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1999 12: 171Family Business ReviewRik Donckels and Johan Lambrecht

Family Business Research in the Western World?The Re-emergence of Family-Based Enterprises in East Central Europe: What Can Be Learned from

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IntroductionIn this paper, we concentrate on the specific char-acteristics of family businesses as they have beenidentified in research projects in the Westernworld. To do so, we try to give an adequate an-swer to four questions: Is there a specific type ofbehavior in family businesses? Are there specificbarriers to professionalization in family busi-nesses? How can the specific barriers be ex-plained? And finally, can we make concrete sug-gestions for family businesses?

It is our firm conviction that the answers tothese questions can be very instructive to peopleinvolved in family businesses in east central Eu-rope. The answers can provide owners with sometools that can help in the re-emergence of familybusinesses. This is extremely important, since thedevelopment of the owner-managed organizationcan be a major key to successfully negotiating thetransition in east central Europe (Gibb, 1993).In addition, it is likely that most of the emergingsmall- to medium-sized enterprises (SMEs) in

The Re-emergence of Family-BasedEnterprises in East Central Europe:What Can Be Learned from FamilyBusiness Research in the Western World?

Rik Donckels, Johan Lambrecht

We examine to what extent lessons can be drawn from the experiences of family businesses in theWestern world toward the re-emerging entrepreneurship in east central Europe. We conclude thatoften, as it does in the West, the family forms the basis for the creation of new business initiatives inthis region. It is evident that research concerning family businesses in the West can lead to particu-larly relevant insights. The three characteristics that almost always affect every family businessconstitute the cornerstone for the future success.

east central Europe will begin to share the be-havior characteristics of owner-managed firms inthe West.

Where appropriate and possible, we refer toresearch results in east central Europe. However,it should be kept in mind, as Todorov and Kolarov(1995) state, that the number of studies from eastcentral Europe is still small. In addition, the num-ber of securely founded family businesses withlong-term aspirations is, for obvious reasons,rather limited (Román, 1997).

Is There a Specific Type ofBehavior in Family Businesses?Economies in east central Europe are essentiallygrowth-oriented, and family businesses continueto increase their role within these economies(Pistrui, Welsch, & Roberts, 1995).

In Romania, for example, entrepreneurs ap-pear to have definite, well-defined expansionplans for the future (Pistrui, Welsch, & Roberts,

FAMILY BUSINESS REVIEW, vol. XII, no. 2, June 1999 © Family Firm Institute, Inc.



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1997). In Poland, Zapalska (1997) finds that 60%of the growing firms are in the commercializa-tion growth stage. This means that althoughthese are growth firms with the capability of pro-ducing and selling, they are still in the process ofestablishing their positions in the marketplace.

Therefore, we concentrate first on the growthissue in family businesses and then look at someother crucial management functions. Finally, weformulate some general remarks on successionin family businesses. Succession will certainlybegin to be a hot issue in the future for familybusinesses in east central Europe.

GrowthCoping with Growth. Donckels and Hoebeke(1992) study both growth and its consequencesin an inquiry conducted among 1,030 managingdirectors of Belgian businesses with less than 100employees. It is evident that the growth of anenterprise can be measured in various ways. TheDonckels and Hoebeke research shows that 85%of the respondents automatically associatedgrowth with sales turnover. Therefore, this is theconcept of growth that we use for the rest of thissection. We measure the size of the enterpriseson the basis of the number of employees.

Does Growth Really Matter? No less than89% of the respondents believe that growth is acrucial objective for their business.

However, Table 1 shows that both the experi-ence and the expectations of growth are clearlycorrelated to the size of the enterprise: The non-growers are significantly more concentrated inthe class of the smallest companies.

This finding contradicts the so-called Law ofGibrat, according to which growth is a purelystochastic process (Gibrat, 1931; Hay & Morris,1991).

However, we have discovered that the phe-nomenon of growth has been linked to more fac-tors than just size. From Table 2, we learn thatwhether or not the business is owned by a familyalso makes a difference, since family-owned busi-nesses are slightly less growth-oriented.

Table 3 shows that one of the main reasonsfor growth may be that most family businessesinsist on keeping their family character: Theywant ownership and management to stay withinthe family.

Is this phenomenon typical for Belgium? Cer-tainly not. Various recent studies in other coun-tries have come to similar conclusions. We referto the results of a study by Dunn and Hughes(1995) performed in Scotland and Northern Ire-land. These results are summarized in Table 4.

In a study on Italian family businesses,Corbetta (1995) states that:

Entrepreneur-owners also seem to fear thechanges imposed by listing; among these fearsare less freedom in the management of the firmand of corporate setups, and the modification ofthe roles and functions of the governing bodies.Fears also originate from a still insufficient mana-gerial culture among the entrepreneurs; the wide-spread conception of the enterprise as a personalpossession not to be shared with others; and acommunication gap that the external operatorsin charge of promoting policies of opening upthe shareholders’ equity still have not been ableto bridge. These fears are deeply rooted in Italy’s

Table 1: Growth and Size of the Enterprise (N = 1, 030)

Number of employees (row %)1 - 9 10 - 49 50 - 99

Effective growth in the last three years Yes 31.7 41.6 27.3

No 42.6 34.7 22.7

Expected growth in the next three years Yes 31.2 40.3 28.5

No 41.8 39.0 19.2

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culture, and will change only with a slow learn-ing process that must benefit from positive ex-periences of collaboration between family andnonfamily partners that have favored the devel-opment and growth of the firm.

A particularly interesting study by Gallo(1995) of large-scale family businesses in Spainaddresses the problems of growth. Gallo sum-marizes the main causes of growth-connected dif-

ficulties as reluctance to take major economicrisks; a prejudice against association with thirdparties in ownership; difficulties in incorporat-ing new directors; problems with organizationalchanges; and financial pressures.

