Leadership Owner Issues Article

The Owner-Operator Culture: How it persists and when it should change

By Marion McCollom Hampton

David Stone founded his manufacturing business MidWest Casting* in the 1970s. For years, decisions in all areas revolved around David, a self-made, hands-on manager who walked through the foundries on a weekly basis. David was what we call an “owner-operator,” a founder (or successor) who not only owns and controls a business but devotes his life to running it. Even when such a founder passes the business down to the next generation, the owner-operator culture can last across generations, as the business grows and the Next Generation(s) take over. But that’s not necessarily a good thing. The persistence of the cultural norms that helped the fully engaged owner succeed can become a significant challenge when the business and ownership become more complex. When a business becomes multi-generational, the kind of “hands on” leadership culture that helped the original founder-operator become so successful can create a drag on growth, a roadblock to strong governance, and a source of conflict among the family owner group.

Many family-owned business leaders default to assuming that the only way to be a good owner, is to also run the company. This means the next generation has to be prepared to step up and lead. But that’s not always the best strategy.

There are pros and cons to an owner-operator culture. Most successful business owners we know have been able to hand off day-to-day management to professionals – and changed the culture of ownership and leadership – while still being actively engaged as owners. Here’s how to know if it’s time to revisit your assumptions about how important it is to keep the strong owner-operator culture alive.

The Owner-Operator Culture

David was the quintessential owner-operator: he rolled up his sleeves and got involved in the details. He was able to do this because he founded the business and knew every aspect of operations. (A note: not all owner-operators are founders – this mentality is also found in successors of any family business who dive in to significantly grow or change the business.) A driving belief in this culture is the core assumption that owner-operators must know every detail of the business in order to be effective leaders and owners.

But this unqualified conviction can lead to a narrow view of what being a good owner means. In our work with family businesses, we often see first- or second-generation owners struggle when Next Generation family members don’t want to join the business. The owner-operator culture leaves no room for the idea that these presumably competent, engaged individuals can add value through board or owner roles. In many cases, they are viewed as “free riders” who receive “mailbox money.” Every entrepreneur we know wrestles with this issue as they decide the future trajectory of the business they have worked so hard to build.

Owner-operators are central to decision-making in the business; very little happens without their input (at a minimum) and usually without their OK. Because of the way they hold control, owner-operators dominate management, the board, and owner decisions, even when governance documents or legal structures give some authority to others.

Of course, this describes most successful entrepreneurs. After all, the business is more or less their “baby.” But where this “passion” can turn into a “roadblock” is in how they define what constitutes good management and good stewardship as an owner: these assumptions form the framework of what we are calling the “owner-operator culture.”

The Impact of the Owner-Operator Culture

The value placed on direct owner involvement in the business and in decision-making often carries through the organization and across generations and has both positive and negative effects. For example, David’s son Ben came into the business after college and learned the business from the ground up. His younger brother Sam followed the same route. The brothers were convinced that the owner-operator mentality was the “right way to do things.” They replicated their father’s decision-model and involved themselves in all the details. Employees used to joke that the brothers were “joined at the hip” as they took all meetings and made all decisions together.

However, as their father aged, the brothers began to experience the challenges of the owner-operator model and, predictably, those challenges first showed up in the family. Their younger sister and brother were smart and hard-working but had never been interested in working in the business. When the time came for estate planning, David awarded ownership of the company to his two children working in the business. He and his wife planned to leave comparable liquid assets to the two who were not. His philosophy: “No free riders.”

But Ben and Sam’s siblings did not see why they should not also be owners of the business, an option their father and brothers at first did not entertain. Over time, an unpleasant “insiders vs outsiders” dynamic developed in the family, where those not in the business felt devalued and left out and extended family meals became uncomfortable. Finally, David’s wife Jenn declared there would be no more talk about business at the table.

Jenn perceived this tension acutely and challenged David: why are two of our children more important than the other two? As they talked, David realized that his antipathy to “passive” ownership came from his own struggle to start the business: he had put all his and Jenn’s assets on the line and borrowed much more than they could afford. He could not see why those who didn’t “add value” to the company should get a benefit from it.

Jenn was up to the task: why shouldn’t all our children benefit from what you built? And if you link ownership to working in the business, aren’t you pressuring them into careers that they might not be fit for or interested in? And what about our daughter, who has a business degree and could be a board member but is out of the workforce now because she wants to be the primary caregiver for her children while they are young?

