Many experts talk about the Venn diagram with three circles—family, business, and ownership. These diagrams describe the different roles and perspectives an individual can have in a family business. Thinking about these different circles helps one understand why being part of a family business can be so difficult.
I like to think of the three circles in a different way. The family, board and management each has a responsibility to ensure that the business has all of the tools that is needs for high performance. There is a perfect balance in a good working system between board, management and family. All are growing and changing as the business grows and changes, but because they are each adapting, the system stays in balance. I call this the “Best Possible Partnership.”
Any one of these entities could positively or negatively impact the performance of the business. First, let’s think about the positive:
The family, through their family governance, is working hard to be a good steward of the business. The family has managed relationships well; they are appropriately managing the intersection between the business and family through policies and processes for raising questions and concerns about the business through the family representatives on the board. The family has made a clear and believable statement to the board and management that they want to remain family owned and has a dividend policy that supports this long term, patient capital perspective. The family is working on engaging the youngest generation at an appropriate level to ensure that each interaction that they have with the business and family is exciting and fun. This lays a solid foundation for the next generation to be actively engaged in the family business. The family sees themselves as a partner with the board and management.
The management shares the stewardship and patient capital perspective of the family. They are working on implementing a long term strategy that will ensure that the business can remain family owned through the next generation. They are open and transparent with the family on the business objectives, financials, risk, challenges and opportunities. Management actively works through the family council to educate the family about the business. Management sees themselves as a partner, not only with the board, but also with the family.
The board thinks strategically about the long term opportunities and challenges in the business. They embrace the patient capital perspective of the family, and think about returns, not only on an annual basis, but returns for the next generation. They think about investments that can be made today to ensure the sustained future of the business for the long term. They are actively working on succession plans, not only for the business, but are also engaged in succession planning at a high level for the family. Outside board members act as mentors to junior family directors. The board sees the family and management as a partner to ensure successful implementation of the business strategy.
There are many war stories about the negative side of family business: lawsuits, in-fighting, fire sale of the business due to poor planning, sale of the business due to lack of interest, etc. This happens when some combination of the board, management or family forgets that this is a partnership, and when one fails in some way, the business is compromised. This often happens when the family gets out of alignment with the board and management.
This causes the board and management to focus on the family, in order to try to correct the imbalance, not the business. When a family is out of alignment with this balanced system, one can see a breakdown of communication, fighting, family issues coming up in the board room, family members calling management, fighting at the office, etc. You can also see the areas in an unbalanced system, where the family is not acting as a good partner with the business, in terms of the dividend policy that doesn’t provide for long term investment, preferential treatment to family employees, lack of trust, breakdown in communication, using information as power, reducing access to decision making, etc. The list truly is endless.
Getting the family to a point where it can act as the best possible partner is hard work. It requires a fully functioning family council, a repeatable change management process, inclusive decision making, a conflict management process and strong working relationships with the family. If a family also has a clearly-defined family strategy, the family isn’t caught off guard when the business and board become more complex and sophisticated as the business grows. A family strategy helps ensure a long-lasting partnership between family, management and board of directors.