1 Professionalization in family businesses: An explorative study among family and nonfamily

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1 Professionalization in family businesses: An explorative study among family and nonfamily

executives

Master Thesis Steven John Hager

MSc. BA. Small Business and Entrepreneurship University of Groningen

Faculty of Economics and Business

Supervised by Dr. Ir. H. (Haibo) Zhou / Dr. M. J. (Maryse) Brand 19th of April 2016

Johannes Mulderstraat 3b

9714 CV Groningen

s.j.hager@student.rug.nl

Student number S1938037

Word count: 16774 (including tables)

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2

“Someday it’ll all be… Whose?”

Dr. Donald J. Jonovic

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3 Table of contents

Table of contents ... 3

List of ables and figures ... 5

Preface ... 6

Abstract ... 7

1. Introduction ... 8

1.1 Problem identification ... 8

1.2 Research question ... 9

1.3 Paper outline ... 9

2. Theoretical background ... 10

2.1 Family businesses ... 10

2.2 Professionalization ... 12

2.3 Professionalization and family businesses ... 13

2.4 Professionalization process ... 18

2.5 Professionalization practices ... 20

2.6 Effectiveness of professionalization ... 20

2.7 Sub-questions ... 21

2.8 Research approach and theoretical framework ... 22

3. Methodology ... 23

3.1 Research design ... 23

3.2 Data collection ... 24

3.3 Case description ... 26

3.4 Data analysis ... 30

3.5 Controllability, reliability and validity ... 31

4. Results ... 32

4.1 Definition of professionalization ... 32

4.2 Process ... 36

4.3 Practice ... 43

4.4 Effectiveness of professionalization ... 45

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4 4.5 Summary of the results ... 47

5. Discussion ... 49

5.1 Theoretical framework ... 49

6. Limitations and future studies ... 56

7. Practical implications ... 57

8. Conclusion ... 59

9. References ... 60

10. Appendix ... 67

Appendix I – Interview outline ... 67

Appendix II – Interview guide ... 71

Appendix III – Within case definitions professionalization ... 79

Appendix IV – Outcomes Likert scale Dekker et al. (2012, 2015) ... 82

Appendix V – Outcomes Likert scale Eijssen (2015b) ... 83

Appendix VI – Used quotes ... 84

Appendix VII – Codebook ... 89

Appendix VIII – Professionalization barrier framework ... 92

Appendix IX – Professionalization process ... 94

Appendix X – Stereotypical dichotomies family and nonfamily businesses ... 97

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5 List of tables and figures

Table 2.1: Definitions family business professionalization

Table 2.2: Five dimensions professionalization model by Dekker et al. (2012, 2015) Table 2.3: Professionalization model by Eijssen (2015a)

Table 3.1: Company characteristics Table 3.2: Executive characteristics

Table 3.3: Methods to overcome research limitations

Table 4.1: Elements of the definition of family business professionalization Table 4.2: Agreeing with the literature (Dekker et al., 2012, 2015)

Table 4.3: Triggers for professionalization Table 4.4: Triggers (goals of professionalization) Table 4.5: Barriers to professionalization

Table 4.6: Implemented professionalization practices

Table 4.7: Likert scale based on professionalization model by Eijssen (2015a)

Table 7.1: Overview of mentioned content and allocated amount of family business executives

Figure 2.1: Research approach and theoretical framework

Figure 3.1: Research Design

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6 Preface

This research was carried out in accomplishment of the requirements of the University of Groningen and the consultancy firm Gwynt. The supervision of Dr. Ir. H. (Haibo) Zhou and Dr.

M. J. (Maryse) Brand has substantially improved the quality of the paper and is therefore much appreciated. Furthermore, I would like to express my appreciation to Dirk-Harm Eijssen for making this study possible in the first place, and his continuous supervision during the research.

His suggestions, critical eye and love for the subject, decidedly improved on the quality of the

paper. In addition, I would like to acknowledge Titia Onnes, who was my fellow researcher on

this journey. I would also like to thank all the family and nonfamily executives sharing their ideas

and knowledge by participating in this study. Finally, I am grateful to my family, friends and

girlfriend Josine Horzelenberg for their patience and support and Tsjerk Bottema for regularly

reviewing my work.

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7 Abstract

Research has not been able to apply a singular meaning to professionalization in a family business context. Many scholars have tackled this issue, however, a field perspective of professionalization in family businesses is missing. A field perspective is needed to determine what professionalization means for practitioners, to come up with better solutions, and to convince family businesses to make the transition. A case study including 24 interviews with 13 family and 11 nonfamily executives in 13 family businesses was carried out in order to identify the definition, process, practice and effectiveness of professionalization.

Key findings indicate that professionalization is a multidimensional construct, and the circumstances in which elements are viewed and implemented as professionalization differ from business to business. The majority of family and nonfamily executives alike had similar professionalization thoughts, and aspects that they brought to light are the basis for a more extensive and detailed field construct of professionalization. A thorough observation of professionalization triggers, barriers, and practices generated certain patterns that are apparent within family businesses. Important triggers are growth, environmental changes and inefficiency.

While the goals of professionalization are merely based on the continuance of the family business, professionalization is often looked upon as a means of repair rather than as strategy implementation. The most common barriers are family resistance, organisational resistance and the lack of knowledge and expertise.

Based on these findings, a barrier sequence is found that has been confirmed by gathered

data. Certain obstructions limited the implementation of professionalization and a distinction

between top level and lower level organisational barriers became visible. Further research is

urged to change the essence and perception of professionalization to let family businesses

overcome most of their traditional weaknesses. In conclusion, a family business

professionalization field perspective is found. However, a note of warning is in order: the

assumption is solely based on the evidence of executives. Moreover, after this research the

appropriate definition for professionalization would be ‘bureaucratizing the family business’.

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8 1. Introduction

In recent years many researchers have tried to narrow the concept of family business professionalization by defining and clarifying the allocated content (e.g. Chua, Chrisman &

Bergiel, 2009; Dekker, Lybaert, Steijvers & Depaire, 2012, 2015; Hall & Nordqvist, 2008).

