“The institutionalization will protect the shareholders’ equity and provide the company with a solid structure that guarantees its sustainability.”
Statistics tell us that family businesses do not even survive their second generation. Where is the error that can be modified to ensure the permanence and success of a business created by the family? The secret is in institutionalization.
One of the advantages of a family business is that it is closer to the needs of the market in which it enters, unlike a multinational company that could lose its way when trying to cover a greater economic and social spectrum.
And for this reason, it is also not surprising that the family business is a model that has so many success stories in Zimbabwe (later I will mention why I consider it this way).
However, other studies have also shown that it is not an easy path if what is sought is permanence and transcendence, both to ensure the assets of the members who share the last name and to remain current in business life. The problem is survival.
INSTITUTIONALIZATION OF FAMILY BUSINESSES
These data may not come as a surprise: 70 percent of family businesses do not survive to the second generation. And 90 percent will not do it the third time either, not only because of the lack of competitiveness in the market but mainly due to the lack of a good delegation of functions and family conflicts that intervene in the business.
This also translates into the loss of management by the original members: 47 percent is led by the first generation; 29, for the second; 14 are headed by the first and second generations and barely 10 percent are headed by the third or fourth generation.
To avoid this disruption, rather than looking at the health of the overall economy, we must look inside the organization. The Institutionalization of a family business can be the transformation process that helps informal situations become organized, which will create stable practices that generate trust and interpret functions with an entity with legal personality for continuity with a view to the future.
WHAT ARE WE TALKING ABOUT WHEN WE MENTION THIS INSTITUTIONALIZATION?
We refer to the creation of corporate governance that guides, in the medium and long term, the objectives and interests of the company, the family, and the relationship that exists between the two. It can be as simple as a management committee or as structured as a board of directors, with independent directors by agreement of the shareholders’ meeting, even with the integration of an advisory council.
When it comes to the family, the first step is to form a family council, until it is possible to have an assembly that brings together a large group, where members belonging to different generations and branches congregate, who share the same nucleus.
Perhaps one of the most important definitions that must be established, especially if the company is growing, is that of the roles of each member, to avoid confusion among those involved who, on occasions, do not know what their function is, how they can help or what is expected from them when it is time to resolve a conflict.
Institutionalization is also key to a clean start, one that anticipates tomorrow’s problems by putting on the table, and in writing, a basic but firm guide on which the future of all those involved, already established and those that will be built, will be built. They are about to join when time so requires and allows.
I mean the following:
· A mission that explains the importance of the family within the company and that spreads this commitment to all interested members,
· A shared vision in which those involved see reflected a model according to their customs, education, and future goals,
· A planning that gives and explains steps to follow for the resolution of conflicts or decision making; something like a “wiki how” that is also a reflection of the foundation that holds the family together, inside and outside the business and
· A list of tangible, real objectives, which are also accompanied by the steps to follow to achieve them.
DOCUMENTING IS PART OF THE PROCESS
Of course, it is also intended that all the activities that are carried out of habit in the company are transferred to a document, to make manuals of functions, policies, and procedures.
It has been seen that the absence of this documentation causes, in many cases, losses of approximately 50 percent of contracts, which is reflected in the growth, profitability, and development of the family business.
The policies, rules, procedures, and manuals to be developed must cover topics such as:
Credit and collection,
Purchases,
Inventory management,
Sales,
Job definition,
Information technology management,
Staff promotions,
Salary tabulators,
Causes of dismissal and the legal procedure that this entails,
And travel expenses,
Documentation of internal control in general, among others.
THE BALANCE BETWEEN TRADITION AND INNOVATION
When the founder’s main concern is that the company he has created continues from generation to generation, he must implement institutionalization and corporate governance, in addition to seeking a balance between tradition and innovation, as the business demands over time.
And while continuity is achieved by establishing key rules, policies, and procedures, these need to be enforced. Likewise, it is required to be open to change and renewal as the business requires.
That is why we put on the table other issues that will be just as important —especially for the prosperity and significance of the company— at the time of its institutionalization:
· Which children will inherit the shares, or if any of them capable of running the company?
· Conflicts generated by the role of family managers, members of the board of directors, and those who are only shareholders.
· If it should be considered an obligation to employ the family, even when they do not have the skills for the positions they occupy.
· The difference between the interests of the company and the personal interests of each family shareholder, and how it leads to distrust in executive decision-making.
EXTERNAL ADVICE TO THE COMPANY
Given the changes to which every company is exposed, individuals or groups may see their position in the organization threatened and show resistance to institutionalization.
So it is also important to put together a council that is made up of people outside the family, since it will be able to put into perspective the most important changes, and even with more risk, without responding to the individual interests of any of the relatives.
It is necessary to understand that an external person can become, if not well chosen, a double-edged sword if he responds only to what is convenient for the person who has postulated him. And that, if family members get too far away, the purpose of the business can also be affected. Finding the ideal middle ground is not a task to be taken lightly.
PREPARATION OF THE FAMILY PROTOCOL
An effective way to carry out the institutionalization process is through the Family Protocol, the document in which a business family puts in writing the rules that will govern the relationship between the family and the company.
To draw up the protocol, it is very important to start from reality and not from our expectations, that is, it will be necessary to identify the stage of the life cycle the company is in so as not to apply inappropriate, premature, or excessive measures.
BUSINESS COMPLEXITY AND FAMILY COMPLEXITY
Finally, let’s not forget that making decisions in a family business will always require us to consider two perspectives simultaneously: the complexity of the business and the complexity of the family.
This perspective will allow us to carry out a healthy institutionalization process and, in turn, the institutionalization will protect the shareholders’ equity, providing the company with a solid structure that will guarantee its sustainability, even if it changes hands upon being inherited.
As a family business, it is understood that one of the objectives is to keep it managed by its members, whether they are from the first or fourth generation.
Let’s keep in mind that institutionalization is the main tool for this to happen, and let’s think that selling it to third parties is not the best strategy in the medium term. I mention it because of Karen Watkins Fassler’s study Financial Performance of Family Businesses vs. non-family businesses.
In it, Watkins shares very interesting conclusions that support the statement that I shared at the beginning of this article, where I say that the family business model could be a success story in our country.
On the one hand, it states that —after reviewing the health of 89 non-financial companies— the combination of a high concentration of ownership in the hands of relatives with a director from the same clan is a successful strategy that not all boast.
And it sounds logical: if the family retains the largest percentage of the shares and participates in the management of the company, it is even easier to align objectives and reduce opportunism. In times of crisis is when it is best appreciated.
Of course, this is achieved if the family acts responsibly, taking into account its impact on future generations, not just outside investors. This path begins with the first big step: institutionalizing the company.