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The biology of the family business

Jorge Estrada Published on 20 November 2013

I am sitting in a conference room with a company’s CEO and his father. The father is the founder and chairman of the board. I had made a presentation about performing an organizational development evaluation for their business to help them focus their investment on people.

The CEO, on one hand, is eager to develop the company’s people. The father, on the other hand, is going in a totally different direction, into processes and procedures lacking in their business.

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They have totally different views of what is needed at a strategic level for their business. I understand they also give different directions to the people below them, leaving people confused as to where they are going, and who is really the boss.

I am going to call these dynamics “the biology of the family business.” Dairies all have their biological aspects, what brings them alive: the cows, growing feed, the interaction of people with cows and equipment to produce an outcome.

The family that owns and manages a dairy farm has their own biology as well, a set of live dynamics that make them particular to manage. Every business organization has a unique set of challenges and problems.

The family business is no different. Many of these problems exist in corporate business environments but can be exaggerated in a family business.

Family businesses go through various stages of growth and development over time. Many of these challenges will be found once the second and subsequent generations enter the business.

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A famous saying about family-owned businesses in Mexico is “Father founder of the company, son rich, grandson poor” (Padre noble, hijo rico, nieto pobre).

The founder works and builds a business, the son takes it over and is poorly prepared to manage and make it grow but enjoys the wealth, and the grandson inherits a dying business and empty bank account.

How do you assure you are building, developing and sustaining a family business that can manage its own biology and produce lasting results and profitability? By managing the following biological aspects of your family business.

1. Establishing direction for the business – What is the vision and core strategy guiding the business? Every family member may have a slightly different view of the future, but has the group assembled one common purpose for going forward?

In a 2003 American family business survey, 19 percent of family business participants had not completed any estate planning other than writing a will, and only 37 percent had written a strategic plan.

If everyone isn’t on the same path, there are sure to be missteps and disagreements, pulling the family in different directions. If you have a clear vision, business strategies and goals defined, are they written and posted, and how are they being communicated to the organization?

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Another component of the larger plans are succession plans. Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions. Here you need to consider how the decisions were made; does everyone know and does everyone agree?

Another consideration is retirement and estate planning, including long-term planning to cover the necessities and realities of older members when they leave the company. Has the senior generation developed one?

Does anyone know what it says? Will it achieve the desired results? Will everyone feel fairly treated? If not, conflict is sure to follow. You don’t know someone until you share an inheritance with them.

Also a consideration is an exit plan or exit strategy. Many times family businesses know they are on their way out, and the panic or disturbance makes them produce no clear plan on how to sell, close or walk away from the business.

2. Managing accountability – This one is highly tied to the roles and responsibilities discussed below and to achieving the goals laid out for the business or its divisions.

When the family business lacks structure, clear roles and responsibilities, and clear goals, it is harder for family members to be responsible for their own actions and for being accountable. To whom are family members accountable?

What happens if a family member isn’t performing up to expectations? What if discipline is required? A sure source of conflict ... usually avoided until resentments build into confrontations.

3. Defining roles and responsibilities – It is the responsibility of the family members to sit down and produce the documents necessary to state the roles and responsibilities each will have in the business, thus clarifying for themselves who does what, who reports to who, and clarifying it for the organization.

As you might have heard before, “If the head is not clear, how can we expect the body to be clear?” Does everyone understand and agree on their roles? Are performance expectations clearly stated?

How do you prevent overlap? Many times the informality of the roles, absence of clear policies and business norms for family members creates confusion, not just for the top management but also for the rest of the organization.

4. Compensation problems for family members – Many times dividends, salaries, benefits and compensation for working and for non-participating family members are not clearly defined and justified.

Compensation or benefits can be one of the most frequent sources of conflict, especially among members of the younger generation. The family must spend time defining these details for each member.

5. Family governance – Family governance is a topic that most families are reluctant to address. It covers two broad topics: governance of the business and governance of the family.

Most family businesses, especially in the formative years, take on the characteristics of the founder or founding family. Although this entrepreneurial model works, as a company grows in size it needs gradual evolution to a different model.

Boards of advisers, boards of directors and professional management are some of the ways to improve the governance of the business. Family governance is a more subtle topic.

Most families find that as they grow there is a need to formally discuss family issues like estate plans, family business leadership transition and family fairness.

