Joe’s Journal: On Managing Family Businesses

“The first rule is that family members do not work in the business unless they are at least as able as any nonfamily employee, and work at least as hard. The second rule is equally simple: No matter how many family members are in the company’s management, and how effective they are, one top job is always filled by an outsider who is not a member of the family. Rule three is that family-managed businesses, except perhaps for the very smallest ones, increasingly need to staff key positions with nonfamily professionals.

Even the family-managed business that faithfully observes the preceding three rules tends to get into trouble — and often breaks up — over management succession. Then what the business needs and what the family wants tend to collide. There is only one solution: Entrust the succession decision to an outsider who is neither part of the family nor part of the business.”

–Peter F. Drucker

This reminds me of a book called Generation to Generation: Lifecycles of the Family Business. Many businesses start as family businesses. Herman Miller, for example, was founded by DJ De Pree in 1923 who started manufacturing in Zeeland, Michigan, after he obtained a loan from his father-in-law, Herman Miller, to buy out the Michigan Star Furniture Company. DJ then ran it until he handed operations over to his son Hugh De Pree. Herman Miller became a public company in 1970 and Max De Pree took over as CEO in 1985.  Ultimately, leadership of the company passed on to a non-family member.  Mike Volkema became CEO in 1994 and Chairman of the board in 2000.  E&J Gallo Winery, on the other hand, has remained a family business for over 75 years with current sales around $2 billion. So, here we see one large family company eventually becoming public and another remaining family-owned and successful. In short, multiple patterns and paths are possible for family businesses. But they all have to become professionally managed in order to grow and prosper once they reach critical size and complexity. Whether and how they do this determines their fate.

[EXPAND More]Hundreds of thousands of companies have been founded as family businesses; the difficulty with them has been to figure out how to keep them growing and healthy from generation to generation.  At some point the companies have to tackle difficult questions. One is: How do you staff a family business as it gets larger and larger?  The second is the question of succession; who will take over and run it when family members either do not want to or can not run it?  Answers to these questions require professional expertise.

Peter Drucker is laying down some tough rules for family businesses here. One rule is that family members shouldn’t get to work at the company unless they are at least as able, and work as hard, as any other employee in the company.  The second is that you should have a board made up of both outsiders and insiders. In fact, I was on such a board of a family-owned company for a long time. The company had sales in the $50 million to $100 million range and was extremely well run during the time I knew the company. I admired the founder who knew the business inside out and but who had little advanced education.  He passed on operations to his son. But, at a point, the son wanted to move on so he tapped a very well regarded young manager inside the company who had grown up in the company but who was not a family member.

Drucker’s rules are really good rules. Drucker is very realistic when he says that most family companies do tend to get into trouble.  It has always struck me as peculiar that so many great management programs ignore family-run businesses because there are so many of these businesses around. It is a huge area of study and we see so many examples of mismanagement. Some business schools have seminars and programs here and there, and of course, Peter Drucker was ahead of his time still again by addressing this problem. But we are missing an opportunity here. Few management programs are focused on family-owned businesses. I would like to see many more.

— Joe Maciariello[/EXPAND]