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Rescuing The Family-Owned Business

Posted On: 2/14/2006

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Business guru Peter Drucker passed away last year, after a lifetime of revolutionizing management theory around the world. But a dozen years before his passing, he published a Wall Street Journal essay entitled "How To Save The Family Business." Its lessons remain applicable for many family-owned routes and FECs today, as well as most distributorships and quite a few manufacturing concerns.

The chief rule Drucker laid down was that the family must serve the business, not the other way around. Paradoxically, if the family does its best to serve the business, then -- in the long run -- the business will be of most service to the family.

Specifics from Drucker began with a strict anti-nepotism clause. It's okay for family members to work in the business, he said, but they must be "at least" as competent and hardworking as non-relatives. (Decades ago, Eastern Airlines president Eddie Rickenbacker was approached by his son for a job with the carrier. Rickenbacker smiled and said: "Of course there is a place for you here at Eastern, son." Then handed his kid a bucket and mop, saying: "Start the way I did, by cleaning the bathrooms.")

Counting nepotism's costs to the company in terms of resentment and loss of good (non-related) employees, Drucker said: "It is much cheaper to pay a lazy nephew not to come to work than to keep him on the payroll." A related rule in Drucker's guidelines stated: Hire professionals for key posts and give them "full citizenship" in the firm. "Otherwise," he warned, "they simply will not stay."

Drucker also said at least one top management post must be filled by a non-relative, no matter how good the family members are at their jobs. This assures objectivity from someone who is outside the family's personal dramas and patterns. "Typically," said Drucker, "this (outsider) is either the financial executive or the head of research -- the two positions in which technical qualifications are most important. But I also know successful companies in which this outsider heads marketing or personnel."

Following these rules won't necessarily prevent a family-owned company from crashing on the rocky shoals of succession, Drucker said. When family issues intrude on the choice of a new CEO, he insisted, "There is only one solution: Entrust the settlement of the succession issue to an outsider." But, he added, if the problem grows big enough, it's often too late by the time such an expert is consulted. So, he said, put an outside arbiter in place to handle this question long before a successor needs to be selected.

Operators and distributors are particularly proud of second-, third- and even fourth-generation "dynasties" that run their businesses. And, much of the industry has expressed sorrow that so few sons and daughters are waiting in the wings to take over the family business today. However, Drucker said this is a natural progression. "Sixth- or seventh-generation family businesses...are quite rare," he observed. By the time the fourth generation arrives, the family has become rich enough for potential successors to be able to afford to seek their own destinies.

Conversely, Drucker also believed it was wise to keep the business under family control through the third generation in most cases. This promotes entrepreneurship (good for the economy as a whole) and protects the strength of the business (good for the family's interests).

Judged by Drucker's criteria, the amusements industry has much of which it can be proud. Drucker wrote: "Unfortunately, the family-managed business that survives the founder -- let alone one that still prospers under the third generation of family management -- is still the exception." Not so in the amusements industry; multi-generational family businesses are, if not the rule, at least a proud and broadly upheld tradition.