The dynamic in Jenn and David’s family is typical of the challenges that spill into the family from an owner-operator culture. Parental approval is associated with working in the business, and ownership is seen as a benefit of employment rather than as a reward and responsibility in its own right.

The Pros and Cons of the Owner-Operator Culture

This story illustrates what can happen in business families when the owner-operator culture is infused into the family arena. In the business arena, this culture has some clear positives – at least for a while. When the business is small, the owner-operator culture allows for nimble and opportunistic decision-making. The driven, hands-on approach imbues a sense of urgency into management and company operations. And the culture generates commitment to the owner-operator and the family, as well as to the company. In one large fifth-generation family business we know, where the owner-operator culture has persisted, employees treat family owners like royalty and cherish opportunities to meet and speak with them.

However, the downsides of the culture can become apparent as the business grows and becomes more successful.

Part of the problem is that many owner-operators simply assume that one person always needs to be in control of management and ownership. When there are multiple members of the Next Generation, this model can become cumbersome and unworkable.

After a decade or more of being “joined at the hip,” sons Ben and Sam wanted more autonomy from each other – and from Dad. They moved into leadership positions in separate areas of the business.

They also recognized that the business would soon outgrow David’s owner-operator management model – he needed to hire professional managers and develop decision protocols that would allow him to keep control of essential decisions but delegate the rest. They needed to empower a board to make some strategic decisions. At first, convincing David to do this was difficult – their father was not ready to give up control. Eventually, however, David’s health forced the issue: a heart attack put Ben and Sam at the helm, and they quickly built a strong management team who would not automatically say “yes” to them. They brought in qualified independent directors. They could see that an inflexible owner-operator mentality would constrain the company’s ability to grow and evolve in complex and necessary ways.

Thanks to Jenn’s advocacy, David eventually did give ownership to all four of his children, with Ben and Sam getting a majority of the nonvoting shares (30% each vs 20% each for their two siblings) and control of the voting shares. Having experienced the “revolution” in their nuclear family, the older brothers understood that, as majority owners, they would face unneeded tensions if they did not provide their siblings information about the business and give them voice into the highest-level choices (acquisitions, debt levels).

Letting Go of the Owner-Operator Culture

If you are an owner-operator, or the successor to one, the idea of changing this strong culture can be daunting. How can the owner-operator culture evolve to meet the needs of the next generations of family managers and owners? It’s a dilemma that virtually every entrepreneurial business will face some point. The key is to understand that there is a choice, but it must be thought through.

Ben and Sam knew that dramatic change was unrealistic; instead, they sought to build on the strengths of the culture but also to let it evolve. By encouraging delegation to experienced executives in a well-structured management team, they kept control of major decisions but allowed the company to benefit from diverse professional experience. They encouraged their managers to institute decision processes and reporting systems that aligned with the complexity and technical needs of the business.

By strengthening the board, they found themselves taking a higher-level perspective on the business. Management dashboards and strong reporting systems meant that they did not have to be in the weeds, and that they and the board could focus on longer term strategic issues.

Sometimes change will start in the family: at some point in every family business generational transition, there will be accomplished and capable children who are not interested in working in the business. This can be the starting point for a change in ownership model that can later lead to a change in the board (the owners will need more guidance), which can lead to changes in management (professional board members expose the owner-operator to more effective management and decision-making techniques).

By focusing on the family first, owner-operators and their spouses can begin conversations that allow the family culture to change.

Communicating to the next generation that you value them equally can open up conversations about what is valuable, about using wealth purposefully, and about key family values. Cross-generational conversations about wealth can build understanding about why generations have different assumptions about the role of money in their lives, as David and his children did.

But sometimes the business itself will become the place where the cultural evolution starts. When the company starts to outgrow the founder’s management skills, some owner-operators realize that they are a bottleneck. For their company to succeed, they have to delegate and professionalize management. Letting go of some decisions does not mean that everything has to change: some elements of the owner-operator culture can flourish – the sense that the buck stops with the owners, that their values will drive the board and the business, and that the family has a strong commitment to the employees.

The owner-operator culture can be preserved and modified in a way that allows a business to continue to grow and thrive and that keeps families unified. Clear values, hard work, and entrepreneurialism can spark the next generations of owners inside, and outside, of the business to contribute to society, create value, and innovate. The strongest elements of the owner-operator legacy can continue to guide the family business into the future.

*Names and identifying details have been changed.