Management: General

Human resources is a essential component of any well-functioning business, but in many family companies, HR is merely an afterthought. Even those family business owners who recognize the importance of the HR function may take an informal approach to fulfilling it.

For instance, a family member may be given HR responsibilities in addition to the person’s “real” job. In such cases, the HR function might get short shrift. If the family member lacks HR training, there is no assurance that best practices are being followed.

When a family member serves in the HR position, role confusion can interfere with adherence to policies and laws. The family system is based on family members’ support for each other through thick and thin, while the business system is based on merit and adherence to the rules. Family HR managers must be sure to wear the “business hat” rather than the “family hat” when acting in the HR capacity.

HR responsibilities require appropriate training 
Without a clearly defined HR department, employees may not know where they should turn to report claims of discrimination or harassment, or even just how to register a change of address.

This ambiguity is a problem for family businesses. HR is the front line of defense in ensuring the company complies with labor laws, wage and hour laws, etc. Non-compliance can result in costly government audits and lawsuits. HR should also be the front line in ensuring employees are motivated and that the business isn’t being harmed by low productivity.

While benefits administration and payroll may be fairly straightforward or relatively easily contracted out, other HR functions are not. One example of a complex process is navigating leave administration under the Family and Medical Leave Act or Americans with Disabilities Act in combination with workers’ compensation laws.

In the case of a sexual harassment claim, an internal investigation must be initiated. The company should ensure the investigation is conducted by an appropriate person. If the responsibility is given to an HR manager who is related to the alleged harasser, it is likely a jury or government agency will rule the investigation ineffective or a sham. An outside counsel or a consultant is a better choice in this situation.

HR helps avoid legal exposure
HR, when run effectively, is management’s partner. Good people practices minimize the risk of unhappy employees — and unhappy employees are the ones who sue. More importantly, happy employees are productive employees.

Expending the resources to build out a full-fledged HR function will save the company legal fees, interruption of business to deal with government agencies and litigation, and big headaches in the long run. It also can prevent business issues from spilling over into family issues. Furthermore, good employment practice makes the company a safe place to work.

Organization charts ensure productivity and transparency
In small family companies, family members may be asked to lend a helping hand when a task needs completing, as they are at home. However, when employees have no defined roles and everyone is responsible for everything, productivity suffers. Moreover, no one can stay in their lane when they do not know what lane is theirs!

An organization chart provides transparency about roles and who reports to whom. It can be critical when multiple children of the CEO work in the business. If these adult children report to a non-family manager, they may be inclined to appeal to their parent if they disagree with the manager’s directive or decision. This maneuvering undercuts the manager’s authority. An organization chart helps identify — in a clear, objective way — the reporting chain of command.

An organization chart also provides transparency for non-family employees. It explains who is next in line to take over the company and what, if any, growth opportunities exist. Retention of high-performing non-family employees can be difficult if they assume they have no room for advancement. An organization chart shows what positions might be available.

Job descriptions aid in legal compliance
Job descriptions are a best employment practice. They clarify what each employee’s role is — and what duties fall outside that role. In addition, job descriptions are crucial for ensuring compliance with employment laws. For instance, federal and state departments of labor examine job descriptions when assessing whether an employee is appropriately classified as exempt from overtime. They look at what tasks the employee is required to do as well as what the person is actually doing. While job descriptions are not determinative in this context, they provide support for the company’s position.

Job descriptions are also helpful when an employee asks for a reasonable accommodation under the Americans with Disabilities Act or similar state or local law. Under federal law, the employer is required to engage in the interactive process to determine what, if any, accommodation can be made so the employee can perform the essential functions of the job. To do this, employers often must refer to the job description to analyze which tasks are essential job functions and which are not. While this does not end the inquiry, it provides helpful support for the company’s accommodation analysis.

When claims of unfair treatment arise, organization charts and job descriptions are a key to your defense. Therefore, it is important to have job descriptions and an organization chart prepared and implemented.

Onboarding and exit interviews strengthen the culture
Dedicated HR professionals are also helpful when employees enter and exit the family business. The HR department conducts an orientation to teach new employees about the company’s policies and the corporate culture.

In a family business, it’s important to ensure a new non-family employee understands the culture and fits into it. Employees who are not properly introduced into the culture may feel ostracized, which could lead to discrimination lawsuits. While it is not illegal to favor family employees over non-family employees, any favoritism in a business setting leads to unproductive behaviors, and this is an unnecessary cost.

Another function of the HR department is to conduct exit interviews when employees leave the company. Exit interviews are vitally important in family businesses because of the challenge of retaining talented non-family employees. The exit interviews provide a great insight into how the family is perceived and what went wrong from the employee’s perspective. The next challenge is to devise a strategy to address the weaknesses uncovered in exit interviews.

HR helps managers communicate effectively
Skilled HR professionals can train managers to communicate more effectively with their employees. This is especially important in a family business, where operations tend to be informal because a large part of the workforce is related or has been with the company a long time. HR professionals can help ensure the family does not lose sight of the fact that work hours should be spent working, not resolving family drama.

Communication skills are also important in dealing with employees who have issues with family members. Family members must be trained to listen to the employee’s point of view.

Finally, HR can help a family business harness the perks of working with family and deploy them to make the company more successful. For instance, family businesses inspire a strong sense of loyalty and commitment to succeed because if the business fails, the whole family will feel the impact. If someone can properly direct this strength, the family unit becomes more successful.

Ultimately, HR is a strategic partner in all business operations. In family businesses the importance of this function is heightened because the family dynamic affects business operations in many ways.   

Robert G. Brody is the founder and managing member of the law firm Brody and Associates LLC. Katherine M. Bogard is an associate at the firm. The firm represents management in all labor, employment and benefits law issues (www.brodyandassociates.com). 

Copyright 2019 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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The #MeToo movement, sparked by October 2017 articles in the New York Times and New Yorker detailing sexual harassment and assault claims against film mogul Harvey Weinstein, triggered an ongoing wave of allegations that has felled once-powerful figures in Hollywood, politics, the media, the hospitality industry and other fields.

For family business owners, l’affaire Weinstein proves how high the stakes are.

In a long-overdue move, the board of The Weinstein Co. fired Weinstein — co-founder of the studio with his brother Bob — after the Times and New Yorker reports were published. On March 1, 2018, after negotiations marked by several twists and turns, the near-bankrupt company reached a deal to sell most of its assets to an investor group led by Maria Contreras-Sweet, former administrator of the Small Business Administration. The Weinstein brothers will receive no cash from the sale. The deal includes a compensation fund for victims, and the buyers will pay off the company’s debt. A suit against the brothers filed by New York attorney general Eric Schneiderman, charging that they repeatedly violated state and city laws against gender discrimination, sexual harassment, sexual abuse and coercion, will continue.

Update: After the print edition went to press, there were new developments in the Weinstein case. Contreras-Sweet's investor group found undisclosed debt of $55 million to $65 million during the due diligence process, and the sale of The Weinstein Company collapsed. On March 19, 2018, The Weinstein Company filed for Chapter 11 bankruptcy protection. Investment firm Lantern Capital submitted a "stalking horse" bid to take over the company's assets. On April 30, 2018, sources reported that no other major bids were made, and Lantern would begin negotiations to take over the assets.

Clearly, it’s high time for workplaces to commit to fighting sexual harassment. Family businesses face challenges in proving that their efforts to do so are genuine. Along with recent press reports about harassment have come revelations about complainants pressured to sign onerous non-disclosure agreements. This has led to a widespread perception that human resources departments exist to protect the organization rather than employees. When the organization is owned by or strongly associated with a family, that perception can be tough to counteract.

“From what we’ve seen, family enterprises are in no way immune to the kinds of behaviors that afflict non-family enterprises,” says Richard Hart, who has investigated sexual harassment and sexual assault allegations in family businesses and other workplaces.

“We have seen that, just like non-family enterprises, family enterprises rationalize their way into not dealing with complaints,” adds Hart, a founding director of consulting firm ProActive ReSolutions. “Loyalty is often one of those ways that we rationalize our willingness to look the other way.”

