Running a family enterprise can be a complicated game. The closeness and trust inherent in a tight-knit family can yield bonds that makes running a business easier and less fraught with suspicion. But as things progress, chafing issues can multiply and the next thing you know you’ve got a lot of drama on your hands.
That can play out in any number of ways, but stats show family businesses don’t have the longevity their founders might expect: only 30% last to the second-generation; 12% to third; and just 3% to fourth.
Fredda Herz Brown, a consultant with Relative Solutions, has, for the past 35 years, specialized in helping family businesses keep on keeping on. We chatted with her to get a handle on what she’s found to be the best strategies for keeping a family business moving onward and upward. The first task, it would seem, is understanding exactly how complex the family network can become.
“You start with a couple of people, it grows to seven or eight, they get married, then they have more kids,” says Herz Brown. “By the time you get to the second or third generation you’ve got a bunch of things going on that need to be dealt with and most families don’t awaken to it until it’s too late.”
Some of those issues include a growing number of people with different experiences, loyalties and motivations, she explained, most of whom might never actually join the family business. Those could be family members who married into the network bringing with them a different culture, others – cousins, for instance – who did not grow up in the same household and don’t have as deep an understanding of the personal styles of the core family leaders. Says Herz Brown: “They’re geographically dispersed, they’re further from the enterprise that originally made them money so oftentimes there’s a disconnect unless you really work at it.” As families grow and disperse, family dynamics becomes clan dynamics, she added.
That type of network requires a solid system of governance in order to survive. Who is in the business and who is not? Who has shares and who does not? Who is in charge? What does it take to become part of the leadership circle? And, perhaps most importantly, how can the larger set of family clans communicate in a way that puts all involved parties on the same page? Families must agree on a set of processes to bring order to a lot of grey areas. “It’s a way,” says Herz Brown, “of putting some roadblocks in the path of bad decision-making.”
Taking Inventory And Planning
The first thing every family enterprise needs to do is decide who will be making the decisions for the organization and who will hold those leadership posts in the future. A family business consultant needs to meet with all of them. “We believe that those people who will be living with the decision-making need to participate in establishing it,” says Herz brown. “They may not necessarily have a vote yet but they definitely need a voice.” In such a meeting, all parties must discuss goals, what is working and what is not.
Once the bones of the family enterprise are laid down, other issues need to be hashed out. Herz Brown has found that families have to come together for serious discussions about such matters as leadership development (how do you groom a new generation of leaders within the family?), financial accountability and management (what goals and standards must leadership meet?), family communication, and understanding how the organization and those in it fit into the larger world (i.e., communicating effectively with employees and understanding personal and organizational optics).
Talking To One Another
When it comes to communication, quarterly board meetings common in many companies may not be good enough. The larger group of cousins and half-cousins needs to have a clear understanding of what’s going on in the larger organization, even if the vast majority does not have voting rights.
Though Herz Brown is tight-lipped about who her clients are, one family that employs her firm let FORBES in on part of its organization’s process for longevity. The D’Addario family, known for producing instrument strings and accessories, keeps itself in line by annual multi-day reunions, an elected council and a family constitution outlining every aspect of the business-family enterprise imaginable. (Read more here: Blood And Business: How D’Addario Fine-Tuned A Family Enterprise That Avoids The Drama)
Changing Is Challenging
A number of other factors make family businesses difficult to maintain for the long haul, one of which is the leeway that each new generation of leadership has in terms of redefining direction. Change, in business, is essential to survival and freeing future leaders to evaluate change can mean letting go of some of the legacy of the previous generation—sometimes difficult for a family biz. “Many of the families that I’m seeing are suffering in a couple of ways,” says Herz Brown. “One is that they continue to put money into their particular company because that’s what they do the best and they don’t think about where the company is in terms of industry.”
One fix is to open the field to shareholder advisors—family connections (or not) that may have good ideas on strategic direction but without voting rights. Even significant alterations to a legacy business are a good idea, if the family’s industry is experiencing major disruption.
That people are tending to live longer and eschew retirement adds a new facet to family business dynamic, says Herz Brown. “You’re no longer passing the baton from one generation to the other and the older generation’s retiring – which is what used to happed 35 years ago. Nowadays you have at least three generations working together.” The middle generation of those three has a unique place: one whose outlook and input must be acknowledged but runs the risk of being passed over.
Another factor that arises from longevity is the impact of business lifers operating within families, says Herz Brown. “Financially, people are encouraged to transition their wealth down a generation or two because you don’t want to have too much in your estate but the fact is people are living longer. Almost every family I am currently working with has a person in it who is 90 years old or more.”
How do families respect the legacy of a much older and still active member of the company while, perhaps, having to make big changes to the enterprise? How does a family with ever-increasing numbers continue to support itself? Can leadership generations transition too late or too soon?
The answers to these questions – like many regarding family-corporate dynamics – are not set in stone, says Herz Brown. Each family is different and must be evaluated on its own complexities.
This article was written by Karsten Strauss from Forbes and was legally licensed through the NewsCred publisher network.