FAMILY WEALTH AND FAMILY HARMONY
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. .
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.
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
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
2. Giving family members the means to be heard-to raise concerns and
ask questions by providing frequent opportunities for open, respectful
3. Provide the opportunity and time for the family to reach decisions.
A Good Family Process A Bad Family Process
Information on a Need to
Respectful/Open Collaborative Patriarchal/Hierarchal
Management Style Management Style
Fairness and Consistency
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
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
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. .
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.
treatment of male and female siblings is important to managing family
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.
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