Setting the tone
Virtually all organizations today have written policies stating that sexual and other forms of harassment will not be tolerated. But these policies do no good unless employees trust the organization will enforce them.
“It really starts at the top. It has to be a cultural issue flowing directly from the highest-ranking owner that is involved in the business,” says Scott Cooper, co-chair of the labor and employment practice group at the law firm Blank Rome LLP, which helps family business clients craft sexual-harassment policies and has represented family firms in harassment cases.

“People should never, ever feel like this is all about legal protection,” says Brooke Iley, who co-chairs Blank Rome’s labor and employment practice group with Cooper. “They should always feel like this is about resolving any potential issue and making a better workplace environment.”

In order for the human resources department to gain credibility as a place where employees can safely report harassment and express concerns, top management must proclaim support for HR, Cooper says.
“They must make that very public,” he says. “They must intentionally not undercut the efforts of HR.” For example, Cooper says, managers should refrain from making jokes about the HR function. Another no-no: telling employees that HR can be bypassed (e.g., “Just see me”).

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Eve Hewitt, director of human resources at Port Blakely, a Seattle-based company in the fourth generation of family leadership, is charged with ensuring employee programs align with the company values. One of those core values is “respect,” says Hewitt, a non-family member.

“It’s very important to make sure that everyone understands what it means to have a respectful workplace, and what could be considered offensive to someone,” Hewitt says.

Port Blakely, which grows and markets renewable forest products, has approximately 116 employees and seven offices in the Pacific Northwest and New Zealand. The core values are publicized throughout the organization and reiterated often, says Hewitt. The company communicates to employees that they all have a responsibility to speak up if they witness offensive behavior, she says.

While Port Blakely has about 85 family shareholders, currently only two family members work for the company: René Ancinas, the CEO, and Mike Warjone, senior director of corporate strategy.

The foundational family governance documents state that any family members who work for Port Blakely will not be given special treatment. Indeed, according to the documents, “… family members not only will be expected to perform their employment duties according to the same high performance standard that is expected of non-family employees, but also will have additional responsibilities as representatives of the family. These additional responsibilities include demonstrated awareness of the individual’s influence on other employees and that his or her actions speak for the values of both the entire family and the company. In addition, the prospective family member employee will be required to separate the roles of professional employee and business owner.”

Responding to complaints
Hart says many organizations err in their response to harassment complaints by taking a reactive approach to the problem rather than a process approach.

“What we need is actual processes that are laid out in advance about how we will deal with this if it happens,” Hart says. “If you wait until it happens to start to act — ‘Gee, how should we deal with this?’ — you risk the process looking biased and partial. There’s much less risk of that if you’ve laid it all out beforehand, and if you follow the process.”

Preparing Your Business in the #MeToo Era

Scott Cooper and Brooke Iley, co-chairs of the labor and employment practice group at Blank Rome LLP, presented a webinar Dec. 14, 2017, suggesting practical advice employers can implement immediately to prevent or confront harassment. In today’s climate, they warned, no company can afford to ignore the issue.
Here is a sampling of the tips they offered:

• Communicate the culture change. Send a companywide memo, signed by the top leader in the organization, stating that a zero-tolerance policy will be strictly enforced and no one is above the law — not even family members or rainmakers. No complaint should be too small to be investigated thoroughly.

• Review your policies and complaint procedures. Do your policies apply to your current business model? For example, if you have expanded to new locations or closed some facilities, do the reporting channels still make sense? Are your complaint procedures up to date and accessible?

• Inform the board and the C-suite. Have a protocol in place. Set a threshold for what needs to be reported up (e.g., depending on the level of employee being accused). Strike a balance between taking complaints seriously and overreacting. Consider the potential impact on your bottom line if allegations are mentioned in the press or on social media. (There will be an adverse effect even if the allegations are unfounded.)

• Review your employment practice liability insurance coverage. Be aware that under “shrinking limits” provisions, insurer payment of defense costs reduces the limits available to settle the claim or pay the judgment. Know whether your employees are the only ones covered, or if your coverage extends to vendor or customer claims. Consider your time limits and the threshold for notification to carriers (when a lawsuit is filed, or when you receive the first demand letter from an employee?). Have a plan for reporting the information to your carrier.

• Prepare for an investigation. Create an investigatory protocol with help from your attorney or legal department. The type of investigation will vary depending on the level or form of complaint, so have these mapped out in advance, since an immediate response is essential. Investigations are complicated, and interviewers must be sophisticated. (The investigator could become a witness in court.) Your company’s defense revolves around conducting a thorough investigation.

• Be aware that there can be criminal implications under state or federal law. The statements you give in a civil case might become evidence in a criminal proceeding and vice versa. Consult attorneys who can advise you on what your rights are and what you should and shouldn’t say.

• Have a PR plan. Much of the damage done in these cases stems from how the initial accusation is discussed on social media and reported in the press. Have a response plan; don’t just shoot from the hip if you’re asked to comment. Consider whether you will talk to the media and, if so, who your designated spokesperson will be. What will you do if the accused employee wants to take a different position from what the company prefers?

• Rein in your holiday party and other social events. Immediately before the event, send a memo to all staff reminding them of your code of conduct. State in the memo that employees and their guests are expected to behave appropriately. (This will cover family members who don’t work for the company as well as employees’ guests.) Consider limiting or not offering alcohol. Work with your HR department to develop a strategic plan for dealing with those who might get out of hand. (This might include talking to these individuals before the party.) Observe the proceedings as if you were a high school chaperone, and deal with questionable conduct quietly, before it crosses any lines.

“Oftentimes in a family-owned business, there ­aren’t clear policies, or there are policies that haven’t been reviewed in a long time,” Iley says. “You really want to take a look now to make sure that if you’re sending something out to employees, it has the right message built in, and that you’re able to follow through on whatever you said. Now is the time to proactively look at that issue and to make sure that you have the system in place if a complaint comes in. Thinking through the issues ahead of time is important.”

All companies have a duty to investigate every claim of harassment. “You have to have a commitment to have an unbiased third-party review or, at least, an internal unbiased review,” Iley advises.

During investigation proceedings, Iley says, “Above everything else, the most important thing is to assure each person who participates that there will be no retaliation or action taken against them for their participation in the investigation.” Designate a contact person to take participants’ calls should they have questions or wish to report additional information, and ensure participants know how to reach that individual.

“The perception and the reality must align, or the [complainant] is not going to feel that they were listened to or had their concerns addressed,” Cooper says.

Jennifer Freyd, a professor of psychology at the University of Oregon, coined the term DARVO in 1997 to refer to a tactic used by many institutions and perpetrators. DARVO is an acronym that stands for Deny the behavior (e.g., “None of this ever took place”), Attack the complainant (“She has a drug problem”), and Reverse the roles of Victim and Offender, such that the alleged perpetrator assumes the victim role and turns the whistleblower or true victim into the offender (“She’s making up these allegations to get rid of her manager”). Along with #MeToo, #DARVO has become a Twitter hashtag.

A DARVO response hampers victims’ ability to recover from trauma, Freyd’s studies have found. “We found that when there is a DARVO experience, it tends to increase the self-blame of the person who gets ‘DARVOed,’” Freyd says.

Another area of Freyd’s research is “institutional betrayal,” or the harm done by an institution to the people who depend on it. She and Penn State clinical psychologist Carly Smith have found institutional betrayal can cause emotional and physical health problems.

Freyd has developed recommendations for how institutions can prevent this betrayal and support what she calls “institutional courage” (see sidebar).

“What is really important for companies to know, whether they’re small or big, is that how they treat people after they’ve been harmed can be either helpful or be a whole new set of harms,” Freyd says.

Freyd has also studied how people respond when others disclose a traumatic experience. While a blaming or dismissive response can exacerbate the injury, respectful and compassionate listening techniques can help a victim to heal. In one experiment, she found that listeners who received just 20 minutes’ worth of training responded to disclosure of a traumatic event in a way that those who told their stories found to be more helpful.
“When somebody hears a story about something really difficult, like sexual harassment, they might get really anxious and confused and not know how to respond, and so do certain [harmful] things not because they mean harm, but just because they don’t know what to do,” Freyd says.

She says that if people recognize how their response to trauma disclosure can affect those sharing the information, they will likely pause to think about whether their response will be helpful or harmful, and avoid institutional betrayal.

