Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

LESSON 5
PROFESSIONAL MANAGEMENT

Learning Objectives

At the end of this lesson, you should be able to:

1. Define what is family managed and professionally managed business.
2. Understand the pros and cons of family and professionally managed business.
3. Explain the different things to do by the board in a business.
4. Enumerate the six pillars of professionalism

Discussion

The term “professionalization” is most often thought to mean “changing from family
management of a business to non-family (read professional) management.” Sometimes
professionalization does occur when a non-family manager has been chosen to lead the business.
During these transitions, family members might stay in other management positions or
sometimes all family employees depart. But changing to non-family management is only one
possible element of professionalizing a family business. It certainly is not a necessary element. If
your family business is considering professionalizing, it is vital for family and business leaders to
agree about what this process entails.

It is important to challenge those who refer to “family managers” of businesses and

“professional managers” of businesses because that implies that the only way to be
“professional” is to be “non-family.” Professionalism doesn’t have anything to do with family or
non-family categories; it has to do with one’s attitudes and behaviors.

But what about nepotism, which has to do with favoring one’s relatives in employment: Can you
favor your relatives in employment and have a professional organization? Can one be a
professional nepo?

Yes. Family members with the right set of qualities can have certain advantages in running the
family’s business so that it emphasizes performance, adheres to core values, treats people like
adults, constantly learns and strives for fairness and consistency in rewards.

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

FAMILY VERSUS PROFESSIONALLY MANAGED BUSINESS

FAMILY MANAGEMENT

The family managed businesses are those companies who are managed/controlled by their
owners. Generally, the chairman or the CEO is the member of the controlling family. Further, the
board of the directors are either members of that family or their associates.

The family led businesses are been major contributors to the growth of Indian economy. A bigger
portion of the companies in India are under the control of family personnel like Reliance, Tata
group, Infosys, Bharti Airtel and Bajaj, who stands as some of the well-known examples.
Here are few major characteristics of the family managed businesses:

• All the major policies of the company are determined by the controlling family (which
may or may not be in the favor of shareholders).
• They are loyal towards their own company. You’ll rarely find any case where the CEO of a
family managed business moved to take a job as CEO of another company just because
they were offering a higher salary.

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

PROFESSIONAL MANAGEMENT

Professionally managed companies are run by the professionals who are also an employee of
the company (not the owner). These professionals may or may not have any significant stake in
the company.

Here are few of the major characteristics of the professionally managed businesses:
• The professionals are in their position of chairman/CEO only as long as they are able to
complete their responsibilities.
• These professional managers can easily be fired by the board of the directors if they do
not meet the required company target. (One of the popular examples is the Tata Son’s
board of directors firing Cyrus Mistry as its Chairman because of his issue with Mr. Ratan
Tata.)
• These professionals focus on performance and consistency.
• The biggest disadvantage of professional management is that they can readily leave the
company for a better pay or perquisites offered by another company.

WHICH ONE IS BETTER?

It’s hard to decide which management style is better- family vs professionally managed
businesses. Both have their pros and cons.

Family led business have their footholds in trust and values. Trust, they share with their
stakeholders and the values they follow to uphold their family pride typically gives the business
the animal spirits needed to pass through all economic phases. The charisma and commitment
of the leaders which is important for the long-term working of firm generally lacks with the
professional management.

Family personnel always have their interests strongly aligned with the firm and follows long-term
strategies to achieve the goals of the firm, unlike the professional CEO’s who strive to make short-
term profit figures that decides their compensation and commissions.

Besides, family firms have their advantage over their ownership of the firm which gives them the
power to take risky calls that provides the opportunities for improved profits and expands the
assets into new diversified areas. But the professional managements perceive this risky action
with conservative stand due to the fear of failure which can show an adverse effect on their
profile.

Many times, family organization structure suffers from the issues which include overconfidence,
inexperience, and non-expertise of the family person who manages the business. But the

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

dynamics of this organizations are shifting bases to include professional team which can help
them to effectively manage their business.

Lastly, one of the biggest drawbacks of the family management is the sibling’s rivalry in the next
generation – Who gets the throne? Many big companies are torn apart just because the siblings
work as rivals and disagree on the business roles. Nevertheless, the sibling’ rivalry is not always
bad for the business.

Learnings from Ambani Family Management Dispute:

Sons of Dhirubhai Ambani leads us to the better examples of pros and cons of family led business,
the disruptions in the reliance due to the conflicts between the brothers and the overconfidence
of Anil Ambani that led him to invest debtors money in risky projects without having a proper
expertise stands out as an example of some of the cons of family led business.

On the other hand, the charisma of Mukesh Ambani that led Reliance industries into greater
heights and the ability to utilize the opportunities to start the projects like JIO tells us about the
pros of this type of businesses.

