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This article was originally published in “TALKING Points” The newsletter of RSM International in December 2008;

Cultural Shifts in Company Successions

Growing numbers of family-owned and closely held enterprises in Europe, North America, and other regions are undergoing leadership successions as company founders depart and new owners assume control. These transitions raise a variety of financial, operational, and strategic challenges that underscore the need for careful succession planning.

Entrepreneurial Culture

In entrepreneurial companies, decision-making authority is concentrated in the person of the founder/owner who embodies the organization’s internal culture. Discipline and accountability are held within the purview of the entrepreneurial leader rather than in managers and employees.
In the early stages of their development, entrepreneurial companies are often highly creative and adaptive to customer needs. The structure of the company may be in constant flux as the founder and employees mold the organization in response to market demands. As the company struggles to survive, everyone does whatever is necessary: there are no set job descriptions, only work that needs to be done. Based on informal perceptions of employees’ capabilities, new job duties are “bolted” onto individual responsibilities.

As entrepreneurial companies mature beyond day-to-day survival, their need for high quality employees grows. But the enterprise may not yet possess the financial resources to compete with larger companies for talented workers. As a surrogate for premium salaries and benefits, entrepreneurial companies may rely on a nurturing and paternalistic culture to promote a sense of belonging among employees. Such enterprises stress organizational harmony and personal loyalty. Employees who can multitask and display strong work ethics are rewarded with job security. Togetherness (family or clan) is highly valued and individuals are careful not to violate cultural or family norms.

In such an environment, the entrepreneurial founder’s personal and family values often intersect with the company’s business practices. In lieu of written policies and procedures, the company relies on the values and beliefs of the founder to provide organizational cohesion. Agility and adaptability are more important than replication and efficiency. How things are done is based on precedent and passed on by word of mouth or stories that explain “how we do it here.”

Resistance to Change in Entrepreneurial Companies

Entrepreneurial companies are often resistant to change. The company’s organization and culture have co-evolved to meet the security needs of long-term employees, whose performance metrics are based on longevity rather than competence and results. These individuals are comfortable with the status quo and protective of the enterprise’s cultural norms.

Mistakes are not well tolerated in entrepreneurial, single-leader cultures. The intolerance for mistakes is often a vestige of the early survival culture and a reminder that the founder carries most if not all of the financial risk. These cultures often use “blaming and shaming” approaches to discipline. Finding who made the mistake can often take precedence over fixing the mistake. This approach to mistakes breeds a culture of caution and dependence. In blame-oriented cultures, the performance management system often rewards with silence and punishes publicly: “You are doing a good job until I tell you that you are not.”

The lack of timely and specific feedback combined with the lack of clear job descriptions and expectations make longevity the only measure of how well a person is performing. In turn, longevity serves as the basis for most promotions to management. As the company grows and begins to hire outsiders, the promotion for longevity rule is replaced by a focus on skills, competencies and results. The long-term employees who had expected to obtain coveted managerial positions often resent and ostracize the new person and may even succeed in driving him or her from the company. The clan (long-term employees vested in the paternal culture) will work to protect its hold on the culture and the company.

Transition to Management Team Culture

In the transition out of the entrepreneurial stage, the company’s leadership structure changes from a single individual who holds most of the authority, responsibility and risk to an organization, to where authority, responsibility and risk are spread across a management team.
The creation of professional managers in entrepreneurial companies is often economically based driven — managers are salaried and can work longer periods than hourly workers without incurring overtime expense. The transition to a management team structure usually begins with the promotion of long-time employees. While the founder continues to hold most decision making authority, newly appointed managers may seek to expand the scope of their jobs by “reaching down” into the organization: i.e., they hold onto pieces of their previous position while establishing the responsibilities of their new role. The lack of clear job definitions encourages this practice.

At this stage in the company’s development, it is common for the management team (which is typically comprised of the longest tenured employees) to operate like a clan or clique, determining who is in and who is out. Decision-making often appears consensus driven. But in reality, the entrepreneur still makes the key decisions and managers declare consensus to confirm the founder’s decisions and reaffirm their personal loyalties.

Aligning Organizational Structure and Culture

As the founding entrepreneur moves toward retirement, he or she begins to explore leadership and
ownership succession options. By this time the company is usually large enough to require a group of
owners to replace sole ownership by the founder. The successor ownership may involve family members, non-family managers, external investors, or some combination thereof.

The change in ownership marks a dramatic shift in the company’s organizational structure, which must be aligned with a new set of cultural norms:

  • Beginning with the new leadership/ownership team, positions need to be clearly defined and the roles of shareholder and manager separated. This leads to all organizational positions being redefined, clarified and placed appropriately within the company’s revised

  • Individuals holding management titles will now have to manage and make real decisions.This requires levels of authority to be clarified and outcomes and expectations defined.

  • To achieve expected outcomes, the definition of delegation must be expanded to include authority and responsibility. Discipline and accountability must be vested in all employees, not just managers and owners.

  • Performance management must be based on clear position descriptions, values, and agreed-upon outcomes between the manager and employee. While longevity is still valued, performance is more valued.

  • Company policies, rules, and procedures must be written down so that the “right” way to do things is based on efficiency and quality rather than the founder’s personal preferences.

As a result of these structural changes, company leadership takes on a new meaning. Shared leadership replaces deference to the personal judgments of the heroic entrepreneurial founder. New company leaders begin to “work on” the organization rather than just “in it.” They learn how to think together and to use conflict and differing perspectives to improve decision-making. They strive to build flexible and efficient business practices that promote stability while allowing for adaptation to a dynamic market environment.

Over the next five to ten years, the world economy will experience more ownership and leadership transitions in family and closely held businesses than ever before. Aligning structure and culture to fit the new ownership/leadership model will be crucial to the success of these transitions.