Apologizing when appropriate is one way to demonstrate institutional courage, Freyd says. But the apology must be genuine. “The details do matter,” she says. “It’s important to word the apology well, to be careful but sincere.”
Of course, companies can be expected to consult their attorneys before issuing an apology. “The worst thing you can do is have someone who has no credibility with the accuser sit there on the advice of a lawyer or HR and make a false apology,” Cooper says.

A skilled attorney can help craft an apology that doesn’t sound “overlawyered.” “I’ve seen apologies that are both effective and have passed through lawyers’ eyes,” Freyd says.

Confronting a family member
Who should be the one to confront a family member who has crossed the line? The answer depends on the family dynamics. Will the professional, objective approach of an HR director be the most effective, or is a respected family member best equipped for the task?

How to Demonstrate Institutional Courage

Jennifer Freyd, a professor of psychology at the University of Oregon, has studied ways in which institutions betray the people who depend on them. Here are some of her suggested principles that can be implemented to prevent institutional betrayal and foster its antidote, institutional courage.

• Respond sensitively to victim disclosures. Avoid cruel responses that blame and attack the victim. Even well-meaning responses can be harmful by, for instance, taking control away from the victim or minimizing the trauma. Compassionate listening techniques can help institutions respond with sensitivity.

• Bear witness, be accountable and apologize. Create ways for individuals to discuss what happened to them. Be accountable for institutional mistakes, and apologize when appropriate.

• Cherish the whistleblower. Those who raise uncomfortable truths are potentially the best friends of an institution. Once people in power have been notified about a problem, they can take steps to correct it. Consider incentives to encourage whistleblowing.

• Engage in a self-study. Institutions should make a regular practice of assessing whether they are promoting institutional betrayal. Conduct focus-group sessions and establish a committee to regularly monitor institutional practices.

• Conduct anonymous surveys. Use the best techniques to get meaningful data, provide a summary of the results and talk openly about the findings. This will inspire trust.

• Educate leaders about research on sexual violence and related trauma. Study concepts and research on sexual violence and institutional betrayal. Use the research to create policies that prevent further harm to victims of harassment and assault.

• Be transparent about policies. Policies and processes should be open to public input and scrutiny.

• Commit resources to these practices. Good intentions are a good starting place, but staff, money and time must be dedicated to make this happen.

When the harasser is the business leader, or if the business leader quashes managers’ efforts to address harassment committed by someone else in the organization, independent directors may be the only ones with the standing to raise the issue. Unfortunately, many family firms have not installed independent directors on their boards. Others have independent directors in place but fail to apprise them of “bad news” like this.

Older family members — particularly older men — are more likely to dismiss calls to confront the issue. Cooper suggests this counterargument, which can be made either directly or humorously, depending on the situation: “This may have been something you could have gotten away with in a prior era, but you definitely cannot get away with it now.”

Hart points out that conversations can devolve into an argument about what constitutes sexual harassment.

“I think that all organizations are hampered when the only way that they have of talking about behaviors is in terms of rules,” Hart says. “That automatically pushes us into an argument about whether a rule has been broken.

“I think the way forward for all organizations, and especially family organizations, is to move away from a focus on rules to focusing on being a high-performance organization,” Hart says.

That shift in emphasis, Hart says, helps center the discussion on behaviors that adversely affect organizational success: “Here’s what you said. Here’s what you did. Here’s the impact.”

If HR finds a complaint has merit and a corrective action is warranted, the company runs a major risk if it doesn’t follow the recommendation, Cooper warns. “It is fatal in most litigation” for a business owner to have to explain why the company disregarded the advice of its own HR department, he says.

Opening a dialogue
Iley has worked with client companies to conduct roundtable focus-group sessions where employees discuss scripted scenarios describing sensitive workplace issues.

“It opens up the dialogue,” Iley says. The small-group discussions should be led by people — often third-party professionals — who “understand the dynamics and know the questions to ask and things to say to make the people feel comfortable,” she advises. “Afterwards, you can set up a survey system or some type of follow-up hotline so that people feel they can ask some follow-up questions.”

These sessions can be revelatory, Iley says. In one family firm, she recalls, “The people at the top felt that they could give a very strong message.” But what emerged in the roundtables was that “people didn’t believe what they were hearing. They had a different perception of the head of the company and whether or not they really could come forward.”

Port Blakely engaged Denison Consulting to conduct a survey evaluating its organizational culture. To follow up on the findings, Port Blakely formed a culture action team to assess areas of strength and areas of development opportunity, and how both could be improved. “One part of that is facilitating conversations in small groups, talking about uncomfortable subjects,” Hewitt says.

Port Blakely offers training in respectful workplace behavior, which the company developed in conjunction with its employment attorney. In 2016, Port Blakely’s managers received the respectful-workplace training. In 2017, members of the company’s Diversity and Inclusion Committee and other frontline employees were trained. In 2018, the company plans to provide the training to all employees who haven’t already received it.

Port Blakely also presented a half-day gender bias training session to all employees. “That generated a lot of conversation and interest,” Hewitt says. Several employees delved further into the issue and took an online test of their hidden biases created by Project Implicit, a non-profit organization and international collaboration of researchers (www.projectimplicit.net).

Not every family company can afford to bring in a major consulting firm to help it address these issues. “In my travels among family businesses, usually the No. 1 problem is that they’ve downsized or not staffed up HR for many years because they operate on the assumption that ‘It’s a family business, we take care of our people, we don’t need these formalities,’” Cooper says. “And yet, that is not really the world we live in anymore.

“The world is catching up to all businesses of all sizes, and there is no family-owned business exemption anymore.”   

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

 

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Many well-established family firms are seeking ways to generate new streams of income independent of the core business. Despite the longevity or success of the family enterprise, inherent risk is typically tied to the legacy business—which also happens to be where most of the family's wealth resides. What if there is a catastrophic business interruption? What if the supply shuts down? What if new technology or global competitors upend a once-defensible position? Your family may very well run a tight ship, but there are many real-world possibilities for disruption that are simply beyond anyone's control.

This is a common conversation among successful family businesses, especially from those who are thinking several generations ahead. There are many benefits to diversifying a legacy business and providing alternative streams of cash flow. Risk management is typically the driving force, but there are other reasons, too: preservation of long-term wealth, offsetting a cyclical industry, extending the enterprising legacy of the family, capitalizing on the family's unique ability to innovate.

Privately held firms actually have an advantage in innovation because of their long-term perspective on capital efficiency, which allows for the "patient capital" attitude of owners to tolerate longer return cycles. Public companies, on the other hand, are pressured by short-term investors to focus on projects that maximize quick returns while demanding high hurdle rates. These "tourist" shareholders (a term coined by Clayton M. Christensen and Derek van Bever in their article "The Capitalist's Dilemma," published in the June 2014 issue of Harvard Business Review) have no patience for investments that may be good but take a bit longer to become established.

If family businesses have such an advantage in long-term investing, why do we not see more active diversification playing out? What is holding back families from capitalizing on their own success? For many, it is simply a lack of expertise and direction in getting started. Looming questions arise: How do we evaluate industries or businesses we have no experience with? What kind of return expectations should we have? How much capital should we allocate?

The answers require some level of investment strategy, process and accountability, which most family businesses simply haven't developed because, well, they're far too busy running their existing business. While the core businesses may be firing on all cylinders, the risk of venturing into new territory can appear greater than the risk of sticking to what they know (which has plenty of its own challenges to deal with, thank you very much).

The fact is, diversifying into new business ventures is fraught with peril. Therefore, family leadership must have a clear, compelling and objective framework to ensure they are making good long-term decisions in the best interest of their current and future shareholders. Some families bypass this complication by parking their non-core investments in a third-party family office or private equity fund, leaving it to the experts to manage those choices. Many families, however, are uncomfortable with the passive nature of this option, preferring hands-on control, security and a sense of ownership over their new endeavors. All the more reason to take a systematic approach to ensure you get it right.

Diversifying your family business is certainly not an easy task, but it can be successfully accomplished if the following steps are applied.