BOTTOMLINE

Both family vs professionally managed businesses have been successful in India and it would be
unfair to select one as a better alternative. For the Indian originated company, family
management still seems little impressive to the public. However, this trend is shifting slowly
towards the professionally managed businesses.

The family led management might need to look for professional help these days because of the
changing dynamics of the economy with the advent of technology. Technology brings in
challenges to some family led business with older generations that feel uneasy to adapt to
technology and some with newer generations without proper competences to understand the
dynamics.

Nevertheless, while evaluating a company to invest- management’s efficiency still remains a

critical factor to check before making your decision. If the captain of your ship is not capable, it
might be little difficult to sleep ‘fearlessly’ in the tidal days.
With these arguments behind us, we still face the question: What does a family business need to
do to become professionally managed?

SIX PILLARS TO PROFESSIONALISM

• Attract, develop and retain great family and non-family talent

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

• Ensure that the organization can always make timely big decisions
• Strengthen family discipline and commitment toward the business
• Respect the management hierarchy and empower employees to make decisions
• Create systems to ensure consistently high performance and fairness
• Guard your core values like a hawk.

EFFECTIVE OUTSIDE BOARDS

What is Board’s Role in Family Business?

Individual- and family-owned businesses are a vital part of our economy. If you or your family
owns such a company you understand how important the company’s success is to your personal
wealth and to future generations. If you’re a nonfamily executive at a family company, you also
recognize that its profitability and resilience is vital to your job security and financial well-being.
We see more family companies interested in corporate governance today than we did a decade
ago, as shown in changes they’ve made to their boards. While some family companies have a
board only to satisfy legal compliance requirements, more are moving toward the outer rings on
the family business corporate governance model, below. Ultimately, owners will choose which
level best suits the company’s needs and when changing circumstances mean the company’s
governance should transition to another ring.

Family Business Corporate Governance Model*

1. Compliance board. While most states require companies incorporated in the state
to have a board, the requirement may be as simple as a board of at least one
person that meets at least once per year. A company may have only the founder
on its board. In the early stages of a founder-led company, this type of board may
well be the best fit for the company, since the founder is usually more focused on
building the business than on governance.

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

2. Insider board. Such a board often includes family members and members of senior
management. This membership can better involve the family in the business, help
with succession planning, and introduce additional perspectives to board
discussions. The insider board may be created by the founder—who may no
longer be the CEO—or by the next generation owner(s) of the company. That said,
the founder/owner(s) retain decision-making authority.
3. Inner circle board. In this type of board, the founder/owner adds directors he or
she knows well. These may include an accountant, lawyer, or other business
professional that guided or influenced the company, or the founder’s close
friends. These directors may bring skills or experience to the board that are
otherwise missing and may be in a position to challenge the founder/owner(s) in
a positive way. Such boards might create an audit committee or other
committees. That said, the founder/owner(s)—who may or may not be the CEO—
retains decision-making authority.
4. Quasi-independent board. This level introduces outside/independent directors
who have no employment or other tie to the company apart from their role as a
director. (See the Family Business Corporate Governance Series module Building
or renewing your board for a more complete discussion of independent/outside
directors.) These directors introduce objectivity and accountability to the board
and they expect their input to be respected. Board processes and policies will
likely become more formalized with outside/independent directors on the board.
The number of committees may increase. This outermost ring on the family
business corporate governance model is most similar to governance at a public
company.

59% of CEOs and CFOs of 147 family-owned/owner-operated companies report having a “formal
board of directors that acts on behalf of company owners to oversee the business and
management,” per a PwC 2013 survey.

Advantages of Evolving Your Governance Model

“Inner circle” or “quasi-independent” boards can add tremendous value to family businesses,
including in the following areas:

Separating the company’s needs from the family’s needs

Especially in a company’s early years, founders and family members may view company assets as
belonging to them. Removing assets—like significant amounts of cash—from a company can
impact the company’s health, and even its viability. It can also have tax and regulatory
consequences.

