How to Professionalize the Family Firm
The history of Kelleher resembles that of many family enterprises.
The firm was started in 1967 by hvacr veterans Mike and Marie Kelleher, and their son Joe, a novice in the field.
Mike strove for innovation and took great care to establish an effective outside board. He wanted to make sure that, even though family values would pass from generation to generation and from home to the business, outside ideas, mentoring, and monitoring would allow the business to be an innovative leader.
Transition To The Next GenerationIn 1990, on his 85th birthday, he opted to take a less active role in running the business.
Although he still is in his office a day or two a week, the baton has been passed to the sons, Joe and Pat. Joe runs administration and operations, and Pat heads outside construction.
The transition to the second generation presented some rough spots in terms of harmonizing differences in strategy but the business moved forward aggressively.
Transitioning to the third generation is currently in process, but it is a demanding task. Three of Pat’s children have been working in the business and have moved into key positions. Joe’s children are pursuing academic interests and still aren’t sure whether or not they want to join the firm.
Sensing clouds on the horizon, the family started making changes to professionalize the business systems, and to develop a succession strategy.
LifecycleOne of the great issues family firms deal with is the need to keep the lifecycle of the business congruent with the lifecycle of the product or service the business provides.
Varying consumer tastes and preferences, the entrance of deregulated utilities, and the growth of consolidators backed with IPO capital present challenges to the existing hvacr family firm. But market-based changes do not coincide with the chronological aging and defined roles of family members.
If the family firm is to move from the informal stage of operation into a culture that is continually renewed, the firm must professionalize. The lifecycle of the family needs to be continually reviewed through formalized human development, appraisal, delegation, and reward policies.
Yul Brynner, when asked how he could still be so fresh, enthusiastic, and vibrant after thousands of performances as the “King of Siam” in The King and I, said he was guided by the fact that to the audience, it was always “opening night.”
The family-run hvac business must be guided by the idea that in the marketplace, it is always opening night.
Professionalization Of The Family FirmFamily firms have inherent advantages over non-family enterprises: stability, trust, security, resilience, positive public perception, speed, and the ability to sacrifice for the long haul, to name a few.
With these inherent advantages, the question of why so few family businesses survive more than two generation deserves consideration. Obviously, risk is part of enterprise formation — yet the data seem to indicate that family firms, even those located in the right place, at the right time, with the right product or service, at the right price, have trouble surviving through successive transition.
If the intention of the founding generations is to provide opportunities for future generations to work in the same enterprise, something clearly goes amiss. Either the enterprise fails to innovate and keep pace with changing market demands, or the internal management and development processes fail to carry the dream and success of the founding generations into future generations.
Professionalizing the family firm is essential to its continuance. Professionalization of the management function includes ensuring that effective internal management processes and human development systems are in place.
Professionalizing the internal management processes is necessary if the organization is to grow and survive. If the next generation is to succeed, it will need a map for accomplishment. Clear objectives, job descriptions, role boundaries, and job specifications become more essential with growth.
However, our experiences in counseling family firms show us that many families are not aware of how demanding an effort the process is, nor how much commitment is needed to develop a successful transition strategy.
Beyond Mom and PopProfessionalizing the firm from its mom-and-pop origins requires the development of policies related to basic management principles and organizational values.
Compensation, placement, appraisal, and discipline need to be addressed. It is essential that policies and guides to action be formulated, clearly understood, and implemented before critical incidents occur.
Policy serves as a basis for decision-making. Policy also allows the inherent differences between generations to be resolved in a less confrontational manner. Professionalizing the family firm aids in allowing conflict between generations to be resolved in a productive manner.
Key benefits from professionalization include:
- A clear succession strategy;
- A receptive environment for outside knowledge and information; and
- Formalized, but not rigid, internal management practices.
There are 150 such forums located throughout the nation. Participation also provided the opportunity to learn from professionals in management, finance, insurance, and legal areas.
Two primary succession support structures were developed to significantly involve the three third-generation members in the governance of Kelleher Corp.
One member of the third generation was elected to the board. This individual has all of the voting rights and responsibilities afforded by the corporate constitution and bylaws during his/her term of office.
The board was formed in 1968 and has met continuously ever since. The board is comprised of nine directors. A majority is made up of nonfamily members. The direct exposure of the third generation to the board has brought about awareness, enhanced vision, and generally aided in developing a more conceptual view of the enterprise. Succession issues can be raised in a less personal realm.
The Kelleher Family Council was formed about three years ago. The three-generation council members are charged with issues relating to family issues, expectations, and the role of the family in the business.
Since that time, the hotly debated issues concerning ownership transfer and leadership succession have been considered. During this laborious process, the group has matured to the point that members are listening more intently.
Succession and professionalization planning takes time, but a clear start has taken place. Once the succession strategy is in place, the actual transformation process will commence.
The Kelleher family’s efforts will hopefully prove that family businesses can have great vitality if the vision includes tomorrow.
Rimler is professor of management, Virginia Commonwealth University, and director, Virginia Family Business Forum. Don Ingersoll is a principal in Compensation Planning Corp. He specializes in developing succession strategies for family firms.
Sidebar: Significance of Family BusinessesOf the more than 18 million businesses in the United States today, as many as 90% are family owned and managed. These firms produce about 50% of the GNP and about 65% of all wages.
Not all of these firms are small. One-third of the Fortune 500 companies are family firms.
In addition to the challenges facing every type of business in a free enterprise economy, family firms have unique demands placed on them. Only one-third survive the transfer to the second generation, and only one-tenth survive beyond that.
As World War II-generation founders retire, the next few years will see the greatest challenge ever to the effective succession of family firms. In the next five years, about 40% of family-owned firms will experience a change in leadership due to retirement or semi-retirement.
Yet 25% of senior-generation family business shareholders have not completed any estate planning other than writing a will, and 81% want the business to stay in the family. Only 20% are confident of the next generation’s commitment to the business.
The lifecycle of the family firm, many started post-World War II, is moving onward. We are approaching the largest intergenerational transfer of wealth in U.S. history.