Reprinted from Turf Magazine
Family businesses, for the purposes of this article, are defined as any business with two or more family members of different generations or branches working in the business or owning the business. .
Unlike businesses in general, family businesses, in addition to managing the usual business challenges, need to manage family interactions as well. Should both of the children in a family be given the opportunity to work in the business? Who should own shares in the family business? Given that almost 80% of all businesses fail within the first four years, adding family dynamics into the mix does not improve this outcome. In fact, two-thirds of family businesses that are initially successful do not survive passage to a second generation.
Family businesses fail for the following reasons:
1. The failure to deal with family issues on a timely and appropriate manner.
2. The failure to properly prepare for and carry out a generational succession plan.
3. The unfair treatment of family members not working in the business.
4. Sibling or cousin rivalries.
5. Gender issues-the frequent inequitable opportunities and treatment of the women in the family.
6. The inappropriateness of a patriarchal/hierarchical management style in addressing family business matters.
7. Inappropriate family values-self-interest and greed overruling family harmony, fairness, and good stewardship.
Being the family business leader is difficult. Not only does one have to manage the business but also, it is necessary to skillfully manage the family’s involvement in and with the business. These are separate, but overlapping roles. This article cannot answer all of these questions but outlines some of the key issues and a proactive process for addressing them. Family members can take on different roles in the family business, employees, shareholders, or both.
Deny or Avoid Family Issues at Your Peril
Too many family businesses leaders avoid, delay or deny that family issues are relevant to the business, However, every family business has family issues that can adversely affect business operations. Family issues arise frequently as families age and grow. Life events such as having children, college, marriage, divorce, and retirement all change people’s financial needs and their views of the family business. Good family business leaders understand this and accept the fact that changing family needs affect family members’ relationship to the business and that implementing procedures and processes to foster debate of the issues before they get out of hand is critical, whether the potential impact is merely hurt feelings or potential litigation.
The Goals of a Family Business
Every family should reach a consensus on what the fundamental purpose of the family business is. This general goal is not conceptually difficult. For most, the purpose is to produce wealth, while maintaining family harmony. This goal must be viewed from two perspectives: What is best for the business? What is best for the family? In the best cases, these two perspectives are in alignment. But, this is not always the case.
My advise to families is the following:
Do not let the business destroy the family
Do not let the family destroy the business.
A Proactive Process
The central question for the continued success of a family business is how to increase the probability of accomplishing the twin goals of wealth with family harmony.
This should be done proactively. Do not wait for problems to materialize. After the family business founder and CEO dies should not be the first consideration of a succession plan. Likewise, after divorce proceedings are filed, should not be the time to initially address how to handle the continued employment of a soon-to-be former son-in-law. The proactive process must anticipate a wide range of predictable family challenges by:
1. Frequently educating family members about the business and its financial capabilities and challenges.
2. Giving family members the means to be heard-to raise concerns and ask questions by providing frequent opportunities for open, respectful discussions.
3. Provide the opportunity and time for the family to reach decisions.
A Good Family Process A Bad Family Process
Information Transparency Information on a Need to
Respectful/Open Collaborative Patriarchal/Hierarchal
Management Style Management Style
Frequent Communications Communications When
Fairness and Consistency Ad Hoc
A good process is inclusive of all adult family shareholders. This also includes their spouses, and, yes, families should begin educating younger shareholders in their mid-teens about the family business.
Many families find it helpful to have an independent third party facilitate the implementation of a proactive process.
Transparency and Frequency of Communications
All adult family shareholders should have full access to all family business financials, including all financial dealings between the business and any family member. Transparency means open books.
It takes time to educate the family about the business. How often should family members meet? I recommend:
1. Quarterly two-way communications with all family shareholders discussing business, financial and family issues.
2. Quarterly family business Board Meetings with open attendance for any family shareholders and spouses.
3. Annual audited financial statements distributed to all family shareholders.
4. Annual family and shareholder meetings with adequate time for education, input and discussion rather than a pro forma two-hour meeting.
Rules of the Game
Family businesses are more likely to succeed if the family agrees that family harmony and family business success are more important than any individual’s self interest. Family stewardship and assessing the overall well-being of the family, should trump any individual family member’s self-interest in the business.
To ensure family stewardship takes precedence, a Family Values Statement or a Family Constitution is an important document to develop. Such documents set forth what the family stands for-what values are important in running the business and the family. One of my clients called its Family Values Statement the “Family Brand.”
Not only is the content of such a document important, but also the inclusive process of determining what the family stands for helps to ensure its viability.
I recently advised a successful family business with multiple generations involved in the business. At issue was the use by family members of corporate perks: planes, condos, vacation real estate, charitable contributions, etc. . Until I was brought in everyone was approaching the issue solely from a financial viewpoint. I advised them to start with identifying the family values asking them to identify what was important and how the controversy over perks fit into those broader family values.
Consistent Family Business Operating Rules
Every family business has common issues:
1. How many family members can work in the business?
2. On what basis should family members be hired and compensated?
3. Who should own stock in the family business?
4. What current financial benefits should family shareholders receive?
5. Should the family business make personal loans to family members? If so, on what basis?
6. Should family members be able to sell their family business shares?
Most families go through stages in dealing with these issues. In most cases, at first, the decisions are made quickly, without adequate thought about long-term implications and potential precedents being set for future treatment of family members.