Families find that some of the best venues to do this are through family councils, family retreats and formal family meetings.

Can you work in the business because you have the same last name as the owner? What requirements should be in place to enter or leave the company? These are but a few of the components of governance.

6. Managing talent – One problem is hiring family members who are not qualified or lack the skills and abilities for the organization. Another is the inability to fire them when it is clear they are not working out.

Sometimes there is a high turnover of non-family members when employees feel that the family “mafia” will always advance over outsiders and when employees realize management is incompetent.

Have a process for selecting and on-boarding or training when you integrate family members into the company. This should provide specific information that relates to the goals, expectations and obligations of the position.

7. Management practices and philosophies – Many families fail to sit down frequently enough to discuss and solidify what their management practices are.

A challenge founding dairy families have is taking enough time away from the day-to-day operations to do some large strategic thinking for the business.

They get caught in the operational aspects, fail to see bigger influences changing in the business environment and get blinded.

Many family businesses are paternalistic, and control is centralized and influenced by tradition instead of good management practices, or they are overly conservative, with older family members trying to preserve the status quo and resist change.

They are especially resistant to ideas and change proposed by the younger generation. And the overall control of operations is not guided or supervised from someone having last say at the top, causing difficulty in controlling other members of the family when participation in the day-to-day work is varied.

8. Communication and handling of conflict, debate and the emotional component – Companies around the world have communication as a main challenge in human-to-human interactions. Communication is used to build trust so that we can manage the business to the best of our abilities.

But provoked by role confusion or lack of clarity, unmanaged emotions (envy, fear, anger), political divisions or other relationship problems, communication breaks down.

Poor, infrequent or partial communication is the norm in family businesses. How can we learn to say the things we need to say to each other?

The truth is that if you work with people, especially family members, you are going to have conflict. It is unavoidable. If you don’t have any differences, it generally indicates one of you isn’t thinking, trying to improve or has little say-so.

We are humans, and emotions are part of being human. You can’t just leave emotion at the door. The emotional intelligence of the family or lack thereof will affect the business. Divorce, separation, health or financial problems also create difficult situations for family members.

Often when I attend a family business meeting, I see a “big elephant in the room,” and yet no one is willing to raise the issue for fear of being attacked or not accepted.

Members of the family and the family entity as a group can afford to spent time developing skills for managing communication and handling debate and conflict in productive ways.

9. Decision-making – The family members are in charge of working together to make the strategic and macro-decisions that will further the organization. Often, conflict arises over who can make decisions and how the decisions are made.

Often the process by which a decision is going to be made is not even talked about, causing the family to spin their wheels and lose time and opportunity.

The thing is: Many times family members get caught in smaller, more operational day-to-day decisions, in response to daily problems, and lose sight of bigger strategic decisions. The wrong decisions can tear loving families apart.

10. Personality differences or rivalries – We are all different, from our personalities to our leadership styles to our communication behaviors, even if we come from the same family. How well do we know and understand ourselves and other family members?

How can we accommodate differences in personalities? When personalities clash, often there is no process for helping them deal with their conflicts, sometimes bringing the whole family into the affair, complicating the biology of the interactions.

The interactions with in-laws can further complicate the biology of the family. Spouses often unknowingly generate conflict.

What do they hear about the business, about other family members, and what do they need to know? Do spouses have a say and how are they integrated? These components must be managed.

11. Financial management of the family business – If differences in personalities, perspectives on the future of the company or communication styles don’t cause problems, differences in how the finances are managed will.

Family members must discuss investments, debt, larger costs analysis, major input buying decisions and how we sell our products. The family members must also discuss the valuation of the business, acquire knowledge of the worth of the business and the factors that make it valuable or decrease its value.

Included here may be the distribution of profits and earnings to working shareholders, non-working shareholders and non-family shareholders.

Included in these conversations are the way growth is managed and problems due to lack of capital and new investment or resistance to re-investment in the business.

If shares of the business are created, who should own stock? Should it be equally divided among children? Who has control?

In the end, your family business must leverage its strengths, likely centered around the commitment to the business and its values, knowledge continuity, and reliability or pride.

These must be balanced with the understanding that there are weaknesses to manage around, like complexity of business governance, informality of business practices and lack of discipline around strategy and planning. If your family business needs support, are you reaching out for help? PD

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Jorge Estrada
President and CEO
Leadership Coaching International Inc.

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