Managing the Business in One Hand; Managing the Leadership Transition in Another
Updated: Jun 18, 2020
It can be the best of times; it can be the worst of times. 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, and 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 a well-functioning system consisting of the family, the individual family members, and the business.
Most family business leaders intuitively understand this three-part system. They know that family issues can impact the business, and that an unhappy in-law can have a very negative impact on 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 family business leaders, “paying the piper” means a willingness to wade into complex family issues even though they are messy and require intense conversations. 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, few entrepreneurs would list “managing difficult family relationships” as a core capability.
Business schools are little help in this arena. When was the last time you saw a course on “managing difficult relationships” in a business school curriculum?
It is not only family 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 facilitate interaction between the family, the business, and the individual family members. Unfortunately, family business leaders hear words like strategies and structures and often think “bureaucracy.” These are not the kinds of structures we are talking about. Rather, we propose structures that support the competitive requirements of the business, enhance shareholder unity, and provide opportunities for personal empowerment and fulfillment of family members.
A Shareholder Agreement is great first step. In addition to clarifying the roles and responsibilities of shareholders, a Shareholder Agreement establishes protocol for information sharing. In this way, shareholders understand the rights they should have - for example, the right to performance information – while at the same time clarifying what rights they do NOT have as shareholders – for example, they are not entitled to direct individual managers from the shareholder office. (A shareholder might not like the company’s radio advertisements, but telling the marketing manager to pull the ad is not a shareholder role.)
A Family Involvement Policy, is another such structure. It defines 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? These are but a few of the kinds of structures necessary to ensure a smooth interaction between the parts of the system.
Mike’s Bottom Line: Family businesses that succeed across multiple generations need structures to help them manage the relationship between the business and the family. These structures, when well crafted, enable entrepreneurial activity and long-term wealth creation. They are what help the best be the best.