To safeguard the businesses’ chances of sur-vival and to maintain their dynamism, Gallo(1995) formulates two suggestions: Develop thebusinesses’ ability to adapt to changes in the en-

Table 2: Growth and Family Ownership (Relative Frequencies) (N = 1,030)

Family-owned Non-family-ownedbusinesses businesses

Effective growth in the last three years 74 79

Expected growth in the next three years 71 81

Table 3: Growing SMEs and the Preservation of Family Character(Relative Frequencies) (N = 100, belonging to the sample of 1,030)

Retain ownershipYes No Total

Retain management Yes 65 0 65

No 15 20 35Total 80 20 100

Table 4: Controlling the Family Firm: Preferences and Practices

Scotland (%) Northern Ireland (%)Yes No Yes No

Ownership

Would consider equity finance 40 60 47 53

Family open to discussion of non-family shareholding 55 45 66 34

Wish ownership to remain entirely in family 73 27 62 38

Foresee family relinquishing control in near future 29 71 41 59

Management

Senior management drawn from family-owning firm 89 11 68 32

Employment for family members a main objective 30 70 15 85

Wish to see family retain present level ofmanagement responsibility 82 18 72 28

The Re-emergence of Family-Based Enterprises in East Central Europe:



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vironment and increase the level of reliability forall interested parties, such as shareholders, di-rectors, employees, clients, and suppliers.

According to Gallo (1995), families can imple-ment this second suggestion by maintaining aclear economic rationale, which will enable themto face the pitfalls that frequently appear, such asconfusing ownership with management ability,or postponing succession; by being sufficientlyprepared, in advance, for succession, and dedi-cating the necessary resources for generationalchanges; by clearly stating the rules governingthe relationship between the business and thefamily (and Gallo notes that these rules, ratherthan hindering the necessary adaptation of thebusiness, should promote it by conserving thestrength of each family member); and by report-ing their actions in a complete, prudent and truth-ful manner, demonstrating their intention andcapacity to accurately comply with the previouspoints

The findings of the cited studies, which comefrom several Western European countries, arehighly relevant for the future of the family busi-nesses in east central Europe. For example, re-search in Romania shows that 94% of the 400enterprises surveyed had at least one family mem-ber as an investor in the business, and 9% had atleast one family member working full-time in theenterprise (Pistrui, Welsch, & Roberts, 1995).Studies performed in Poland indicate the extraor-dinary significance of using the founder’s ownfunds (77.4%) and those of family and friends(20.3%) for the establishment and early devel-opment of private businesses (Arendarski,Mroczkowski, & Sood, 1994). Research also findsthat undercapitalization is the most critical prob-lem that affects the growth prospects of owner-managers.

As Erutku and Vallée (1997) state, most en-trepreneurs draw on their immediate families asa source of cheap capital and labor. Todorov andKolarov (1995) observe that in Bulgaria, only avery small number of owners of an enterprise arewilling to share in the duties and responsibilitiesof management.

Crucial Management FunctionsLet us return to Belgium. Using four databasescomprising 4,000 respondents, we comparedfamily and non-family businesses (we define afamily business as one in which the majority ofthe shares are in the hands of one family, and inwhich the general management of the businessalso belongs to the same family). The statisticallysignificant differences are summarized inDonckels and Aerts (1993):

Strategic Behavior. Family businesses differfrom non-family businesses in having less clearanswers to the question of where the businessshould be heading in the next three years, andless often have anything written down on thissubject. Family businesses are less willing to takeserious business/economic risks. They believethat growth is a less important objective, althoughthis does not prevent them being well aware ofthe negative consequences of remaining small.They are less active internationally (for instance,this is expressed by the fact that the share of ex-ports in their total turnover is significantlysmaller) and follow a more traditional marketapproach.

Personnel Affairs. The typical description offamily businesses indicates there is a greater sta-bility factor in the field of employment. As a rule,family enterprises are not forerunners when itcomes to creating employment, but neither dothey lay off easily. This fact is probably connectedto the usually very strong personal ties familybusinesses have with their employees. In familybusinesses the managing director takes a largerpersonal involvement but makes less use of es-tablished procedures and rules (selection crite-ria, remuneration systems, career planning). Del-egation is clearly more difficult in family busi-nesses, and consequently the employees havefewer opportunities to be genuinely involved atmanagement level.

Financial Policies and Financing. A very deli-cate subject, which also gives rise to two typicalcharacteristics of family businesses: In familybusinesses, the heads of SMEs are far more per-sonally involved with the finances than those innon-family businesses (because it’s about their

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own money, of course!). Second, family busi-nesses strongly prefer external financing to theinclusion of non-family shareholders.

View of the Outside World. There are alsotypical differences. For example, doing businesswith large enterprises is much more difficult forfamily businesses than for non-family SMEs. Theheads of family SMEs play a much more impor-tant role personally in contacts with the custom-ers and pay less attention to training, advice, andgathering information from outside sources. Infamily SMEs, institutionalized social consultation(e.g., a works council) appears to be much moreof a barrier to expansion than it is to non-familyowned SMEs.

2. Many of these findings correspond to theconclusions of other research. For example, theEuropean STRATOS project, which studied thebehavior of 1,132 industrial SMEs in eight coun-tries (Austria, Belgium, Finland, France, theNetherlands, Switzerland, the United Kingdom,and the former West Germany), concluded thatfamily SMEs export less, are less involved withsupplying, and collaborate less with other com-panies. They are less open to capital injectionfrom new partners and participation by or creditfrom public authorities. They pay more atten-tion to cash reserves and are significantly morelikely to keep the profits inside the business(Donckels & Fröhlich, 1991).

A study by Harris, Martinez, and Ward (1994)of the literature concerning strategic behavior infamily businesses shows that the element of fam-ily business affects strategy formulation andimplementation. Some of the important charac-teristics of family businesses that influence strat-egy are the business’s “inward” orientation. Thereis great importance attached to family harmony,employee care and loyalty, long-term commit-ment, and generations of leadership. The familybusiness shows slower growth and less participa-tion in global markets; it is less capital-intensiveand has lower costs; and its board has a heavyinfluence on the implementation of planning.

As a last element of comparison, we cite theInterstratos research project. This project con-cerns a longitudinal study on the international-

ization strategies of SMEs in eight Europeancountries.

