Family business owners must be ready to stop meddling

Owners of successful family firms often try to bring in outside professionals to fill senior positions, but often set themselves up for failure due to one simple mistake.

Recruiting outsiders as senior managers is a common path for family businesses that reach a certain size and find further growth constrained by their own abilities. Sourcing good candidates among existing employees is usually not possible, so it seems logical to seek talent from outside.

Unfortunately, this arrangement frequently does not end well because of a simple, crucial mistake: While they may invest considerable time and money in finding, hiring and training the right outside professional, all too often owners of family businesses assume that an outsider can do the job without the owner changing their own behavior.

In Asia most family firms are built around strong, hands-on family leadership, but are weak in systems. Many decisions are taken in an ad hoc manner in response to problems or opportunities, without or outside a comprehensive strategic plan. There may not be any job descriptions or human resources policy, and employees are often unsure what decisions they may take on their own. Although a trusted insider may oversee accounting, other formal checks such as internal and external audit are usually symbolic rather than substantive.

This allows for great flexibility, speed and low overheads, but makes family firms highly dependent on strong leaders.

In cases like this, it is likely that no single outside professional, no matter how competent, will ultimately succeed. After all, how can an outsider run a business when the owner constantly meddles in decision-making?

If employees or business partners can turn to the owner with their issues and convince them to overrule the newly hired outsider, the latter's legitimacy and authority is quickly undermined.

Most outside professionals enter family firms with little idea of what to expect. They are often promised a lot yet end up with high levels of frustration. Those that are used to working in multinational firms are bewildered by the chaos, weak systems and lack of management quality they find in family firms.

They often tell stories of owners who go straight to their lower-level employees with detailed instructions. Or they lament the firm's seemingly ad hoc decision-making, rendering any attempt at long-term planning or consistency futile.

These outsiders quickly come to feel that the owners themselves are the ones preventing them from performing well. Unsurprisingly, they often resign in frustration within a relatively short time.

To break this cycle a different approach is needed. Based on several years of studying cases of family firms across Asia, here are four steps that firms should consider to successfully incorporate outside professionals.

1. Take stock. The first step on the path to incorporating outside professionals in family firms is introspection. Owners should ask themselves the following: What am I doing today that I should stop doing? How can I give real authority to the new manager, yet also build systematic checks and balances so that power is not unchecked? How can I have oversight without taking every single decision or knowing about every little detail?
2. Set up corporate governance rules. If family firm owners honestly assess their organization, they will probably realize they do not offer a context in which outsiders can succeed. They need to build proper procedures and systems before they can fully benefit from outside expertise. This means clearly defining responsibilities, performance targets and authority levels, including placing limits on the owner's authority. In other words, family firms need to strengthen their formal corporate governance prior to hiring outsiders.
3. Implement new routines. Most family business owners are not used to a role of high-level strategic oversight and find it hard to step back. They may feel a loss of control once they relinquish day-to-day decision-making. It is important that owners feel comfortable with a hands-off approach, and that they do not overstep their boundaries. This requires awareness, acceptance, training, and practice for all parties involved – both existing staff and new recruits. The key is not just designing the system but also having the discipline to stick to the new rules and roles.
4. Hire multiple outside professionals. Only if a system is in place and implemented should owners start hiring outsiders for clearly defined roles. They must also be aware that outside experts will often prefer to hire their own people (rather than rely on loyal family-firm insiders) so the cost of professionalization can be substantial. Family business owners must also accept increased overheads as they professionalize their firms. It often takes not one, but an entire team of professionals to take over the many roles that the owner used to perform alone.

Building strong governance systems is a prerequisite for family firms trying to expand beyond the leadership capabilities of the owners. Failing to prepare for professionalization will increase the chance of failure overall.

Yet the benefits for family firms that get it right will be substantial. Investments in professional management systems and people will translate into more stability, sustainability and stronger growth as the firm becomes less reliant on family talent and able to tap on a wider talent pool.

Marleen Dieleman is an assistant professor of strategy and policy at National University of Singapore Business School.