As families grow in size, however, tensions will arise not only between those family members working in the business but, also, between family members working in the business and those who are not. Family members will compare the relative financial benefits of the family business for each group. How much of a financial benefit should a family member working in the business receive compared to a family member that simply owns shares? To mitigate objections to preferred treatment or unfairness (perceived or real), families need to proactively set out family business policies, to be applied consistently.
Central to effective family business operating policies is an overriding decision: Will the family business conduct its relationships with family members on an arms-length, market basis or will it conduct itself more like a family piggy bank? This decision impacts how many family members work in the business, on what basis, and for what compensation. It also impacts the entire areas of family business perks and the family’s ability to use business assets for non-business purposes. What is critical is the consistent and equitable application of the rules to all family members.
One of my clients after a rivalry between two brothers to be the successor CEO created a set of policies for the employment of family members in the business. Under their family business policies, only two children, one from each of the two family branches could work at any one time in the business. In addition, any employment was only on a need, merit and arms-length compensation basis and was considered only after that family member had worked at least five years successfully in a business other than the family business, .
The successful transfer of management and ownership of the family business to the next generation is one of the most difficult challenges faced by the departing CEO and the family. The difficulty is often magnified because there are two different positions being transferred-the leadership of the business and the leadership of the family. There are also at least two major life events going on in a succession. First, is the retirement of the CEO, often difficult in any circumstances. In addition, there is the elevation either of another family member, which can create or exacerbate family rivalries, or a non-family member to the CEO position. .
Successions can fail for a multitude of reasons. Sometimes, the retiring CEO cannot let go of the reins. Although formally stepping down from the position, the retiring CEO may continue to actively run the business or be such a formidable presence that he/she undermines the new CEO. The family may also jeopardize the business by choosing an unqualified family member to run the business. The eldest son simply may not be the best-qualified choice to manage the enterprise although he may have grown up with a sense of entitlement to the post. Intense family rivalries for the position of the CEO may split the family, and the business..
To avoid these hazards, family businesses need to develop and annually update a succession plan, which clearly outlines what will happen in the case of either the expected or unexpected departure of the CEO and/or family leader. The succession plan should be reviewed and revised by the Board of Directors each year.
I have been an advisor to a variety of successful transfers of leadership in family businesses. Some involved family members taking over the business and others involved outside non-family members becoming CEOs. In all cases, successful successions resulted from careful planning, the family having advance notice of the succession plan, and the successor being a “tested” person, one who had previously extensive experience in or with the business and who has earned the trust and respect not only of the family but, also, the non-family business employees as well.
In most cases, several family members, who might have considered themselves possible successors, and whom were working in the family business were passed over for successor CEO. In one case, the brother not chosen became the CEO of another family-owned business, which was a better fit for his skills, In another case, a family member stayed in a senior position in the family business, for which he was well qualified, and continues to work there productively. In these successful successions, potential family conflicts were avoided by having a succession plan worked out over years with the active participation of the family.
And, in all cases, the retiring CEO was able to let go of his or her role in the family business because he had something meaningful to move on to, whether it was politics, charitable work, community involvement, travel or teaching. Encouraging the departing CEO, if a family member, to actively plan his/her exit strategy is important.
The last point I want to discuss is the role of gender in managing family businesses. This is often a challenge for family businesses, many of which were founded by male family members and may have sons, but not daughters, who have worked in the business. Although these family and business patterns are changing, squarely addressing the issue of gender and fairness among siblings, cousins, and other family members is essential.
We all know of cases where a daughter had less impact on a family business than her husband or where a brother assumed control upon the retirement or death of the patriarchal CEO, although a daughter may have been more qualified. And we know of other cases when a business was left to a son with the assumption he would provide adequately to the daughter-but then failed to do so. .
Overall, equitable treatment of male and female siblings is important to managing family harmony.
Building and managing any business is hard work. Building and managing a successful family business is doubly challenging. All family businesses have family issues. They cannot be avoided. To increase the probability of success of such an undertaking, a family business needs explicit procedures and policies in place to deal with the common issues that will arise. In addition, family business leaders must be cognizant and forever vigilant to the precedents being set for the family by a wide range of business decision-making. To be successful, a family business must strive for transparency, consistency, and fairness in dealing with family members’ interests in the business.
Great family businesses can both strengthen families and be successful in the marketplace. But it takes work. Good luck.
Professor Edward D. Hess is a full-time Adjunct Professor of Organization and Management, and Founder and Executive Director of both the Center for Entrepreneurship and Corporate Growth and the Value-Based Leadership Institute at Goizuetta Business School at Emory University. He is the author of five books, over 40 articles, and is a frequent speaker. His three most recent books are The Successful Family Business: A Proactive Plan for Managing the Family and the Business (Praeger, 2005); Leading with Values: Positivity, Virtue and High Performance, Hess and Cameron, Eds. (Cambridge University Press, 2006); and The Road to Organic Growth: How Great Companies Consistently Grow Marketshare from Within (McGraw-Hill, 2006. Professor Hess has an active family business consulting practice. His resume and other publications can be found at www.EDHLTD.com. He can be reached at Edward_Hess@bus.emory.edu or 404-727-4891.