Summary:
· When Less is Really More
· The Inner World of an Owner
· Top 5 Threats for Giving Up Control
· 4 Considerations Before Reducing Control
In the words of Michael Jordan, “Talent wins games but teamwork and intelligence win championships.” In family business a founding owner’s talent has driven the business to success using an innate need for control. The tendency for control over the product and staff, the need for achievement, and a relentless drive that pushes the owner forward are all positive and necessary attributes for business success. This nature puts owners in a paradox of success; where the attributes that drove success become weakness that hinder family succession.
Michael Jordan wisely reminds us that talent only goes so far. Without a skilled and knowledgeable management team, transition becomes far more complicated; from both business and relationship perspectives. Below are some insights to help owners pivot their leadership approach to gain greater satisfaction as they move toward business succession.
When Less is More
Owners with a firm belief that they can control their environment by driving the outcomes and results of their business are demonstrating their locus of control (LOC) as being internal. LOC occurs on a spectrum from external to internal and people with a high internal LOC (iLOC) have a deep-seated belief in their ability to exert their will and create the change they desire.
On the other hand, people with an external LOC (eLOC) believe their success or failure results from forces beyond their control. They believe efforts to change their circumstances will result in low levels of success, particularly in complex business environments with forces they have little ability to shape or influence.
Family business owners with iLOC succeed because they take extreme ownership for creating their success and failure. Rather than succumbing, they are driven toward goal achievement and conquering their environment. While iLOC is necessary for growing a family business, it becomes a weakness when power, authority, and control must be diffused throughout the organization at points of significant transition.
What’s going on in the owner’s inner world is an interesting phenomenon that arises between the need for goal achievement and iLOC. While it may feel counterintuitive, an important study reveals the value and need for releasing control throughout the business to achieve growth goals.
While at Harvard, Noam Wasserman conducted a study exploring the relationship between the need for control and the ability to grow enterprise value. This included comparing old and young companies to see if there was any difference in these variables.
His findings demonstrated nearly identical trend lines between the two groups. The more control released, the greater the enterprise value.
Trend lines for old and young companies are similar. Owners giving up both management and governance control realized double the enterprise value.
Wasserman's study begs the questions, "what happens below the surface?" and "are family business leaders aware of the relationship between their inner world and business decision-making?"
The Owner’s Inner World
Leading researcher Manfred Kets de Vries and his team explored psychological and business aspects for decades. His research, along with our own, suggests strong correlations between business performance and the owners' inner worlds.
It is common practice for family business owners and their teams to focus on observable, external business issues. Doing so keeps change at the symptom level, with root causes hidden in business leaders' inner world. When this recurring pattern exists, change and goal achievement goes from difficult to nearly impossible.
How and why does this phenomenon happen?
Our brains are biologically designed to protect us from threats to our safety and security. Physical hazards trigger flight-fight- freeze reactions but, most are observable. For example, seeing an object flying straight at your head will trigger a duck and cover response. While threats to our psychological safety trigger an even more intense and persistent preservation response, they are far more difficult to detect. In fact, we may remain blind to the subconscious responses happening deep within our brains.
As a result, family and founder-led firms face unique business and psychological challenges.
The top five threats owners must conquer to transfer management and governance control include fights to protect:
1. Socio-emotional wealth (SEW): Think of this as the family’s shared superpower or relational glue. SEW is derived from family-centered non-economic, relationship dynamics that give them competitive advantages when it is a strength. Like all strengths, SEW can become a weakness when family harmony and relationships are prioritized at the expense of business performance.
2. Identity: Founders and many successors have a set of personality attributes that allow them to achieve goals others simply can't. As the business grows, the owner(s) experiences psychological satisfaction and significance derived via their role, and many experience fusion of their self and role identities. Adding external accountability often forces owners to give up aspects of their role, opening themselves up to criticism, and challenge their self-identity in new and uncomfortable ways.
3. Autonomy: Business owners build businesses that work for their psychology. The ability to exercise their free will, agency, and independence is a hallmark of successful owners. Realizing the benefits of a skilled governance body requires owners to exchange their autonomy for board guidance and direction. This behavior flies in the face of an owner’s natural wiring.
4. Significance: Asking a business owner for their business strategy and financials is like asking them to get naked. We all have a need for significance, the challenge is where and how we get that need met. Allie's dissertation research revealed an owner's need for significance is often derived from their role as owner. The more this need is satisfied through the business, the more personal business performance becomes. A high-functioning board challenges owners in ways that can be threatening if the owner has not come to grips with this part of their psychology.
5. Control: Owners often believe their past success means they will continue to be successful in the future. They also believe their success is derived from their approach to business leadership and decision-making. This common misattribution bias leads to beliefs that drive behaviors and increase the owner’s need for control. Unfortunately, under these circumstances, the expression of iLOC quickly moves from a strength to a weakness. While effective boards empower owners to be more successful, they may do so only when the owner accepts the value of limitations to power. To do so, owners must first conquer the iLOC barrier.
While the argument for giving up control is strong, the tension it creates when confronted by an owner's need for control often results in owners never transitioning to a governance structure that would allow them to realize the full value of their business.
Owners willing to take on the challenge of separating management and governance will foster the opportunity for smoother succession efforts, improved business performance, and increased family cohesiveness. In addition, the organizational and family development effort required for separating management and governance can yield powerful results in improved family cohesiveness.
4 Considerations Before Reducing Control
So, where do you begin? The following four tasks will establish the basis for separation of management and governance and, as a bonus, happen to be best practices for growing organizational capacity:
1. Systems: Design formal planning processes for strategic direction, resource allocation, and performance management.
2. Structure: Create role clarity and define decision-making authority in alignment with culture.
3. Strategy: Align performance measures and evaluation practices to vision and key goals/objectives/priorities
4. People: Identify and close gaps that are holding the company back. Specifically, evaluate the adequacy of KASE (knowledge, ability, skills, and experience) for all staff and family members (particularly those in leadership roles). Explore how family values and behaviors may be negatively impacting business decision-making and effective use of power.
While these efforts will not solve every challenge, developing or enhancing these attributes increases organizational performance, builds a culture of accountability, supports the identification of new strategic opportunities, drives more money to the bottom line, and fosters family cohesiveness.
Looking for family business help? Contact Orange Kiwi, LLC to learn how our expertise and knowledge can guide you through a successful transition.