Drucker on Family Business Management Part I

Robert Swaim, our contributing writer of the  Drucker Files for the past two years, has been a colleague of Peter F. Drucker for more than 25 years. Drucker was recently recognized by the American Management Association as "the most influential person on leaders today based on his philosophy, values and practices."

This month's article outlines Drucker Rules for Family Business Management. Part Two of this article next month will deal with Exit Strategies and Management Succession in the Family Business. 

Swaim teaches the Peter Drucker Executive Development Program- based on Druckers 60 years of writing, teaching and consulting- at the Bright China Management Institute in Beijing.

INTRODUCTION:  THE FAMILY BUSINESS IN PERSPECTIVE

Of the 13.2 million businesses in the United States, 90 percent are family owned and managed. These companies employ more than 77 million people, or about six out of every 10 workers in the United States, pay 65 percent of all wages, and generate 55 percent of the nation s gross domestic product. Between 1977 and 1990, family businesses created eight out of every 10 new jobs in the United States.

Not All Family Businesses Are Small

Contrary to popular belief, not all family businesses are small like the husband-and-wife team running the local restaurant. About 200 of the Fortune 500 companies are family owned. There are also large Chinese family-owned businesses. As an example, 40 percent of the Hong Kongs market capitalization is controlled by 15 Chinese family groups. In Taiwan, 16 of the top 20 companies in terms of total assets are family-owned and family controlled. In Indonesia, nine out of the top 10 businesses are owned by Chinese families, and in Thailand, Chinese families own four of the countrys largest banks.

Family Business and Size

According to Drucker," There is little doubt that beyond a certain size, a business can no longer reserve management to family members and remain viable. Beyond a certain size, that management burden increasingly has to be borne by professional managers."

This article presents Drucker s Rules for family business management and the role of the family and non-family professional managers in the family business. The Chinese family business may differ considerably from family businesses found in the West, and the Chinese family business owner will have to determine which, if any, of Druckers Rules apply.

DRUCKER'S RULES

Functional vs. Management Work

There is really no difference, says Drucker, between professional management and family-managed businesses when it comes to functional work  research, marketing or accounting. On the other hand, when it comes to management of the family business, different rules are required. Without them, the family business will not survive or prosper.

Rules for Family Members in the Business

Family members should not be allowed to work in the family business unless they are as capable as non-family employees. They should only be allowed to stay in the business if they qualify on merit, not because they are family members.

Respect is a critical dimension of the family member working in the business. If the family member does not command professional respect, they should not be in the company. Dr. Swaim sights a case: the son of a founder was CEO of the company, but did not enjoy the respect of the non-family professional management team   marketing, finance, operations, and managers. The lack of direction hurt morale and the company performance waned. Dr. Swaim arranged for a management buyout of the son and the company is now doing very well managed by non-family professional managers. The major issue: Lack of respect.

A family member who is not willing to work, no matter what their educational background and capabilities, should not be allowed in the family business. Also, if the family member is not of top-management caliber, with the potential to take over leadership of the company, they should actually be paid a stipend to stay away from the business. Some analysts also suggest that family members not be allowed into entry level positions. Ideally, they should have spent several years gaining practical experience working in another business before joining the family firm.

With respect to promotions, family members should never be given preference if there is a more qualified and better performing non-family member in management. Finally, over time, family members will elect not to enter the business and the company will eventually become totally professionally managed by non-family members.

Rules for Non-Family Managers

The non-family members in top management should be given rewards and incentives that make them feel like owners  or as Drucker says, they need full citizenship in the firm.  After all, it is their commitment to the family business that allows the business to grow and continue to be successful. These rewards can be stock options, stock bonus plans, phantom stock  or other creative incentives to retain the commitment and motivation of a non-family manager. Without these incentives, there is danger the non-family manager or managers will become frustrated, elect to start their own business and end up becoming a competitor. With respect to top management, Drucker suggests at least one senior management position always be filled by a non-family professional manager such as the COO, finance manager or marketing manager.  For a humorous example, Drucker cites the Mafia, where the second in command to the Godfather , the consigliore, is not a member of the family and may not even be a Sicilian.

Unless the family business is small, key staff positions should also be filled by non-family members  research, marketing, finance and human resources management. Family members cannot have all the knowledge and expertise required for all of these areas.

Another important rule for the non-family manager is: Dont mix business with family. If the non-family manager attempts to become too close to the family, there is a danger of losing perspective on the business. Therefore, the non-family manager should generally avoid family social gatherings unless it is a special event to which he or she has been invited. Summer barbecues, for example, do not qualify as such a special event.

Succession Planning

Who will take over the leadership of the family business is a critical decision. It shouldn t be left until the day after the founder dies. Drucker advises this decision be trusted to an outside advisor who is neither part of the family, nor part of the business. We will deal with succession planning and family business exit strategies in more detail in part two of this article in next months edition.

Summary and Plan for Change

The family business needs to plan for its eventual change in character. Drucker estimates that after two generations, the family will only be the beneficiaries of the business, not the bosses. As an example, studies have shown that 80 percent of family businesses never get to the second generation.

Finally, opportunities for family members should be available to those who are able and desire to pursue a career in the business. On the other hand, those who do not fit these requirements should stay out of the business and remain investors.

Next Month

Next month's article will deal with succession planning and discuss various exit strategies available to the family business.