1. Establish a clear and compelling vision for diversifying the business. Does your family vision statement tie the business to a single industry, or leave it open to grow from various sources? Despite your emotional attachment to the family business, it is nothing more than an asset representing a source of income and value creation. When families treat their business this way, they are more likely to acknowledge there may come a day when competitive pressures or capital requirements dictate the asset could create more value if it were liquidated and redeployed into higher-return opportunities. This may sound blasphemous to certain family members, but when you stop and think about it, your family business legacy is likely to be more about growing wealth than clinging to a specific company or industry, especially if it is struggling to maintain relevance, or is losing value.

Articulating a clear statement of long-term intent cements your family's commitment to enterprising beyond your core business, even if you are not sure what it might look like one or two generations from now. By raising the concept of "diversified enterprises" as a purposeful direction for the family business, you also gain enthusiasm and buy-in from shareholders who will now publicly stand behind it, even expect it. Something powerful happens by agreeing on a future aspiration, writing it down and then providing frequent exposure to that message. You will eventually make it happen.

2. Set the strategic framework and criteria. Once a vision is established, the next step is to fill in details around a strategy, which informs the type of industries and approaches you will take toward diversification. Start by casting a wide net around your playing field. What are you good at? What assets are currently underleveraged? What core competencies might be transferable to other markets or customers? This process taps into your unique capabilities to generate new, profitable sources of growth.

Next, layer in a filter of risk correlation. For example, would you prefer to focus on synergistic businesses, or counter-cyclical ones? Will you consider businesses related to your core enterprise, or do you want completely independent industries? An agribusiness firm historically dependent on one product driven by commodity markets decided to venture into alternative commodities that were historically uncorrelated to its core product. A newspaper publisher entered the travel and tourism industry with niche consumer resource publications. You could also go horizontally forward or backward in your supply chain, but generally that only ties the risk further into your existing industry. Obviously, the less correlated an industry is with your core business, the more you are truly diversifying risk.

Additional criteria to consider should include expected returns, industry growth rate, build vs. buy, geographic limitations and capital constraints. As you develop a strategic framework, get as specific as you can while leaving plenty of room for iteration. In the end, you should be able to look at it and see how it makes sense strategically. An example might look something like this: "We will pursue regional businesses in adjacent but counter-cyclical industries within the Northeast region that will provide returns similar to or greater than those from the legacy business."

3. Appoint a dedicated leader reporting directly to the CEO. Many diversification attempts either sputter or produce spotty results because they lack dedicated, focused, accountable leadership to see the mission through. A diversification initiative cannot be approached as a part-time gig with a "let's see how it goes" attitude. The pitfalls of approaching diversification as a side project of current management are two-fold: Either the core business sucks management back in, leaving insufficient energy for the diversification initiatives; or the shiny new diversification projects become a distraction, drawing management's attention away from the core enterprise.

Putting an objective leader in place can allow the business to cut through emotionally driven decision making—a weakness that family businesses are prone to that often leads to a hodgepodge of starts and stops that may or may not be consistent with the strategy. Once your investment criteria have been agreed upon, a designated leader operating separately from the core business can provide objective analysis of new opportunities and ensure that the family is focused on achieving outcomes rather than dabbling. If you are serious about it, put a competent individual in charge, and then structure the new initiatives to operate separate and apart from the core business.

4. Apply a process to narrow down the best choices. Now that a strategy and criteria have been set, a process is needed to evaluate new opportunities. All ideas should be considered from a variety of sources, as if they are being thrown into a large funnel, except now there is a screening methodology for evaluating the strength of each proposition. The more aligned with strategic criteria, the further down the funnel the business idea will go. There should be just a few gems coming out the other side. My initial work with a food manufacturing company generated a wide range of ideas: restaurants, trucking, machine fabrication, refrigerated warehousing and grocery retail stores, to name a few. After the process was applied, the only idea left standing was the refrigerated warehouse, which went on to become a substantial success for the family.

Despite the straightforward nature of this process, it is also where the family dynamics can get in the way, requiring management to remain disciplined. Does Uncle Charlie's friend's investment project meet the criteria? If not, no offense to Uncle Charlie, but toss it out. During this phase, one should expend enough attention to validate a fit with criteria, but no more than a first-pass level. An internal review board is helpful to vet ideas that make it through to more advanced stages, forcing justification and validation of the most promising proposals.

5. Develop the best ideas into a full-scale business plan. Here is where the viability of the business investment can be fully validated in great detail. This is no time for shortcuts or reliance on anecdotal information. Spend the time and energy necessary to develop a robust, data-heavy business plan with compelling market and financial justification, as if it were being pitched to an outside investment group. The business plan should cover typical components such as marketplace feedback, industry growth rates, prospective customers, competitive landscape and a financial pro forma. Ultimately, the business plan should clearly depict its unique strategic differentiator—why will you win? What makes it a compelling investment?

Finally, get outside feedback from a third-party expert in the industry who can provide an unbiased perspective on your plan's integrity and a critical view on its probability of success. A designated devil's advocate can provide a reality check on your assumptions around operations, market, customer, pricing and competitors. Even the most promising ventures will present challenges, so make sure you understand the minefields that will be faced.

6. Provide visibility and accountability. Once the new business plan has been vetted, critiqued and approved, now it's time to take the leap and launch. The business plan should provide a set of milestones for tracking progress, which also becomes an accountability mechanism to ensure appropriate oversight and course-correction when necessary.

Be prepared to evolve and iterate. Admit what you don't know and bring in expertise to help operationalize when necessary. Diversification can be a risky proposition, but given the right commitment, process and discipline, it can de-risk your business—and that is something your grandchildren will thank you for.

James B. Wood (jrwood9@verizon.net) has worked with middle-market family businesses for more than 25 years as executive, management consultant and board member. He is the author of The Next Level: Essential Strategies for Breakthrough Growth.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Dirty Little Secrets of Family Business: How to Successfully Navigate Family Business Conflict and Transition, by Henry Hutcheson • Indie Books International, LLC 2014 • 196 pp., $20

Henry Hutcheson grew up in a business family and became a family business consultant after a management career with IBM, UPS and Sumitomo Electric. He has written about family business topics for newspapers in North Carolina, where his practice is based. In his new book, he sheds light on some issues that family business owners don't want to admit to others—or, in some cases, to themselves.

Dirty Little Secrets of Family Business contains advice that can help a wide range of readers, from those who have been educating themselves about family business best practices to those just beginning to address the challenges of combining family and business.

The opening pages of the book are most relevant to the latter constituency. The first "dirty little secret" mentioned is a fundamental family business truth: that the family system (based on unconditional love) and the business system (based on profit) are often at odds.

Hutcheson notes in his first chapter, "[F]or a family business to be successful long-term, it must put forth effort in some key areas: communication, governance, management succession and planning." (The italics are the author's.)

Subsequent chapters delve more deeply into family business dynamics. Hutcheson takes a no-nonsense approach to explaining many of these issues. Take, for example, his advice on grooming successors: "If the owner is truly interested in the company moving forward, it is necessary to begin handing over some control and allow the next generation to get the creative juices flowing and shape it in their own way. But the problem with the next generation is that years of doing things the owner's way may inhibit ingenuity."

Later in his text, Hutcheson shares a "dirty little secret" about entitlement: "While entitlement can come from many different places, the cause, and the place where change must begin, is typically with the parents."

Hutcheson is a grandson of Olan Mills, founder of the eponymous portrait photography studio that was sold after nearly 80 years of family ownership. He explains why his family sold the company and reflects on his reaction to the news. Another personal anecdote involves Giovanni Agnelli, a classmate of Hutcheson's at the McCallie School in Chattanooga, Tenn. Agnelli, a great-grandson of the founder of Fiat, was being groomed to take over the company when he died of a rare form of stomach cancer at age 33—evidence of how the best-laid succession plan, even with a well-chosen successor, can go awry.

The book's strength lies in its practicality. It offers advice on what to say when firing your child, as well as how to explain to your offspring that he or she will be compensated according to fair market value for the position. For next-generation members, Hutcheson suggests language for gently informing your parents that you don't want to take over the family company.

Dirty Little Secrets also provides helpful tips on training next-generation members, as well as a detailed discussion of the importance of a buy/sell agreement. There is also an extensive discussion of non-family CEOs. Hutcheson warns against installing a non-family executive "who is called the leader, but whose job is really to negotiate between the siblings." A brief essay by Bill George, who served as the president and CEO of SC Johnson from 1993 to 1997, provides a look at family business leadership from a non-family executive's point of view.