Despite of the amount of research done to define and clarify the concept of professionalization within the family business context, there is still indistinctness in the literature (Stewart & Hitt, 2012). Morover, there is also indistinctness among family business executives in the field. It is often not clear what professionalization means, and executives, especially during the early generations of the family business do not see its importance (Dyer, 2006; Eijssen, 2015b).

However, the processes of managing growth and organising and formulating new strategic choices are often part of the program during the second and third generation, and very important for the continued vitality of the family business (Jongkind, 2013). Several scholars who recognized the continuing vitality of family businesses believe that in spite of this vitality, family businesses could overcome most of their traditional weaknesses if they “professionalized”

(Martinez, Stohr & Quiroga, 2007).

1.1 Problem identification

This study was triggered by Gwynt’s interest in the topic. Gwynt is a consultancy firm based in

the Netherlands that focuses on operational, financial and commercial processes among (family)

businesses. Based on the experiences from Gwynt and the research by Eijssen (2014), it became

evident that the general meaning of professionalization among family businesses is often unclear,

and varies between family and nonfamily executives. Family business executives interpret

professionalization in various ways, and often do not perceive it as strategically important (Dyer,

2006). Moreover, literature has proposed several descriptions of professionalization (e.g. Dekker

et al., 2012, 2015; Hall & Nordqvist, 2008; Stewart & Hitt, 2012), yet further research is needed

to establish a field perspective of professionalization (Eijssen, 2014). Several researchers have

tackled the issue: the most acknowledged so far is the classification of the five dimensions model

by Dekker et al. (2012, 2015). Still, according to Hung & Whittington (2011), the current family

business professionalization theories are not sufficiently featured and substantiated. This

stipulates that family business professionalization is an understudied topic and needs greater

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9 clarification. Therefore, new insights from family business executives are required to obtain a broader understanding of what professionalization means in the field.

1.2 Research question

This research aims at identifying what family and nonfamily executives of family businesses consider to be professionalization, how they implement this professionalization in practice, and whether they are satisfied with the current level of professionalization. By doing so this research validates, details and extends the list of known factors of professionalization and an executive or so-called field perspective is established. A distinction between family and nonfamily executives is made as Gwynt is interested in the two viewpoints. This leads to the following research question.

What do family and nonfamily executives consider to be family business professionalization and how do they implement this professionalization in practice?

In order to answer the research question a distinction is made between how executives define professionalization, what professionalization they implemented and which triggers and barriers they faced. Additionally, executives were asked whether they were satisfied with the current level of professionalization. The study is organised as follows: first a multiple-case study among 13 family businesses including 24 interviews with family and nonfamily executives is conducted.

This is followed by coding and analysis of the gathered data by two researchers and a family business expert from Gwynt, to increase the validity as well as the reliability. Finally, the results of this study are discussed in order to answer the research question.

1.3 Paper outline

The rest of this paper is organised as follows. First, the theoretical background concerning family

businesses and professionalization is discussed. Second, the theoretical framework and sub-

research questions are discussed. Third, the methodology section including research setting, data

collection and analysis are discussed. Fourth, the results from the study are presented, followed

by an in-depth discussion and analysis of the results. And finally, the conclusions will be

presented.

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10 2. Theoretical background

In this section, existing literature relevant to professionalization features, processes including triggers and barriers, and professionalization effectiveness related to family businesses is reviewed. The terminology is clarified, and a theoretical framework is developed within which this research will be implemented.

Literature review 2.1 Family businesses

Family businesses constitute a noteworthy global force (IFERA, 2003), yet a central definition of family businesses is missing (Abdellatif, Amann & Jaussaud, 2010). Research has acknowledged the heterogeneity of family businesses, and there is ongoing debate about their definition of family businesses. Academics have determined different types of family businesses (Chrisman, Sharma & Taggar, 2007; Lubatkin et al., 2005; Melin & Nordqvist, 2007; Sharma & Nordqvist, 2008).

One of these types is simply based on the level of family involvement in ownership and/or management in family businesses (Chua, Chrisman & Sharma, 1999; Westhead & Howorth, 2007). Chua, Chrisman and Sharma (1999) developed one of the most acknowledged methods with three qualifying combinations of management and ownership. (1) Family owned and family managed; (2) family owned but not family managed; (3) family managed but not family owned.

A majority of scholars agree with the combination of family owned and family managed being considered a family business (Sharma & Nordqvist, 2008; Westhead & Howorth, 2007).

However, a weakness in the typologies, which largely focus on management and/or ownership characteristics is that they oversimplify the definition of a family business to such an extent that the mere presence of family becomes a descriptive for all business behaviours, activities and outcomes (Dekker et al., 2012). Because management and/or ownership is a somewhat oversimplified, one-dimensional and rather static typology concentrating on how the business is constituted, Dekker et al. (2012) provide a description of different typologies that go beyond this scope. Based on family professionalization they make a distinction between different ‘types’ of family businesses: autocracy, domestic configuration, clench hybrid and administrative hybrid.

These different types make it possible to distinguish family businesses that have the same

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11 ownership and/or management structure, but operate differently (e.g. working procedures, controlling mechanisms, decision-making authority, management quality).

Although the involvement and/or management by family members is a rather simplified measurement of defining exactly what a family business is (Dekker et al., 2012), the European Union defines it in a similar way: “1) The majority of decision-making rights are in the possession of the natural person(s) who established the business, or in the possession of the natural person(s) who has/have acquired the share capital of the business, or in the possession of their spouses, parents, child, or children’s direct heirs. 2) The majority of decision-making rights are indirect or direct. 3) At least one representative of the family or kin is formally involved in the governance of the business. 4) Listed companies meet the definition of family enterprise if the person who established or acquired the business (share capital) or their families or descendants possess 25 per cent of the decision-making rights mandated by their share capital.” (European commission, 2016). This definition includes the three most important aspects of defining a family business. First, one or several families hold a significant part of the business’ capital. Second, family members keep significant jurisdiction over the business (e.g. distribution of capital and voting rights) with probable statutory or legal restrictions. Third, family members are positioned in the top management (Villalonga & Amit, 2004).

