STRATEGY FOCUS


All in the Family

Family conflicts are not new. In the book of Genesis one quickly recognizes the paradox of relationships within families – togetherness on one hand and bitter conflict on the other.

The stories of Cain and Abel, Abraham and his sons, Isaac, Jacob and Esau, and Joseph and his brothers contain it all – love, kindness, devotion, cohesiveness and loyalty starkly juxtaposed to greed, jealousy, conspiracy, intrigue and even murder. Interestingly, businesslike matters are often at the center of these plots – consider Jacob’s elaborate scheme to steal his brother’s inheritance, the sale of Joseph into slavery by his brothers, and Joseph’s ultimate rise to power in Egypt, all based on what we today might call visionary insight, political savvy, and operational management skills. In any case, when it comes to fighting in the family over money, possessions, power, position, and authority, it is easy to become pessimistic.

ALL IN THE FAMILY

Recent prominent corporate upsets in family-dominated businesses like Adelphia Communications (ADELQ) and Parmalat have nurtured this pessimism. Yet, recently published analyses of the S&P 500 index companies revealed that those businesses with an active family heritage have outperformed the “non-family firms” in both profitability and market performance.

If blood lines in the business alone are not a guarantee for financial success, what makes these family businesses so successful? The often cited “good corporate governance” (usually interpreted as a strong independent Board) alone cannot make the difference, as the heavily family-influenced Boards of Clear Channel Communications (CCU) and Wal-Mart (WMT) have successfully demonstrated. The additional quantum of passion, pride and long-term commitment family-ownership brings to the table certainly contributes to the success story of family-dominated businesses, but these factors did not prevent Adelphia and Parmalat from their doom. What successful family businesses have in common is a system of checks and balances that ensures strict adherence to the values on which the company was founded, with no compromises allowed. In cases where families allow their internal disputes to put the business at risk, those values are in jeopardy. Norelli first wrote about the importance of values in family business success over a dozen years ago. We are pleased to re-issue this early writing, originally published in 1991.

HARMONY IN FAMILY BUSINESS IS POSSIBLE

It takes the courage of individuals, whether a family member, employee, outside director or trusted advisor to create this system of checks and balances, so important to the business’s ability to step-up and act in times of critical need. The following examples depict situations where individuals mustered the courage to seek help and committed themselves in advance to living with the results. In the end, the results were positive for the families, their companies, and employees.

A MODERN DAY CASE

A southern family corporation had many of the elements that can make family business situations so complex and difficult to address. The aging patriarch, a driving entrepreneur, was no longer physically able to carry on, and the non-family “professional manager” chosen to replace him had, of course, “failed.” A destructive rivalry between two cousins rushed into the vacuum created by this failure, and the ensuing feud dominated the everyday climate in the company. Mutual distrust and an almost blind lack of respect for each other’s competence had reached the point where, if either individual had literally been able to demonstrate the ability to spin straw into gold, the other would have refused to believe it. The cousins’ children and spouses were employed somewhere in the organization, but earned mostly poor reviews from the other employees.

The decidedly negative impact on the business should not have surprised anyone. The notion of making a product or delivering a service to satisfy a customer at a profit seemed to be the farthest thing from the family’s mind. Employee morale was poor, profits had disappeared, cash was tight, and lenders were very nervous. Non-family minority shareholders were restless; it seemed everyone had a lawyer. Without changes, the very survival of the business would soon be called into question.

A HAPPY ENDING

Luckily, the downward spiral stopped. Through the efforts of outside directors, trusted advisors, and concerned attorneys, a “cooling-off” period permitted an independent assessment of the entire situation, ranging from (i) the purely operational and marketing issues of the business, to (ii) the personal objectives of the squabbling cousins, to (iii) the relationships with the banks. Each shareholder grew to trust the process, and the result was an amicable resolution of a messy conflict that a few short months before was destined for the courts.

Business operations were strengthened, resources reallocated, roles clarified, and real and valid grievances were addressed. Not coincidentally, the financial fortunes of the business soon improved, permitting the Company to purchase at a fair price the shares of those who just wanted their money. The Company entered an era of renewed success and new value creation which continues through today.

THE THREAT OF HIDDEN FEARS

Experienced advisors to family businesses under stress know that an unfortunate but common trait in these situations is that the family members are unwilling or unable to admit their fears. Perhaps the unspoken fear is (i) whether the business will survive at all; or (ii) that sister Julia will become the Chief Executive; or (iii) what will happen when Dad retires; or (iv) that one’s job will be restructured or even eliminated. The impact of these hidden fears can be quite dysfunctional, causing the business to bounce from one crisis to another without the principals ever being able to resolve anything. A cynic might say that it is almost as if the family members would prefer fighting over “manufactured” problems to addressing their true concerns or real business issues.

TWO FAMILIES IN CRISIS

The future of an old-line, well-regarded manufacturer was being threatened by this very phenomenon. Only this particular crisis was worse than the norm - even for a family business. There were two families instead of one. Each individual was afraid of something, ranging from lack of a succeeding generation in his/her family, to the possible loss of personal status in the industry, to the possible demotion of a sibling. The inability of the members to articulate and share their concerns with one another had spawned a vicious circle of repetitive crises marked by counterproductive and even inflammatory actions taken by one individual or another. Attempts to discuss watershed issues affecting the families’ and company’s future invariably degenerated into shouting matches leaving the participants emotionally drained and succeedingly less willing to try again.

But in this case, the cycle was broken. An experienced and objective outsider was able to gain the respect and confidence not only of each family member, but also of key non-family executives, and the family members’ spouses. The real issues were brought to the surface, and personal objectives became understood. A plan to address the structural problems plaguing the organization was developed and implemented. Individual relationships were put on a positive enough footing to permit the business to once again flourish and the employees (whether family or not) to have some modicum of fun in their jobs.

COURAGE

Professionals who work with family corporations are not miracle workers. In fact, in the end it is difficult, if not impossible, to influence someone (or several someones) who is intent on self-destruction. Positive change starts with the courage and commitment of individuals close to the organization.

 

REFERENCES

Studies were conducted by Ronald C. Anderson (American University) and David M. Reeb (Temple University), published in the June 2003 issue of The Journal of Finance and the November 10, 2003 issue of BusinessWeek.

Family businesses were defined as companies where the founders or their families are still heavily involved in the business, as directors, senior managers, or influential investors. Based on this fairly broad definition, family businesses are said to represent one third of the S&P 500 companies.

For a clinical discussion of this characteristic see Kaye, Penetrating the Cycle of Sustained Conflict, IV Family Business Review 21 (1991).




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Orchids & Steam Shovels Part I

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Procrastination and Consequences
Part II

All in the Family
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