Juggling on the precipice of succession

Family businesses can be the best of the best, and they can be the worst of the worst.

We all know of some family business that was destroyed by greed or infighting. Adelphia Communications Corporation in Philadelphia is an example. They were a very successful family business, until the owner-managers began to view the company as their personal asset, rather than a business belonging to shareholders. They took money from the company like it was their piggy bank, forgetting that shareholders owned the company, abandoning their sense of stewardship.

But when family businesses are good, they are really good. In fact, family businesses outperform non-family businesses on nearly every measure of long-term competitiveness. From Return on Assets to Return on Equity to long-term revenue and profit growth, family-controlled firms beat their non-family controlled competitors over time. Part of understanding what makes the good ones good is understanding that family businesses are actually a system comprising three distinct parts: the family, the individuals, and the business.

It bears repeating: Good family businesses are well-functioning systems consisting of family, individuals, and the business.

Most family business leaders may intuitively understand this three-part system. They know that a family issues can impact the business, and that an under-performing family member can also impact the business. And yet, few leaders view themselves as responsible for actively managing their business as a system: juggling all three parts as well as managing the interaction of those same parts. Those who intentionally manage these three parts are the ones who are rewarded with multi-generational success and long-term profitability.

If the best jugglers of the family-individuals-business system win, why aren’t more leaders working harder on their juggling skills?

Systems are complex things—daunting and interdependent. We’ve all heard the legend from the Middle Ages about the Pied Piper brought to Hamelin to lure the rats away with his magic pipe. After the townspeople refused to pay “pay the piper,” he used his magic on their children, leading them away to their demise.

For many family business leaders, “paying the piper” means wading into complex family issues that have the potential to impact the business. It means taking the time to address why Uncle Fred is underperforming—even though it may lead to conflict with a family member. Firing Uncle Fred is never fun and it will create conflict, but it may be necessary for the health of the system. Doing this effectively is always difficult. After all, business leaders are trained in managing and addressing business problems. That’s their background. That’s where they are comfortable.

Business schools are no help. When was the last time you saw a course on “managing difficult relationships” in a business school curriculum?

There is a clear measurement stick for business: are sales up or down as a result of my decisions?

It is not only leaders who find the “system” paradigm a tough pill to swallow. Consultants and other advisors are famous for recommending to leaders that they need to “get the family out of the business.” Such an approach may make sticky issues appear less complex. But from my experience, this is like removing one’s liver to fix a liver problem. Taking out the problem kills the system. Systems work because their parts interact in unique ways sometimes difficult to quantify. Putting a wall between the business and the family is not the answer.

The answer does entail the difficult work of putting strategies and structures in place that deliberately manage the relationship between the family and the business. Sometimes entrepreneurs hear the words strategies and structures and think “bureaucracy.” These are not the kinds of structures we are talking about. Rather, we propose that support the competitive requirements of the business and not allow family issues to constrain a business’s ability to compete. They must promote unity within the family. They must address the empowerment and fulfillment of the individuals in the system.

A Family Involvement Policy, for example helps define whether working in the business is an opportunity for qualified family members or whether it is an entitlement for an owner’s child. Such a policy would also define how family members are hired, evaluated, promoted, and, if necessary, fired. 

Another example would be a Compensation Policy. This policy helps define how owner-managers are paid. For example, do all family members get paid equally (because Mom and Dad love us all the same)? Or will we pay family members based on the value they create for the business?

Other considerations for such a policy include whether family businesses focused on education and personal fulfillment of the individuals in the system or on obligation and entitlement? Is there a clearly articulated vision of how the business intends to create wealth in the next five to ten years?

Bottom Line: Family businesses that succeed across multiple generations need structures to help them manage the relationship between the business and the family. If your family involvement policy or your strategic plan addresses competitive advantage, family unity, and individual fulfillment, you have a chance for a great business system.