Issues in Family Businesses
A family business can be described as an interaction between two separate but connected systems—the business and the family—with uncertain boundaries and different rules. Graphically, this concept can be presented as two intersecting circles. Family businesses may include numerous combinations of family members in various business roles, including husbands and wives, parents and children, extended families, and multiple generations playing the roles of stockholders, board members, working partners, advisors, and employees. Conflicts often arise due to the overlap of these roles. The ways in which individuals typically communicate within a family, for example, may be inappropriate in business situations. Likewise, personal concerns or rivalries may carry over into the work place to the detriment of the firm. In order to succeed, a family business must keep lines of communication open, make use of strategic planning tools, and engage the assistance of outside advisors as needed.
Bowman-Upton listed a number of common issues that most family businesses face. Attracting and retaining nonfamily employees can be problematic, for example, because such employees may find it difficult to deal with family conflicts on the job, limited opportunities for advancement, and the special treatment sometimes accorded family members. In addition, some family members may resent outsiders being brought into the firm and purposely make things unpleasant for nonfamily employees. But outsiders can provide a stabilizing force in a family business by offering a fair and impartial perspective on business issues. Family business leaders can conduct exit interviews with departing nonfamily employees to determine the cause of turnover and develop a course of action to prevent it. If the problem is a troublemaking family member, Bowman-Upton suggests counseling them on their responsibilities to the business, transferring them to another part of the company, finding them a job with another firm, or encouraging them to start their own, noncompeting company.
Many family businesses also have trouble determining guidelines and qualifications for family members hoping to participate in the business. Some companies try to limit the participation of people with certain relationships to the family, such as in-laws, in order to minimize the potential for conflicts. Family businesses often face pressure to hire relatives or close friends who may lack the talent or skill to make a useful contribution to the business. Once hired, such people can be difficult to fire, even if they cost the company money or reduce the motivation of other employees by exhibiting a poor attitude. A strict policy of only hiring people with legitimate qualifications to fill existing openings can help a company avoid such problems, but only if the policy is applied without exception. If a company is forced to hire a less-than-desirable employee, Bowman-Upton suggests providing special training to develop a useful talent, enlisting the help of a nonfamily employee in training and supervising, and assigning special projects that minimize negative contact with other employees.
Another challenge frequently encountered by family businesses involves paying salaries to and dividing the profits among the family members who participate in the firm. In order to grow, a small business must be able to use a relatively large percentage of profits for expansion. But some family members, especially those that are owners but not employees of the company, may not see the value of expenditures that reduce the amount of current dividends they receive. In order to convince such people of the value of investments in the company’s future, Bowman-Upton suggests that the leader of the family business use nonfamily employees to gather facts and figures to support the argument, demonstrate the bottom-line effect of the expenditure, and enlist the help of outside advisors such as an accountant, banker, or attorney. To ensure that salaries are distributed fairly among family and nonfamily employees, business leaders should match them to industry guidelines for each job description. When additional compensation is needed to reward certain employees for their contributions to the company, fringe benefits or equity distributions can be used.
Another important issue relating to family businesses is succession—determining who will take over leadership and/or ownership of the company when the current generation retires or dies. Bowman-Upton recommends that families take steps to prepare for succession long before the need arises. A family retreat, or a meeting on neutral ground without distractions or interruptions, can be an ideal setting to open discussions on family goals and future plans, the timing of expected transitions, and the preparation of the current generation for stepping down and the future generation for taking over. When succession is postponed, older relatives who remain involved in the family firm may develop a preference for maintaining the status quo. These people may resist change and refuse to take risks, even though such an attitude can inhibit business growth. The business leaders should take steps to gradually remove these relatives from the daily operations of the firm, including encouraging them to become involved in outside activities, arranging for them to sell some of their stock or convert it to preferred shares, or possibly restructuring the company to dilute their influence.
Family business leaders can take a number of steps in order to avoid becoming caught up in these issues and their negative consequences. Bowman-Upton noted that having a clear statement of goals, an organized plan to accomplish the goals, a defined hierarchy for decision-making, an established plan for succession, and strong lines of communication can help prevent many possible problems from arising. All family members involved in the business must understand that their rights and responsibilities are different at home and at work. While family relationships and goals take precedence at home, the success of the business comes first at work.
When emotion intrudes upon work relationships and the inevitable conflicts between family members arise, the business leader must intervene and make the objective decisions necessary to protect the interests of the firm. Rather than taking sides in a dispute, the leader must make it clear to all employees that personal disagreements will not be allowed to interfere with work. This approach should discourage employees from jockeying for position or playing politics. The business leader may also find it useful to have regular meetings with family members, engage the services of outside advisors who have no connection to family members as needed, and put all business agreements and policy guidelines in writing.