NOVEMBER/DECEMBER 2014


Marx ADVISERS FORUM

Context conflict: Balancing family and business

By Frederic J. Marx

Success for a family business cannot be packaged in a neat bundle. There are too many nuances; family dynamics, succession, business revenue and multigenerational financial health all play into the mix. All companies have a web of challenges, but family businesses must balance these complexities and many other elements to capture growth without sacrificing family-oriented goals.

We have a phrase for the balancing act: "context conflict." Often applied to the social media sphere, the term refers to the dance we do in order to manage different constituencies with different needs (e.g., posting to social media personal thoughts that will be seen by professional contacts). For family businesses, context conflict applies in a slightly different form. The organization demands a certain focus on the bottom line, which is not always in the long-term interests of the family. How do you walk the fine line to ensure both needs are met?

The most pressing concern is that maintaining culture and values are high priorities for family businesses, but owners have a fiduciary obligation to maximize the company's economic value. This commitment may be rattled if, for instance, owners receive an outsized offer to purchase the company that does not fit the family's long-term vision. In order to decline an offer that would bring greater value than the company is worth, owners must have legal provisions that allow them to vote "nay" if that better maintains the family's vision. Otherwise, they can bid a bittersweet goodbye to the family enterprise.

Keeping culture on track

Culture is an element of the enterprise that cannot be purchased, forced or wished into effectiveness. It must be fostered continuously and grown organically, with open communication and support from the ownership level down through the ranks. Without that consistent reinforcement, employees are likely to grow skeptical of moves that prioritize culture over financial value. Over time, this can lead to a rift that will make it difficult for companies to succeed.

One of the best parts of being involved in a family enterprise is the unique way the company contributes to the family—and vice versa. The personal goals of the owners play a tremendous role in corporate culture, so they must work to balance their family values, long-term vision and profitability.

Of course, the first and most important issue is figuring out what the values and vision are. That's no easy task when multiple generations and personalities are involved.

Families can start by asking three questions:

1. Who is the family? This may seem straightforward, but as a family grows it is crucial to know who is involved in the business. Identifying what "family" means leads to a discussion about the level of participation and roles. Are spouses part of the management circle? Is the family prepared to navigate fallout from a divorce, especially if a former spouse is entrenched in the company?

Including the younger generation is another key consideration. It paves the way for succession, but families must determine how wide the net is cast. They also must actively mentor younger family members to ensure their "buy-in" to the company mission and their participation further down the line.

2. What are the missions of the family and the business? The missions of the family and the business are often intertwined, and without the right discussion can expand into a tangled roadmap that is impossible to follow. Some may aim to grow the business with continuing reinvestment; others may want to maximize income from the business to further family members' personal goals. There are no wrong answers, but the family must agree on a direction and integrate it into the fabric of the company.

Once mission statements are crafted, families should agree to implementation steps and revisit them each year to ensure new family members, as well as existing ones, remain invested.

3. What is the core business, and into which industries can it successfully diversify? Discussions about the mission can have a profound impact on the strategic direction of the business. Issues such as the family's appetite for risk and debt, the notion of selling a business line, or expanding service offerings and geographies are often brought to the table. When the overall goals of the family and business are already in hand via the mission statement, ideas about where to take the company become easier to evaluate.

Answering these questions is rarely easy, and it's important to remember that every family has a different perspective. The issues call for thorough investigation, thoughtful consideration and consultation from advisers who are familiar with the financial and legal landscape.

Goals should be reviewed at least annually in a structured forum. This is not Thanksgiving table conversation, but is more suited to a conference room where facilitators can guide the discussion. Conduct a formal family meeting with a written agenda and ground rules that are agreed to in advance, with all family members present and committed to active participation.

With a firm grasp on the values and goals, it's time to build them into the business. Families should hard-wire the mission statement into corporate documents, and owners must then build the culture to reflect and support the family's values.

Corporate documents set the structure

Navigating this financial and cultural context conflict gets much easier when provisions are included in the legal structure of the company.

That may seem like an obvious measure, but is often overlooked in the drafting of shareholder agreements or Articles of Organization (for corporations) and Operating Agreements (for LLCs). A few actions to take:

Create your own language. Shareholders can include specific language that permits boards of directors or managers to prioritize factors beyond economic return. This allows for flexibility when it comes to customizing the goals of the business and empowering the family to make decisions that support their long-term interests.

Keep it flexible. Language in the corporate documents can be as loose or rigid as the shareholders decide, although a middle ground is likely the best place to land. One effective route is to identify the highest-priority goals, such as preserving family ownership, preserving the composition of the stakeholder group or preserving independence. Keeping the terms broad also can let shareholders adapt their style to fit the times and the dynamics of the family. Owners who try to predict—or restrict—the behavior of subsequent generations are likely to have their efforts backfire.

Think ahead to changes. If the time comes to make a change, the corporate documents can set guidelines around the number of votes necessary to edit or strike the provisions. They can establish the need for majority consent all the way up to a unanimous vote, although unanimity means that a sole vote can veto an important amendment.

There is no short path to keeping culture on the rails within a family, a business or both. Family business leaders can, however, make sure they balance their fiduciary and familial obligations to minimize context conflict for the current generation and those down the line.

Frederic J. Marx is a partner at the law firm of Hemenway & Barnes LLP in Boston (www.hembar.com).


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.