Given the book's title, and the wisdom contained in Hutcheson's "dirty little secrets," it's a shame that these insights aren't used as an organizational framework for the book, or even highlighted within the text. Another flaw is that the role of a board, and the advantages that seasoned independent board members can bring to a company, are mentioned only in passing (and Hutcheson recommends an advisory board without discussing a fiduciary board).

These drawbacks aside, Dirty Little Secrets of Family Business provides solid advice that is realistic and action-oriented. Hutcheson does family business owners a great service by sharing these secrets and suggesting how that knowledge can help them put their company on the road to long-term sustainability. 
 

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.combwenger@familybusinessmagazine.com.

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What kind of feedback do you provide to your family and non-family employees? How much of it involves reprimanding or taking corrective actions? How often do you offer praise or encouragement? How often do you express gratitude?

Most likely, in the family or the business your feedback percentages go down as the list progresses from reprimand to gratitude. Yet research shows that gratitude is one of the most powerful strategies we have for effective leadership. Studies also suggest that gratitude makes people happier. Perhaps that is why it is such a popular topic in the management research arena today.

What is gratitude?

As we approach the holidays, we naturally give thanks for all that we appreciate—the loving people in our lives, the things we treasure, our health and a future full of opportunities. We acknowledge the sacrifices we made for all of these treasures and reflect on the high return on our investment. Our culture also encourages us to remember that others have made investments and sacrifices on our behalf, leaving us legacies often beyond belief.

Our ancestors wanted to ensure that the next generation had it better than theirs, so they delivered decades of hard work and sacrifices, uncompromising values and solid businesses that supported their family and many others. Their estates allow us to act on promising opportunities and support the causes that move us. To honor them, we promise to do the same for our children.

The idea of reflecting on what one is thankful for is at the heart of gratitude, which is derived from the Latin words gratia, meaning "favor," and gratus, meaning "pleasing." It has to do with kindness, generosity and even getting something for nothing.

Gratitude allows us to acknowledge others' efforts and successes. It feels good to give it and receive it. Gratitude implies humility as well—recognition that we could not be where we are in life without the contributions of others. Even highly intrinsically motivated people who prefer self-analysis over general praise enjoy hearing that someone else appreciated their actions.

In a recent study by the American Psychological Association, more than half the respondents said they were considering looking for new jobs because they felt undervalued. More than half the HR managers surveyed by the Society for Human Resource Management (SHRM) said that showing appreciation for workers reduces turnover, and 49% said it increases profits. "When employees feel appreciated and understand that what they do is truly important, they are more motivated to go above and beyond their job descriptions to make a difference for their companies," the SHRM report said.

Many family companies have non-family employees who have been on the staff for decades. It's likely that these long-tenured employees feel valued. But what about your family members?

In a meeting of family business owners, we asked how many owners evaluated their children working in the business. Few hands went up. In our busy worlds, we tend to focus on giving feedback to our non-family employees. So who gives it to the family? Often, no one does.

In negotiating our often-tumultuous relationships in family businesses, we might ask ourselves if we can make our relationships better by being more grateful, or by taking more time and effort to express our gratitude.

Giving gratitude

You might think that gratitude involves just a simple thank-you, but if you want to maximize the effectiveness, there's more to it. Dr. Mark Goulston suggests that there are three parts to what he calls a "power thank you":

1. Be specific. Mention the specific behaviors you are grateful for. For example, "Sara, thank you for going out of your way to deliver Mrs. Smith's special shoe order to her yesterday and making sure the shoes fit her properly. Because of your thoughtfulness, she called me to say how pleased she was and how she recommends our business to everyone in her apartment building. Your service is what differentiates us from Macy's."

2. Be personal. Tell the person what his or her actions meant to you. "Sara, when you went to extra lengths to help our accountant resolve our invoicing problems with our best supplier, who was very upset, it said to me that you care passionately about our family business. Knowing that you are doing everything you can to keep our family dream alive and helping us to serve our customers to the best of our abilities means a lot to me. Excellent service is at the top of our values, and I'm grateful to you for embodying that in all that you do."

3. Acknowledge the person's contributions. Recap his or her personal efforts and sacrifices. "Sara, when you dropped what you were doing to turn your attention to our customer's problems, I know that required you to stay late and rearrange your family dinner plans, and yet you did not complain. That kind of gesture is symbolic and helps us all to stay motivated."

A culture of gratitude

Once you start giving gratitude, you will notice others around you beginning to do the same. University of Kentucky provost Christine Riordan in a Harvard Business Review blog suggests that leaders who regularly give gratitude help their staff work more effectively in teams. Employees who receive gratitude, Riordan writes, are more likely to understand the behaviors that help them be better contributors. They are also more likely to give gratitude to others, which makes them better colleagues. This works the same way with family teams.

Here are a few things you can do to build your gratitude aptitude:

1. Keep a gratitude journal. Each night, jot down two or three things for which you are grateful.

2. Write a gratitude letter. Think back on your life. Who made a significant contribution that you might not have fully acknowledged? For example, a few years ago, one of us (Carol) learned that her doctoral adviser had lost a daughter in a car wreck. This was the second daughter he had lost; the first one had had a rare disease. Carol thought about what she could do for the man who suffered this loss. She knew it wouldn't be right to tell him she understood or that she could relate in any way. So she wrote him a letter that summarized all the opportunities that had come her way because of her doctorate (such as great jobs, wonderful colleagues and travel experiences). She emphasized that she would not have been able to earn the degree had it not been for him. He wrote back to her, saying the letter was one of the most significant thank-yous he had received and that it came at a very meaningful time in his life. Receiving his gratitude was a profound experience for Carol.

3. Convene a gratitude session. In debriefing meetings for big projects, take time to give gratitude to those involved. Be specific and be inclusive. A word of caution: If you're going to give gratitude to someone in front of others, be careful about how it will affect that person. While gratitude might encourage the recipient, it also could foster jealousy or have other unintended consequences. In a team meeting, we suggest giving general gratitude for things the team did well together, and then giving gratitude privately to individuals. Over the years we've enjoyed watching our family members give gratitude to each other. This is perhaps one of the highest forms of expressing love.

Gratitude is hard work; it takes much practice to get it right. Have you thought about how you can start giving gratitude? Start with something simple. We would be remiss if we didn't remind you that most business plans are never executed, so just do it—today.

Carol B. Wittmeyer, Ph.D. is an associate professor of management at St. Bonaventure University. Christine Wittmeyer is a sales associate at her uncle and aunt's company, TurboPro, located in Alden, N.Y. She is an MBA candidate at St. Bonaventure University.

Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Study of European listed companies finds family firms stand out

 

By Cristina Cruz

 

 

Imagine that you had invested €1,000 in family businesses listed on European stock exchanges in 2001. What do you think your investment would have been worth by 2010?

 

When I challenge people with this question, they routinely cast doubt on the performance of family firms. Words like “complacent” and “slow-moving” are often used. The stereotype of the sleepy family firm doing little to create new value is incredibly strong.

 

And yet, the reality is that your €1,000 invested at the beginning of the 21st century would have been worth €3,533 by the end of the decade. Impressive, but even more so when you consider that €1,000 invested in a portfolio of comparable non-family firms would have grown only to €2,241.

 

The reality is that family businesses are vitally important, but underestimated, generators of economic value and growth. After, all they account for 50% to 80% of GDP in most economies.

 

My recent research (conducted with Laura Núñez Letamendia and funded by Banca March, a 100% family-owned Spanish financial institution) looked at 2,423 companies listed on various European stock markets during the period 2001-2010. The results of this first “Banca March-IE Report on Value Creation in Family Firms” are conclusive about the relationship between family businesses and value creation.

 

We examined the performance of listed European companies capitalized at more than €50 million. Of these, 27% are family firms, although this varies between countries. Italy has the highest proportion of listed family businesses compared with non-family firms (52%), followed by France (49.6%), Portugal (45.83%) and Spain (42.11%). At the opposite extreme are the U.K., Luxembourg and Ireland, where family firms make up barely 10% of listed companies.

