One of the exercises I like to conduct with families in business is identifying the positive and negative impacts that the family can have on the business and the business can have on the family. This exercise is a good way to illustrate the purpose of the family business constitution, which is to support the positive impacts and prevent, or at least minimise the effect of, the negatives.
These impacts are usually readily identifiable by members of the family - after all they have usually lived with the good and the bad interaction of family and business for decades.
A number of typical family- in- business interactions have Jekyll and Hyde qualities – they can manifest in both good and bad impacts.
One of the positive impacts that the family can have on the business is the transfer of knowledge that comes down through generations, providing the business with management who have an innate understanding of how the business functions and why it has been successful over a long period.
The downside of such embedded knowledge is inflexibility and rigidly. The mantra “We’ve always done it this way’ can hinder innovation and development, and an organisation that does not adapt to social, economic and technology change is destined to fail. History is littered with demised snuff box manufacturers and carriage makers who did not believe that cigarettes and motor cars would ever catch on.
Many family businesses recognise the risk of being too insular by having a policy that family members must work outside the business for a period of time to gain knowledge and experience that can then be injected into the business to keep it abreast of current business trends. Many send family members to work in similar businesses overseas in order to be informed of international best practice in their own industry.
Combining an intimate knowledge of their own business with an understanding of the latest general business and industry developments gives any family business a formidable advantage over those competitors who have only one part of the picture.
Families value security – at its most basic this is reflected in the need to maintain a roof over the family’s collective head. The fact that the debt of many family businesses is secured over that roof makes those businesses inherently risk averse. One of the commonly nominated positive impacts of family on business is that the family’s need for security is reflected in a financially secure business with low levels of debt and an aversion to taking high risk strategies in the market place. Indeed the extreme gearing that brought down many high profile businesses during the GFC was, by and large, not the case in the family business sector where caution and low gearing underpin their survival in times of declining turnovers and credit squeeze.
However this need for security also has its negative impacts. A business which takes no risks will usually be slow to innovate and is likely to be left behind by more enterprising competitors. Businesses which eschew debt are often not able to grow to realise their full potential.
However by acknowledging that risk aversion can lead to lost opportunities and stifled growth, the family can then determine risk management policies and a reasonable level of gearing that will balance the family’s need for security against the needs of the business to grow and innovate.
A commonly identified positive impact that the business can have on the family is the provision of opportunities for family members, including careers in the business and the inheritance of equity. However it is the provision of these very opportunities that can also result in the business having negative impacts on the family.
Being employed in the family business can be difficult. The ‘silver spoon’ syndrome and the ever present taint of nepotism hang over family employees. Many feel under pressure to work harder than their non-family colleagues to prove themselves. Many feel isolated in their own workplace, others complain of being drawn into conflicts between other family and non-family employees and being targets for manipulation by other employees with their own agendas. High expectations of family members, from both outside and within the family can create considerable pressures.
However bringing professional, commercial principles to the employment of family members in the business can help overcome these negative impacts. Requiring family members to meet employment criteria in education and experience; ensuring they are objectively assessed for a role; paying them commercially appropriate salaries; giving them performance reviews and, wherever possible, involving senior non-family members in this process, all go a long way to ensuring that family employees are, and are seen to be, making it on their own merits.
Going through the process of preparing a family business constitution gives family members the opportunity to celebrate and strengthen the good things that families and businesses bring to each other. It also allows for the negatives to be openly discussed and for mitigating policies to be determined. The ultimate result should be that family harmony is maintained and the value of the business is protected and enhanced.