How profits leak in family businesses

 

 

‘‘Forget “blood is thicker than water.” That kind of mentality will send you straight into a financial hole you may never climb out of. Believing that your relatives feel they have as much at stake in the business as you, is a fallacy”

George Cloutier, Author, Profits Aren’t Everything

What are the dangers for profitability with family businesses?

Company profits can be likened to a bucket of water. As a manager or owner, you are responsible for keeping as much water (i.e. profits) in the bucket as possible and plugging the holes where profits are leaking out of the business. Plugging the ‘profit leakage’ is more difficult to eradicate if the business has poor systems of management and governance.

As a former business co-owner, with 3 other partners that employed over 100 people, I was clear about the potential issues with employing family members. Having worked for several family businesses beforehand, you need very clear rules if you decide to employ family members. I had witnessed the corrosive effect on profits of ‘profit leakage’ when family members held significant positions in a business. From the managing director’s brother who was totally incompetent, to a wife who held a significant position and had low people skills which all lead to lower profits.

Here are 5 circumstances where profits leak from family businesses:

  1. Family members have different rules to other employees. I have seen situations where rules are bent or even ignored for family members. Having more than one standard can adversely impact profitability. However, this is rarely acknowledged, particularly the impact these have on employee morale as it effects motivation and productivity. For example, family member who are employed in the business may decide they have different time keeping rules to other employees.
  2. Family members having a sense of entitlement. We constantly hear stories of relatives employed in family businesses having neither the skills, training nor temperament for their roles. It is essential to have clear roles and responsibilities, and everybody including family members must be held accountable for performance, otherwise profits leak through poor sub-optimal performance. Having worked in a business where the owner employed his son, I witnessed the corrosive effect that the son’s poor work ethic and his sense of entitlement had on the business through poor morale and lack of respect for both the owner and the son.
  3. Maintaining the Status Quo. As family members age they often become resistant to change, stifling innovation and new ideas. Furthermore, they can become complacent and often have other agendas. The one certainty about business is change and anything that impedes change will lead to opportunities being missed and profits adversely effected. Business founders and leaders who stay too long in the business, often stifle change where egos rather than sound judgement, can be the basis of their decisions.
  4. High employee turnover, particularly high performing staff. There is no better indication of poor business health than top performing staff leaving. In family businesses, when high performing non-family members are passed over for promotion they leave when they see positions reserved for relatives. There are hidden costs in employee turnover. Profits leak as time and money is spent on recruiting, training, and settling in employees into their new positions whilst non-performing relatives remain in their positions continuing to negatively affect morale. I left a senior managerial position many years ago when I was twice passed over for a promotion, when the position was given to the brother of the managing director who was incompetent and lazy and generated little respect from staff.
  5. Family tensions. Tensions arise in most families and even if they do not have anything to do with the work environment they have a habit of affecting the work situation. This can negatively affect morale and the efficient and effective operation of the business and ‘leak profits’. For example, I have witnessed situations where spouses who worked together were having domestic troubles. This severely impacted the running of the business.

What is the solution?

First of all, recognise that it could be a problem. Put your egos aside and recognise the problems and deal with the issues in a rational and organised way.

Secondly, ensure that there are good systems of management and governance. Clear rules on performance, accountability and behavior are essential.

Finally, make sure that you implement and enforce these rules and management systems are followed. Outside advice using a mentor or advisor, their guidance and assistance can be useful tools to improve company performance.

Family businesses have significant advantages over large bureaucratic organisations, so don’t allow the weaknesses to over-ride the strengths as family businesses can be more nimble, effective and profitable.

So, will you prevent ‘profit leakage’ in your family business?

What’s the difference between disruptive and unpredictable leadership?

Donald_Trump_2015_BigHead“We have to be unpredictable.”

Donald Trump – USA President

Often in the media we hear about disruptive technology changing our lives and the workplace. For example, Uber disrupting the cosy taxi industry in Australia, or Amazon shaking up the retail industry. Disruptive technology is not new. Motor cars and the railways disrupted horse drawn transport.

Recently I was speaking to a good friend about his current work situation. Having known him for over 20 years I was disturbed to hear his normally positive and enthusiastic voice very subdued and hesitant. It was not a pleasant conversation. However, my friend’s story was different. The disrupter was not technology, but his unpredictable boss.

Unpredictable managers are not organisational psychopaths.  They are more easily identified. Although they may engage in manipulative behaviour behind the scenes, a large proportion of their behaviour is clearly visible to their work colleagues and subordinates.

Are disruptive managers the same as unpredictable managers?

Whilst some companies need to have disruptive leaders to provide positive direction and leadership to break out of their inertia or poor performance, unpredictable leadership is a different story.

The boss’s behaviour was unpredictable and disruptive in a negative way. Meetings were arranged that had no planned agenda, team members were ridiculed in meetings and the goal posts were often unclear and seemed to keep changing. This unpredictability created a lot of “noise” in the workplace. None of this was helpful as much time was wasted by team members as they struggled to work out how to navigate his leadership, whilst trying to predict what he wanted. It became clear that this was a strategy to hide his lack of understanding of the business or industry, lack or emotional intelligence, empathy and maturity under the guise of ‘keeping people on their toes’.