In a comparison beween family and non-fam-ily businesses, Donckels and Aerts (1998) con-clude that fewer family businesses feature as play-ers on the international scene. Non-family busi-nesses are the ones that call the tune when itcomes to import, export, branch and/or produc-tion plants abroad, obtaining licenses from andgiving licences to foreign companies, and settingup joint ventures with foreign companies. Fortheir import, export, branch and/or productionplants abroad, non-family businesses underlinemore strongly the importance of high-qualitystaff and management. Family businesses are sig-nificantly more concerned with their reputationin import and export. Clearly, innovation is givenfar more attention by non-family businesses thanby family businesses.

When we interpret these findings, we notethat in most family businesses, most of the man-agers have only limited international experience.They are not very integrative and “resist” theincorporation of international activities due tothe novelty it involves (Gallo & Sveen, 1991).

Some Remarks About SuccessionIn an article that surveys scientific research onsuccession, Handler (1994) draws on no less than108 articles by 82 writers. The researcher’s ques-tions and output were impressive indeed. An in-depth analysis of their work reveals that succes-sion revolves around three main themes: Succes-sion as a dynamic process, the role of thefounder(s) or retirer(s), and the point of view ofthe successor(s)

We briefly examine each of these three pointsand illustrate them with material taken from ourown experience as researchers and consultants.

Succession as a Dynamic Process. Except inthe case of a dramatic event, when emergencysuccession arrangements have to be made, hand-ing on the business to the next generation doesnot need to occur overnight. Time plays a veryimportant role in succession, even if it is onlybecause the head of the company gets older while




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the impatience among those of the next genera-tion increases.

We have learned from research and experi-ence that it often takes a long time before thesubject of succession is raised. In Belgium, forexample, research indicates that two thirds of the1,000 SMEs surveyed had not made any prepa-rations for succession (Donckels & Hoebeke,1989). Only in 18.2% of the Belgian cases stud-ied was the successor known. These figures aresignificant, since one third of the Belgian respon-dents were older than 50 and half were at least45 years old.

A study of 35 family businesses in the north-east of England suggests that only about a quar-ter had selected a successor to the present chiefexecutive officer (Kirby & Lee, 1996). About 42%of these English family businesses had no cur-rent plans whatsoever for the transfer of control.The study found no correlation between the sizeor age of the enterprise and their successionpreparations.

According to another survey conducted inmore than 20 countries (Austria, Belgium,Canada, Denmark, Finland, France, Germany,Greece, Indonesia, Ireland, Italy, Malaysia, Nor-way, the Netherlands, the Philippines, Portugal,Spain, Sweden, Switzerland, the United King-dom, and the United States), only 25% of thefamily businesses had formal rules for the nextgeneration’s entry into management (Wagen,1995). The study showed that informal rules ex-isted in 47% of the family businesses, and that38% did not have any rules at all.

We also noticed that the process of succes-sion often stalls at the first step. It is discussedonce, but the bull of succession is never grabbedfirmly by the horns. Working toward successionis often met by much resistance.

It becomes clear that arranging for a succes-sor takes time. This is mainly because so manypeople are involved, each with their own views,objectives, and interests. Each person should al-ways bear in mind that they must seek some formof compromise. Like any other compromise, whatfamily-business owners must devise is a solutionthey can live with, not necessarily one they can

be enthusiastic about. Making succession ar-rangements means that they should be willingand able to practice the art of possibility.

We have learned much about succession fromthe views of 1,000 Belgian heads of SMEs(Donckels & Hoebeke, 1989). We asked themabout the major objectives that they wished toachieve at the end of the succession process, andwhat problems they saw as being part of that pro-cess.

Of their three most important objectives, thefirst is to ensure the continuity of the enterprise.Next, they wish to make a fair arrangement forall the children. Third, they want to keep own-ership and management within the family.

They named four succession problems: esti-mating the value of the enterprise, financing thetake-over, making legal and fiscal arrangements,and coping with emotions.

We have strong reservations about the orderof points in the second list. The fact that emo-tions only came fourth was probably the resultof what the psychologists refer to as a process ofsuppression. Our experience as consultants showsthat family businesses can often be dangerousemotional minefields. If someone does not suc-ceed in clearing that minefield, then the effortsmade in other areas may blow up.

The Role of the Founder(s) or Retirer(s).Many consultants consider the founders andretirers as being identical. In fact, this is oftenincorrect, because there is one specific point onwhich a retiring founder differs considerably froma retirer who did not actually found the com-pany. This is an identification with the company,i.e., the company being central to the life of thefounder. Observation shows that this identifica-tion is almost always weaker among non-found-ing retirers. This phenomenon can be called a“cooling off” of family patterns. Corbetta (1995)describes it as follows:

The founder(s) identify completely withthe business they began and, in the caseof more than one person, are bound bystrong ties of affection, even when con-flicts arise. With the passing of genera-tions it is natural for these affective or

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affinity ties to slacken; the strong iden-tification with the business weakens.

This does not mean the retirers do not iden-tify with the company, only that the degree towhich they do so tends to be less pronounced. Itseems clear that the more the retirer identifieswith the business, the greater the difficulty inhanding it over.

Another important question posed by retirersis, “What am I going to do afterwards? Outsidethe business I have nothing, no hobbies or sociallife. The company has always been my passion.I’m really afraid that I’m going to fall into a verydeep hole.”

Because their task in the context of succes-sion is such a delicate one, we take this opportu-nity to give retirers a helping hand. The follow-ing suggestions might serve as points of refer-ence for the future retirers of newly emergingfamily businesses in east central Europe:

Consider your succession arrangements as themost important investment in your life. Whatthese arrangements involve is taking the rightsteps to make sure that what you have worked sohard to build with your own hands can live on.

Never assume that you have to arrange it allyourself. At difficult moments, it might be advis-able to use a facilitator who could help the pro-cess along by indirectly contacting the partiesinvolved. Such a person must be someone who isaccepted by all those involved and whose abso-lute priority is the continuation of the company.Research shows that this person is often thebusiness’s accountant or banker.

Succession is a subject that needs to be dis-cussed in confidence. In addition, each succes-sion situation is unique, not only because of theindividual characteristics of the business, but es-pecially because of the various individuals in-volved.