Another, and more recently emerged typology of family businesses is established by Dyer (1988, 2006). He argues that family business culture, familial liabilities, familial assets and agency costs are central elements for defining types of family businesses. In a similar vein, Chrisman, Chua &

Sharma (2003) distinguish family businesses based on business behaviour and characteristic

resources arising from family involvement rather than only family ownership and/or

management. What can be seen overal is that more recent family business scholars seem to be

shifting towards typologies of family businesses that go beyond solely family management and/or

ownership alone (Penttilä, 2003). This research applies the widely acknowledged family business

definition as developed by Chua et al. (1999). A business is considered a family business if the

business is family owned and family managed. Stereotypical dichotomies between family and

nonfamily businesses are presented in Appendix X.

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12 2.2 Professionalization

The ambiguity of the term professionalization is to a large degree based on the ambiguity of the term “professional”, which has a wide variety of implications. (Hwang & Powell, 2009; Von Nordenflycht, 2010; Stewart & Hitt, 2012). This could be the result of the relatively multidimensional atmosphere to which it applies (Chua et al., 2009; Parada, Nordqvist &

Gimeno, 2010). To this end, a widely acknowledged and multidimensional professionalization description by Flamholtz and Randle (2012), sums up professionalization as features of formal training, planning and governance bodies; these include management development, regular scheduled meetings, defined responsibilities, performance appraisal and control systems. This description indicates that professionalization is a process that transforms any trade or occupation into a true profession. Professionalization in this sense is perceived to be a transformation from less qualified to establishing acceptable qualifications that guarantee expertise and trustworthiness (Abbott, 1988). In addition, Bureau and Suquet (2009) argue that professionalization is not a pre-defined situation that meets a certain number of criteria, but was offered as an alternative to bureaucracy (Benveniste, 1987). A substantial part of the traditional and still paramount understanding of professionalization is professional management (Chittoor &

Das, 2007; Gedajlovic, Lubatkin, & Schulze, 2004, Stewart & Hitt, 2012). The more a business delegates responsibility to professionals, the less bureaucracy is needed (Hall, 1968). According to several scholars, professionals seem to have preferences that conflict with the nature of a bureaucratic organisation (Barley, 2005; Barley and Tolbert, 1991; Malhotra, Morris and Hinings, 2006).

When evaluating Weber’s (1968) concept of a bureaucratic organisation there is much overlap with the professionalization definition as stated by Flamholtz and Randle (2012). The bureaucratic organisation is characterized by modernistic, efficient and rational structures to organise economic activities, and is therefore very different in nature to traditional and charismatic organising methods (Weber, 1968). The authority of bureaucratic organisations is rational and legal, and formally based on objectivity, norms, rules and rational decision-making.

Managers in this sense more willingly claim authority through technological qualifications and rational values, instead of through individual characteristics and physical ownership rights (Hall

& Nordqvist, 2008). Closely related to this, Chandler (1990) argues that the coordination of

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13 salaried managers will improve when the organisational structure is precisely defined. All things considered, professionalization has consequences over different dimensions, e.g. formal structures and training mechanisms, meritocratic values and independency among directors (Chua et al., 2009; Parada, Nordqvist, & Gemino, 2010).

2.3 Professionalization and family businesses

In recent years numerous scholars have discussed the emergent field of family business professionalization (e.g. Chua et al., 2009; Chua et al., 2012; Dekker et al., 2012; Hall &

Nordqvist, 2008; Stewart & Hitt, 2012). Families have a close relationship with their business which affects organisational lifecycle (Nelson, 2003). The dynamics of the relationship may change when family businesses hit a turning point and need professionalization implementations.

Such a turning point can be caused by growth, lack of skills and resources, transforming norms and values of the business operations, preparations for succession or control issues (Eijssen, 2014, Stewart & Hitt, 2012).

Family involvement and external managers

Business literature often refers to professionalizing the family businesses when the involvement of the family is reduced, and nonfamily employees are entering the family business particularly with the delegation of executive authority (Chittoor & Das, 2007; Gedajlovic, Lubatkin &

Schulze, 2004). This assumption is incomplete because the mere presence of an external,

nonfamily executive is enough to mark the whole business as a professional family business,

neglecting all other possible features (Dekker, Lybaert, Steijvers & Depaire, 2015). It is an

outdated assumption that family members are inherently non-professional executives that need to

be replaced to let the business grow (Hall & Nordqvist, 2008). Various scholars have researched

the effect of implementing this simplified measure of adding a nonfamily executive in relation to

business performance, however, they do not deliver consistent results. Some scholars claim that

hiring a nonfamily executive has negative effects on the business performance, and other claim a

positive effect (Anderson & Reeb, 2003; Chittoor & Das, 2007; Miller & Le Breton-Miller,

2006).

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14 According to Fama and Jensen (1983) family ownership and management minimizes agency costs due to shared interests. Hiring nonfamily executives would lead to conflicting interests, as they have a tendency to pursue their own goals that are often short-term oriented and differ from the interests of the family (Chrisman, Chua, & Reginald, 2004). This can cause agency costs to emerge, due to agency problems and opportunistic managerial behaviour, therefore, from the viewpoint of the family, professionalizing in this way can harm the family business (Dyer, 2006).

Schulze, Lubatkin, Dino, & Buchholtz (2001) demonstrated that family ownership and management can expose family businesses to unknown elements of agency costs (e.g. problems of altruism and self-control). Family businesses can hire nonfamily executives to bring expertise into the company and to nuance these agency costs (Dekker et al., 2015). Family businesses are frequently unwilling to hire external nonfamily executives because the owners want to keep control of the business by maintaining the executive role themselves (Chrisman, Chua, &

Reginald, 2004). This paternalism should be closely monitored, as this unwillingness may not only create problems of altruism and self-control, but additionally other agency costs can emerge.

These can be caused by unsuccessful management, distributive injustice, nonalignment of concern between family members, free riding and nepotism, which will force family businesses to professionalize their companies with different methods than employing nonfamily executives (Lubatkin et al., 2005; Schulze, Lubatkin, & Dino, 2003; Songini & Gnan, 2009). Hence, professionalizing the family business should be evaluated as a more extensive construct than solely as the entrance of a nonfamily member to resolve the emergent agency problem (Flamholtz

& Randle, 2012; Lubatkin et al., 2005; Schulze, Lubatkin & Dino, 2003). Professionalizing the family business and family control are not mutually exclusive targets. Therefore, professionalizing the family business should not be treated in a one-dimensional way, since there are multidimensional possibilities (Stewart & Hitt, 2012).