 

Family businesses—defined as companies in which an individual or family holds at least 20% of the shares and at least one family member serves on the board—tend to be smaller than non-family firms. Interestingly, the family businesses that created most value for their shareholders were smaller than the other family firms.

 

Family firms are also older—the average age of the family firms we studied is 60 years, vs. 43 for non-family firms. An impressive 20% of these family businesses are over 100 years old. This might explain their reputation for being slow-moving.

 

Seven findings stand out:

 

1. Family businesses outperform their local stock market indexes. In all the countries examined, family firms achieved much higher returns than local indexes did at similar or even lower risk levels. The biggest difference in return was attained by German family businesses compared with the DAX, their national benchmark index.

 

2. Family businesses create value while the rest of the market destroys it. If we measure value creation through the economic value added generated by a company for each unit of assets employed in its business, over the last decade family businesses created value while non-family firms destroyed it.

 

3. Family businesses generate more profit from their assets. Family firms achieved a much higher return on assets (ROA) than non-family businesses over the course of the decade.

 

4. Family businesses gain access to financing at a lower cost. The weighted average cost of capital of family businesses was lower than for non-family firms, as both the interest they pay on their debt and their cost of equity are lower.

 

5. Family businesses create more jobs than non-family firms do. The annual compound average growth rate of the average number of employees over the period was 3.4% for family firms and 0.8% for non-family enterprises.

 

6. Family businesses create more jobs during downturns in the business cycle. Over the last decade, job creation by family businesses was higher in downturns than in upswings. By contrast, non-family firms created jobs only during upswings, while they cut jobs or kept them virtually stable in downturns.

 

7. Family businesses have much higher average labor productivity than non-family firms do. Labor productivity for family companies was €1.58 million, compared with €0.16 million for non-family firms. The family firms also had significantly lower wage costs throughout the period studied.

 

The key to growth

 

To explain such results, you need to return to the very raison d’être of family firms. The key differentiating factor about family businesses is the fact that profit maximization (financial wealth) exists side-by-side with other non-economic objectives that are important to the owner family. For some it is more important to be able to hand over a thriving enterprise to the next generation than to record stratospheric profits.

 

This does not make family businesses paragons of new-age economic perfection. But it does make clear that they have a vital role to play in creating economic growth. Ignore them at your peril.

 

Cristina Cruz is a professor of entrepreneurial management and family business at IE Business School in Madrid.

 

 

 


 

 

 

 

An entrepreneurial cross-country trip

 

 

By Barbara Spector

 

 

Two Asheville, N.C., brothers and business partners are taking a two-month cross-country trip to visit and interview small-business owners in major metropolitan areas. Their goal, they say, is not only to tour the country, but also to share information on business strategies, challenges and successes with other entrepreneurs. The mission of the trip, as the brothers describe it in a video on their website, is “to promote and enliven the entrepreneurial spirit throughout the United States.”

 

Brothers Jacob and Daniel Ballard, owners of iWebXpert, an Internet marketing company, left their hometown on April 1, planning stops in Dallas, Las Vegas, Los Angeles, Seattle, Chicago, Cleveland and New York, among other cities. They started their trip with a list of prospective interviewees and hoped to find others along the way via a combination of referrals and serendipity.

 

The Ballards are documenting their journey—which they’ve dubbed “Big Town, Small Business”—on their company’s website, -iWebXpert.com. The “roadtrip” section of the site includes a city-by-city blog and video documentaries. They’re also using social media like Facebook and Twitter to promote their travels, during which they plan to offer free workshops to business owners and tout their brand.

 

The brothers say their trip is possible because the nature of their business enables them to serve their clients from remote locations. The services they offer include web design and development, graphic design, search engine optimization and social media marketing. “We have the option to work wherever we want,” says Jacob Ballard, 27, who founded the company about two years ago. “All we need is our computers and the Internet.”

 

Daniel Ballard, 30, who held a variety of jobs before taking a full-time post at iWebXpert, says this flexibility helped seal his decision to join the company. “That idea was exciting to me,” Daniel recalls.

 

Maintaining their business while traveling and producing their documentaries will be challenging, Jacob notes. “It sounds like it’s all fun,” he says, “but we’re going to be doubling our workload.” To help fund their trip, they are seeking donations from visitors to their website.

 

A March 15 article on the Ballards’ travel plans in the Asheville Citizen-Times caught the attention of Cindy Clarke, executive director of the University of North Carolina Asheville Family Business Forum. Clarke reached out to the brothers and suggested they discuss family business issues during their interviews with entrepreneurs. “I thought, ‘They’re probably going to see businesses that are family-owned, and I bet they never thought about that aspect,’” Clarke recalls. “Now they realize that there’s another perspective, and that best practices include family communication. This gives them a whole other dynamic.”

 

Jacob acknowledges the need to maintain a balance between family and business when working with his brother. “We piss each other off and then become friends [again] in 15 minutes,” he says.

 

The brothers’ first blog post and video document their visit to New Orleans, including a sit-down with Jason and Inta Phayer, a husband and wife who own The Milk Bar, a sandwich and milkshake shop. Jason Phayer acknowledges in the video that the eatery can’t compete with larger restaurants on the basis of price or fancy décor. “We compete on product and service,” he says.

 

In keeping with the brotherly spirit, Jacob and Daniel will end their journey with a visit to their brother Josh Ballard, 28, in Lakewood, Fla., who expects to become a first-time father in early June.

 

 

 


 

 

 

 

Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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In family-owned businesses, what constitutes a risk management plan? Astute executive teams plan a response to disasters that might impede business continuity. Yet interestingly, most risk management plans fail to incorporate one issue that can have dire consequences for any family-owned business: the estate plans of the family owners themselves.

Issues involving succession, tax planning and ownership are among the many challenges family businesses face if the corporate plan does not align with the estate plans of the family owners. Failing to proactively manage these issues can create a domino effect that may permanently cripple a company.

The advantages of proactive risk management became evident to me when I advised a privately held telecommunications company. The company was considering a unique opportunity to quickly expand its regional footprint.

My clients were seeking ways to recapitalize their business so they could bid for assets being divested by a national wireless carrier following the government’s antitrust ruling requiring that company to sell assets in the region.

As they weighed financing options, it became clear that the executive team would need to reorganize the business to accommodate potential investors, and their ownership desires. I sat down with the attorney who had been doing the family’s estate planning for many years and asked whether any buy-sell or stockholders’ agreements existed. From the back room of his office he pulled out a photocopy of a 25-year-old stock buy-sell agreement that dated back to when the company was a very small, family-owned, rural telecom business.

The existence of this document was news to everybody on the financing team—and to half of the family members still involved in the business.

When I read the buy-sell agreement, I realized that this document could potentially derail the company’s efforts to recapitalize and expand. Unbeknownst to everyone in the room, the agreement essentially gave all the signatories a perpetual right to buy corporate shares if the stock was ever offered for sale or otherwise transferred to anyone other than a family member. To complicate matters, the agreement provided for a new price calculation if the existing shareholders exercised their option to buy based on the book value of the stock, disregarding any third-party offer or fair market value appraisals.

In other words, if stock were offered to these non-family private equity investors, under the terms of the agreement family members could buy those shares at book value and without the investors’ consent. Bottom line: This meant the company couldn’t bring in a private equity partner to fund the acquisition of new assets.

Why did this clause exist? First, it was an attempt to artificially depress the value of the stock. The reduced stock price applied to anyone who tried to transfer shares outside the family and would therefore penalize family members who tried to sell shares that had been given to them by their grandfather. The reduced value of the stock was also an effort to lower taxes—a failed attempt, in fact, since the valuation in the buy-sell agreement was not binding on the IRS. The agreement was also designed to keep ownership in the family, since transfers outside the family were effectively prohibited by the way the agreement was structured.

In most family businesses, the discovery of such an agreement could spark a crisis that at best would cause a severe delay in business planning, and at worst permanently throw the business plan off course. In this telecommunications company, however, we had already gone through the exercise of creating a risk management program that analyzed a series of “what-if” scenarios. One of those scenarios involved the steps we might take if we needed to extinguish the rights of family minority shareholders who were hostile to family members managing the business. While the scenario we had worked through centered on the death of a key shareholder, our potential solutions were applicable to this situation.

