Including the family in sound business practices

In family firms, the family is as important as the business. Acknowledging this essential fact can help business leaders increase their companies’ chances of success.

By Sharon Nelton

“But we’re different!” family business owners used to say, in an effort to explain why the best management practices that helped other businesses thrive would not necessarily work so well in their own companies.

Not until pioneering family business consultants and educators in the 1970s and 1980s led the way, developing family business as a field of study and consulting, did we begin to understand what being “different” meant. The difference was the family.

“The most critical issues facing business-owning families are family-based issues more than they are business-based issues,” writes John L. Ward in his book, Perpetuating the Family Business: 50 Lessons Learned from Long-Lasting, Successful Families in Business. Ward, a clinical professor of family enterprises at Northwestern University, recalls, “I used to argue that you’ve got to run a business like a business, business comes first, business is what matters, business issues are the real issues, let’s focus on the business, et cetera, et cetera, et cetera.”

But his consulting work with family firms began to take him by surprise. “When I offered what I thought were some brilliant strategic planning ideas, business owners said, ‘Well now, how do these ideas fit in with our value system?’ Or they asked how my suggestions would connect with the family’s capabilities and the personalities in the family.” As family business owners insisted on taking values into consideration, Ward says, “they gave me a whole new perspective on strategy.”

What Ward and a whole generation of educators and advisers came to understand was that in family firms, the family is as important as the business; thus, the family must be considered every step of the way.

One major discovery these professionals made was that while family companies were indeed different from non-family firms, family businesses shared important similarities with one another. What’s more, these similarities were predictable, and that predictability has enabled consultants, educators and other professionals to develop a body of knowledge that could be used to coach family business owners.

Initially, the family business “movement” concentrated on the problems of passing a business to the next generation. In the past 20 years or so, understanding of family business has broadened and deepened, and now business-owning families have a wealth of knowledge available to them on all sorts of issues.

Out of this knowledge, Family Business has gleaned nine recommendations for family firms. What sets them apart from “best practices” followed by other companies is that these aren’t limited to the business. They address the family side of the family/business equation and show how companies increase their chances of success by acknowledging and honoring the family and nurturing its support of the business.

We offer these suggestions in no particular order. Those at the beginning are no more important than those at the end. All are crucial to family business continuity.

1. Understand that all family businesses go through predictable stages and plan accordingly.

Each stage has characteristics and challenges that are common to the same stage in other family companies. In the first stage, the business is typically owned by one individual. The critical issues, according to Ward, are the owner’s ability to let go of control and the availability of a competent successor.

In the second stage, the business evolves into a partnership of siblings, whose major challenges are revitalizing the company’s strategy and working together as a team.

The third stage is what researchers call the “cousin consortium” or the “cousin collaboration,” when the business passes on to a group of cousins. The family is now more diverse and dispersed, and among the crucial issues facing it are winning family members’ commitment to the business and building family cohesion. All too often at this stage, siblings and cousins put their own branch of the family ahead of the family as a whole and this can be destructive to both the extended family and to the business. (See No. 8 below.)

2. Deliberately educate the entire family.

Education is needed for preparing current and future family shareholders for responsible business ownership, instilling values in younger family members, and developing the next generation of business and family leaders. Shared family education can also enhance communication, bring family members closer together and strengthen the family’s commitment to the business.

Education can be formal or informal. Members of the Leavens family, which owns the Leavens Ranches, growers of lemons, avocados and grapes in Ventura and Monterey counties in California, are now spread across the U.S., and some live overseas. The nine members of the third generation recognized the need to prepare their own children for future ownership and leadership of the business. To meet that need, they developed an education program that included yearly family gatherings with business seminars for adults and programs that helped teenagers understand their family enterprise; “Camp Mary,” an educational summer camp for kids named for the family matriarch; and a summer youth employment program.

Writing in FFI Practitioner, an online publication of the Family Firm Institute, Heather Leavens August, a third-generation family member who lives in Firestone, Colo., said her brother gave the young people a lesson in lemon picking at the first Camp Mary. “This was not only to teach the logistics of the job, but also to make them appreciate how hard our employees work,” she said.

Many families include educational sessions at shareholder meetings or family meetings and retreats, bringing in outsiders to discuss a given subject or to conduct a seminar. Others join family business forums, often sponsored by universities, where they can learn from the experiences of other business-owning families.

3. Stand for something. Develop a core set of values that will guide the family and the business.

Early this year, Steven H. Korman, the CEO of Korman Communities, a family-owned housing development company in Plymouth Meeting, Pa., set forth his position on CEOs’ responsibility toward their employees in the current economic downturn. He spent $16,000 on ads in the New York Times and Philadelphia Inquirer denouncing the elimination of thousands of jobs by companies seeking to “improve the bottom line.” He urged all CEOs to be willing to accept a smaller profit and to remember that he and they were dealing not just with numbers “but with real people and real families who need to keep their jobs.” He also sent a letter with a similar message to the CEOs of 17 companies whose stock he owned. While Korman told a reporter he had “no problem” if layoffs were made to save a company, he made it clear that he put people before a higher bottom line. (See FB, Summer 2009.)

Determining a family’s values and setting them down on paper in a values statement is especially important in the first and second stages of a family business. When you get to the cousin stage and beyond, it becomes harder to do because of the family’s greater size and diversity. Nevertheless, the family can still agree on core values that will guide the business. The many members of the Ochs-Sulzberger family, which has owned the New York Times for more than 110 years, are still united by their belief in their cherished newspaper as a public trust and hold to the credo established by Adolph Ochs in his first editorial, in 1896, that the Times would “give the news impartially, without fear or favor, regardless of party, sect or interests involved.”