Management and employees

Dyer (1996) extends the professionalization construct a bit further, by introducing two additional

paths apart from new professional managers, namely the professionalization of nonfamily

employees and the professionalization of family employees. This can involve educating the

succeeding generation in business schools (Pérez-González, 2006; Tsui-Auch, 2004). A

transformation in management style can also be seen as professionalization, the style

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15 transformation from an informal to a formal management to guarantee the continuity of the business (Benavides-Velasco et al., 2013). Moreover, if family businesses professionalize their management and governance bodies, and have to be held accountable to minority shareholders, they can overcome most of their traditional weaknesses and take advantage of their strengths and succeed (Martinez, Stohr, & Quiroga, 2007).

Further professionalization features

Apart from the managerial components there are multiple other possibilities to professionalize the organisation. The modification of the informal atmosphere of the organisation is inherent to the traditional understanding of the concept of professionalization (Dekker et al., 2015). Features that have been discussed include the delegation of decision-making authority to lower managers, the implementation of formal control systems to measure organisational output and behavior, changes in the decision-making process, and/or the possible modification of the organisational structure (Chua et al., 2009; Flamholtz & Randle, 2007; Songini, 2006; Stewart & Hitt, 2012;

Yildirim-Öktem & Üsdiken, 2010). Table 2.2 categorizes the contributions of multiple scholars to

business literature.

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16 Family business professionalization features Representative citation

Professionalizing the board with external nonfamily executives

Chittoor & Das, 2007; Gedajlovic, Lubatkin & Schulze, 2004; Klein & Bell, 2007; Levinson, 1971; Songini, 2006; Stewart & Hitt, 2012; Yildirim-Öktem &

Üsdiken, 2010; Zhang & Ma, 2009 Professionalizing the management team with external

nonfamily managers

Chittoor & Das, 2007; Levinson, 1971; Sonfield &

Lussier, 2009; Stewart and Hitt, 2012 Formal management and governance bodies, and

accountability to minority shareholders (e.g.

appointment of nonfamily and external members).

Flamholtz & Randle, 2007; Martinez, Stohr, and Quiroga, 2007; Songini, 2006; Suáre & Santana-Martin, 2004

Training of family members Training of nonfamily employees New professional managers

Dyer, 1996

Transition in management style, from informal to more formal

Benavides-Velasco et al., 2013

Delegation of control and decentralization of authority Chua, Chrisman, and Bergiel 2009; Flamholtz and Randle 2007; Stewart and Hitt 2012

Educating the succeeding generation in business schools.

Benedict, 1968; Pérez-González, 2006; Tsui-Auch, 2004 Formal financial control systems. E.g. budgeting,

planning and performance evaluation and incentive compensation.

Chua et al., 2009; Flamholtz & Randle, 2007;

Gedajlovic, Lubatkin, and Schulze, 2004; Sonfield &

Lussierm 2009; Songini, 2006

Formalised manner of recruiting Dyer, 2006

Formal governance mechanisms Songini 2006; Stewart and Hitt 2012; Yildirim-Öktem and Üsdiken 2010; Zhang and Ma 2009

Formal planning, regular scheduled meetings, defined responsibilities, formal training, performance appraisal systems, management developments, formal governance bodies, and control mechanism systems

Flamholtz, 1986; Flamholtz and Randle, 2007

Formal human resource control mechanisms Dyer, 2006; Flamholtz & Randle, 2007; Tsui-Auch, 2004

Modification of organisational structure Flamholtz & Randle, 2007; Hofer & Charan, 1984 Table 2.1.: Features of family business professionalization

Dekker et al. (2012, 2015) developed a model that includes several of the previous features of

professionalization. The model contains the following five dimensions: (1) nonfamily

involvement in governance systems, (2) financial control systems, (3) human resource control

systems, (4) decentralization of authority, (5) top level activeness. In the following table, the

dimension descriptions as stated by Dekker et al. (2012, 2015) are specified.

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17 Dimension Dimension content

1) Nonfamily involvement in governance systems - Family involvement in board of directors (reversed) - External board directors

- Family involvement in management team (reversed) - Nonfamily CEO

2) Financial control systems - Use of budgets

- Budget evaluation system

- Formalized financial goals and objectives - Firm performance evaluation system 3) Human resource control systems - Formal recruitment system

- Formal training system - Incentive training system

- Personnel performance evaluation system - Formal scheduled staff meetings

4) Decentralization of authority - Delegation of control

- Centralized individual decision making (reversed) - Centralization of authority (reversed)

5) Top level activeness - Board activeness

- Management activeness Table 2.2: Five dimensions professionalization model by Dekker et al. (2012, 2015)

These five dimensions indicate that family businesses increase their level of professionalization by implementing one or more of these individual dimensions (Dekker et al., 2012, 2015). Dekker et al. (2012, 2015) used the work of various scholars in their model; therefore this model is used as a measurement instrument in this study. Dekker et al. (2012, 2015) rooted variables related to nonfamily involvement in their model, but also included other professionalization features which can act simultaneously. Their research is solely focused on previous general management literature and measures the effects of the dimensions related to firm performance.

An alternative professionalization model developed by Eijssen (2015a) includes four dimensions:

(1) formalisation, (2) delegation, (3) rationalisation, (4) specialisation. This model was developed

in an attempt to develop a clearer field perspective of professionalization, and will also serve as a

measurement instrument in this study. In the following table, the dimensions description as stated

by Eijssen (2015a) are specified.

