Family businesses have unique characteristics. These entities combine two worlds with different principles: the corporate world, which is governed by rationality and procedures, and family relationships, which are influenced by emotions and personal bonds. This contrast is clearly reflected in their organizational governance. On paper, many family businesses appear to be managed formally—complete with organizational charts, official positions, and reporting lines. However, in daily practice, decision-making often follows personal relationships, unwritten authority, and family dynamics. In other words, the organization appears formal on paper, but is very fluid and personal in its implementation.
This phenomenon is not necessarily a weakness. In many situations, it is precisely this flexibility that is the source of family businesses’ agility, loyalty, and long-term vision. However, if not properly regulated, the gap between formal and informal systems can lead to confusion, waste of resources, and potential disputes. Understanding the existence of this dual system is key for leaders, both from within the family and external professionals, in managing the complexities of family businesses.
Formal Structure: Regulations, Positions, and External Recognition
Well-established family businesses generally have a neatly documented organizational framework. The structure chart explains positions such as Chief Executive Officer, Chief Financial Officer, division heads, and managers in various functions. Job descriptions are available, the chain of command is documented, and governance mechanisms—such as a board of directors, special committees, or even a family council—are formally established.
This written structure serves several purposes:
- It provides legitimacy in the eyes of external parties. Financial institutions, investors, regulators, and business partners need clarity regarding who is in charge and who can be held accountable. Neatly organized structural documents reflect a level of professionalism and consistency.
- It regulates operational coordination. As the business grows beyond its initial phase, formally defined roles are necessary to manage increasing complexity.
- It prepares for the succession process. A formal framework is often introduced when preparing for a generational leadership transition, especially when the next generation needs clearer boundaries and space.
On paper, these companies may appear similar to non-family-run corporations. However, this is only the surface layer.
Informal Networks: Relationships, Trust, and Emotional Influence
Behind the organizational chart lies another ecosystem—an informal network formed by family ties, shared history, loyalty, and emotion-based authority. Decisions are not always made in boardrooms according to the chart. Influence may come from senior family members without formal positions, siblings with strong emotional ties, or even non-family executives who have earned the personal trust of the founders.
In practice, patterns such as the following can be observed: employees who contact senior family members directly, without following the official reporting chain; founders who continue to provide informal strategic guidance even after stepping down from their structural positions; younger family members who hold high positions on paper but have limited influence in day-to-day operations; or executives from outside the family who are accountable for their performance in two ways: formally to the company structure and personally to the owner family.
This invisible network has powerful influence because it is built on a foundation of trust, loyalty, and shared history—assets that are often more valuable than formal authority in the context of family businesses.
Why Does Dualism Exist in Family Business Structures?
The coexistence of formal and personal structures is not a coincidence. It arises from several fundamental dynamics.
Family businesses operate in three interrelated spheres. The formal structure exists in the business sphere, but family and ownership systems constantly influence how decisions are made and authority is exercised.
Founders typically build businesses relying on personal networks, instincts, and direct control. These patterns often persist as organizational culture, even after formal mechanisms are implemented.
Family businesses tend to rely on relationships of trust as a foundation, which can speed up decision-making but also reduce reliance on formal hierarchies.
Family ties give rise to a form of emotional authority that can sometimes override authority based on position. Parents, older siblings, or respected relatives can exert significant influence regardless of their formal position in the company.
When the Gap Begins to Show
Problems in family businesses often stem from one source: the gap between what is written in the organizational structure and what actually happens in the field. The wider the gap, the greater the risk.
When actual power no longer aligns with official positions, uncertainty spreads quietly throughout the organization. Employees hesitate—not because they lack competence, but because they no longer know whose authority truly matters. As a result, work can overlap, decisions are delayed, or worst of all—silent conflicts arise.
Competent non-family managers come with the expectation that the system will run as it should. But when important decisions often bypass formal channels, they gradually feel that they are no longer needed.
The founders or previous leaders may no longer sit on the board of directors, but their presence is still felt. The new generation that officially holds the positions finds it difficult to demonstrate their capabilities. Not because they are incapable, but because the stage is not entirely theirs.
Conflicts rarely erupt in the boardroom. But in the midst of informal conversations, in unofficial WhatsApp groups, influence is wielded and decisions are swayed. The problem is that this kind of power is difficult to manage because it is not visible on paper.
Formal systems exist to create consistency. But when informal channels are more dominant, decisions become heavily dependent on who is close to the owner, not who is most competent.
However, This Can Also Be a Strength
Until now, we have tended to view dual structures (formal and informal) as a weakness. In fact, if managed properly, they can become a competitive advantage.
- Personal relationships based on trust often cut through bureaucracy. In many situations, decisions can be made in a matter of hours, rather than weeks.
- Employees in family businesses often feel like part of a large family, not just a number. This sense of belonging cannot be bought with salary alone.
- The pressure to make big profits in a short time is not always a factor in family businesses. They are more free to make long-term decisions because they do not have to respond to market expectations every three months.
- When a crisis hits, genuine informal relationships allow people to work together, even beyond their formal obligations. This is invaluable social capital.
Therefore, the question is not how to eliminate informal structures. That is impossible, and unnecessary. The big question is: how to align them so that they reinforce each other?
The Art of Bridging Two Worlds in a Family Businesses
Long-standing family businesses do not replace family warmth with rigid systems. Instead, they devise ways to allow personal values to coexist with structural order.
Make a mutual agreement: strategic matters are discussed at the boardroom table, family matters in the family forum. If the two continue to be mixed, confusion over authority will arise. The same person can sit in two different realms, but it is important to distinguish when they are speaking as a family member and when as a director. It is unfair to give someone a big responsibility without sufficient authority. Shadow leaders who continue to pull strings from behind will only undermine authority and the system.
Professionalization does not mean eliminating the human side. The system needs to be designed to clarify, not to create suspicion. The goal is structured trust, not oppressive bureaucracy.
It is not enough to simply hand over a position. There is an emotional process that must be gone through. Letting go completely does not mean losing one’s role, but finding a new role as a wise advisor, not a shadow looming over others.
Hidden power becomes destructive because it is invisible. But if it is acknowledged in a healthy way, it can be integrated into the system. Transparency reduces friction.
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