Distinguish between succession of ownershipand succession of management. Where succes-sion of ownership is concerned, kinship gives allthe heirs the same rights of ownership, but thisis where the consequences of kinship should end.In management succession, there is really onlyone valid criterion, competence, in the broadest

possible sense of the term.Keep in mind that succession in the company

is only one part of the overall inheritance ar-rangements, but in most cases, it is usually themost important and the most delicate part. Otheraspects of inheritance nevertheless play an essen-tial role. For example, when compensations haveto be found outside the company for certainmembers of the family.

Make sure that you always know exactlywhere you will stand when the arrangementshave been finalized. Agreements should be puton paper concerning two matters: First and fore-most, there should be a clear arrangement aboutyour further involvement in the company. Thisinvolvement should be described exactly and de-fined efficiently.

To define your retirement, there are threequestions you must ask yourself: What will I, theretirer, continue to do after retirement? Underwhat/which plan will I continue to do this? Howlong will I go on doing this?

But this is not where the story ends. Therecan still be a very dangerous sting in the tail. Thisbrings us to the second area for which an agree-ment is necessary, namely for financial securityfor the duration of the retiree’s life.

The Successor’s Point of View. Now we con-sider the second party in the matter, the one(s)who take over the business. We would like to givesuccessors five suggestions:

Try to break the taboo on the succession. Itis not an easy task to raise the subject of suc-cession. Bringing it up often provokes a reac-tion from the older generation, as if you hadasked them to dig their own graves. Keep inmind that many heads of SMEs do not have asuitable alternative occupation. Lack of confi-dence in the successor is another reason forkeeping quiet about it for a while. If you donot succeed in opening up the issue of succes-sion, try to do something about it through anintermediary, for instance, the external accoun-tant, the house banker, or a friendly entrepre-neur. If this discussion is to be a success, thisperson has to have the confidence of all theparties directly concerned.




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Remember that kinship, as such, only givesthe right to ownership. It is often difficult to putthis idea into practice, but it must be done. Neverforget to write down ownership agreementsclearly on paper, make the appropriate numberof copies, and have all the parties sign all the cop-ies, with one copy to each party. This will pre-vent agreements from being disputed afterwards.It is obvious that there is a lot to be settled. Ittakes time.

Always remember that you attract attentionas a family member in the business. There isnothing as stimulating as a family member whopulls his weight, but nothing as dangerous anddisheartening as a family member who takes iteasy, for instance, by not respecting the regula-tions himself and always being late. Negative ex-amples have a negative snowball effect.

As a successor, you will have to exercise a cer-tain authority within the company. Three ele-ments will play an essential role in this: your per-sonality, your competence, and the degree towhich you have proved yourself in the past.

Do not commit yourself before there is a soundagreement on what the preceding generation isgoing to continue doing after the succession. Keepin mind that propositions such as “I will remainavailable as an advisor at all times and for any-thing” are dangerous.

Before you take over, ask yourself these ques-tions: “Do I really want to become an entrepre-neur?” This has to be a conscious choice, andnot something you do just because it’s in the fam-ily tradition. “Am I good entrepreneurial mate-rial?” Just because your father or mother did wellis no guarantee that you will be able to do welltoo. “Do I accept the implications of being anentrepreneur?” The term “implications” coversmany areas, such as taking risks, claiming atten-tion, time management, dedication, income. Andfinally, “Does my social environment accept theimplications of my being an entrepreneur?” Bythis we mean your family or your partner. Youare never alone in taking on a business, and ifyour immediate family is not behind you a thou-sand percent, don’t even start. You absolutelymust have the support of your environment.

Are There Specific Barriers toProfessionalization in FamilyBusinesses?Before we discuss the barriers, we must empha-size that the concept of professionalization cov-ers a wide range of meanings. It concerns bothtechnical skills and the various functional man-agement areas However, because of the natureof the average SME, we emphasizeprofessionalization of management, because mostSMEs certainly have sufficient technical skills.For that matter, these technical advantages areoften the essential cornerstone for the success ofthe SME.

We distinguish four specific barriers:Distorted Perceptions of Family Potential.We

are not talking about underrating the skills offamily members, but about overrating them.What we mean by this can best be illustrated bythe following assertion by an SME expert: “Thereare two kinds of entrepreneurs, those who areconvinced that genius is hereditary, and thosewho do not have children.”

Let us be clear on this matter. Just becausethe parents are successful in business does notmean that their children will also be successful.We realize that this is a delicate point. Still, wethink it is pertinent to emphasize this, becausesome seem to find it very hard to accept this evi-dent but harsh truth.

Sterile Environment for the Available Fam-ily Potential. The key question here is, is the fam-ily environment willing to provide sufficient op-portunities for the expertise that the family mem-bers have? Moreover, it is quite possible that non-family members in the business will also try tokeep family expertise at a distance as much as theycan. That this certainly does not serve the inter-ests of the business does not concern them at all.

Inadequate Structures. The term “structures”might seem a little strong. In fact, we would liketo talk mainly about the inadequate organizationthat afflicts many family SMEs, including: inac-curate or non-existent organization charts thatlack lines of communication; the absence of clearjob descriptions, linked to a lack of clarity in theevaluation and reporting systems; and the lack

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of structurally integrated times for evaluation andconsultation, using an established method of pre-paring for the future on the basis of the past. Thislatter point is painfully illustrated by the manycompanies whose boards of directors only existon paper. Because their boards do not actuallyfunction, these companies lack a vital lever toprofessionalism. For example, research in Polandindicates that most of the Polish owners (79%)do not want to establish formal business controlswithin their firms (Erutku & Vallée, 1997).

Maladjusted Company Culture. Two elementsare essential in avoiding this:

First, there must be no professionalism with-out openness.To insist on settling all importantbusiness matters within the closed family circlepresents a serious impediment to professionalwork. Openness to and involvement of all theavailable expertise are two absolutely essentialconditions for attaining a maximum internal syn-ergy. For that matter, let us never lose sight ofthe fact that the word “team” can be an acronymfor Together Everybody Achieves More!