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

Directors can ask questions about how the company’s assets and profits are used. They can also
help moderate discussions about the appropriate level of dividends for shareholders. This can
help ensure the company retains sufficient funds so it can survive and grow.
Directors can leverage what they’ve seen elsewhere to help managers address challenges or
perhaps avoid them in the first place. Some directors may also bring deep industry experience,
which can be helpful when setting and implementing the company’s strategy.
Plus, directors often have extensive networks that can prove helpful to the company in other
ways:
1. Help the CEO look beyond tactical issues
CEOs, especially in smaller family companies, often find themselves caught up in day-to-day
operations with little time to think strategically about the business. Discussing strategy with a
board can help the CEO focus on the big picture and spot trends, changes in the marketplace,
and new opportunities.
2. Accountability
Periodic board meetings can help instill discipline in the executive team as managers will need to
report on strategy, projects, financial results, and other matters.
3. Risk management
Directors can bring an outside perspective and discipline through overseeing risk management.
They may bring different views on the importance of the risks that management has identified,
and encourage executives to devote appropriate resources to addressing those risks.
4. Objectivity and independence
Often a company founder or CEO is the champion for certain projects and people. This can be
great because it ensures a project will get needed resources and leadership attention. But
sometimes it can be a problem if management doesn’t recognize when to pull the plug on
something that’s just not working. Outside (i.e., nonfamily, no management) directors can bring
objectivity that can help management make hard decisions when needed. And those directors
may be in a better position to deliver sometimes difficult but necessary messages to the CEO.
5. Planning/advising on CEO succession
Because no CEO or founder lives forever, succession planning is critical. While a planned, orderly
succession is ideal, a sudden illness or death could create a leadership vacuum. If the founder or
CEO hasn’t considered succession, a board can encourage him or her to address it properly.
Indeed, in an emergency an experienced director could even step in on a temporary basis until a
permanent leader is found.

In the case of planned succession, the board can assist by encouraging the CEO to identify
possible replacements and ensure internal candidates get the various operational roles to help
prepare them for the possible chief executive role. Directors can also participate in coaching and
mentoring family members who have joined the business and may aspire to run it one day. Given
family dynamics, directors who are not related to the family may be able to identify—better than
a parent or relative can—strengths and areas where a son or daughter (or niece or nephew)

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

needs coaching. And those younger family members may be more receptive to receiving and
acting on that advice from someone outside the family. By helping family members develop into
effective business leaders, a board can improve the odds of a successful leadership transition
within the family.
6. A safe harbor
If something goes wrong in a company—especially if it may involve a family member—employees
or outsiders may find it easier to report concerns to directors who are not family members or
part of the management team. The board can then decide whether to investigate further.
7. Smoothing ownership transition to the next generation
In our experience working with family companies, some falter when passing control of the
company (which may be different from changing the CEO) from one generation to the next. An
established board can provide continuity and guidance to a younger generation and help
preserve the founder’s vision for the company. Effective directors build relationships with new
family members who are added to the board.
8. Planning/advising on exit strategies
Sometimes passing the company down to the next generation isn’t the best move to maximize
shareholder wealth or to ensure the company’s ongoing survival. A board can provide advice on
whether the generation in control should:
• Sell the company
• Merge with another company
• Take the company public
• Wind the company down
Family companies also may have one or more outside investors, and these investors may have a
time horizon for their exit from the business. A board can provide input on exiting with minimal
disruption to the company.

Possible Concerns About Changing Your Governance Model

It’s all well and good to talk about the value a board can bring, but it’s not unusual for founders
to have concerns about adding individuals to their board who aren’t either family members or
close friends. Here are some of the common concerns and possible ways to address them.
1. I don’t want to give up control
If you’re the controlling shareholder you still get final say, regardless of what your board might
suggest. You can also draft your delegation of authority policy to preserve the decisions you want
to take.
2. I don’t want to share confidential information with outsiders
One way to avoid doing so is by having only insiders (family and management) on your board. If
you choose to add other directors, you can remind them that they’re expected to maintain
confidentiality about the company’s operations and results. You may consider reinforcing the
expectation by having the directors periodically sign a nondisclosure agreement.
3. I have no time to go through the formalities of having a board

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

Having a board does require certain formalities—like preparing meeting agendas and materials,
and recording minutes. And yes, these activities take time. Hopefully, your board is effective at
bringing value so this time investment pays off.
In some situations, these formalities can prove valuable. For example, if at a future point in time
some family members allege that the company is not being run properly, having copies of
meeting materials and minutes can help demonstrate that there was appropriate board
oversight.
4. It’s expensive
Governance usually costs more as you formalize processes and add directors. If cash flow is a
problem you could consider equity-like vehicles for director compensation. However you choose
to compensate directors, you can assess whether they are bringing the value you need. If not,
you can replace them.
Although it’s not a concern, per se, we also commonly hear from founders that they don’t need
a board because they already know what’s right for their company. However, there could be a
time when you’ll face a new situation where you are less certain about which direction to take.
An established board that understands your business may help you respond to such challenges
with sound advice and perspective.

What Can You Expect Your Board to Do?

