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A dialogue between Amy Schuman and Dr. Stephen McClure

What happens when you put two family business experts into one room? We have tested it with family business consultants and authors Amy Schuman and Dr. Stephen McClure from The Family Business Consulting Group, USA. Providing us with deeper insights than ever, the dialogue between Amy and Steve allows a true appreciation of the complexity of human capital management in the family business, the relationship between family and non-family employees, and the importance of the planning process.

What are the greatest challenges family businesses face in formulating their human capital strategies?

Amy: Probably the biggest challenge is that many families do not recognise the need for a human capital strategy in the first place. What is it that causes a family business to formulate a human capital strategy? Are they good planners by nature or do they only formulate strategies when they are faced with difficulties? I commend businesses that choose to create these strategies as a pro-active effort.

Stephen: I agree that in many cases family businesses just don’t believe that they have to work on a plan. I think that families think of human capital strategies when a critical point of succession is reached and also they have a hard time distinguishing between human capital planning and management succession planning. Generally, it is hard to get a family to plan for its human capital strategy especially when it concerns employees below senior management. It is a great challenge.

Amy: Yes, but an even greater challenge is that each family generation assumes that they can do things the same way the previous generation did. The founders have a lot more freedom and self-determination that leads to their success as entrepreneurs. The second generation comes along expecting the same level of independence and autonomy, which can create problems. It is hard for siblings and cousins to accept their limitations in the relationship with the business; they should be subjected to the same performance measurements as non-family members and do not have the independence of the previous generation who mostly worked without a job description.

Stephen: You are right in that the new generation wants to manage things the same way. Yet, we also see that it is they who undertake challenges that the previous generation did not tackle well, especially, if they have been exposed to a lot of education and exposed to a lot of other business leaders inside and outside family firms.

Do you think a difference should be made between family and non-family employees in human capital strategies?

Stephen: I think that there should be a difference. Family members should be successful. While merit principles need to be implemented across the entire organisation, family members cannot be put into a position wherein they are going to fail publicly. It is important to consider what might be done to help family members become successful in their position.

Amy: I agree. I think for many years in the family business field best practice taught that family members have to be treated exactly like everyone else. It has always been a real concern that if we treat family members differently it might be damaging to the business. However, in reality it would be hard to find a family firm where no special consideration is given to family members. While they shouldn’t hold positions for which they are not qualified, it is dangerous if we don’t recognise that family members are different. So how do you deal with that duality in which family members need to be like everyone else while recognising the ways in which they are special?

Stephen: By developing policies and explaining those policies at a very early age before people even start thinking about their careers and allowing at the same time to create the understanding that a merit system is dominant in the business.

Amy: Indeed, maybe the human capital strategy for family members should start when the next generation is 8 years old! This way it is not just about them fulfilling a specific role in the business but also about carrying on the legacy and a set of values.

Isn’t that confusing succession planning with the human capital strategy?

Amy: I think it is important to always think about both. You might be making a decision on the talent management side that influences the succession of ownership. Let’s say we have a controlling owner who is not performing adequately. It is not easy to give him feedback on his lack of performance because he has the deciding power. This is where talent management and succession planning become intertwined. One of the remedies is to raise this issue early on and help the family understand the different roles of owners and managers. Later on, owners choose managers and one of their most important tasks is to make sure that the business is run by the best qualified people whether they are from the family or not.

Stephen: Maybe an extension of human capital planning in a business family is to add a section dedicated to ownership. Too many families are just left to discover what it means. They often base their ownership notions on what they have seen in the previous generation.

When is it acceptable not to apply the merit principle to family members?

Amy: It is easy to argue for the need for meritocracy but it is not easy to argue for the need for special treatment and status for family members. If we talk about merit in a business setting this involves employees demonstrating certain business skills. But you might have family members that do not have strategic or financial skills but are very talented in transmitting family values to the rest of the organisation.

Stephen: It is a fine line especially with leadership roles. There are of course all kinds of pluses in having a family member in a leading position. The question is how much competence from a pure merit perspective does that family member bring in.

Should there be a glass ceiling for non-family members in the family business?

Amy: I have met a great number of non-family executives that do not really feel limited by their lack of access to the top jobs in the family business. Part of their satisfaction comes from supporting the family in their continuity and talent management. Their dedication is to the continuity of the business and its values. If you were to ask them if there is a glass ceiling for them they would say ‘yes’. If you ask them if it’s a problem then most of them would say ‘no it really isn’t’. Of course there are many family firms that fill the top jobs solely based on merit and I think that is a very legitimate approach as well.

