Risky family business
This year, our MLR Media team has focused on the topic of risk — an appropriate subject to consider in a year marked by a pandemic, destructive wildfires and social unrest.
Our sister publication Directors & Boards is addressing risk from various angles in each of its issues in 2020. Here at Family Business, we’ve centered our Transitions Fall 2020 conference on the theme of “Managing Risk in Good Times and Bad.”
A black swan event like the COVID-19 outbreak can take even seasoned business leaders by surprise. Other risks are more predictable but nonetheless negatively affect numerous companies each year. Unfortunately, family businesses are among those most likely to overlook warning signs.
Here are a few questions to consider:
• What is the risk of failing to embrace diversity? America’s corporate giants are examining their business practices with the goal of increasing diversity and inclusion, a task that became more urgent amid recent outrage over police killings of Black men. Family businesses tend to be insular, but if you aspire to grow your company and operate in a business-first culture, you would do well to conduct a similar review. Does the public perceive you as contributing to the problem or to the solution?
• What is the risk of putting off succession planning? Study after study has found a depressingly high percentage of family businesses lack a succession plan that has been documented and communicated to key stakeholders. Procrastination, especially during a pandemic, threatens the continuity of your family enterprise.
• What is the risk of not sharing information with outsiders? A reluctance to broadcast your financial results or family squabbles to the world is understandable. But engaging accomplished independent board members (fiduciary or advisory) can help your company reach the next level of growth, and the right consultant can help your family work its way out of destructive conflict.
• What is the risk of not spending time (or money) on family governance? Multigenerational business families need a formalized system for sharing information, addressing concerns and strengthening relationships. This involves time, effort and a budget allocation. The alternative is a disconnected group of distant-cousin shareholders with tenuous ties to the business and few reasons to continue as business partners.
• What is the risk of ignoring shareholders’ need for a return on their investment? If you never provide liquidity for your investors, they will demand a buyout. A family firm should have a policy that spells out when and how dividends will be paid. The policy should balance shareholders’ need for money with the company’s need for capital investment.
The good news is that many business families have managed these risks and are willing to share their experiences and lessons learned. On the flip side, you can easily find news reports describing what happens to families who don’t address business risks.
As this perilous year comes to a close, I hope you all commit to comprehensive, dispassionate risk assessment in 2021. Have a safe holiday season.
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