He was quoted as saying: “I like to keep my subordinates on their toes because just when they think they have got me figured out they realise they haven’t.”

Time was wasted as the team spent unnecessary hours dealing with the fallout of working in an unstable and unpredictable environment. The environment was one of uncertainty, fear and mistrust. This created a culture of unhelpful and destructive game playing. The best staff began leaving the company, profitability dropped and customer service suffered. His behaviour was both unpredictable and disruptive in a negative way. The opposite to this behaviour is having a consistent style and track record which people can learn to trust. In other words being authentic. This blog is worth reading. Authentic Leadership

The current US President, although a political disrupter to the established order, displays the characteristics of an unpredictable leader. His tweets and outbursts are unpredictable and often abusive whilst appearing to play games and gamble with the fates of others.

Dealing with an unpredictable manager is certainly a challenge as its exhausting both physically and mentally. This was how my friend was feeling. The previous feelings of safety and being part of a team under the previous management were now lost.

So how do you deal with unpredictable managers?

Here are some suggestions.

  1. Try and ignite empathy

This is a challenge when being faced daily with unreasonable behaviours. However, if you try to think about why the person is acting this way, it can be beneficial for you both. People bring all sorts of baggage from their past.  Whilst having empathy does not condone unreasonable behaviour, it can help in trying to manage the situation. I can remember being confronted with unacceptable behaviour from a manager. However, when I took into account that the person had suffered a recent family tragedy, it helped me deal with situation better by depersonalising the behaviour.

  1. Making a decision

The decision is whether you are able to remain in, or continue to tolerate the difficult situation.  Ask yourself some questions to clarify your options:

  1. Is it impacting adversely on my life?
  2. If so, how much?
  3. What can I control and what is outside of my control?
  4. Is there someone I can ask to help me?

For example, if the situation is affecting your health or personal relationships and you cannot control the situation you may decide to leave the organisation and/or seek professional assistance.

  1. What are your professional or personal boundaries?

Good employees and managers have clear boundaries, both personally and professionally. The recent issue regarding sexual harassment in the entertainment industry is a good example. Certain behaviour is unacceptable and if your professional and personal boundaries are breached then you probably should consider a plan to exit.

  1. Seek perspective

Often, we get emotionally involved in such situations so seeking an outside perspective can be an important step. When I was faced with unacceptable behaviour I sought out an outside advisor or mentor to try and take the emotion out of the situation. It however, took me some time to undertake this course of action. This was after much emotional anguish which was impacting on my family. I eventually left the organisation. It was liberating.

In concluding, it is essential that you seek out some clear thinking time.

Some suggestions include, take a walk around the block, visit the gym or make notes in a journal so you can reflect. Such actions help you from becoming overwhelmed and you can go through the suggested steps in dealing with your unpredictable and therefore disruptive manager.

As leaders, we all have all witnessed disruptive behaviour by others in managing people and organisations. The challenge is to recognise such behaviour and use them for positive outcomes that benefit others, rather through being unpredictable and derailing and decimating people and the organisation.

The decision is as always, how can I manage the current unsatisfactory situation to make it positive?

 

Leadership v Management

“Management is doing things right; leadership is doing the right things.”

Peter Drucker

Management is the act of exerting influence on individuals, therefore wielding control over a business or organisation. Good management achieves this in such a way that a positive outcome is achieved. Bad management is the opposite!

Competent managers organise, summarise, administer and communicate with other people, departments and organisations. However, management is not a substitute for leadership. People cannot be managed into responsibility or competence, however they can be lead there. A competent leader may also be a good manager, but a good manager may lack the inspirational or creative traits to be a ‘real leader’.

Leadership is ‘the ability to influence the opinions, attitudes and behaviour of others’. Note the difference between control (management) and influence (leadership). An effective manager normally displays leadership qualities. Think of Winston Churchill as the Prime Minister of Great Britain during World War II. He worked in the War Rooms beneath Whitehall with the War Cabinet (management-control) whilst the bombs rained down on London. He also provided inspiration and leadership (leadership – influence) to the British people through his speeches and walking and talking to Londoners during the ‘Blitz providing hope and vision for overcoming the Nazi threat. He was both an effective manager and leader.

Here are some of the characteristics of managers and leaders :

Managers

Leaders

Rely on control of the situation Inspire trust in their followers
Have a short range view Have long range perspectives
Generally accept the status quo Usually challenge the status quo
Administers and maintains the organisation Motivate and develop the organisation

Having compared the two, most managers develop leadership qualities over time, given circumstances, training, support and ability.

There are 6 main characteristics of being an effective leader:

  1. Having – clear sense of direction (vision and goal setting)
  2. Communicating – the vision to others
  3. Being – innovative and searching for opportunities (taking risks)
  4. Empowering – by building and encouraging strong teams
  5. Leading – by example, having clear views and being consistent (moral authority)
  6. Knowing – your own and followers strength and weaknesses

As leaders, whether at the local sports club, charity, department, organisation or business we need to develop our leadership skills and understand the main characteristics of being an effective leader?

How can you become a more effective as a leader?