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18 Dimension Dimension content

Formalisation - Clear governance

- Predictable processes - Systematic budget cycles - Standard work instructions

Delegation - Giving responsibility

- Remain within the agreed role

- Sharing information with the organisation

Rationalisation - Objective norms

- Business cases

- Key performance indicators - Make use of selection criteria

Specialisation - Attract and appoint experts

- Accept judgement of experts - Spread responsibilities Table 2.3: Professionalization model by Eijssen (2015a)

2.4 Professionalization process

Like other businesses, family businesses also follow the habits of general organisational development models, for instance the life cycle curve, which delineates a set of predestined stages of phases through which a business progresses (Dekker et al., 2015; Lubatkin, and Schulze 2004; Hofer & Charan, 1984). When businesses go through the organisational life cycle, they will be confronted with increasing levels of internal and external complexity, which will increase the requirement for appropriate management and organisational systems. Due to this increasing demand and the often fast growth tracks, family businesses experience an earlier need for professionalization (Flamholtz & Randle, 2007; Gedajlovic, Lubatkin, & Schulze, 2004; Hofer &

Charan, 1984). In the first generations of the family business, there is often a higher need for

entrepreneurial skills than for managerial skills; later, when the business grows and stabilises, the

need for managerial skills emerges (Chittoor & Das, 2007). In general, this means that the family

business transforms from a more entrepreneurial, often owner-managed, to a more formalised,

structured and institutionalised organisation (Dekker et al., 2015). This process tends to involve

establishing acceptable qualifications, a professional body to oversee the conduct of the family

business and some degree of differentiation between the qualified and unqualified executives

(Flamholtz & Randle, 2007). The processes of managing growth and organizing and formulating

new strategic choices are often part of the program during the second and third generation

(Jongkind, 2013).

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19 2.4.1 Triggers

The process starts with a trigger for professionalization, this can be the time period (Steinmetz, 1969), the size of the organisation (Flamholtz and Randle, 2007), or specific needs of the organisation (Hofer and Charan 1984). Agency problems can also trigger the need for professionalization features (Dekker et al., 2015). After the process has been triggered, the professionalization practices discussed in the previous section can be implemented. The practices mentioned might not be considered as independent dimensions, as different features can be related and/or constituted to only one dimension at the same time (Dekker et al., 2012, 2015;

Gedajlovic, Lubatkin, & Schulze, 2004; Stewart and Hitt, 2012). Expanding this view, Dekker et al. (2012) state that family businesses diverge from each other not only in how they professionalize, but also in the quantity they professionalize.

2.4.2 Barriers

Dekker et al. (2012) argue that divergent motivations affect the actual implementation of the

features of professionalization. Many family businesses fail to implement features of

professionalization, which can be part of the explanation for different modes of

professionalization (Stewart & Hitt, 2012). One of the reasons why many family businesses fail

to professionalize is because they are unable to do so. They lack the skills or the drive to

positively generate the transition to a more professional management style (Sharma, Chrisman

and Chua, 1997, p. 16). This so-called incapacity to professionalize might result from cognitive,

cultural, emotional or managerial barriers (Stewart & Hitt, 2012). If the threshold for

professionalization is higher than the present barrier towards professionalization, the

acknowledgement of features of professionalization may start (Schulz et al., 2001). However, not

every business conducts the organisational lifecycle in the same manner. Furthermore, features

differ from business to business, which means that there is no generally applicable

professionalization process (Hung & Whittington, 2011; Parada et al., 2010; Stewart & Hitt,

2012).

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20 2.5 Professionalization practices

An overall agreement about the need, the effect, and the road towards professionalization of family businesses is not yet established among scholars, although many theories focus on this issue (Songini & Gnan, 2009). As professionalization cannot be seen as a singular concept (Stewart & Hitt, 2012), it often contains multiple features as discussed in section 2.4. A comprehensive understanding of several aspects is needed to distinguish the different features of professionalization. According to Stewart and Hitt (2012) there are six distinct categories of variables that influence the appearance of professionalization features in practice. 1) The environment, such as industry characteristics, competition and governmental aspects (Zhang &

Ma, 2009). 2) Family characteristics, such as the generation active in the company (Bennedsen et al., 2007). 3) Business characteristics, such as the size, turnover and control of the organisation (Chrisman et al., 2009; Kotey, 2005). 4) The managerial approach, such as internal and external established knowledge (Oxfeld, 1993). 5) Performance outcomes, which can relate to economic and noneconomic benefits (Chrisman et al., 2010). And finally, 6) various stakeholders, including minority shareholders and nonfamily executives (Martínez et al., 2007).

2.6 Effectiveness of professionalization

Measuring the effectiveness of professionalization requires defining its meaning within the

context of family businesses. Often family businesses have to cope with the tensions and

contradictions that arise between the family needs and the business needs, and this affects the

business level outcomes (Habbershon, Williams & MacMillan, 2003). Taking the

multidimensional construct of family business professionalization, and the family needs and

business needs into consideration, it is difficult to measure effectiveness based on business

performance. This study previously referred to Schulze et al. (2001), who stated that not all

family businesses want to professionalize and are satisfied the way they are. Furthermore,

extensive professionalization is possibly not appropriate or needed (Stewart & Hitt, 2012), and

family businesses value the creation of both economic and social economic wealth (Gómez-Mejía

et al., 2007).

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21 2.7 Sub-questions

To develop a more comprehensive understanding of family businesses professionalization, it is essential to examine the executive perspective (Stewart & Hitt, 2012). Executives’ intentions, abilities, actions and thoughts give new insights into how family businesses concur the organisational lifecycle and their corresponding professionalization features (Gedajlovic et al.

2004). Following recent research, sub-questions are formulated to answer the central research question: What do family and nonfamily executives consider to be family business professionalization and how do they implement this professionalization in practice?

The first sub-question has the purpose to increase the understanding of what family business executives consider to be family business professionalization. A field perspective of family business professionalization is aimed for, as numerous perceptions occur in the literature (Hall &

Nordqvist, 2008; Stewart & Hitt, 2012, Dekker et al., 2012, 2015). Sub-question one (definition):

What is professionalization according to family business executives?

The second sub-question has the objective to develop a thorough understanding of what can support and hinder professionalization (Flamholtz & Randle, 2007; Stewart & Hitt, 2012). There are expected benefits or goals for professionalization, and certain triggers that actually start (further) professionalization at a certain moment in time. There are also factors that stimulate and hinder the professionalization process. Sub-question two (process): What are the triggers and barriers of professionalization?