Because we had the risk management plan in place, we were able to reorganize the company and bring on private equity investors within six weeks, allowing us to meet the deadline for bidding on the divested properties. Without the plan, everything would have collapsed.

Scenario planning

When developing a risk management program for a family-owned business, it’s important to create two outlines. The first takes a more linear, traditional approach to business continuity planning; it plots out options for events that can be forecast, or reasonably predicted. For example, you can pro-ject economic growth at different percentages and analyze the impact on the company, and the risk of taking on certain operating expenditures in each growth scenario.

The second outline, however, is the one that’s unique to each family business because it involves issues that are not linear in nature, and are often rooted in questions of ownership and control. To plot out this path, you need to brainstorm trends, and scenarios within each trend. Instead of one linear path, you will have branches of potential paths that link back to the core.

Often these trends link back to the family’s estate plan and what will happen when that plan is executed. Will the family wealth be broken up and disbursed, or maintained? Will the family keep the business or sell it? Has the estate plan effectively accounted for potential tax consequences, and how will those tax payments affect the business? Does the plan set out steps for succession that are in keeping with the business plan?

In the case of the telecommunications company, the scenarios we had initially developed were based on the estate plan of the grandfather, a second-generation owner of the business. The company managers had discovered that a clause in the grandfather’s estate plan that froze the value of his stock for his own estate tax planning purposes had the undesirable effect of significantly increasing the income tax, and required distributions of cash from the company to the grandfather. Further analysis of the estate plan uncovered additional conflicts for the business that would have made it difficult to obtain the capital needed for future growth initiatives.

So we stepped back and looked at the trends affecting the family and the business. What’s happening in the telecommunications industry? How is Grandpa’s health? Who is going to be the next generation of corporate managers? Where is the money coming from? Do we want to keep the minority stockholders and, if not, how do we buy them out fairly? What if the IRS blows up a creative estate plan? Where does Grandpa’s life insurance go?

For each of these questions we plotted out a half-dozen different scenarios, possible actions and potential impact. Some were good, some bad. Some were based on the outcome we wanted; others were based on what we feared.

Our outline allowed us to prepare for a potentially devastating circumstance that would have been difficult to predict: the existence of a buy-sell agreement that would have blocked our ability to recapitalize the company.

Proactive risk management is a process that at the outset may feel like chasing shadows. During this process family members need to envision many different events and scenarios. Most—and possibly none—of these will ever occur. Thinking about these scenarios can easily take you past your comfort zone. But if a crisis hits, it quickly becomes evident that investing the time in conducting these exercises returns major dividends to family business owners and managers.

Once a crisis is upon you, it is difficult to tap the creative resources of the business owners and managers because they are so focused on attending to the added burdens imposed by the crisis. With scenario plans in place, family members can move forward because they have already thought through potential actions and their consequences. A crisis is going to be hard no matter what, but with some thoughtful risk management planning, the family will be well positioned to manage it.

Matthew F. Erskine is principal of The Erskine Company LLC, a strategic advisory firm located in Worcester, Mass., that counsels clients on the management of unique family assets, including multimillion-dollar family businesses, numismatics collections, fine art and Americana collections, commercial and residential real estate holdings, and family compounds (www.erskineco.com).

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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“The first generation builds the business, the second expands it and the third destroys it.” It is a universally acknowledged phenomenon that few family-owned businesses survive beyond the third generation. While most business owners are highly successful in building and managing their companies, they are often less successful when it comes to transitioning their enterprises from one generation to the next.

In the typical evolution of a family business, it moves from the controlling owner stage to the sibling partnership stage and then to the cousin consortium stage. Professionalizing the business is generally considered to be a necessary step in its evolution, as expansion and survival would naturally require companies to benchmark industry best practices and tap into the external labor market for access to a higher quantity and quality of human resources. The best practices and experts in the corresponding fields can contribute significantly to a family firm’s expansion and success potential. They also in turn inject more professionalism into the firm, enabling the family company to achieve rapid financial growth within a short time span.

While conventional wisdom dictates that higher levels of professionalism within family businesses will translate into better firm performance, there is, however, a limit to the amount of professionalism that a family firm should adopt.

Let us examine Yeo’s, a well-known food and beverage brand in Asia that was started as a family business in 1901. Today, none of the owners belong to the Yeo family that gives the brand its name. By the 1990s, squabbles over investment and business management decisions had caused tensions among the third generation of the Yeo family and led to an acrimonious dissolution of the business.

Yeo’s history illustrates that the initial success attained through professionalizing family businesses is often offset by problems, squabbles or even family feuds. The reason why many family companies fail to survive beyond the third generation actually lies in the process of professionalizing itself. How so?

a. Professionalism cannot sufficiently address the complexity associated with family ties. The involvement of the family in family businesses creates complexity and may undermine the business structure and theoretical methodologies commonly employed in non-family enterprises. For instance, professionalism requires all organizational processes to be intrinsically involved in delivering shareholder value. However, in the case of a family business, organizational processes must factor in not only the business, but also the family dimension, which encompasses both human and emotional aspects of the family. Enforcing professionalism could mean ignoring the family dimension, thus resulting in family conflicts that threaten survival of the business.

b. Professionalism causes family businesses to lose their inherent competitive edge over non-family businesses. It has been widely established that family businesses have a competitive advantage over non-family businesses. For instance, family firms have a unique working environment that fosters a family-oriented workplace and inspires greater employee care and loyalty. In fact, family businesses have reportedly seen better performance than non-family businesses, with an annual return on assets that is 6.65% higher than the return on assets of non-family firms (David Thayne Leibell, “Succession planning,” Trusts & Estates, March 2011).

However, as the level of professionalism rises, the traditional business structure and family relationships in the family business are gradually eroded. These consequences, coupled with the inherent complexity of the family business, may cause the organization to lose its competitive edge and eventually fail to survive.

Family capital as the cornerstone of success

Despite well-known headlines that captured the public’s attention, such as “Rum on the rocks: Bacardi’s family secrets are spilling into a court fight” and “Hot dog joint made famous on M*A*S*H [Tony Packo’s] threatened by family feud,” many family businesses have successfully bypassed the cold, harsh track to transcend beyond their third generation. In fact, the world’s oldest hotel, Hoshi Ryokan in Japan, is a family business that has successfully run for 1,300 years and transcended across 46 generations. In the West, we have Lyman Orchards in Conneticut (managed by its eighth generation), Heineken in the Netherlands (managed by its fourth generation), etc.

Indeed, successful family businesses today have engaged in some form of professionalization before they arrive at their current market standing and yet have managed to transcend beyond their third generation. Hence the question: Why them, and not the rest?

What most successful family companies have done to achieve their current performance goes beyond professionalizing their businesses. While it is important to professionalize to attain strong financial capital, it is even more crucial to secure a high level of family capital. This is achieved through building a strong, gratifying and supportive relationship among family members.

Family capital enables the firm to move forward as a unified body without strife and dissension, thereby ensuring its sustainability. Healthy relationships among family members aid in bonding the family together in tumultuous times and are a good form of defense in warding off hostile takeovers.

A strategy that overemphasizes professionalism and neglects the family will lead to a deteriorating family business. Even though the business might thrive initially, the family, which forms the basis of the enterprise, will start to fall apart, ultimately causing the business to fail. The study “Correlates of Success in Family Business Transitions,” by Michael H. Morris and associates (Journal of Business Venturing, September 1997) found that 60% of succession plans failed because of problems in the relationships among family members.

Kikkoman Corporation, a family company that was founded in 1630 and is still thriving today, demonstrates the importance of focusing on family as well as financials. A creed the company adopted in 1926 formalized numerous habits and traditions typically found in families, including “make strong morals your foundation, and focus on money last,” “strive for harmony in your family” and “have a family reunion twice a year. At these reunions, don’t judge your family members based on their income but rather on their character.” These core values were designed to support internal family harmony, and have worked well in sustaining the business.

What defines family capital?

Family capital is a unique form of social capital that is an asset to family enterprises. It comes in three critical forms.

1. The business connections and knowledge networks established by previous generations of family managers.

Implication: The next generation of family members can tap into these connections and networks, thereby fast-forwarding business success and ensuring business continuity. The new generations avoid making major mistakes by learning from their forefathers’ experiences.

