Family business differences could lead to a shock or two

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Family-owned businesses are critical to the success of emerging economies. Research has revealed that the majority of businesses in these economies are owned by families. Yet despite their success, many of these businesses do not have longevity, with only 15 percent surviving into the third generation

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Ironically, the very characteristics that can give them a competitive advantage, such as their informality and close interpersonal ties, are also the factors that contribute to high levels of destructive conflict that often occur in them.

If not managed well, these differences can escalate to become time-consuming, distracting, costly and destructive of both the business and the family.

A 2006 study conducted by the Centre for Effective Dispute Resolution in the UK revealed that, generally, 80 percent of disputes have a significant impact on the smooth running of business. There are several ways in which conflict can affect businesses in general. Some of these can be quantified with relative ease, but the major damage often goes unaccounted for:

n First-order effects, such as lost revenue, employee severance payment and replacement and legal costs, are usually quantifiable.

n Second-order effects, such as missed opportunities, increased supervision and management, and reduced quality of decision-making, are harder to quantify.

n Third-order effects, such as passive-aggressive behaviours by disgruntled workers, high staff turnover, the poor image of the organisation within the industry or community, and the impact on family relations, are impossible to truly quantify. These can be real “business killers”.

These effects can be even more pronounced in the context of family-owned businesses where conflicts permeate beyond the business into family relations, sometimes for generations. The best cure for these conflicts is prevention and, failing that, dispute resolution processes that are sensitive to the unique dynamic and needs of family-owned business.

Mediation is an ideal mechanism for the resolution of disputes in family-owned businesses. It is a voluntary and confidential process in which an independent third party: the mediator, assists the parties to a dispute to arrive at an agreed, consensual solution to their dispute.

It is increasingly becoming a preferred method of dispute resolution in disputes both within and between businesses of all kinds. Compared to litigation, mediation is quicker and less costly, but most importantly, it leaves the decision about the solution to the dispute in the hands of the disputing parties.

For a family-owned business, mediation offers the disputing parties the best opportunity to repair relationships that might have been damaged by internal conflict. Relationships are more than likely to be further damaged or destroyed altogether by litigation.

Several factors make family businesses different from other businesses. There is no rigid divide between work and family. Decision-making authority is initially vested in the founder. There is often no coherent and transparent internal decision-making process. Lines between ownership, management and control are blurred. Business and personal relationships are intertwined. Sibling rivalry, especially in the absence of a clear succession strategy, is a key contributor to conflict. And there is sometimes a clash between the “old” culture of the founders and new values and norms of later generations.

So, as not to lose their key competitive advantages, family business need to ensure that there are adequate systems and rules in place not only to resolve conflicts and disputes as early as possible, but also to ensure that every effort is made to prevent conflict from happening in the first place.

Some preventative measures are the following:

n Agree on how to resolve conflicts as early as possible by distinguishing between disagreements to be resolved at family meetings and those that should go to management board meetings. Try to separate business and interpersonal issues. A deadlock-breaking mechanism is needed.

n Agree on an internal communication mechanism and protocol. Face-to-face communication should be encouraged. Interpersonal issues should be addressed in person and not by e-mail. Private discussions should be held in private.

n Parties should try to understand the views of others before responding. When one of those involved is too emotional, discussions should be postponed.

It is a good idea to establish firm rules, captured in a “social contract” or “family constitution”, regarding the following:

n Family employment: Appointment to any position in the business should be subject to competency requirements; the number of family appointments should be limited; and there should be rules regarding career development and progression.

n Career development and succession: It can be very demotivating for non-family members in the business if their experience and qualifications are ignored by the appointment to senior positions of a family member who is not suitably qualified for that position. Succession planning is probably the single most important consideration in ensuring the survival and growth of the business.

n Compensation for management members: Spell out how compensation, rewards and benefits are determined, and what performance measures apply.

n Financial and other contributions: There should be clarity about what is expected, not only from those actively involved in or running the business, but also from beneficiaries who do not play an active role. The latter’s expectations often exceed the value of their contributions.

n Ownership: There should be clarity about where ownership vest, for example in a partnership, corporation, trust, foundation or individual owners. Each of these has its own legal consequences for which proper advice is required. When does ownership pass? Does the founder remain a residual owner and for how long? How are shares in the business acquired: merely because of familial bonds or is some consideration like money or services required? What responsibilities are attached to ownership and what rules apply to the alienation of shares? How must the relationship between internal and external owners be regulated?

n Retirement: For new thinking and modernisation to occur, it is not advisable for founders to continue to have an over-riding influence if they no longer play an active role in the business. The introduction of a mandatory retirement age for employees, including family members, can resolve this problem.

Agreements should be formalised to remove uncertainty. It should include not only the actual terms of these agreements, but also capture the spirit in which they are entered into. The absence of such formal policies, rules and procedures could be a recipe for disaster. However, the introduction of more formalised policies and procedures must be handled with extreme care so as not to undermine such trust as may exist, as this is what provides family-owned businesses with their unique business advantage.

Prof Jordaan is the head of the Africa Centre for Dispute Settlement at Stellenbosch University.


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