Strategies for a harmonious family business dynamic

Family businesses with a long history of success are those that work very hard at communication, according to Dr. Eric Clinton and Catherine Faherty from the Centre for Family Business(CFB) at Dublin City University Business School.    

Effective internal communication is vital in all businesses, especially those owned and controlled by families. For these businesses, the overlap of business, family, and ownership systems often leads to diverging viewpoints on how the business should be run, the direction it should take, and steps that should be followed to achieve the goals of the firm. Take for example a parent who is CEO and 100 percent owner of a family firm. He or she will likely view things differently than a family member who is not active in management and does not own any shares in the business. Similarly, a non-family manager is likely to have a very different perspective as a result of his or her unique placement in the family business system.


Whilst difficulties arising from the overlap of these systems can be minimised, they cannot be avoided entirely. Successful family businesses develop strategies that help them to recognise and manage family and business issues, enabling them to reduce the problems that arise when one set of values collides with the other.

 How to manage family business conflict
Two approaches that can be particularly useful in helping families to anticipate and manage these challenges are:

1.Regular participation in family meetings/retreats, perhaps involving the establishment of a “family council.”

Family meetings provide a forum for the family to come together and discuss with its members the direction and performance of the family business. This can be done formally through the establishment of a family council, which is the governance body focusing on family affairs. It allows an opportunity to communicate and discuss family related issues and make decisions that are not directly related to the business.

The family council serves the family as the board of directors serves the business. It reduces the likelihood that family concerns will be ignored or inappropriately exported to a board of directors or a top-management team. Examples of decisions or discussions that might take place in a family council are: criteria for family involvement in the business, deliberations on family employee compensation, dividend policy, education of the next-generation of leaders, liquidity arrangements, transfer of ownership and control, etc.

Some families hold annual retreats in order to discuss family business concerns. A family retreat is a meeting of family members, usually held over a weekend at a remote location, in which family members communicate and discuss family business matters. In most cases, the atmosphere is informal to encourage members to communicate freely and discuss their concerns in a comfortable environment.

Many family businesses elect the services of an outside facilitator trained in family business dynamics to ensure optimum results or to step in “if things get ugly.” This type of forum presents an opportunity to celebrate the business’s founders, their achievements and sacrifices, as well as highlight the legacy passed down to future generations of the family.

 A recent study conducted as part of the Successful Transgenerational Entrepreneurship Practices (STEP) project on international family businesses found that 31 percent of family businesses surveyed utilised formal family meetings as part of their governance process, while 59 percent chose to rely on more informal family meetings in order to deal with family issues.[1]

 

2. The development of a written constitution/charter for the family business, reflecting both family and business values.

To govern the relationship between shareholders, family members, and managers, many successful family-owned businesses formulate a family constitution. The family constitution, or family charter, is a written statement that encapsulates the family’s goals and vision for the future, as well as a plan for how to achieve them. This enables management to develop strategies for the future and align the interests of all company shareholders.

The family constitution typically incorporates broad principles relating to education, communication, the scope and use of the family office, expenditure on joint and individual project, and the involvement of external advisers etc. While the existence of a family constitution is more prevalent in larger multigenerational families in business, it represents an important tool to maintain family unity. The family constitution usually has no legal bearing, but instead refers to the appropriate legal documents, including articles of incorporation, buy-sell agreements, etc. that support the family’s intentions.

Successful family businesses use these forums and mechanisms as a means to facilitate communication and education between and within generations. However, every family business is different and there are really no right or wrong answers, or hard and fast rules. At the end of the day, it is commitment that matters.

[1] Results from the global STEP survey conducted by 35 universities worldwide, consisting of 3,900 respondents in 686 family businesses across the world. The STEP project was founded by Babson College in 2005 and investigates transgenerational value creation of family firms. Dublin City University is the Irish partner to STEP. More information can be found at www.babson.edu/Academics/centers/blank-center/global-research/step/overview/Pages/home.aspx

Dr Eric Clinton is Associate Professor in Entrepreneurship at DCU Business School and Director of the DCU Centre for Family Business (CFB)

Catherine Faherty is a PhD research scholar with the DCU Centre for Family Business