Second, there must be no professionalism with-out an accounting system. To steer a companysafely past the shoals of economic events, theremust be a strong guideline. A set of sound account-ing principles is an absolute necessity. Every busi-ness should invest in a systematic follow-up, innumbers, of what is happening in the company.Regrettably, we see that many SMEs do not give ahigh priority to such investments.We suggest anattitude adjustment in this area.

How Can the Specific Character ofFamily Business Be Explained?Dyer (1994) concludes that those who specializein describing and explaining how businesses workdid not begin to pay attention to family businessesuntil quite recently. Dyer’s explanation is that clas-sical ideas about family businesses are overloadedwith negative prejudice. Family businesses wereconsidered devoid of all rationality, exhibited ram-pant nepotism, and were founded on pure emo-tion. In short, family businesses are not worthstudying!

However, a certain amount of change has oc-curred recently. The academic world has cometo the conclusion, to its surprise and of coursewith much delay, that family enterprises can infact be an exciting subject for research.They alsorealize that when confronted with the complex-ity of family enterprises, only a multidisciplinaryapproach would suffice for studying and under-standing the phenomenon.

Therefore, we examine the following themes:a complex subject, strong and weak points, threeforms of logic in family businesses.

A Complex Subject. Where does this complex-ity come from? First, of course, it stems fromthe fact that the subject is a business. It goes with-out saying that doing business nowadays is muchmore complex than it was a couple of decadesago.

When we focus on SMEs, we confront sev-eral characteristics inherent to their limited size.These include restricted means (human re-sources, finances, market possibilities), a specificform of organization that often has its own ap-proach to management, an inadequate concernfor long-term policies, a vulnerability toward anumber of factors in the immediate environment(the government, financial institutions, interestgroups, etc.), and so on. However, what we wishto emphasize is the family character of mostSMEs.

The complexity of doing business applies afortiori for economics in transition. This com-plexity is illustrated by a study in Poland, in whichit appears that emerging entrepreneurial firmsin Poland experience more diverse problems thando firms in the West (Zapalska, 1997). The mostimportant constraints on private-sector develop-ment are an inability to raise outside capital, eco-nomic problems, the lack of aid for small busi-nesses, state and local taxes, and recruiting andretaining properly qualified and responsibleworkers.

Strong and Weak Points: In Search of theUnderlying Motif. Large-scale research byDonckels (1996) on the strong and weak pointsof 1,000 family businesses shows that most headsof SMEs stress the following:




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Strong Points:Knowledge and experience: Basic knowledge andknow-how handed down from generation to gen-eration, starting in very early youth:

“I was born right here among these biscuits.”“My brothers and I were born with sawdustbetween our toes.”“I’ve been maneuvring between pots andpans ever since I could crawl.”

In a study in Bulgaria, the entrepreneurs alsoreferred to the experience of the owner/manage-ment team as a main reason for business success(Todorov & Kolarov, 1995). Family businessesin Poland considered as the most important suc-cess factor high quality, which deals of course withknowledge and experience (Welsch, Hills, & Hoy,1995). Finally, in the Ukraine, background, pro-fessional skills, former professional links, andknowledge were cited as success levers (Isakova,1997).

The personal and financial efforts made forthe company: Typical comments are:

“You don’t count your hours in a family business”.“You have to be able to put everything atstake for the business.”“Members of the same family can easily helpeach other out.”

Family business owners in Poland (in their1995 study, Welsch, Hills, and Hoy define “fam-ily business” as one in which a minimum one fam-ily member is employed full-time) say they de-vote more than 65 hours per week to the busi-ness. In the Czech Republic, an entrepreneur andhis family reported that they worked 12 to 18hours a day with no time off on weekends(Benácek & Zemplinerová, 1995).

The owners are often the only people who canshoulder the burden of the small private busi-ness. The reason is that workers lack identifica-tion with their jobs and work environment.Workers are not accustomed to cooperating pro-fessionally in an informal way, and refuse to takerisks, initiative, or personal responsibility in theirwork. The most damaging legacy of the com-munist past is the devastation of the workers’morale. In Hungary, a survey among 33 entre-preneurs showed that the average entrepreneur

works 54 hours per week in the business (Iles &Clarkson, 1996).

Speed in decision-making: Comments include:“We are never slowed down by cumbersomestructures in which various recommenda-tions are needed before arriving at a deci-sion.”“If need be, we can come to a decision dur-ing afternoon tea on Sunday”.“We know each other inside out. And weknow what’s important for each of us. Thisundeniably speeds up the decision-makingprocess.”

Weak Points:Company knowledge is lacking in certain areas:Comments include:

“As a family we cannot handle the situationwithout the help of specialists.”“We are all good technically, but we are weakas far as the company’s finances are con-cerned.”“Everything has become so complex nowa-days. Take environmental legislation forexample, or product liability. That’s reallynot our area; we need others to help us outthere.”

For example, Erutku and Vallée (1997) findthat Polish entrepreneurs lack marketing know-how and are not sufficiently aware of the rolethat marketing can play in a business develop-ment strategy. One reason given to explain thisbehavior is that aggressive marketing may sym-bolize “going public,” breaching the historicaldictate that entrepreneurs operate unobtrusively.Polish family businesses also rank marketing asfirst among desired services (Welsch, Hills, &Hoy, 1995).

Family conflicts in the business. Commentsinclude:

“The succession arrangements are the hard-est for me.”“My mother hoped she could have had mearound for longer and trained me more.”“In the beginning, I used to think I wassmarter than my father.”

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Conflicts between family and business in-terests. Comments include:

“Some of the family want to milk the busi-ness.”“At each annual meeting the tension betweenthe active and sleeping partners runs reallyhigh.”“It is a pity though, that they can’t see thatwhat’s good for the business is also good forthe family.”

What can we conclude from all this? That thehuman factor continually pops up everywhere.But saying this does not mean that we intend tojump on the fashionable bandwagon of “humanresources management” (HRM). Our conclusionhas been forced on us by the SMEs themselves.A family business is a microcosm in which themain elements are people.

