A business filled with family members will not take you far

May 21, 2012 Business Daily, Management

“The fatal fact about nepotism is that the really good people won’t go to work for you in the first place or will quit or quit trying for your job when they spot your uncle, brother, nephew, wife, mistress or son on the payroll…
…If there’s even a bare possibility that you’re prejudiced, the smell of it will scare off or turn off the very people you need most. The stockholders will never know how many good people they missed who never applied for a job”

ROBERT TOWNSEND “Up the Organization” (1970)

Bob Townsend was a one-off. A no-holds-barred plain talker, he ran Avis Rent-a-Car before writing his instant business bestseller, “Up the Organization.” I have referred to it before on this page, and intend to do so again.

Today’s excerpt shows Bob talking turkey about family firms. This was in 1970, remember, when many an American company had a significance presence of family members strolling around. He had the prescience to understand that businesses need to evolve out of this format as economies and markets mature.

The key reason for this is highlighted in the excerpt. If your business is bedecked with your cousins and uncles and nephews at all levels, what message does that send to your other employees? That this place has its “wenyewe.” That only the members of the family are on the true inside track, all others skid on the periphery. That if you don’t carry the family name, you are only going to go so high.

In Kenya the family business still prevails, and I’m often stunned by how few founders realize its limitations. There is no doubt that being a close-knit family endows great advantages in the early stages of a business. You get unity of purpose, bonding, and might even save on salary costs as you get your firm established. But once you are past that stage, you need to look beyond the bloodline.

At some point, you need to stop trying to shoehorn footloose family members into jobs they are patently not qualified to do. You need to get professional managers doing a proper job. And guess what? If those professionals think your company runs on nepotism, they simply won’t appear. They won’t even apply. And then, good luck with your expansion plans using your busload of happy families.

At some point, you will also have to expand the shareholder base. If you have any real ambition, that is; if you want to keep all control and call all the shots, then you can do that for as long as you like, but you will only ever have a medium-sized business.

It’s not just key employees; shareholders also dislike nepotistic tendencies. Why would they not? Would you really invest in a company where family members control every decision, and only tolerate minority shareholders because they need to raise extra capital?

Beyond a certain point, companies need funding and talent. Few families can provide those things in the abundance required. A time comes in the evolution of every family enterprise when wise decisions are needed about the future. These decisions involve relinquishing a degree of control in order to secure the future. The companies that make those decisions go on to become the Fords, BMWs, Oberoi Hotels, Tatas and HPs of the world. Those that don’t, become the also-rans who place a ceiling on their own growth by not being able to change their governance.

Many do, of course, ignore this advice. They do expand and spread, whilst retaining strong family control and presence. Those ones tend to come unstuck very publicly at a later date. Witness the tribulations of the Murdochs and the Ambanis. And closer to home, the problems now surrounding Tusky’s and Akamba Bus.