Two of the most common mistakes made by family-owned firms

In my last post, I offered five strategies that family firms should follow if they have hopes of long-term survival. Today, the focus is on two of their most common mistakes, which can also make life much more complicated for their top leaders.

(1) Bringing family members into the fold

It’s not unusual for founders to believe that appointing a family member as their successor – usually a son or daughter – is only logical. In the same way, it’s also common for family members to view the family firm as an obvious source of employment.

These beliefs are perfectly understandable from an emotional standpoint, but not so much from a logical one: statistically, it isn’t likely that there is more talent within the owner family than outside it.

Of course, there are certainly cases of family members who bring more talent to the table than an external employee but only after proving themselves outside the family firm, where they are judged on their expertise and experience, not their surname.

Surnames don’t guarantee anything. While familial lines give family members the right to inherit (if the current owners so decide), they aren’t a free pass – or at least, they shouldn’t be – to assume top-tier governance or leadership roles within the family business.

Following this logic, family firms should make sure next-generation members are adequately prepared to serve as responsible shareholders. In this sense, it’s important to remember that the firm’s foremost decision-making body is the general shareholders’ meeting: among other functions, it appoints members to serve on the company’s board of directors, which in turn is charged with making sure the firm is managed by the best possible leaders.

(2) Ignoring market rules when it comes to compensation

Family firms often fall into another common trap when remunerating their managers and directors. It’s obvious that there are rules governing the job market and how salaries are calculated depending on the level of responsibility, previous performance and other factors that I won’t mention here since this article isn’t meant to be a manual on remuneration strategies (of which, there are many).

If these are the standard guidelines followed by non-family-firm competitors, why do family businesses insist on treating “their own” differently, whether they are family members or “employees who are like family”? This seems like cheating at solitaire to me, since burdening the company with above-market rates directly undermines its competitive advantage.

By the same token, we are also cheating ourselves if we pay below-market rates with the promise that “someday all this will be yours.” People’s happiness at work is important, and while their salary might not be their primary motivator, earning a below-market paycheck can certainly be demoralizing.

My next article will highlight other common errors in family-owned firms, but these two offer enough food for thought for today.


Homepage image: Marc Kleen on Unsplash