Moreover—and this must also be furtherexplained from two distinct points of view—it would be incorrect to assume that only fam-ily members play leading roles. Key positionsin many SMEs are often held by outsiders.Second, we assert that it would be a mistaketo assume that family members should by defi-nition play the major parts in the managementand daily running of a company. As we men-tioned earlier, competence should be the ba-sic criterion, but in a family business, compe-tence is not sufficient. The competent familymember not only has to be recognized, butthe head of the SME should also consistentlyact on this knowledge and place this personin an appropriate position of responsibility.

Emotional factors often prevent direct action.A motivated, third-generation potential succes-sor expressed his concern on this matter, saying,

“Can we combine what I want and what Iam capable of with what would be accept-able for the other members of the family?”

This is an important question, and we wouldlike to insist that the second part in particularshould not be overlooked.

Three Forms of Logic in Family Businesses.All we have discussed so far allows us to clearlystate that three forms of logic are often interwo-ven in family business:

The logic of business economics. This approachgives absolute priority to company interests. Theinterests of the family and of each individual areconsidered subordinate on principle. In this ap-proach, the handbook on economics is appliedto the letter.

The logic of family. This form of logic canimply that family interests can supersede what isimportant for the company. This can result in a“milk-cow” situation with all its consequences.

It can also be understood in a second sense,where role patterns in the family are carried overto the business. This can involve, for example, akind of primogeniture. In this sense, the eldestare destined to run the family business in the fu-ture, whatever their level of competence or ca-pability might be.

The third logic concerns agreements madewithin the family. Examples of this are:

“My brother and I each have two children,but we have already agreed that only onefrom each family will join the business.”“In our family we hold strictly to the agree-ment that none of the daughters or daugh-ters-in-law can join the business.”

The logic of emotion: We have repeatedlynoticed that emotions often win the day. In say-ing this, we expose the most vulnerable side offamily business. Therefore it is little wonder thata retirer was greatly concerned, and asked, “Arewe really doing our children a favor by lettingthem take over the business?” Once again, this isa very pertinent question and not an easy one toanswer.

Are There Concrete SuggestionsTo Be Made?In this section, we strongly emphasize the im-portant role that can be played by a familycharter, and the possibilities of working withoutsiders.

Family Charter. We answer three questions:What is a family charter? Why is it necessary?What might its contents be?

What is a family charter? A family charter isa document that defines the rights and obliga-




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tions of the family members who are directly orindirectly involved with the family business.

This document is signed by all parties. It rep-resents an important moral commitment of in-dividuals toward both one another and towardthe business. To make the agreements and ruleslegally enforceable, we recommend that the con-tents of the family charter be incorporated intothe company statutes.

Why is a charter necessary? Let us start withan example of a situation that we have witnessedrepeatedly. Quite often, serious problems arisein family businesses because of incidents or mat-ters that appear to be mere trifles to more objec-tive outsiders. However, we must not lose sightof the fact that these are often matters with aheavy emotional charge, mortgaged by previousevents either within or outside the business, forinstance, in the family circle.

A well-considered family charter can helpto remove the many small fuses from the emo-tional time-bomb. It is therefore important todo preventive work: Prevention is better thancure, and proactive behavior must be preferredto reactive.

What might the charter’s contents be? Webelieve it is important to give the family char-ter a definite structure. The following is an ex-ample of how this can be done, using a four-part structure.

General principles. For example, these mightinclude the dicta that company interests mustoverrule personal interests; that family membersmust accept the implications of entrepreneurship,such as dedication, the willingness to rotate jobs,and the willingness to take additional educationand training; and that equality concerning kin-ship does not necessarily imply equal involvementin the business

Requirements for being actively involved in thebusiness as a member of the family might include,for instance, the number of persons per branchof the family, level of education, previous experi-ence outside the family business. Family mem-bers should accept the idea that no vacancies willbe created just because a member of the familyhappens to enter the labor market, but that hir-

ing awill be exclusively the function of the needsof the business.

Salaries will be determined on the basis of re-sponsibility in the company, not on the basis ofkinship.

Conditions will be created which family mem-bers must fulfill to be able to get a managementfunction.

Practical agreements. These might includethe establishment of salary and pay scale forfamily members; the clear positioning of themembers of the family in the organizationchart, with clearly defined job descriptions andreporting positions; the establishment of struc-tured deliberation and systematic communica-tion between the members of the family, andof an evaluation procedure for family members(preferably with an objectifying external input).

Fringe Benefits. The entrepreneur might askwhy we assign a separate heading to each of thesebenefits. There are two reasons: First of all, thisis a very explosive matter, requiring special at-tention precisely because it is so dangerous.Moreover, business owners must make allowancefor the fact that silent partners quite often layclaims to such benefits.

Examples:• The car problem. (Who gets a company

car? What type? When to replace? Howoften can it be available for private use?)

• The possibility that a business playsbanker for the rest of the family. (Whatare the amounts that can be borrowed?

• For what purposes? What is the interest?Is there a due date for settlement?)

• Purchase of products from the business.(For whom? What is the discount? Whatare the terms of payment?)

Rules for decision-making. A dangerous diseasethat threatens many family businesses is the onecaused by the lack of decision procedures. On thistoo, the family charter should include an agreement.When there is no agreement, there is a double risk:Decisions already taken may be questioned againand again, or positions taken up earlier may be re-tracted. As a consequence, the business inevitablystarts to drift. That is why it is so important that

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the family charter states the obligation of the fam-ily members to strictly follow the rules for deci-sion-making.

Working with OutsidersWe examine two forms of collaboration withpeople who do not belong to the family, as mem-bers of the board of directors on the one hand,and as consultants on the other.

Non-Family Directors. We present two find-ings that may at first sight seem extraordinary.First, we find that in many Western EuropeanSMEs, the boards of directors do not function atall. Although most countries legally prescribe theestablishment of boards, boards often performpoorly in their function as a leading and control-ling force.

The composition of the board of directorsleads to a second striking discovery: The peopleon the board are very often the same people whorun the business on a daily basis. If the directorsboth lead and control themselves, this can presenta significant danger: Everything is kept withinthe internal family circle, which usually leads toa family-bound company blindness.

