Category: Article

Sha is the third-generation director of a mid-sized and progressive medical company. His grandfather started the organisation on a very small scale in a small town in UP. The Board of the organisation consists of his uncle (father’s younger brother, cousins (father’s elder brothers’ son and himself) – all family members. Most of the key positions in the organisation are also managed by themselves. Over the years, they have grown to be a known brand with large presence in Central and North India. During Covid and post covid period, this organisation has achieved notable business growth, especially in nutraceutical products and in modern marketing outlets. While discussing about engaging consulting organisations to support this growth Sha has brought in the idea of appointing a non-family expert to the Board as an independent member, which was rejected immediately. Rest of the family members did not find any reason to bring in a non-family member to the Board.

What’s preventing the vast majority of non-listed family businesses to appoint an independent and non-family member to their Board?

While reasons vary, the last few years of working with Family and Family Managed business of various size and industry has provided us with few insights into the how, why, and what – to enable you to appoint an independent board member.

ESTABLISH A MEANINGFUL PURPOSE

For a traditional family business sharing their space and secrets is a big move.

Whoever is proposing this idea to the Board (family member / family business facilitator), must establish and communicate the purpose of the proposal. For example, in the above case, to bring in strategic input on nutraceutical.

CREATE CONSENSUS

Creating consensus among the board members on the requirement of an independent director is paramount. All board members should be able to accept the idea of having a non-family member sitting on the Board. They should also understand that this person will be a neutral person who will take decisions based on his/her experience or subject-matter expertise and data. For him/her organization is the objective not the individual.

The objective of appointment should not be to side-line or silence another member of the board.

REMOVE THE FEAR OF INSIGNIFICANCE

Most of the time, family members object to the appointment of a non-family member to the Board due to the fear of being seen (sometimes being felt) as insignificant on the Board. Fear of being marginalised and side-lined by rest of the directors along with the external person will lead to future issues in family and business.

Family Board members should collectively discuss about it. In some cases, we have advised, in the initial days, that the family board members meet separately to discuss topics before they discuss the same in full board meetings to avoid conflict in the presence of an external person.

OBJECTIVE ASSESSMENT LEADING TO FAIR / NEUTRAL DECISIONS

An independent BOD applies an objective angle while making decisions; they have nothing to lose, and their main role is being responsible for stakeholders and shareholders equally. Therefore, they are unbiased and will make decisions that are beneficial to the ultimate users /clientele. This is also a great advantage when succession planning needs to be put in place, as conflict of interests is a key issue in appointing a successor. Many a times promising candidates are overlooked during succession planning because of bias / prejudice / lack of perspective etc.

AN ORGANIC CHANGE IS ESSENTIAL

As the business grows along with time, people, technology and demands, so too a board needs new eyes that help keep pace with this dynamic turn. Challenges and complexities have to be met with and in order to sustain and develop the business even further, a change in the BOD is also essential. Independent directors are an asset during such times.

AREAS BEYOND CURRENT CAPABILITY

Once the consensus is created, members need to identify the area of appointing independent director. BOD should look for areas beyond the capabilities of the current directors; in some cases, they look for futuristic areas. However, the Board must ensure all members have a similar thought process.

Identifying an expert who has exposure in the family owned and managed business, especially for the first time, is crucial. An independent director with similar industry knowledge will help and find it easy to align with the thoughts of family directors faster. In many cases, totally radical or different ideas are not accepted well and then the director will feels out of place and becomes non-value adding.

An independent board member with exposure to family owned and family managed business environment will bring in lot of value and acceptance from rest of the BOD.

SET RIGHT EXPECTATIONS

An appointment with clarity will lead to clear expectations.

Board members should have clear expectation from the external member. It is imperative that this is shared during the initial process. Most of the initial dialogs should be about the role of the independent director. All family board members must participate in these meetings.

COMMUNICATE

Design and communicate the job description, period, and frequency of meeting, point of contact etc. The chairman of the board should intimate the appointment of the independent board member to rest of the family members / family board/ family council etc.

