Acting as advisor of various family businesses I truly understand the various particular difficulties that family business face – from different family owners with different views and priorities, to the difficulty in discussing critical issues like corporate governance, succession planning, compensation and performance management. Normally these delicate issues end up being constantly swept up under the carpet until the issues emanating from the lack of addressing these matters become so big, that there is no carpet big enough to sweep them under. By this time, it could be highly likely too late to patch things up. If there is anything that I have learnt from advising family businesses, is that avoidance doesn’t work.
Learning to move through uncomfortable issues constructively is one of the biggest challenges that family businesses face. Unfortunately many family business owners lack the interpersonal skills to address these issues. Here is an outline of various delicate issues with some tips of how to address them:-
(A) Corporate Governance
It is still a normal occurrence that family businesses are really led by a single person or a very restricted amount of persons, who take critical decisions based on what they think is best (best for who?). Such a setup creates multiple issues both in present terms but more so for the future. In present terms as there is no system of checks and balances to make sure that decisions are being taken in the best interest of the business and that such decisions are being based on sound information and analysis. With regards the future, such a setup, makes it virtually impossible for someone to really fill in adequately the leadership shoes of the present family business leader, as the system being presently used, is an adhoc system, intended to satisfy the preferences and requirements of the present family business leader and no one else.
Hence family businesses , even if they are micro businesses, with just a few employees, cannot operate effectively today and plan their future adequately, if they do not have a truly functional leadership team – this ideally takes the form of a board of directors, who would meet regularly (not merely once a year), with a clear terms of reference ( to discuss and decide on business strategy, the general business goals and direction) with a set agenda of things to be discussed and minutes taken. This could serve as an ideal training ground for future leaders to understand that they need to operate and take decisions within the context of a board of directors to which they need to report too and learn how and on what basis decisions are to be taken. Such board of directors should not be completely made up by family members or family members working in the business, but should leave space for external independent directors who can guide the board and give in their impartial input.
(B) Succession planning
Figuring out how to handle the transfer of the family business leadership is a massive challenge for any family business. This main difficulty is to ensure that the next cohort of the family business leaders truly learn all their is to learn about the family business and gain the skills needed to run it. This process is very delicate and a lot can go wrong. So my advice is that it is never ” too early” to start planning on this front. Here are some suggestions
- Make sure that the so called “identified” next leadership are really interested and committed to the family business. They might want to do something else in their life. Assuming they will just lead the family business without every discussing the matter with them is one recipe for disaster. Moreover it needs to be clear that leading a family business is no walk in the park and requires sacrifice, discipline and skill.
- Make sure is that the present leadership of the family business is committed to the process and hence fully grasps that down the line this will mean that they will move out of the family businesses leadership and pass on the baton to the new family business leadership. Nothing ruins more a succession planning process than the present family business leaders wanting to hang on to their leadership role, at all costs.
- Planning ahead gives the added advantage that the rules of the succession plan are established and agreed upon before they’re needed. Next-generation talent discussions are much easier when they’re theoretical, broad conversations rather than focused on elevating some relatives to leadership roles.
- It would help greatly if family businesses develop guidelines around family employment in the business, such as requiring a certain number of years of work outside the company and demonstrated success at it, or prohibiting jobs from being created just for family members. Moreover one should make sure that these policies are actually followed.
- Write things down. Setting family constitution documents is not a waste of time. It is important to have a document that sets the agreement there is about the family businesses with regards the business’s vision, values, and decision-making approach. Developing such a constitution is hard work and can creates tension, in such cases the setting of a family business council, whereby the family business directors and other family business shareholders & employees can interact and discuss matters to create a better level of understanding, would help greatly.
Directors often struggle with questions about pay for family members. I have seen cases of family members demanding to be paid a wage from the family business although they contribute absolutely nothing to it. Other family businesses struggle with whether family members employed in the family business should be remunerated more, less or just like outsiders who would do the same role. This leads to one of the most common mistakes that happens in family businesses. They equate fair with equal. It is important to avoid this mistake, both to manage expectations and to attract non-family talent. To be clear – fairness is the name of the game!
(D) Under performing Family Employees
This is one of the thorniest problems to deal with – but it is definitely best to nip things it in the bud. Like any other under performing employee, struggling family members should be measured against established performance metrics and given all the help and opportunity to do better. However if such family members employees do not improve than just like other employees, they need to be either guided towards other opportunities in the business where they can succeed or plan a path to exit and leave the family business. If it becomes clear to everyone that such family member employees can’t do their jobs, it harms the culture of the company to keep them around. But it’s extremely important to handle their exits delicately and allow them to save face.
Family businesses need to shape up and create a professional culture, based on a sound corporate governance culture, where asking questions is not only encouraged but expected. Getting engulfed in daily operations issues and never dealing with all the above will only results to a tragic end to the family business, where family businesses run themselves to the ground or cease to exist beyond the present leadership or are run to the ground by the next generation. This would mean that all the energy you are devoting today to sort the present operational issues would have been for nothing.