and nephew in leading their family and business is impressive.

Whether your own system is modeled on unitary or team leadership, you need to design, structure and allocate leadership roles. We'll turn to this in my article next month.

Other articles in this series

Managing the Family Business: Leadership Roles

Managing the Family Business: Firing the CEO

2014 by John A. Davis. All rights reserved. A version of this article first appeared in Portugese in HSM Magazine.

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Comments

    • Moses Chirewa
    • Managing Director, Certegy Investments t/a Litac Growmix

    Very insightful reading!Normally we look at family run businesses as entities that are self propelled totally disregarding the dynamics that may exist within the family itself,the business unit(s),and shareholders.And their effect on the success or failure of that business.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Historically, family businesses develop from scrap when someone starts a business, takes the reins and develops it, his family becoming part of the group. The governance and final decision-making remains of the starter who generally is the eldest and head of the family. Usually such entities start as traders going in for manufacturing and technical activities later on. Key functionaries are family members most of whom learn by experience alone with nominal academics. With the developments taking place all around, need has been felt for imbibing professionalism for which getting youngsters properly educated has been prioritised. Many of such businesses have been converted into corporates with boards to make decisions. At the apex level is still the head/ key member of the family and outsiders are admitted only if absolutely necessary. In India, we also have family run businesses known as HUF (Hindu Undivided Family) whose "karta" ( the man at apex) is the head of the family. Many HUFs are doing good business. Which leadership model is better cannot be said with certainty. It all depends on the focus and long-term vision and appropriate action planning to achieve the set goals.

     
     
     
    • Waseem Al-Herwee
    • Chairman Assisstant, Abdul Wadood Al-Herwee Trading Houses

    After I finished my BBA and joined my father Company 2 years ago, My mind have been busy into how Family Business Management Structure should be made in order to enable the Business Leaders to make better decisions as well as perform in more productive way. This Article has added many lost Guidance I've been looking for. Thanks A lot Sir.