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THE
SUCCESSFUL FAMILY BUSINESS:
FAMILY WEALTH AND FAMILY HARMONY
Reprinted from
Turf
Magazine
INTRODUCTION
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
and
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
Inclusive
Exclusive
Information
Transparency Information on a Need to
Know Basis
Respectful/Open Collaborative Patriarchal/Hierarchal
Management Style Management Style
Frequent
Communications Communications When
Issues Arise
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,
.
Succession
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.
Gender Issues
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.
Conclusion
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.
Author
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.
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Copyright © 2007
