Company Culture: The Catalyst or Killer of a Family Business

Family-owned businesses are as unique as the families that run them. But they tend to have one trait in common -- progressively slowing growth after the founder steps down.

In fact, PwC found that in the first generation, 42% of businesses have double-digit sales growth. By the fifth generation, only 22% do -- and 48% are in the single digits.

Reasons for such slow growth -- such as risk aversion, market changes and succession problems -- differ just as the businesses do. But meager growth can often be traced back to one thing: the misalignment of leadership around the company's purpose, values, mission, vision and brand.

Every business can fall prey to leadership misalignment, but the problem is pronounced in family-owned businesses, especially in the generations that come after the founder. The founder's ambitions, ethos and vision become part of the organization's DNA, while the successor's left in charge of sustaining the founder's dream despite changing market conditions.

This leaves them with conflicting, competing demands -- plus highly charged family dynamics that can slow decision-making.

Before a company can straighten this problem out and really grow again, it has to understand the impact of its current leadership culture on its future aspirations.

The Four Types of Leadership Cultures in Family-Owned Businesses

W. Gibb Dyer, Jr., academic director of the Center for Economic Self-Reliance in the Marriott School of Management at Brigham Young University, has examined leadership in family-owned businesses and finds that their cultures tend to fall into four general categories that influence a company's potential for growth -- for better or worse.

The Paternalistic Culture: "The leaders, who are family members, retain all power and authority and make all the key decisions," says Dyer. Paternalistic cultures are great for decisive strategy and rapid market growth but may overspecialize in a market niche, inhibiting the company's ability to change and vastly reducing the successor candidate pool.

The Laissez-Faire Culture: Differs from Paternalistic in that certain nonfamily employees are deemed trustworthy enough to make key decisions. But it resembles Paternalistic cultures in that "relationships are hierarchical, family members are afforded preferential treatment, and employees are expected to achieve the family's goals," says Dyer.

The Participative Culture: The rarest of all family-owned business leadership cultures, according to Dyer, and one that most family businesses would like to achieve. It's the most amenable to growth, change and nonfamily talent. "The status and power of the family tend to be de-emphasized. Employees are deemed to be trustworthy," says Dyer, and the "participative culture is present-focused but also oriented toward the future."

The Professional Culture: The family maintains ownership, but turns "the management of the business over to nonfamily, professional managers," says Dyer. Effectively, the family business becomes a full-fledged corporation with profit as the core strategic imperative.

To move from either the Paternalistic or the Laissez-Faire culture to a Participative culture requires transformative change. The family would need to be challenged to align the company's purpose, values, mission and brand. Aligning family members requires a proactive and extremely sensitive approach -- and it needs to happen if the family wants the business to grow.

How to Align a Family Around a Common Culture

When Gallup consults with a family business, our process begins with structured interviews with three leadership stakeholder groups -- nonexecutive family members, nonfamily executives and, most vitally, executive family members -- because they are the guardians of the culture and the engine of progress, and their views are crucial to the business.

These groups don't always see the present or the future the same way. Their conflicting business and family priorities can create conflicting priorities and cultures for the entire organization, which alienates workers from the company's purpose.

When employees have strong ties to their company's purpose, business metrics improve. In fact, improving employees' connection with the mission or purpose of their organization by just 10% could result in a 12.7% reduction in safety incidents, an 8.1% decrease in turnover and a 4.4% increase in profitability. That could solve a lot of business problems, including slow growth.

The first step to aligning leadership is getting a grasp on the family's feelings:

• What does the founder's legacy mean to family members?
• What family values bind its members together?
• What does the business brand mean to the family at large? (And does leadership's view of the brand match the market's?)
• How far from the founder's plan can executive family members comfortably stray?
• Does the family trust its future with outsiders?
• Is risk aversion part of the culture, and if so, is it protective or limiting?
• What needs to change -- if anything -- for the company to grow?

Next steps involve helping them form what they want their employment culture to look like:

• What kinds of development do employees get? Leaders?
• How is succession determined? Is there a loving off-ramp for family members whose talents lie elsewhere?
• Is there a genuine on-ramp for nonfamily leadership?

Those answers create awareness, shared understanding and belief among family leaders, family members, senior executive leadership and the workforce at all levels. Ultimately, that aligns the family at large and corporate leadership to a unified and desired purpose, brand and culture.

Next, family leadership needs to embed that shared belief, culture, purpose and brand in the family constitution; empower it through the family council; and recalibrate the family office's systems, policies and processes to ensure that every member of the family supports them in their behaviors and work practices.

Finally, the defined purpose and revitalized culture must be socialized and supported throughout the company.

Those steps are absolutely necessary -- but utterly temporary if not sustained by formal processes and procedures. Family leaders must be role models, monitoring and safeguarding the culture through the family office, and holding all family members and employees accountable to defined, agreed-upon metrics and standards.

Family members have to agree on the processes, policies and metrics -- but processes, policies and metrics will only help the company grow if the family supports them. And that can only happen if the leader is committed to culture change.

It may be difficult.

Balancing the Emotional Weight of a Family Business When It's Time to Change

Transforming a company culture takes a lot of energy and focus, especially for leaders working under the emotional weight of a family's expectations, history and unique needs. One leader can't do it alone.

The majority of family members need to be on board -- and bringing in a third party to help navigate the sensitive situations may be the only way to break through. The third party must help the company meet the demands of the market but also suit the needs of the family to make successful changes.

All family-owned businesses eventually reach an inflection point when they must choose to either grow or sell. When a business hasn't grown in five years or so, leaders -- and the family -- should realize their culture is most likely constricting growth.

At which point they have a decision to make: change, or sell.

Ideally, the family makes that decision before the market makes it for them.