Key executive leadership of organisation also should be briefed about the appointment

Appointing an independent nonfamily member on board is the sign of progressive family owned and managed business. They will bring in fresh perspective to the board and help them to take well informed decisions. An independent board member also brings in an effective governance system to the family board thus can make the entire organization to be professional and progressive. So, move out of the fear zone and embrace progression.

 

M R Rajesh Kumar
Lead Partner and Family Business Coach
GatewaysGlobal LLP

Amongst professionally run businesses, the early stages of a family business might have only family members acting as managers. Upon progression and over the years, members of the family business often decide to step back. They might shift their focus to Strategic Areas and expansion thus needing the addition of non-family professionals to operate the business.

Most of the family businesses prefer the following options while considering non-family professionals for their organization:
Promote Non-Family talents from within the current manpower.
Hunt experienced talents from other successful organizations. At this phase, various types of family businesses seek specialized external services in hiring talents from other successful organizations.

Here, we would like to share some of our observations during our interventions in various types of family businesses (Family Owned and Managed (FOM)) as well as the key points to be focused upon while bringing in professionals of any role (bottom-up or top-down talent sourcing) from external organizations.

In our experience, most of the FOM organizations would like to start with a Business Head. Most organizations start from the top as the family members prefer to concentrate on strategic areas. They prefer experienced Business Heads to run the day-to-day operations.

Detailed below is our 5C guideline to be considered before hiring an external professional for your family business management:

Create Consensus

Create an internal harmony amongst the board of directors. Consider everyone’s opinion. If any of the members present have a different opinion, then it should be further probed and resolved, else the new hire will be met with resistance.

Bring in Clarity

Curate a clear job description, compensation package and responsibility matrix. There needs to be clear differentiation of roles and responsibilities between the current family members and the new business head. Limit the duplication of responsibilities. Specify and determine who reports to whom.

Pay is another significant aspect, in conventional businesses, as entrepreneurs typically withdraw the payment through various mediums. However, in the presence of an external business head, they like to have a defined remuneration structure. Another significant point is to regulate a responsibility matrix such as a RACI Matrix (Responsible, Accountable, Consult and Inform) for better facilitation.

Confirm and Re-Confirm

Conduct multiple degrees of discussion with the candidate. Try not to employ in haste without appropriate meetings. In the case of key recruitments, instincts for the most part are not accurate and may lead to failure. The Board members present ought to have both formal and casual meetings with the business head.

Ideally, all the family board members should meet at various times separately and collectively. It would be advised to have all individuals meet the business head before offering the final contract.

Seek assistance from external experts during the negotiation and interview process. Do conduct various recruitment processes such as reference checks and psychometric assessment. These may assist us in finding the right behavioural mix of candidates.

Communicate

Ensure to pass on an organization-wide communication about the role changes and reporting structure. Establish a positive changing environment through various sets of communication. Make and impart the standard procedures for the employees on when and how to meet the family board members.

Cultural Immersion

Establish a successful interaction to inform the new leaders of the existing culture of the organization. Engaging the services of an experienced Executive Coach will be helpful to support and guide the new leader through their transition.

Ensure that the board members and managing directors have regular meetings with the new leader. Set up a prefixed meeting plan with the whole board and managing director. Lessen the recurrence of the meetings complementing the pace of the transition.

Organizations should seek the support of an Executive Coach or a Family Business Facilitator to handhold both the family and the newly appointed non-family professional during the initial phase. This could be the key to a smooth and hassle-free transition.

Case study

GatewaysGlobal has worked with one of the main Family Owned and Managed FMCG Organizations in India, to create a conducive environment for the hiring of a Business Head. The family was successful in running the business but considering the business growth potential, the family members in the business wanted to invest more time on strategic functions. Hence arose the need for a professional to run the business.

Our process started with creating an awareness to have a leader to maintain the business and to accomplish the estimated growth. We had the option to work with the family board of directors and persuaded them regarding the requirement for a single face inside the family to maintain the business. This led to delegating one of the family board individuals as the business head. But soon they felt the requirement for an external Business Head. After various conversations, meetings and considerations, we obtained a total agreement from the board.