The third sub-question has the purpose to explain how family business executives professionalize the family business (Dekker et al. 2012, 2015; Flamholtz & Randle, 2007). Sub-question three (practice): How do family business executives professionalize the family business?

Finally, the fourth sub-question measures the effectiveness of the implemented

professionalization. The aim of this question is to review whether executives are satisfied with

the benefits that are achieved through professionalization or if more professionalization is needed

(Schulze et al., 2001). Sub-question four (effectiveness): To what extent are family business

executives satisfied with the current level of professionalization?

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22 2.8 Research approach and theoretical framework

Figure 2.1: Research approach and theoretical framework

In summary, professionalization among family businesses has not yet been properly explained from a field perspective, and limited remarks have been made on how the field implements professionalization activities (Eijssen, 2014). Therefore, this research will adopt an explorative research method in order to validate, detail and extend the definition, to provide an understanding of the process, practice and effectiveness of family business professionalization as illustrated in Figure 2.1.

Theoretical framework Family and nonfamily

executive

Definition of professionalization

Process of professionalization

• Barriers

• Triggers

Practice of professionalization

Family business professionalization

Effectiveness of

professionalization

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23 3. Methodology

In this section, the research method and the process of data gathering and analysis are presented.

Prior to explaining the methodology, a statement regarding the origin and design of the research will be presented. This research originated from out of the interest of the Dutch consultancy business Gwynt which focuses on family businesses. The company wanted to know the differences between family and nonfamily executives regarding professionalization. The author and a fellow researcher both researched this subject, however with slightly different research angles. This explains the condition of having a research team with two researchers and an expert.

The expert referred to is Dirk-Harm Eijssen, who is a co-founder of Gwynt and succeeded an executive master in Consulting and coaching for change at the business school Insead.

3.1 Research design

This research project was divided into two phases. In the first phase, family executives and nonfamily executives answered questions regarding professionalization. The outcomes of the interviews and questionnaires were analysed by the research team to establish an accurate understanding. In the second phase of this research, the identified elements from phase one were compared with previously studied literature about professionalization. The results from both phases serve as the foundation for answering the research questions. The research design is presented in Figure 3.1.

Figure 3.1: Research design

Phase 2: Comparison with literature Phase 1: Differences between FE & NFE

Literature study

Design of research questions

24 interviews + questionnaires (13 FE & 11 NFE)

Analysis of results

Comparing observations with literature Analysis of

results

Conclusions

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24 3.2 Data collection

The sample of family businesses was partly drawn from Gwynt’s network and partially from the researchers’ personal network. After sending out 25 invitations to companies that matched the description of family business (being family owned and family managed), 13 companies were willing to participate in the study. Primary data were collected in-depth interviews with family and nonfamily executives. By using two different sources at each family business, a richer understanding of the material was established, resulting in triangulation (Eissenhardt, 1989).

Unfortunately, two nonfamily executives were unwilling to be interviewed due to time restrictions or a disinclination to share their personal ideas and opinions for this research. The family and nonfamily executives who did participate were interviewed separately by the author and a fellow researcher, increasing circumstance reliability (van Aken, Berends & van der Bij, 2012). The use of interviews with family and nonfamily executives as well as the use of questionnaires contributed to construct validity as discussed by Yin (2009). In order to contribute to the internal validity of this study a detailed interview outline was established. Additionally, the use of two researchers contributes to construct and internal validity, as the researchers can both maintain the focus on the original purpose behind the answers given (Leonard-Barton,1990). All except two interviews were conducted in the office of the executive, one interview took place in a hotel lobby and one interview was performed over the telephone. All interviews were held between November 2015 and January 2016 during office hours (8 am-5 pm). The participants were given a confirmation that the gathered data could not be traced back to a person or a company. In total, 24 in-depth interviews were held at 13 companies, with 13 family executives and 11 nonfamily executives. Interviews lasted between one to two hours and were based on open questions complementary to a questionnaire. Additionally, in order not to lose any detailed information, the interviews were recorded and transcribed in full. A qualitative method was preferred over a quantitative method in an effort to realize an open atmosphere that should contribute to a better understanding of feelings, values and perceptions. It is important to evaluate and understand the family businesses professionalization thoroughly, and an open atmosphere is key to having a clear picture of the invisible forces present in family businesses (Hall &

Nordqvist, 2008). All 24 interviews were carried out in Dutch with full cooperation of the

interviewees.

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25 3.2.1 Limitations regarding data gathering

The extent to which findings from case study research are generalizable is often debated. On a more detailed level, the gathering of sufficient cases and ditto executives proved to be challenging. Therefore, for case 12 and 13 the participation of the family executive alone is accepted. Furthermore, for two cases (three executives) the Likert scale by Dekker et al. (2012, 2015) was not applied due to time restrictions. Likewise, in two other cases (four executives) the Likert scale by Eijssen (2015b) was not applied due to time restrictions.

3.2.2 Interview and questionnaire

The interview consists of level one questions, asked specifically to family or nonfamily executives as discussed by Yin (2009), as well as level two questions going in-depth into each individual case. The concept version of the interview was discussed and edited by the expert, which resulted in the final interview outline as presented below. Please refer to Appendix I for the complete interview outline or to Appendix II for the interview guide.

The interview consisted of five parts:

1) Company description: size, year established, number of employees, turnover, type of business, owners’ role and other family members in the company.

2) Individual demographics: age, gender, education, years active in company, job function, family or nonfamily executive.

3) Definition of professionalization, process of professionalization, practices of professionalization.

4) Opinion about the professionalization model by Dekker et al. (2012, 2015).

5) Measuring satisfaction regarding the current level of implemented professionalization

features using the professionalization model by Eijssen (2015a).

