HR in Family Business Growth

ISB’s Kavil Ramachandran, along with co-author Sanjay Paul Antony, recommend four roles that HR leaders can assume when a family-owned firm steps into formal management.

What happens when the founders of a family business transfer leadership, and the once informal, close-knit management suddenly must function like a professionally managed organisation?

This is more than just a procedural change for family businesses; it means building a company that operates smoothly without the family-owners exercising unrestricted control over the firm.

In this process, one of the biggest shifts they go through is ‘institutionalisation’ - the stage where the organisation matures and develops a distinct identity. As this transformation happens, founders of the family business gradually lose their ability to directly influence organisational outcomes.

But who is responsible for making this shift effective, efficient and smooth during this critical transition? The HR leaders.

In family-owned firms, it is important for HR to understand the governance practices, philosophy, and values of the promoter family to formulate the right policies and practices for the organisation. Beyond just hiring talent, HR must continually shape and define the core values that set the organisation apart.

In his study, ISB faculty Kavil Ramachandran points out that most family businesses dream of a legacy that outlives generations. But the creation of such a legacy is more than a dream - it is an arduous journey undertaken by HR professionals.

This is where the researcher’s '4P model' serves as a practical guide for HR leaders. It explains how and when they can take on four critical roles - Protector, Process Specialist, Proponent, and Partner - at different stages of professionalising family businesses, depending on the level of governance in the family and the business.

Here’s a breakdown of each:

1. Protector (Low business governance and low family governance): In organisations where both family and business governance are weak, the focus of the HR leader should be on meeting regulatory requirements, including payroll management and legal compliance. At the same time, they must protect the family from potential legal pitfalls. In these early-stage businesses, there is no documented HR strategy, and few talent processes. The HR leader could be a trusted family insider rather than a seasoned professional, due to the lack of centralised HR function. It is essentially firefighting while playing the role of a protector.
2. Process specialist (High business governance and low family governance): When business governance is strong, but family governance is weak, HR has to play a more structured role, ensuring the company follows set processes. The focus should be on building HR expertise and standardising practices like hiring, training, workforce planning, and compensation. While HR systems are well-established, the challenge is to keep improving these processes and to insulate the business from poor family governance.
3. Proponent (Low business governance and high family governance): When family governance is strong, but business governance is lacking, HR has to assume the role of a change agent. In this case, the family is beginning to see the importance of better business governance and is open to improvements. This makes HR crucial in areas like training and talent management. At this stage, HR starts to influence business strategy by focusing on employee development and skills. As a "proponent of change," HR helps the company attract talent by aligning employee benefits with local needs.
4. Partner (High business governance and high family governance): In the most evolved family businesses with strong business and family governance, HR has to take on a strategic role, closely working with owners and top executives. They act as the guardian of the company’s culture and values and work towards optimising the workforce and using digital analytics to guide decisions. Online HR systems are fully integrated with business systems, allowing for informed decision-making. In these mature organisations, HR is a key partner in driving continuous improvement and adapting to evolving business needs, playing a major role in building the institution.

Professor Ramachandran recommends that HR leaders act as an interface between the family and business, distilling values and beliefs into tangible organisational frameworks. As the primary conduit of these values, HR must create systems that make them core elements of the business.

Author: ISB Editorial Team