Human capital, broadly defined as knowledge, abilities and skills that reside within a company and / or a business family, is one of the key success factors in long-living family firms. However, the family firm context offers specific challenges but also opportunities when it comes to creating unique human capital and a resulting long-term competitive advantage. Prof. Philipp Sieger, Professor at the Center for Family Business at the University of St.Gallen (CFB-HSG), Switzerland, discusses the particularities to consider when analysing human capital in family businesses.

While there are numerous different aspects of human capital in the family firm context, two main aspects will be considered in the following. Firstly, human capital provided by the business family itself is a decisive factor to be discussed. Secondly, the human capital from outside the family is crucial for long-term success as well. Both perspectives hold unique challenges and opportunities.To start with, the presence and long-term involvement of a controlling family in family firms can have both positive and negative effects on human capital. Across time, business families can develop unique industry-specific knowledge that can be transferred from one generation to the next. Even more importantly, research shows that business families also develop unique entrepreneurial knowledge, meaning knowledge and skills how to found and run a business in the long-term. This knowledge may also be transferred to members of the next generation. This leads to a more comprehensive perspective on succession: effective succession, thus, does not only include the transfer of assets, but also the transfer of a unique entrepreneurial mindset and related capabilities. The main challenge here is for business families to become aware of their own relevance in terms of human capital. As a consequence, an explicit and systematic enhancement of family-internal human capital is needed. In addition, business families should always be concerned that only family members that are both highly committed and highly qualified can join the family firm. Hence, clear guidelines and policies should be formulated regarding when, how, and under what conditions family members can get involved in the business. Important aspects are the level of required education, experience gained outside the parents‘ firm, entry positions, possible career paths within the firm, and continuous performance assessment. Taking family members on board that are not sufficiently qualified may erode the family‘s human capital base over time.

Referring to the second main aspect of human capital in family firms, it is obvious that the firm grows significantly quicker than the owning family itself. The business family cannot provide a sufficient number of highly qualified family members to fill all positions in a growing company; as a consequence, hiring family-external employees becomes necessary.

On the positive side, the family firm context can provide a unique setting to foster non-family employees‘ knowledge, skills and abilities. Family firms are often characterised by very strong cultures, where non-family members may even feel part of the family. In addition, family firms’ long-term orientation and the absence of hire-and-fire policies in the majority of cases contribute to a setting where human capital can develop systematically in the long-term.

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On the downside, the family firm context can be hampering when it comes to retaining and attracting highly qualified family-external staff. In family firms, attractive top-level positions may be reserved for family members. For instance, a business family could determine that the CEO always has to be a family member. This is related to another potential weakness, namely the presence of nepotism or altruism. When family members receive preferred treatment in terms of salary or promotions within the firm, even though they might be less qualified than family-external applicants, it might lead to perceptions of injustice by non-family employees. As a consequence, they might want to leave the firm, which would lead to a loss of human capital. In addition, if those practices are known, highly qualified potential employees might not want to join the family firm to begin with. Furthermore, business families are often very reluctant in handing over shares to non-family employees, as they do not wish to dilute their ownership and control rights, which is a basic condition for remaining a family business. Thus, non-family employees realise that they will never have the chance to own a substantial amount of stock, and that they will never be able to exert controlling rights. As a result, they might be receptive to offers from competing firms where substantial ownership is possible. Logically, employees striving for at least partial stock ownership in the long run will be hesitant to join a family firm in the first place.

Summing up, business families can create a unique competitive advantage by fostering human capital both within and external to the family. Family-internally, knowledge and skills of young generation members that are intrinsically motivated and interested in the business should be enhanced systematically, while at the same time implementing clear rules and procedures regarding their potential entry. Referring to non-family employees, business families should try to exploit the advantages that they have as a family firm to get access to human capital from outside the family, and also to keep and develop it in the long-term. Non-family employees should feel that they can develop their full potential within the family firm, meaning that positions are filled based on qualification and not on blood ties. In addition, stock ownership for a small circle of employees might be worth considering. However, formal ownership alone may fall short in creating the desired effects. On top of formal ownership, business families should also focus on creating a sense of belonging, attachment and psychological ownership among their employees. This would further increase the chances of creating a highly knowledgeable, skilled, and loyal workforce, contributing to family firms’ long-term competitive advantage and success.

Tharawat Magazine, Issue 14, 2012