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26 3.3 Case description

Concerning the research objective, the approached companies had mixed management teams e.g.

family and nonfamily executives (Klein & Bell, 2007). 12 out of the 13 companies had a mixed management team, while one company had a different structure. In this case the founder functions as shareholder and his sons are active in the holding, however not in management positions. Moreover, 12 out of 13 companies were in the second and third generation; an underlying reason for their participation could be that those companies are facing the implementation of professionalization and were therefore interested in the research topic (Jongkind, 2013). The family businesses were all established and active in the Netherlands, and all but one company are also active internationally. The companies are active in industrial manufacturing, wholesale and retail trade, and transportation and storage. The type of business was not a selection criterion, but simply the result of the network used. The size of the companies was measured using turnover and number of employees, this to determine possible life cycle stages and the relation towards professionalization (Dekker et al., 2015; Lubatkin, & Schulze 2004; Hofer & Charan 1984). Turnovers ranged from approximately €10 million to more than

€600 million, and the number of employees ranged from 25 to more than 5000, although 10 out

of 13 have between 150 and 500 employees. Finally, family ownership percentages (Dekker et

al., 2012), and the presence of a supervisory or advisory board were determined in order to

establish the willingness of the family to let go (Flamholtz & Randle, 2007). An overview of the

companies provided in Table 3.1.

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27

Case Sector Turnover

In € x million

Employees Age

company (years)

Generation Super-‐‑ or advisory board

Ownership Interview

FE NFE

1 Industrial

company Food industry

€200 -‐ 300

550

59 3th SB 100% family v v

2 Industrial

company Agricultural

€50 -‐ 100

500 57 3th AB 75% family

25% (one) external shareholder

v v

3

Wholesale &

retail trade + € 600

5000 49 2th SB 100% family v v

4

Industrial manufacturing

€ 50 -‐ 100 150 186 7th No 100% family v v

5

Industrial

manufacturing < € 10 25 84 3th No 50% family

50% NFE v v 6

Waste processing industry

€200 -‐ 300 150 42 3th No 100% family v v

7

Wholesale &

retail trade €300-‐ 400

8

Industrial company furniture

€10 -‐ 50

9

Industrial

manufacturing €50 -‐ 100 180 60 2th* SB 100% family v v

10

Transportation and storage

€100 -‐ 200

400 64 2th* AB 95% family

5% NFE

v v 11

Industrial company Flower industry

€ 100-‐ 200

500 56 2th AB (in

developmen t)

100% family v v

12

Industrial company e.g. chemicals

€ 100 -‐ 200

350 56 2th SB 80% family

20% investor v 13

Industrial company Food industry

€200 -‐ 300

400 91 3th SB 100% family v

Table 3.1: Company characteristics (*not initially started by current family)

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28 3.3.1 Description of executives

The units of analysis in this study are family and nonfamily executives operating in a family business. In three cases the interviewed family executive was a management team member and a nonfamily executive was the CEO. In one case the nonfamily executive was interviewed after he resigned from the position of COO. According to his reasoning he had made the position of COO dispensable, and left three months before the interview on a friendly basis to decrease overhead costs. On average, family executives were active longer in the company than the interviewed nonfamily counterparts, however in one instance the opposite was the case, in another the duration was the same, and in two cases the data from nonfamily executives were not covered.

The majority of the executives were male, and there were two female family executives. The average age for both family and nonfamily executives ranged between 40-49 years. All exept two executives (22 out of 24) had completed higher professional education (HBO) or had a Bachelor or Master of Science (WO). The variation in educational level is rather limited, which can be caused by the fact that apart from one executive, all other executives interviewed were non- founders. According to Patel and Cooper (2014) there are often fewer differences between non- founder executives than between founder and non-founder executives, as non-founder executives have usually completed the appropriate education, and are less attached to the business than their founder counterparts. Apart from the executive details, the involvement of other family members in the company was also observed. In the majority of the family businesses other family members were also active in the company in addition to the interviewed family executive. The executives’

characteristics are summarized in Table 3.2.

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29

Case Executive Generation Age Gender Education Job function Years active in

the company

Other family members active in the company

1 Family R#1 2^nd 60-‐69 M HBO CEO 31-‐35 3^rd generation active in operations

Nonfamily R#2 50-‐59 M WO CEO 1-‐5

2 Family R#3 2^nd 50-‐59 M WO CEO 26-‐30 3^rd generation active in operations

Nonfamily R#4 50-‐59 M WO CFO 6-‐10

3 Family R#5 1^st 70-‐79 M No higher

education Shareholder 46-‐50 2^nd generation active in holding

Nonfamily R#6 50-‐59 M HBO CEO 6-‐10

4 Family R#7 7^th 30-‐39 F WO MT general 1-‐5 6^th generation advisory role, 7^th generation active in operations Nonfamily R#8 30-‐39 M HBO MT planning 11-‐15

5 Family R#9 3^rd 50-‐59 M HBO CEO 26-‐30 -‐

Nonfamily R#10 50-‐59 M HBO CMO 26-‐30

6 Family R#11 2^nd 50-‐59 M MBO CEO 21-‐25 3^rd generation active in operations

Nonfamily R#12 40-‐49 M HBO MT sales 21-‐25

7 Family R#13 2^nd 50-‐59 M WO CEO 41-‐45 3^rd generation active in operations

Nonfamily R#14 30-‐39 M WO MT

operations 1-‐5 8

Family R#15 3^rd 30-‐39 M WO CEO 6-‐10 2^nd generation supervisory board

Nonfamily R#16 50-‐59 M HBO COO 6-‐10

9 Family R#17 2^nd 30-‐39 F WO CEO 6-‐10 2^nd generation active in operations, 1^st generation active in advisory role

Nonfamily R#18 50-‐59 M HBO CFO 1-‐5

10 Family R#19 2^nd 30-‐39 M HBO MT sales 11-‐15 1^st generation active in advisory role

Nonfamily R#20 50-‐59 M WO COO

(Resigned) 1-‐5 11 Family R#21 2^nd 40-‐49 M No higher

education

CEO 26-‐30 2^nd generation active in MT

Nonfamily R#22 40-‐49 M WO CFO 1-‐5

12 Family R#23 2^nd 30-‐39 M WO MT operations Europe

6-‐10 2^nd generation active in SB

13 Family R#24 3^rd 40-‐49 M WO CEO 16-‐20 -‐

Table 3.2: Executive characteristics

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30 3.4 Data analysis

The data analysis was organised following the principles of conventional content as debated by Hsieh & Shannon (2005). In conventional content analysis, coding categories are directly retrieved from the text data. Specialised coding software (NVIVO) was used for the qualitative processing of the interview transcripts. After the transcripts had been completed, the central concepts that reflect the meaning of the participants were coded (Lichtman, 2013). A coding distinction or so-called coding tree was developed using the theoretical framework in Figure 2.1.

