Why are mature family-owned businesses vulnerable to decline and failure?

From a strategic perspective, family-owned enterprises are most susceptible to accelerated decline and failure precisely because of their own reliance on the individual entrepreneur or next-generation CEO. The hero, who founded and led the young business to accelerated growth, displays a natural disdain for organizational architecture, and for establishing systems, professional managerial practices, and governance mechanisms. While not always the case, next-generation heroes often exhibit some of this same disdain for managerial discipline as they engage in the strategic regeneration and growth of the business. Professional managerial practices are, after all, considered the relatives of bureaucracy; bureaucracy is the dreaded disease the privately held company CEO fled from in the world of publicly owned global behemoths.

When a family group is added to the equation, that is, when multiple members of a family become active in management and/or engaged as shareholders in thinking about the future of the enterprise, disagreement, conflict, and, as a result, paralysis often set in. The different perspectives on conflict and the different tolerance for difference held by active and inactive shareholders, as found in the Discovery Research for Family Business project, makes strategic planning a task to avoid.

The survival statistics for family-controlled enterprises are alarming. Entrepreneurial firms have a dismal record of preserving the spirit of innovation that started them and propelled them through maturity. What lies beyond the exciting and exhausting start-up or regeneration and growth phases of each generation is organizational maturity. Maturity may be wise and may certainly feel like a well-deserved stage where there is wealth, influence, and a feeling of finally having “arrived.” But under the veneer of plenty lies the greatest risk of accelerated and protracted decline and eventual sale or death of the enterprise.

At this stage, the business has become a complex set of stakeholders or audiences: the banks that have financed the growth, family members who have worked summers in the enterprise since high school, key nonfamily managers who have substantially contributed to the success the business has enjoyed, other branches of the family with a financial and/or emotional interest in the enterprise, other investors, employees, and the government. And each of these stakeholders has a different perspective on the enterprise and feel entitled, for different reasons, to what they want from it. Like running an election campaign by poll results, leaders of family-controlled enterprises overwhelmed by the complexity of their audience often lose sight of that visceral sense of vision that was so much a part of the young organization. The absence of this vision often sets the stage for decline.

If you’d like to discuss any of these concepts, I welcome your call or email.

Jim Baka

Chairman, FBLI