4. Be honest and ethical.

While this would be a “best practice” in any business, it is especially vital in family firms. Lack of honesty can ruin not only a business, but also a family. Consider Bernard L. Madoff, alleged to have bilked his Wall Street investment company’s clients of $50 billion and now in federal prison. He was turned in by his two sons, who worked in their father’s firm. Or consider John Rigas, the founder of Adelphia Communications, once the nation’s fifth-largest cable company, based in Coudersport, Pa. He and his son Timothy were convicted of fraud and conspiracy and are now serving lengthy prison terms. Another son, Michael, received ten months of home confinement on lesser charges.

Unfortunately, history offers too many such examples.

5. Draw from the whole talent pool in your family, not just the male half.

In the past two decades, we have seen an increased crumbling of the practice of primogeniture in family businesses in the U.S. and elsewhere. To have available a family talent pool twice the size it might have been when just males were included can only benefit family companies.

As recently as the 1980s, women were usually relegated to behind-the-scenes roles in their families’ companies, if they had a role at all. But things began to change as young, educated, competent women started to assert their rights.

Probably the first statistical research to even mention women’s participation in family firms was the MassMutual Family Business Study of 1993, which reported that 16% of the respondents’ daughters were involved in day-to-day operations. A 1997 study indicated that only 5% of the family businesses surveyed were run by women. That percentage doubled by 2002, and in 2007, in what the American Family Business Survey called “a major advance,” 24% of the respondents said their companies had a woman CEO or president.

While you’re considering your entire talent pool, don’t forget daughters-in-law. After her husband was killed in a traffic accident, Ardath Rodale stepped in as CEO of Rodale Inc., a major book and magazine publishing company founded by her father-in-law in Emmaus, Pa. She ran the company successfully for a dozen years and then served as chair for another five. Countless other daughters-in-law have played similar vital roles in their families’ companies.

6. Manage family expectations.

A key way to do this is to develop a set of policies that spell out family members’ participation in and relationship to the business and the family. Families often start by creating a family employment policy, stipulating what is expected of family members if they wish to join the business and advance in it. Some families also develop family mission statements, setting forth the family’s goals; compensation and performance policies for family employees; family philanthropy guidelines; and codes of conduct that lay down standards for how family members will treat one another. A shareholder agreement, which covers such issues as who can own shares and conditions under which stock can be bought and sold, is another type of policy. Many families also establish a requirement for prenuptial agreements to ensure the business stays in family hands.

Family business consultants frequently advise families to establish policies before they’re needed. Doing so averts having to create a policy under emergency circumstances. Policies are then also seen by family members as more fair and objective because the rules apply to everybody.

7. Encourage and provide for career development for the next generation.

Younger family members are the future of your family business. Even the ones who don’t join the business have a stake in the career development of those who do—the ones outside will likely be shareholders and will depend on those inside to be able to move the business forward. Having insiders who are competent and well trained to lead the business can encourage trust and minimize conflict among “insiders” and “outsiders.”

Too often, business owners tell younger family members working in the business to “sink or swim” or “learn by doing,” according to Amy M. Schuman, a principal of the Marietta, Ga.-based Family Business Consulting Group Inc. Instead, in her booklet on career development, “Nurturing the Talent to Nurture the Legacy,” Schuman recommends a carefully planned and monitored development process that begins when family members are young, with part-time jobs and internships during high school or college, followed by their first real jobs in the family firm and then expansion of their responsibilities. She notes that to be effective, a career-development process should include determining where the family wants the business to go and what kind of leadership it will need to get there. Young family members who aspire to advance can then pursue education and on-the-job experience that will help enable them to fill any future leadership gaps that family perceives.

8. As best you can, minimize sibling and cousin rivalry.

Many a family business has been known to splinter as a result of friction among siblings or cousins. A famous example is that of Gucci, the renowned Italian luxury goods company. According to Sara Gay Forden’s history of the company, The House of Gucci, founder Guccio Gucci often played his three sons against each other, “believing that competition would stimulate them to perform better.” Instead, it created animosity among the brothers that they in turn passed on to their own sons. The fact that the family could not unite played a key role in the company’s eventual fall out of family hands.

Parents can foster better relationships by a show of ample affection for and appreciation of all their children and by setting an example of mutual respect toward their own siblings. As suggested in No. 1, parents must consider the well-being of the business and the whole family and resist putting the needs and desires of their own branch of the family first.

If you are members of a conflicted younger generation, particularly a cousin generation, perhaps you can break the cycle. Call off the feud. Begin to know one another. You may find you like each other!

9. See to it that there are roles for everyone who wants to participate, either in the business or in the family.

A business may not be able to absorb all the family members who wish to be involved. Or, younger family members may wish to pursue careers elsewhere but still hope to maintain a connection to the business that has been such an important part of the family’s life. The good news is that everyone can play a role as long as each sincerely wants to be involved and can bring useful skills or ideas to the table.

For a family member who has inherited shares in the business but does not work in it, participation means becoming an effective shareholder—a very significant responsibility.

Roles in the family itself are just as important as roles in the business, and there are many opportunities for willing and able family leaders. Many families need leaders to run family councils, head up committees, or chair family meetings or retreats. Some families have foundations, which need family oversight.

Keep in mind that it’s important to reward family leadership and show it the same respect offered to leaders in the business.

Abundant sources of help

Many resources—articles, books, advisers and networking groups—are available to those seeking more information on these best practices. In the last few decades, considerable research has been devoted to understanding and supporting the success of family-owned businesses. Family businesses indeed are different from other enterprises, but family business owners can rejoice in the certainty that they need not face their challenges on their own.

Sharon Nelton has been writing about family-owned business for more than 25 years. She is a former board member of the Family Firm Institute.