Apart from the prearranged variables, the data analysis was structured as a conventional content analysis using the transcribed interviews as coding source. During the coding process, regular meetings with the fellow researcher and discussions with the expert resulted in a reduction of codes. This reduction from 72 to 56 was the result of overlapping or similar codes that could be merged. The opposite also occurred; some codes were subdivided into sub-codes to increase specificity, resulting in a total of 60 codes (Appendix VII). After all the interview transcripts were coded and discussed thoroughly with the research team, resulting in higher internal validity and reliability (Leonard-Barton, 1990), different analytical techniques such as pattern matching and cross-case synthesis were used (Yin, 2009). Pattern recognition seemed to be an appropriate technique concerning the descriptive nature of the research question and the possible known answer prior to the empirical data collection (Yin, 2009). The open questions allowed taking rival explanations between executives into account to recognize patterns within the cases. As the study uses multiple cases, a cross-case synthesis to determine patterns across cases was applied.

Within-case analysis was used to detect differences and similarities that were present between

family and nonfamily executives within the same business (Eisenhardt, 1989). After this analysis,

between-case analysis was performed in order to see if differences or similarities occurred in

multiple cases (Eisenhardt, 1989). The expert provided much additional insight, which led to the

development of a more thorough understanding of possible patterns in the data. By combining the

gathered information using pattern recognition techniques as discussed by Yin (2009), answers

were found for the research questions.

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31 3.5 Controllability, reliability and validity

This research adopted a set of measures to ensure controllability, construct-, internal- and external validity as well as reliability (van Aken et al., 2012). According to van Aken et al.

(2012) controllability is the corner stone of explaining both reliability and validity. In this research controllability is ensured through explicitly describing the methodology used. Table 4.2 summarizes the methods used to increase controllability, construct-, internal- and external validity as well as reliability.

Controllability

- Research methodology explicitly explained

Construct validity

- Mixed data collection methods (interviews,

questionnaires)

- Multiple sources of evidence (FE+NFE) - Measuring methods controlled by expert

Internal validity

- Development of interview outline

- Use of two researchers for interviewing - Use of two researchers + expert for coding - Qualitative transcript analysis (NVIVO) - Pattern matching

External validity

- Multiple sources of evidence (FE+NFE)

Reliability

- Apply predetermined protocol

- Use of two researchers for interviewing - Use of two researchers + expert for coding - Multiple sources of evidence (FE+NFE) Table 3.3: Methods to overcome research limitations

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32 4. Results

In this section the results from the data analysis will be presented. For every subheading (definition, process, practice and effectiveness) there will be a general examination of the data, after which an analysis between family and nonfamily executives is performed (phase one of the research), followed by a comparison of the findings with the existing literature (phase two of the research). The used quotes are presented in Appendix VI. Please recall that apart from the Likert scale indications, all measurements contained 13 family executives and 11 nonfamily executives.

4.1 Definition of professionalization

In the literature review many commonalities and differences among scholars were presented, and this is also seen among the executives. The first research phase is within-case analysis to illustrate the differences between family and nonfamily executives on case level. In Appendix III all given definitions of professionalization as stated by the executives are presented. The statements are translated from Dutch to English, and some are shortened and examples are let out to retrieve the essence of the message.

Within-case analysis

Different responses towards the question ‘What is professionalization?’ are given and there are various differences and similarities between family and nonfamily executives. For a few cases differences can be observed. In case four, family executive R#7 views professionalization as adaption towards the market, while nonfamily executive R#8 views professionalization as applying structures and procedures. In case six family executive R#11 does not confirm or realize that the implementation of external managers as elaborated by nonfamily executive R#12 can be seen as professionalization. “It is a wide concept and I think everybody views it differently. But for us it is the process of doing business, not per see professionalization. These are logical things to do, because they are needed.” (R#11, FE). And “Professionalization is the fact that you gain the right knowledge. Having qualified people at the right positions. Our FE missed certain qualities amidst his children, therefore he said that we need external people.” (R#12, NFE). For case eight the family executive refers to the transition from entrepreneurship to structure.

“Professionalization is going from entrepreneurship towards structure and this has to do with

the size of the company.” (R#15, FE). The nonfamily executive refers to efficiency. “I think

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33 professionalization at a factory like this is having efficiency.” (R#16, NFE). For case nine the family executive also mentions the importance of efficiency. “In my opinion professionalization is having KPIs, a distinctive dashboard, process automation, these kind of things are professionalization to generate efficiency.” (R#17, FE). And the nonfamily executive R#18 refers to the right leadership and management style. “I think a business is professional if for every phase of the business you know which style of leadership and management is needed.” (R#18, NFE). Reflecting on the argued professionalization, about half of the family executives conceived the concept of professionalization differently than their nonfamily counterparts.

Between-case analysis

If a between-case comparison is performed the differences between family and nonfamily executives seem to be omitting substantial differences as illustrated in table 4.1.

Total Family executive Nonfamily executive

Container definition 11 6 5

Structure (and standardizing) 11 5 6

Objectifying 8 4 4

Gain knowledge or experience (e.g. NFE) 6 3 3

Delegation 4 3 1

Efficiency 4 2 2

Adapting to the environment 4 3 1

Systems (implementing) 4 3 1

Vision, mission, and strategy 3 1 2

Rules and regulations 2 1 1

Processes (automatic) 2 2 0

Organizing 1 0 1

Table 4.1: Elements of the definition of family business professionalization (Question 3.1)

The question ‘What is professionalization?’ was answered by a variety of answers, including 11 executives who declared that they found professionalization a difficult, vague or broad concept (code 1: container definition). This finding is in line with several scholars who declared that professionalization lacks a singular meaning (Hwang & Powell, 2009; von Nordenflycht, 2010).