2. Family rights and obligations. “Rights” refers to the power to make business decisions. “Obligations” refers to the responsibility of ensuring both the financial and the emotional well-being of other family members.

Implication: Meeting one’s family obligations maintains the fabric of familial relations and allows objective business decisions to be made with minimal opposition or ill feelings from family members that can threaten continuity of the business.

3. Family values and family governance (the set of processes and policies affecting how a family business is managed).

Implication: Teaching family values and professional ethics to the next generation equips future leaders with a sense of responsibility and the ability to differentiate right from wrong. The next generation of leaders will then act in a manner consistent with the preferred workplace behaviors and will integrate family values with other desired management practices.

Attaining deep pockets and warm hearts

It is important to maintain high levels of family capital to encourage further accumulation of financial capital. The current perception that professionalism is the key to long-term success in family businesses is misguided. Without accounting for family capital, professionalizing a family business will be equivalent to playing Russian roulette.

As the preceding case examples have demonstrated, family business success of depends on achieving balance between strong financials (deep pockets) and family capital (warm hearts). By monitoring the level of family capital on top of financial performance, family businesses can keep the hearts of their family members warm and the pockets deep, thereby ensuring long-term continuity.

Andreas Raharso (andreas.raharso@haygroup.com) is the director of Hay Group’s Global R&D Center for Strategy Execution, based in Singapore.

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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As of this writing, the state of the American economy is grim. The state of American politics is contentious. But the state of American family businesses is resolute.

Naturally, some have been more successful than others. Even in prosperous times, it’s not easy to balance the competing demands of family membership and business ownership. When investment yields and company profits are declining, conflicts below the surface are more likely to bubble up.

Which family enterprises will thrive in this sputtering economy? Though every clan has its own way of approaching its challenges, the most resilient have the following qualities:

• They take calculated risks and embrace innovation. Later-generation leaders’ complacency can lead to businesses made obsolete by technological advances or eclipsed by global competitors. Savvy successors continually test the assumptions behind their strategic plan and invest in adjustments when needed. Hussey Seating Company of North Berwick, Maine, was founded as a maker of plows in 1835 and reinvented itself several times during and after the Industrial Revolution. Hussey now makes seats for schools and arenas.

• They achieve family buy-in. While family members who work in the business are committed to its mission, those who don’t work there may view it as just another investment. Consider Menasha Corporation in Neenah, Wis., owned by about 150 descendants of founder Elisha Smith and run by non-family managers. Fifth-generation member Sylvia Shepard says the family began to reconnect to its legacy as it prepared a history book to celebrate the company’s 150th anniversary in 2000. She later spearheaded creation of the Smith Family Council to unify family members, educate shareholders and give them a voice.

• They conserve cash and use debt wisely. “Cash is king” is a common family business mantra. That philosophy is serving family firms well in these recessionary times. But debt has its place if it’s used to finance smart growth or facilities upgrades. In 2006, Ford Motor Co., America’s second-largest family business, borrowed $23.6 billion by putting up all its major assets as collateral. That helped the automaker to survive without a government bailout.

• They learn from their legacy. A family business legacy is a strategic advantage. Courtney Cole and Monica Peck, sixth-generation owners of Noblesville, Ind., Chevrolet dealer W. Hare & Son, say awareness of their family’s persistence through a depression and two world wars helps them keep the current recession in perspective. But a distinction must be made between embracing a legacy and clinging to an outmoded tradition. When W. Hare & Son was founded in 1847, it sold buggies—not a wise business model for the 21st century.

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Sustainability is serious business. A well-developed sustainability plan will help your company to mitigate risk and will position it to leverage opportunities for value creation. Sustainability is particularly relevant for family-controlled businesses, which are strongly connected to their communities and are oriented toward preserving wealth and ensuring success for future generations.

Multiple definitions

There are many definitions of sustainability. A 1987 report from the United Nations’ World Commission on Environment and Development, “Our Common Future,” defined it as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” John Elkington, a leading authority on corporate responsibility and sustainable development, coined the term “triple bottom line,” which requires consideration of “people, planet and profit.” The Dow Jones Sustainability Index defines corporate sustainability as “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”

However sustainability is defined, it’s important, and many corporations have stepped up to develop plans. At Duke Energy, one of the U.S.’s largest electric energy companies, alternatives are assessed through a “sustainability filter” with four elements: “connections to the big picture and the interrelationships between issues; efficiency to save money and respect our planet’s limits; balance, effectively addressing competing interests; and grandchildren, anticipating how future generations will view the actions we take (or don’t take) today.”

Why it’s essential

The massive Deepwater Horizon oil spill in the Gulf of Mexico in 2010 made it abundantly clear why companies must deal with environmental, social and economic issues. But, given the many challenges facing family-controlled businesses, should sustainability be a priority in family companies? We believe it must be, and the reasons are compelling.

• Sources of capital for privately held businesses are limited. Increasingly, banks and other financial institutions are considering a company’s environmental exposures and opportunities. Lenders such as Goldman Sachs say they seek to identify “the best managed companies around the globe that will succeed on a sustainable basis.” Others, including Deutsche Bank and StateStreet, regard sustainability as important for investment decisions. Environmental exposures increase a company’s costs of capital and insurance.

• Risk tolerance for major environmental issues is lower. One environmental mishap can ruin years and years of dedication, hard work and good will.

• Family-controlled businesses often have a unique relationship with the communities in which they operate and recognize the need to contribute to them. Many family companies provide their employees paid time off for community service and donate generously to local charities and institutions.

• Long-term stewardship is generally a core value at family firms. Fisk Johnson, chairman and CEO of SC Johnson, has said that business has both an opportunity and an obligation to make the world better by advancing environmental and social progress.

Tangible benefits

While some companies regard sustainability issues as no more than required compliance with regulations, other firms have embraced it as an opportunity for significant value creation. Nearly all businesses can reduce operating expenses through increased energy efficiency, reduced water consumption and elimination of waste.

Several years ago, with oil hovering at only $60 per barrel, the World Business Council for Sustainable Development found that energy use in buildings could be reduced on average by 40%, with investments generating a payback in five years. Just as important, companies are finding that significant savings are available through collaboration with their suppliers to improve the eco-efficiency of the supply chain. Optimizing logistics can yield dual benefits of reduced energy expense and reduced emissions. A key to increasing operating sustainability is a systems approach—from product designs for increased material efficiency or reusability, to improved packaging, to optimized logistics.

Visionary companies are leveraging sustainability to increase revenues through competitive advantage. “As a family-owned business, we take seriously our responsibility to create a healthy future that we all can savor,” Bob Boller at Kendall-Jackson Vineyards wrote in a blog post. “[W]e take the same approach to sustainability as we do with any other business activity—we demonstrate leadership. Whether it’s quality, customer service or sustainability, our expectations are to lead all industry.”

Companies have found that marketing more sustainable products leads to increased revenues. A key finding is that while consumers will not pay more or accept diminished performance for green attributes, they will favor green products over other comparable alternatives.

Assessing the benefits

How can the benefits of improved sustainability be funded, monitored and captured? A key is a comprehensive but pragmatic sustainability strategy. A coherent plan for a firm’s sustainability initiatives should be based on an assessment of both the needs (what’s clearly not sustainable and creates risks?) and the opportunities (how do we make this financially viable?). Actions to address needs and opportunities can be prioritized, with near-term operating efficiency improvements funding longer-term efforts to redesign products and grow markets.

Consumers, financial institutions, regulators and the public at large are becoming increasingly sensitive to the challenges of fulfilling the needs of the present without jeopardizing the ability of our children, our grandchildren and future generations to do so. Family-owned businesses have unique challenges and a heightened sense of responsibility to the community in which they operate. Attention to sustainability offers the family business opportunities to reduce costs, enhance products and services, and mitigate the risk of potential environmental issues. An enterprise sustainability strategy can unite and energize employees, undergird public relations and drive value creation.

Fred C. Mason is a consultant at ReProduct Inc., a firm based in Kennett Square, Pa. He assists corporations in creating shareholder value and competitive differentiation through sustainability (www.reproduct.net).

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