A scientific field offers insights for family businesses

By Scott E. Friedman

Family business struggles are well known to anyone working in the field, whether as a proverb (“shirtsleeves to shirtsleeves in three generations”), as a statistic (only 12% of family businesses make it to the third generation), through regularly published accounts of prominent families caught up in litigation or through personal experience. Despite having access to professional advisers working to promote intergenerational success, many family businesses continue to struggle. This suggests the need for family business leaders to adopt a new planning paradigm.

The evolution of conflict

In The Science of Fear, Daniel Gardner writes that the central insight of evolutionary psychology is that “our brains were simply not shaped by life in the world as we know it now, or even the agrarian world that preceded it.” Our modern-day brains are inherited from our ancestors, whose survival depended on their ability to react to the presence of predatory animals. While many of these predators are extinct or today mostly encountered in the zoo, our brains remain hard-wired to fight, flee or freeze when faced with a fear-triggering response. Dr. Dan Baker explains in his book What Happy People Know:

“The forces of evolution, by their very nature, endowed [our neurological] fear system with tremendous power, because in the brutal early epochs of mankind, it alone kept us alive. It gained us the hair-trigger capacity to spring into action at the first hint of threat. The automatic fear response became faster than the process of rational thought, faster than experiencing the feeling of love, faster than any other human action.… Unfortunately, in modern life, what is good for survival is often bad for happiness and even for long-term health.”

Family businesses are fertile breeding grounds for modern-day fears that create “fight or flight” responses. These fears, though not life-threatening, include the fear of being undercompensated, the fear of not being given appropriate credit on a project and the fear of not having sufficient control (or the fear of losing control).

Best-selling books like Blink by Malcolm Gladwell highlight how our brains can confound us. We are prone to irrational thinking. All too often, we think we are paying close attention to what someone is saying when we actually aren’t. In family businesses, this can precipitate actions that erode the bonds of trust over time and make multigenerational success unlikely. Fortunately, there are antidotes to these challenges that are informed by the science of positive psychology.

The science of positive psychology

Positive psychology is the scientific study of factors that contribute to the optimal functioning of people, groups and organizations. This field of study offers important insights into the correlation of a positive workplace culture with individual happiness and organizational success. Shawn Achor offers some observations in The Happiness Advantage: (1) Happy people are more productive, work longer hours and take fewer sick days compared with unhappy people. (2) People who express positive emotions are more effective negotiators than those who are neutral or negative. (3) Happiness increases dopamine and serotonin levels, which increase neural connections and allow us to be more thoughtful and creative. (4) Teams with encouraging managers perform better than teams whose managers praised them less.

These and similar insights can help family businesses counteract the negative consequences of our hard-wired brain functionality. When working with family businesses, I have found the following seven specific strategies particularly helpful:

• Focus on culture. Family businesses can help create (or reinforce) a positive culture by agreeing to a code of conduct that promotes respect and kindness. Similarly, changing organizational focus from “problem solving” to “possibility seeking” can create positive energy that benefits both family relationships and business initiatives. This can be accomplished through the use of organizational development tools.

• Promote “fit” over “convenience.” Family employment decisions should be based on there being both a need and a good “fit” between the job opening and a family member’s talents and experience. A variety of validated assessment tools are available to help ensure that individuals are assigned to fill a role based on their strengths and interests—not on the basis of status, convenience or entitlement.

• Emphasize humility. While the importance of effective communication is well known, science suggests that there will always be inherent limitations in our ability to communicate effectively owing to a variety of evolutionarily derived foibles that, for example, lead us think that we are listening when we are only really “hearing” but not paying attention. Accordingly, families would be well served to complement traditional communication improvement techniques with an increasingly appreciated leadership trait: humility. According to Bradley Owens, an assistant professor at the University at Buffalo School of Management, successful leaders admit their mistakes, highlight team members’ strengths and demonstrate their willingness to learn.

• Clarify and commit to core principles. Family businesses are inherently complex organizations made up of individuals who have their own view about what is good for their business. As a result, the decision-making process can often prove divisive, with heated emotional arguments stemming from someone’s sense of unfairness. A helpful antidote to this problem is the thoughtful articulation of—and adherence to—core principles, including a statement of values, a mission statement, a vision statement and appropriate policies.

• Establish professional governance structures. Best-selling books like Freakonomics by Steven Levitt and Stephen J. Dubner help explain why we do some amazingly dumb things. Such errors are often the product of survival strategies that allowed our ancestors to evade danger and find food. We are prone to irrationality and overconfidence, and to making snap decisions. To help counteract these tendencies, family business leaders would do well to seek the advice and perspective of objective observers. For this as well as other reasons, developing a board of directors with capable non-family members is critical for family business success.

• Preempt conflict. Differences of opinion not only are inevitable but also can be a sign of a strong family business, one in which individuals are encouraged to think creatively and express their views. Such differences often result in better decisions. But disagreements among family members can be mishandled and threaten the sustainability of the business. Traditionally, lawyers include a “conflict resolution” provision in a shareholder agreement that specifies whether conflict will be resolved by arbitration, mediation or litigation. Unfortunately, by the time a family gets to this stage, trust is so diminished that it can be nearly impossible for family members to work together after “resolving” their conflict. Accordingly, families should consider alternative mechanisms that may be more likely to resolve differences constructively, such as seeking the advice of a family elder or a non-family director. Additionally, developments in collaborative law and game theory might be considered as strategies to help preempt conflict.

• Complement traditional plans. Many “technically” great plans don’t work because family businesses are fueled by emotions and instincts, not just by data. Professional advisers must expand their planning toolkit to engage in a more holistic planning process. There are some exciting opportunities to develop more positive plans. For example, “retirement planning” might include helping senior family members think about their “second-act careers.” Estate plans might focus not only on the transmission of tangible assets but also on the creation of an ethical will to transmit intangible assets like insights, experiences and lessons.

Scott E. Friedman is managing partner at the law firm of Lippes Mathias Wexler Friedman LLP in Buffalo, N.Y. (www.lippes com). His new book, Family Business and Positive Psychology: Planning & Counseling for Lawyers and Business Professionals, will be available in Spring 2013.

 

 

 

 

 

 


 

 

 

 

 

 

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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May/June 2013

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