Behind the Scenes of Family Business Leadership

Behind the Scenes of Family Business Leadership
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In family firms, leadership plays a decisive role because ownership and leadership are unified within the same group of persons. A recent study called “Behind the Scenes” by KPMG in collaboration with the Friedrichshafener Institute for Family Firms at the Zeppelin University depicts the complex but crucial interdependence between firm, family, and leadership and analyzes how this trinity can contribute to success or failure.

Here are some key findings from the study:


Autocracy is obsolete

– In a survery of family businesses, 96.5% of them agreed it is best to allow employee freedomes, with a preference of the management and employees making decisions together. 92.9% involved their employees in the decision making process, while 18.8% made decisions through the managers alone. Only 6% of family firms are lead through authoritative leadership. Significantly more are lead in a participatory (85%) and cooperative (65%) manner, while a delegative leadership style was found less common (8%).

– The leadership style of family firms has changed. Today, teamwork and the involvement of employees is indispensable for the success of the company. At the same time, situational leadership is gaining importance to allow flexible reactions to rapidly changing environments.

Infographics: Hammam Nabtiti

What shareholders really want – Participation in the decision making process instead of money

– Shareholders want to shape the company – Compared to pure shareholders (77.8%), managing directors who are also shareholders are far more likely to actively participate within the company (94.8%). Moreover, family managing directors report stronger levels of development and personal growth (98.3%) compared to pure shareholders (77.8%).

– The bond that managing directors feel for their company is stronger than that of pure shareholders. When asked “Under which circumstances would you sell your shares of the company?”, they were less likely to consider that option than pure shareholders. This was especially true when “financing personal goals” was the cited reason for selling their shares (managing partners 5%, shareholders 33%). Also seen in the findings, satisfaction leads to loyalty. If shareholders are content with the family situation and feel like they are part of a strong community, the probability of selling their shares decreases.


Extended family vs. branch organizations

– The importance of the extended family is diminishing. There are more and more shareholder circles that group themselves into branch organizations, with a 7% rise in the number of branch organizations.

– The reason for this is that as the number of shareholders grow, families perceive branch organizations as a potential solution to manage this growth.

– The coherence of families that classify and organize themselves as an extended family is significantly higher than those of branch organizations. A reason for this is that extended families foster stronger ties, which strengthens the solidarity within the family. The study also reveals that members of extended families are happier: 91.7% feel that they are part of a strong community (compared to 77.3% of branch organizations), and 95.8% have opportunities to actively participate in the company or family (compared to 86.4% of branch organizations).

family leadershipFamily rows and ties

– Generally speaking, entrepreneurial families highly value open and direct communication (85.9%). While rules for handling conflicts within the family are also perceived as important (57.1%), they are hardly implemented (25.9%). This implies that entrepreneurial firms partly fear conflicts so much that they do not even want to consider finding a provision for it.

– A shared base of values is, according to the entrepreneurial families, what strongly distinguishes them (94.2%) from others, and 81.2% report using these vales in their businesses.


The perception of conflict within the business

– Companies with purely family management was revealed to be more likely to suffer from lack of communication or fail to deal with conflicts. Mixed or externally managed companies rate their collaboration levels to be better than a purely internally managed companies (graded 2.0 vs. 2.3).

– There is a general backlog in task distribution and in the decision making process, with 72.6% of companies expressing issues with task allocation 58.4% saying the same about decision making.

Family first! Ancestry is more important than expertise

– For a family-managed company, subjective aspects (such as family membership) were seen to be a priority, with loyalty to the company getting a higher rating than individual performance.

– Generally speaking, there were specific requirement profiles for family members who want to enter management. There was also a greater likely that external managers would be let go in comparison to family members.

The older the family business, the less family members are in upper management.

– The model of pure family management gets less attractive as the business becomes older. In the second and third generation, family members often share leadership, usually with external managers. From the fifth generation on, it is likely that only one member of the family remains in leadership.

More revenue = less family: Growing companies rely on expertise of external management

–  As a company’s revenue rises, there is a correlation with a fall in the number of family members involved. When a company generates less than 50 million, 55% are family managed. When a company generates over 500 million, only 8% remain purely in family hands.

– Another correlation can be seen in that the proportion of purely externally managed companies increases when the revenue rises. For companies with less than 50 million, only 5% are managed just by external managers, in comparison with 26% of companies that do over 500 million.

– External managers display a preference to work without internal family managers because they feel limited in their decisions.

Supervisory BodySupervisory bodies are attractive alternatives for the family to maintain influence in the company

– The bigger the company, the more likely it was to have a supervisory body. When a company generates less than 50 million, 34% have a supervisory body, compared to 75% of companies that generate over 500 million.

– The less family members there are in management positions, the more likely that the company was to have supervisory boards in place.