We recommend the introduction of an exter-nal view into the board of directors. However,research shows that doing this is not at all simple.Schwartz and Barnes (1991) formulate the fol-lowing conditions as the basis for a successfulintroduction of outside directors:

There must be an honest desire on the part ofthe CEO, and preferably of family members aswell, for an outside board with open communi-cation.

There should be a selection process that seeksand assures the choice of competent outsiders.

There must be realistic shared expectationsabout the contributions that outside directors canmake.

Our own practical experience in Belgium in-dicates that the choice of outside directors mustbe based primarily on their competence and ex-perience.

First of all, the directors must be people whoknow very well what it means to do business and

whose past performance gives them the neces-sary prestige in the eyes of the family. It is wrongto begin with the assumption that directors mustbe familiar with the sector of the business inwhich they become a director.

There must be an attempt to reach a familyconsensus concerning the individuals who aretaken on as outside directors. Good outside di-rectors will never accept being considered themouthpiece of a part of the family or of one mem-ber of the family in particular. For outside direc-tors, the interests of the business are the onlyacceptable point of departure. Please note thatwe have been speaking of directors, that is, inthe plural. In our opinion, it is quite pointlessfor a non-family member to join a board of di-rectors that otherwise consists entirely of familymembers. The outsider input must have a mini-mum of critical mass.

The outside director must be a real director,with the same rights and obligations as the fam-ily member-director. Some family members havea problem with this, especially when it concernsaccessibility to company information or decision-making authority on the board of directors. Onthe board, all directors must be on an absolutelyequal footing. There must not be any distinctionbetween family and non-family directors, excepton very rare, exceptional decisions. The dismissalof a family member-director from the business isan example of a very delicate matter to whichspecial rules apply.

It can be beneficial to have an outside direc-tor to chair the board of directors. This increasesthe chances of a more objective process. Thischairman then has a threefold responsibility:drawing up the agenda; chairing the meeting,taking care that it follows the agenda and thateveryone is given sufficient opportunity to statetheir views; and seeing that the minutes are ac-curately reported.

To function well, the first meeting must setdown internal regulations, establishing the rulesand decision procedures.

External Consultants. Jurists, fiscal experts,business economists, psychologists, and therapistshave begun to see family businesses as a target




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group, but so far, family SMEs have only foundthe way to such external support on a limitedbasis.

This is certainly the case in east central Eu-rope. In Romania, for example, researchers foundthat the five main sources of advice were busi-ness associate, spouse, partners, collaborator, andclosest friend (Pistrui, Welsch, & Roberts, 1995).In Poland, too, entrepreneurs see no benefits andlarge costs associated with assistance programs.They prefer to rely on friends, relatives, and otherbusiness owners to gather the information theyneed (Erutku & Vallée, 1997). Finally, in theUkraine, research indicates that even if entrepre-neurs do know the business service providers,they do not necessarily use their service (Klochko& Isakova, 1996). Only one third of businessessurveyed used the consulting service.

External consultants and family businesseshave difficulty working together, as there are anumber of pitfalls:

SME managers cite the following reasons fornot working with consultants (Ettinger, 1991):

“All that costs far too much.”“That kind of thing is good for large busi-nesses, but not for SMEs.”“The consultant knows nothing about mysector. Besides, when l need advice, l can con-sult my accountant.”“Those things are usually so confidential thatwe do not wish to put them to unknown thirdparties.”“I am quite willing, but the family will nothear of it.”“It will take too much time and besides, Ihave heard a lot of negative stories aboutconsultants.”

In the Ukraine, most small entrepreneurs donot apply for assistance by consultants, partlybecause of the very high prices (Klochko &Isakova, 1996). For example, a one-hour consul-tation with a lawyer costs anywhere from a fewdollars to US$200.

The practices of the consultants themselvescan be discouraging. Their approach and salesmethods are sometimes too aggressive. Manyconsultants are neither able nor willing to adapt

to the ways of living and thinking, and to the ex-perience of SME managers. Some consultants donot fully realize that trust is of the utmost im-portance. That is precisely why the enlistmentof younger colleagues is usually not valued inSME circles. (In their 1996 study, Klochko andIsakova show that this point is also valid for theUkraine. Service providers there are not small-business oriented, because they have to servelarge solvent enterprises, joint ventures, banks,and the like to survive and grow).

Consultants’ reports are usually too volumi-nous and indigestible for SME managers. Fur-thermore, after the consultant hands in the re-port, the SME is usually left to its fate, becausethere is no provision for following up the practi-cal application in the field.

How do family SMEs respond to their expe-rience of collaboration with consultants? We givea Belgian and an American answer. An enquiryamong 900 Belgian managing directors yieldedthe following opinions (Donckels, 1992):

Positive Experiences:“I am very satisfied with my external ad-visers. When you ask a question, they don’tbeat around the bush. My advisers reallyknow what they’re talking about.”“I always work with the same people, so thatthey know the firm through and through.This greatly increases the value of their ad-vice.”“Thanks to talks with your adviser, you starthaving a lot of new questions yourself. Thisnaturally leads to a better insight.”

Negative Experiences:“My accountant knows a lot about accounts,but he is clearly lacking when he has to giveme fiscal advice.”“One does learn a bit, but the price you haveto pay for it is sometimes exaggerated.”“Some advisers have a lack of commitmentto solving a problem in the short term. Youjust can’t accept this as an entrepreneur.”

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SME heads themselves gave a number of tipson the correct way to work with advisers:

“I think it is dangerous when aconsultancy firm comes knocking on my doorwith an offer, without commitments, toanalyse the company in order to increase pro-ductivity and profitability. It is the entre-preneur himself who should take the initia-tive. It is best to talk to colleagues first, tofind out where you can get help. Accordingto me, you have to have a clear agreementon the extent of the problem. On his side,the adviser has to draw up a schedule andput a price-tag on the project. Clear agree-ments will give the best results here.”

“Good advice is only possible on conditionthat the question is posed correctly. What isit exactly you want to know as an entrepre-neur? If necessary, the adviser himself mustbe able to discover the right question.”

”An adviser must restrict himself to giv-ing advice. You’re backing the wrong horseif you assume that the adviser is also goingto do it for you. The decisions must be takenby yourself as an entrepreneur. You have todecide on what is feasible and what is not.”

