How family business owners can create functional family dynamicsSeptember 14, 2021
If family-business experts could tell the leaders of family firms just one thing about effective succession, it would probably be this: There is no shortcut.
The only way for a family business to have a transfer of power that runs smoothly is to have a family that runs smoothly. And the only way to achieve that is to put in the work over the long term. Just as with any other kind of investment, the earlier you start investing time, care, and resources into your family relationships, the greater the payoff will be when it comes time to hand over the reins of power.
There are some established ways to increase the likelihood of success—for your business, your family, and your succession.
Best Practice #1: Shift the Paradigm
If you are a family-business leader, you face a common chicken-or-egg dilemma. Your business supports your family; your family supports your business. So which should you prioritize: keeping your business in good shape, or keeping your family relationships in good shape?
Many leaders will choose the business. Their reasoning is this: Since the wealth and happiness of their family members depend the business doing well, it makes sense to focus more on the state of the business than the state of family relationships.
Almost any expert who has studied the secrets of family-business longevity will say that this is the wrong answer. The fact is, when family businesses fail, it’s not usually because of the business: it’s because of the family. Leading wealth-preservation expert James E. Hughes believes that the single biggest reason that families lose their wealth, especially through failed succession, is “the focus on the family’s financial capital to the exclusion of its human and intellectual capital.” He goes so far as to argue, “This concentration on financial capital may even cause [the company] to go out of business in just one generation.”[i]
The takeaway is that you and your family need to start thinking about the money side of the family business differently than you may have been. Instead of money being the primary goal, it should be the means to an end. What is that end? The happiness, development, and fulfillment of all members of your family (including, don’t forget, you).
If you do reconceive the relationship between your business and your family in this way, your next step will be to find ways to measure the growth of human wealth in your family and your firm. This means asking questions such as “Is everybody in this family thriving as an individual?” and “Does the next generation have a strong social compact about contributing to the family firm?”[ii]
Best Practice #2: Create a Comprehensive Family-Governance System
A strong family-governance system is the single most effective way to develop a family that can handle the process of power-transfer with minimal conflict and the best outcomes for business longevity.
There are two basic elements of a family governance system:
- Family meetings
- The Family Constitution
Regular, scheduled family meetings are the cornerstone of the family-governance process. Most experts advise that you limit these meetings to immediate family but intermittently hold larger assemblies that include all family members, even those who are not actively involved with the business.
Family meetings can start before next-generation family members are involved in the business. Indeed, the best time to start holding them may be as soon as a family exists. These gatherings can greatly increase family cohesion, closeness, and functionality. They also give everyone a voice and encourage group perspective.[iii]
The one time not to start holding family meetings is directly before or during a transfer of power. This is a time of heightened tension. When family members have not yet developed their skill at handling conflict, meetings can turn ugly.[iv]
If there is conflict in your family, or you do decide to start holding family meetings during a time of stress, your best bet is to bring in a facilitator for the first number of meetings. He or she will be able to mediate disagreements. [v]
Take the time to research established ways for conducting productive, enjoyable family meetings. These include defining and writing down a clear purpose for each meeting, establishing a clear set of rules for participants, and keeping meticulous notes. The safer and fairer your family meetings are, the more likely they are to foster productive communication instead of turning into ugly squabbles that make matters worse.
The Family Constitution
The Family Constitution is the most important single document a family can have. It provides an explicit written expression of the family’s basic understandings about values, agreements, and operational procedures. By doing so, it can stave off the perceptions of unfairness that cause so much of the conflict and strife within family businesses, especially when it comes to succession.
A strong Family Constitution includes elements such as Mission and Vision statements, an expression of your family’s core values, your business’s employment policy, next-generation development, and, crucially, a set retirement age that applies to everyone involved with the family firm, including the owner/CEO.
A Worthwhile Investment
The time, energy, and persistence needed to develop good family dynamics may seem like a lot. However, what’s at stake is no less than the survival of the family business and the well-being of the family. What’s a more important investment than that?
To read more on the topic of family dynamics, download TTSG’s whitepaper: “Family Dynamics are Central to Business Succession Planning”
[i] James E. Hughes. Family Wealth: Keeping It in the Family. Bloomberg. p. 8.
[ii] Hughes, Family Wealth p. 12.
[iii] Hughes, Family Wealth. 46-47.
[iv] Credit Suisse: “How Leading Families Manage the Challenges of Wealth,” p. 20.
[v] KPMG: Family Business Succession, pp. 48-49.