Stephen: I would add that there is a glass ceiling in some family businesses and in others there isn’t. In families that have developed towards being family-owned and well-governed, family members may not feel the need to lead the business themselves. On the other hand there are family businesses with good cultures have long-term employees that understand that the family owns the business and that they can do with it what they want. There are also families that introduce a glass ceiling in a reckless way often when they are too oriented towards providing family members with certain roles; for instance, if one brother or sister gets a senior level role then the other siblings should get similar positions. That’s a natural thing for families to think about but it is also destructive if the required capabilities aren’t there. If it is handled in a reckless way it becomes difficult to maintain motivation for non-family members and the best ones leave or never join.

Amy: Yes, maybe the glass ceiling is not necessarily an issue if it is handled well. A good barometer would be to see whether the family can retain the high-quality talent in the long run. If you can’t attract or retain the very best non-family managers then that could be a sign that the glass ceiling is not being handled well.

Stephen: Generally, I think that many non-family managers accept nepotism and in fact we are surprised by how many even support it. If a family really invests in its human capital strategy and formulates the policies for family members and if they apply objectivity to the process then non-family members find it easy to accept the company culture. Family companies may not be able to offer the CEO role just as they can’t offer ownership. There are, for instance, many different ways to work around not being able to transfer ownership to non-family members. There are lot of good reasons why non-family managers should not own stakes in the family business and too often I think that families do not invest in explaining that to the non-family members. If the family is transparent about their reasoning for family leadership then non-family employees will find it easier to accept glass ceilings and preferential treatment.

What are motivators for non-family members to join a family business and what are the incentives that can be offered to ensure non-family talent retention?

Stephen: For attraction and retainment I think that business families have the potential to capitalise on their integrity, their values, and their culture. Not every executive non-family candidate is going to find that appealing but the ones who do will understand and appreciate the family culture. I think that is a key motivation factor for the right candidates.

Amy: Moreover, it is a great motivator for non-family members that there is often less bureaucracy in family businesses and you can reach a decision-maker more easily. To create more incentive the family business human capital planning should consider compensation approaches that allow non-family executives to create wealth, as they contribute to the success of the family and the business. I also think that compensation and benefits for family and non-family managers should be up to market standards. To make this all work there is the need to create an atmosphere of open and honest communication. Non-family executives don’t want to work in a place where they have to speculate about what is going on. You may not choose to treat family members exactly like others but it is best to be honest about it. It is best to create an environment in which people can raise problems when they perceive them. If the special treatment of a family member goes beyond what is reasonable there should be a way of communicating this in the company.

Stephen: There should be channels though; not everything should be said in an open meeting for instance and embarrassing a family member publicly should be avoided. It should always be handled in a graceful way.

Should non-family employees act as mediators between family members?

Amy: Here we are caught between aspiration and reality. I think the aspiration is for people to talk directly to each other and that using an intermediary is not conducive to developing communication skills. In reality, however, people may not be able to do this. It is human to get a third party involved. I think that as long as the third party works toward promoting direct communication it is fine. Unfortunately, sometimes that third party starts to garner increasing power the more they are confided in. Whether consciously or unconsciously the family starts to believe that they wouldn’t be able to function without these people and direct communication becomes less and less probable. Non-family members are often put into an intermediary position. Often this role falls to the HR person who gets involved as a mediator in the career planning for family members.

Stephen: I do not think that non-family managers should be asked to be mediators. I think that they should be asked to be educators and facilitators. They might often see the family business in a clearer light than the family itself and are crucial to the business success. I think they can become advocates for the self-sufficiency of family members resolving their issues in a productive way. It is not just non-family managers; sometimes it is an independent board member, sometimes a trusted legal or accounting advisor who becomes part of the fabric of the family business success.

Amy: Yes, people evolve into these roles because of their natural skills and their trust-worthiness. I think that the loss of such a key person in terms of succession planning can be very detrimental to the business: If everybody has been relying on that person as the central communication point and they are gone with no one to fill the gap, things can fall apart because the family hasn’t built the ability to communicate on its own.

Stephen: I think that is when we step in and the consultant becomes a temporary fix. We help the family business remain sustainable while they are dealing with the succession. At least that is our goal.

Amy: When planning for a successor we often can’t imagine who would ever step into a key person’s shoes. One thing we have learnt about the human capital planning process is that the planning itself will allow families to understand what they look for in the future. But it is the discussion not the plan that really matters. Having a written human capital plan on the shelf does not guarantee implementation. Plans have their place; they are not worthless but often things change and they are made redundant. However, the understanding that was created through the planning process is what endures and enables the family to make decisions.

Stephen: If a family engages in an emergency succession plan, for example, if someone dies, the question is whether they are ready to adapt to the radical change that would be required. Often discussing changes that would be required in the event of a tragedy actually prepares a business for the eventuality. Rather than waiting for it to happen they understand that they are at risk if they do not anticipate such events. Non-family members can be a great help in these cases and assist with objective insights.

Amy: In human capital strategies it is really the planning process and the dialogue around the planning that is significant and will lead to lasting success.

Tharawat Magazine, Issue 14, 2012