Family Businesses Need Best Practices

The list of differences between family firms and their non-family counterparts isn’t long, but it is huge. Being engaged with family in a business model provides great opportunities for both conflict and shared success. Ignoring the family dynamics in the family business would be like ignoring the lava flow of an active volcano. You know it’s there and you must address it. You can avoid it by changing location, but even doing that admits that it can’t be ignored and must be dealt with.

So it is of the family dynamics in a family firm. A business owning family brings with it all the heat of the molten core of their being. While it can remain dormant for long periods, it will eventually bubble up and wreak havoc on the surface. It is always best to be aware and to deal with the impending issues. Having the structures in place before the issues explode will make all the difference between survival and destruction like the city of Pompeii.

Best Practices

Family businesses have all the responsibilities of their non-family counterparts to develop good models and practices. And then, on top of that, they need to realize that the family dynamics are a real part of their business’ culture and address how, when and where the family pieces will be handled.

 

Over the years, family business research has indicated that there are three “best practices” that lead to long term success:

 

  1. Have a formal Governance Structure for the business like and active Board of Directors or Advisory Board
  2. Hold regular Family Meetings
  3. Develop a Family Constitution

 

Governance Structure

 

“Who’s decision is it, and how will they decide,” is one of the most simple and complicated questions to put in front of a family business. Imagine a business in the throes of succession and the decision of who will be the next CEO when Mom retires is on everyone’s mind. Mom (or Dad) usually thinks it is their decision to “anoint” their successor as in a monarchy. The next generation feels very differently -“ more like they should have some say-so, if not out-right decision making power. My experience has been that if the chain of command isn’t addressed in a way that stakeholders have buy-in, then it will unravel in the future like a Shakespearian Play.

 

A better governance would be to have a decision making process in place. That way when these decisions need to be made, the decision won’t be about how to decide, but rather they will focus on the task at hand.

 

An active Board of Directors is the most commonly used vehicle for the business’ big decisions. By the way, annual board meetings are mandated by statute in the State of Michigan for all corporations. I believe that family businesses need to have real outsiders on their boards-¦ not the corporate counsel or the CPA, but real outsiders-¦ strangers. This brings objectivity and boundaries to the proceedings. If you are uncomfortable with that, then start out with an advisory board. I guaranteed if you follow good practices for the development of an Advisory Board, then over time it will become a real Board of Directors.

 

Family Meetings

 

Nothing helps the family dynamics more that regular annual Family Meetings! This is a place for education on what the business is, how it is doing and what the future holds. All the stakeholders are interested, but they are usually kept in the dark. It works much better if the family leaders and business leaders are inclusive instead of exclusive.

 

Many families use the Family Meeting as a time for an annual retreat. They bring the kids along, plan age appropriate activities for fun and for learning about the business. I had one client that held the family meeting at Cedar Point in Ohio and it was a huge success for all concerned.

 

You can’t avoid your family’s impact on your business. Family Meetings are one way to embrace your culture and make it a positive.

 

Family Constitution

 

Family Constitutions have become popular with business owning families for more than 25 years now. The concept is simple: Let’s digest all of our plans, policies and procedures into a document to be developed and shared by all. The documents can be legal, ethical or procedural. The constitution might contain everything from a Governance Structure to a Code of Conduct, from an Entry Policy to an Exit Policy, or from a Code of Conduct to Shareholder Rights. They usually begin with a Vision/Mission Statement that can be a beautiful description of what the family feels is valuable in life and how it sees the business impacting future generations.

 

The beauty of developing the constitution is in the meaningful conversations needed to take place to get it done. Much like our country’s founding fathers work, the accomplishment of a Family Constitution provides a road map for how we will do business and a signing meeting that makes everyone proud.

 

Time and time again the research has proven that these three “best practices” of successful family businesses become the pillars for family harmony and business success.

 

 

Richard M. Segal is a family business consultant with a Fellows status in the Family Firm Institute. Segal is also the founder of the Family Business Council. He can be reached at [email protected] or visit his website at www.segalconsulting.biz.