The family had identified business head candidates through references and external consultants. With a thorough search, the family narrowed down on their preferred business head after going through their references and interviews.

Upon appointing the new business head, we established an Induction process. We provided them with clarity on their roles & responsibilities for which we had already formulated a clear job description, RACI framework and entitlement structure. We had additionally planned, designed and implemented the setup of a Board – Business head meeting structure. It was also agreed that the current business head (family member) would handhold the new hire. We laid down clear communication rules between the family board of directors and the newly appointed business head along with clear hand-holding plans for the family board members for their everyday activities.

Summary

The family ought to collectively agree to employ external professionals: – NO forced fixing.
For sustainable and viable family business management, Start from the top.
Follow 5 Cs to bring in professionalism in family business
Seek the help of external specialists.

Author : M R Rajesh Kumar (Founder and Lead Partner GatewaysGlobal LLP)

Across the globe, while some of the notable business entities are owned by family.

Why successful professionals from professionally managed organisation hesitate to join Family owned and managed business even if the compensation & other related benefits are attractive?

What reduces the career longevity of professionals who join the business owned and managed by Family?

Cognitive dissonance is one of the reasons for most ambitious and successful professionals reaching the threshold of quitting the family business, specifically owned and managed by family members from first & second generations.

In my interaction with most of the leaders, I have noticed the presence of cognitive dissonance. Most of them feel uncomfortable to accept it as they feel its linked to one’s own integrity and career choices. In some cases, they don’t even identify it. Let’s take a deeper look at it.

Meaning of “cognitive dissonance” in the Cambridge English Dictionary is “an uncomfortable feeling that comes from believing or thinking two different things that cannot both be right. This feeling might be caused, for example, when someone wants to or has to (or is asked to) do something that they believe to be wrong”

As mentioned, in Wikipedia, In the field of psychology, cognitive dissonance is the mental discomfort (psychological stress) experienced by a person who simultaneously holds two or more contradictory beliefs, ideas, or values.

In A Theory of Cognitive Dissonance (1957), Leon Festinger proposed that human beings strive for internal psychological consistency in order to mentally function in the real world. A person who experiences internal inconsistency tends to become psychologically uncomfortable, and so is motivated to reduce the cognitive dissonance, by making changes to justify the stressful behaviour, either by adding new parts to the cognition causing psychological dissonance, or by actively avoiding social situations and contradictory information likely to increase the magnitude of the cognitive dissonance.

One of the common situations in family business is, leaders hired by offering complete autonomy in decision making has to consult the owners for even small and trivial matters and (mostly forced to) accept their decision. For example, a business leader hired as Head of Business (with a fancy designation of Chief Operating Officer) of a large business was offered complete freedom of decision making. However, when it came to the recruitment of a finance department head, owner-director questioned the decision and removed the hired candidate. In the beginning, newly joined Business Head took it as his judgment error. But when similar situations repeated, he understood the real meaning of autonomy in that organisation.

If professionals can continually adjust the correspondence of their mental attitudes (cognition) and personal actions, survival is easier. Such continual adjustments, between cognition and action, could lead to loss of identity at least for some. For others, it’s the beginning of a new identity.

In the real world what is the effect of cognitive dissonance for a professional? It’s challenging to define, however, it’s a true sense of discomfort, most of the time its proceeds as a burning issue progresses as days go by. Various instances and incidents create and aggravate this uncomfortable feeling. Slowly, if not addressed, the leader becomes dysfunctional, negative and reach the resignation zone. At last either the organisation or the professional will have to take the tough choice.

Who loses out in this entire situation? In reality – both organisation and individual. The organisation loses its credibility, potential employee and engaging work environment. And for the individual, their peace of mind.

There are several solutions and practises that help reduce cognitive dissonance. An Executive coach can help the professional in identifying the right solution and support in practising it until finding the result.

So, start by identifying the existence of cognitive dissonance and the move towards reducing it. With the help of a coach, this transition will be enjoyable.

M R Rajesh Kumar PCC
Managing Partner, GatewaysGlobal LLP