Boards of private family companies have more flexibility in the roles they play than public
company boards. Why? Because they’re not bound by the SEC and stock exchange listing rules
that set responsibilities for public company boards and board committees. [1] Directors on
private company boards do, however, have legal duties of care and loyalty (See the Building or
renewing your board module in this Series for descriptions of these duties.)
There are certain standard responsibilities that boards typically have. Understanding what those
are can help you better consider which responsibilities you want your board to take on.
1. Corporate strategy
Most executives agree that it’s management’s responsibility to develop the company strategy
and then discuss it with the board. During this discussion, directors draw on their experience to
challenge the plan and the appropriateness of the underlying assumptions. Often, the discussion
will result in at least some changes to the strategy initially presented. Once management and the
board agree on the strategy, the board will approve it and (in many cases) the budget needed to
achieve it.
2. Company performance
How does the board know that management is executing the approved strategy effectively? By
asking management to identify and set targets for key performance indicators that can be used
to monitor progress. The board then monitors performance and discusses what remediation may
be needed if performance is falling short.
3. CEO evaluation, compensation, and succession

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

No CEO knows everything—even if he or she founded or “grew up” in the company. For example,
a founder who is a technology or service innovator may not fully understand the different
financing options for growing the company to the next level. Or a CEO who has developed a
concept largely alone may not understand how to build an effective team. An important role for
private company directors can be to coach the CEO. That could include acting as a sounding
board, helping the CEO manage through an issue, or having sometimes difficult conversations.
The reality is that founders or controlling shareholders who are CEOs usually determine their own
compensation. But boards can be helpful in establishing performance targets and pay levels for
CEOs who are other family members or professional managers. When a family member is the
CEO, a good board can provide guidance and perspective about the appropriate level of
compensation. And when the time comes to replace the CEO, whether planned or unplanned,
the board will participate in hiring a new CEO. (See the Succession planning module in this Series.)
4. Risk management
A company might face risks as varied as new competitors, emerging regulations, unreliable IT
systems, losing key people, or the impact of severe weather or other natural disasters on
operations or the supply chain. Directors can provide feedback on whether they think managers
are identifying the relevant risks and addressing those risks effectively.
It’s often difficult to determine how much risk a company should take. For example: Should it
take on more debt to finance expansion into new countries or should it delay that expansion until
it can self-finance? Should the company invest more into a product line that already accounts for
a large part of its income or should it expand to other products to help spread its risk? There is
no single correct answer to such questions, and directors can help executives determine the level
of risk to take.
5. Significant investments and transformational transactions
Significant investments (say, purchasing a major product line, building a new plant, or
establishing a strategic relationship) and transformational transactions (like mergers and
acquisitions or divestitures) don’t always pay off as initially expected. Directors can ask questions
to help ensure management focuses carefully on the expected costs and returns of a proposed
transaction, and whether it fits with the company’s strategy.
6. Compliance with legal and ethical standards, the company’s “tone at the top,”
and the company’s impact on its community
Most agree there is a clear linkage between long-term, sustainable performance and a company’s
behavior as it relates to shareholders, customers, employees, and the communities in which it
does business. That’s why many boards monitor the company’s moral compass. How? Partly by
ensuring the CEO is setting the right tone at the top.
A board can also help ensure the continuity of the company’s culture through succeeding family
generations and leadership changes.
7. External communications
The board can play an important role in ensuring that the information—whether favorable or
unfavorable—the company communicates about its performance is reliable, relevant, and

Prepared by: Ms. Eloisa Mae Lipio

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND EXTENSIONS
MARAGONDON BRANCH

timely. And that includes overseeing the reliability of financial information that goes to the
family, other shareholders and creditors, and any regulators or other authorities.
8. Board dynamics
Bringing the right people together is the first step to creating an effective board. What else is
needed?
• An appropriate board structure, possibly including committees
• Enough meeting time to allow the board to carry out all of its responsibilities
• The right information to support board decision-making
• An environment that encourages candid discussions and healthy debate
One way some boards check on whether they are effective is to periodically assess their own
performance.
Family company boards may face even more challenges than other companies in ensuring they
have effective board dynamics. Why? Because sometimes family issues become intertwined with
company issues. When the two overlap they can distract management and the board.
How many boards are involved in the responsibilities described above? A PwC 2013 survey asked
CEOs and CFOs of 147 family-owned/owner-operated companies that question.

What are the board’s main responsibilities?

Monitor company performance 85%

Set corporate strategy 74

Oversee/approve capital budget and key operating budgets 62

Set/approve compensation for top executives 61

Oversee risk management 59

Evaluate top executive performance 56

Succession planning 56

References

• Family Firms Need Professional Management (hbr.org)

• https://tradebrains.in/family-vs-professionally-managed-businesses-india/
• What Is a Board’s Role in a Family Business? (harvard.edu)
• https://cfeg.com/insights_research/professionalizing-the-family-business-its-not-what-
you-think-it-is/

Prepared by: Ms. Eloisa Mae Lipio