“When you work with several advisers,you run the risk of being given contradic-tory advice. It is better to work with onlyone adviser for each branch of the business

for which you are seeking help.”“It is the entrepreneur who leads the en-

terprise and succeeds, with the help of theadviser. It is not the adviser who acciden-tally meets an entrepreneur, who is respon-sible for the success of the business. You as anentrepreneur have to be made of the rightstuff. Alas, there are some who take thingstoo lightly and put the blame for their fail-ure on the environment or on the adviser.You have to be tough to succeed in business.An adviser can be of help for certain prob-lems, but on its own it is certainly notenough.”

Two studies in the United States, which wesummarize in Table 5, offer a concrete view onthe issues connected to consulting in family busi-nesses (Upton, Vinton, Seaman, & Moore, 1993).

It is certainly no accident that succession andthe relation between family and business are topof the list.

Concerning the collaboration with consult-ants, we would like to add the following:

In family SMEs, the consultant is usually ageneralist who works very closely with the man-aging director. It is impossible for the consultancyto function well without a sound relationship oftrust. This confidence must be based on a highdegree of mutual openness:

The head of the SME must be willing to pro-

Table 5: Issues Confronting Family Business Practitioners

Study 1 (1990, N = 381) Study 2 (1991, N = 105)

-Succession planning -Leadership

-Interface of family and business -Interpersonal conflict

-Management effectiveness -Family/Business goal conflict

-Enhancing survival, regeneration and growth -Transfer of ownership

-Strategic planning -Delegation

-Roles and role transition -Tax planning

-Entry of new family members into business -Cash flow

-Diagnosis and change efforts -Undercapitalization

-Financial, trust and estate planning -Lack of customer demand




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vide all useful information, so that the consult-ant can form as clear an idea of the situation aspossible.

The adviser should be completely candid ingiving his opinions: Playing hide-and-seek ben-efits no one. Well-balanced advice can never bebased exclusively on what the managing directorsays. All members of the family must be giventhe opportunity to air their views. The consult-ant must insist on this.

If a contract is concluded with a consultant,then the following points must be kept in mind:The objective of the assignment, the methodused, and the timing; agreements on fees andexpenses; the responsibilities of the consultant(confidential treatment of information, no con-flicts of interest, etc.; and the way in which thereport will be made available. The contractshould also stipulate if the consultant will be al-lowed to use the firm as a reference to third par-ties, the conditions of discharge of contract, andconcerning legal settlement in case of dispute.

Before we close, we present ten questions onwhich to reflect, questions that every family busi-ness should ask itself before hiring a consultant(Ettinger, 1991):

1. Are there objective reasons for hiring aconsultant?

2. Have we stated clearly what our practi-cal objectives are for taking this advice?

3. Will we be objective in our choice of theconsultant?

4. Are we really willing to change if it isnecessary?

5. Is it possible, and are we willing, to giveenough time to this consultant?

6. Have we convinced ourselves that wecannot withhold any useful informationfrom the consultant?

7. Are our expectations realistic?8. Are we willing to act?9. Do we want to remain free?10. Do we wish to work with a new partner

in our business?

Summary and ConclusionIn this article, we have explained the specific typeof behavior in family businesses. We have illus-trated this by treating the topics of growth, cru-cial management functions, and succession.

We have showed that the majority of familybusinesses feel very strongly about growth, whichthey define as an increase in sales turnover.

However, the majority also insists on keepingownership and management within the family. Itis reasonable to assume that this preference is asvalid in east central Europe as it is anywhere else.Research in several central and Eastern Europeancountries shows that the immediate family is themost important source of labor and capital forthe establishment and development of privatebusinesses. In Bulgaria, studies find that the ma-jority of enterprise owners are not willing toshare the management. The analysis of crucialmanagement functions, such as strategic behav-ior, personnel affairs, financial policies and fi-nancing, and view of the outside world, show thatfamily businesses differ from non-family busi-nesses.

We believe that succession will be a hot issuefor the future in Central and Eastern Europeanfamily businesses. We must remember first of allthat succession is a dynamic process. This meansthat it often takes a long time before the subjectis raised, and that arranging for a successor takestime. We have also pointed at the crucial role ofthe founder(s) or retirer(s) and at the successor’spoint of view.

We explained the specific type of behavior infamily businesses, then mapped the specific bar-riers to professionalization in family businesses.These barriers pertain to the distorted percep-tion of family potential, the sterile environmentfor the available family potential, the inadequatestructures, and the maladjusted company culture.

Next, we studied how the specific characterof family businesses can be explained.

First, we noted that it is a complex subject,which stems to a large extent from the fact thatdoing business nowadays is much more complexthan before. This is a fortiori the case for econo-mies in transition.

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Second, on the one hand, family businesseshave pronounced strong points, such as knowl-edge and experience, personal and financial ef-forts made for the company, and speed in deci-sion making. These strong points have also beenobserved in family businesses in east central Eu-rope. On the other hand, family businesses havetheir weak points. We refer to the lack of com-pany knowledge in certain areas, such as marketknowledge for central and Eastern Europeanbusinesses, family conflicts in the business, andconflicts between family and business interests.It is clear that the specific character of familybusinesses is defined by the interrelation of thelogic of business economics, the family logic, andthe logic of emotion.

Finally, we made concrete suggestions, givingattention to the important role of a family char-ter and to the possibilities of working with out-siders.

To conclude, we would like to relate an eter-nal truth. A royal prince once put the followingquestion to the Greek mathematician Pythagoras:“Is there not a slightly easier way for a prince tolearn this difficult mathematics?” As can be ex-pected from a mathematician, Pythagoras’s an-swer was unequivocal and terse: “There is noroyal way!”

For family businesses, there is no royal wayleading to the next millennium. They will haveto work hard. If all those concerned are well awareof that, then they stand a very good chance ofsuccess.

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Rik Donckels is professor at the K. U. Brussels and honorary director of the Small Business Research Institute.Johan Lambrecht is a former senior researcher at the Small Business Research Institute and employed by theArtesia Bank.

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