Why listen to the dumb relatives ?

When the discontented have no voice in the business or rights of exit, the company may be in for an explosion.

By Peter Davis

Over time in family firms, it becomes harder and harder to keep everyone happy. Young family members who see little prospect of ever running the business think about leaving. Family stockholders in third generation companies may be getting little in the way of dividends while the managers are paying themselves well; they get more and more frustrated when they feel they have no influence.

When dissatisfaction grows, the response of the power structure in the business may be: "Be quiet and be grateful for what you have." Or, "Don't you realize how difficult it is to make money today! Don't you see what heroes we are in a very difficult business!"

Family businesses cannot afford to ignore expressions of discontent and dissent from their members. The leaders must establish forums in which the disenfranchised can have a voice, and, if they still want out, must make it easy for them to sell their stock. Otherwise, the pent-up dissatisfaction may one day explode.

A generation ago, a politcal economist named Alfred Hirschman wrote a landmark book about what people can do when the organizations they belong to no longer meet their needs. The title expresses the three options as Hirschman sees them: Exit, Voice, and Loyalty.

Some younger family members may finally choose the loyalty option, even though they are unhappy. They will declare loyalty to those who are running the show, hoping thereby to reap rewards that will ultimately compensate them for their feelings of deprivation. But the company's most appropriate responses should be 1) to make exit easier, and 2) to develop a comprehensive but flexible set of voice options.

In a family business, exit is extraordinarily difficult. I have worked with numerous young family members who feel they are stuck in their careers. These are people who should leave the business and go to work elsewhere, but for various reasons they are staying put. Perhaps after thinking it over, they are simply unwilling to give up their "golden handcuffs," for example, or they may feel they would be letting down their parents and siblings if they left.

If they want to sell their stock, they run into other, equally formidable barriers. Many families consider selling stock in the company to be an act of disloyalty, if not high treason. If you sell at the value that the family's lawyers have engineered for estate tax purposes, you should probably have your head examined.But if you insist on a higher price, the company may be forced to go into debt to buy you out; if the company goes down as a result, you are saddled with a lifetime of guilt. And if, in your greed, you force up estate taxes for everyone else, you and your lineage may be cursed for generations.

Shareholder liquidity is a fiction in most family companies, but it shouldn't be. Companies have much to gain by making exit easier. For one thing, letting young people sell out permits them to make career choices more in line with their true aspirations. For another, if all the kids are quitting, at least that lets the powers-that-be know they have to do more to keep the new generation interested.

Giving a larger voice to shareholders who are removed from the power structure is easier said than done — and one reason, of course, is that it threatens the power structure. The leaders may feel that the shareholders who complain the most are "chronic complainers" who are not really prepared to do the work necessary to be responsible participants.

In reality, this attitude often reflects myths and prejudices in family firms. For example, there is the Pandora's Box myth: "Don't open that up, because you never know where it will lead us!" And there is the sleeping-dogs myth: "Why bring that up to Aunt Tillie — it will only upset her." And there is the dumb-relatives routine: "Why confuse them with facts when they don't know the first thing about the business?"

Questions of participation go hand in hand with power issues. When the patriarch is alive, it's pretty clear where power lies.Once the patriarch is dead, family members may have a real fear of a loss of control. Differences over goals and objectives have to be openly discussed. If family members are unwilling to confront the issues, if they're reluctant to go to the mat with each other because it may break up the family, the business will be in danger of paralysis.

In a family business, the legitimacy of power is bestowed by the older generation, but also depends on the chosen leader's ability to continue meeting the family's needs and running the business according to family tradition. Encouraging participation is one way that the leader can maintain legitimacy in the eyes of other family members.

For the leaders, the challenge is to increase participation in the business without losing control. That may take as long as half a generation and requires the family to re-examine issues of power and how it is used.

First and fundamentally, those in power must commit themselves to a process of real empowerment of the others. Convincing the leaders that it will be all right — that giving the kids some voice in decisions won't doom the company — requires persistence and tact.

Second, the family has to build a consensus in favor of including all the members and respecting their needs and opinions. Third, shareholders have to reach a consensus on some minimal ground rules for running the business — on growth targets, for example, or on the amount of risk that will be taken, perhaps even on payouts to shareholders.

Fourth, the family has to define the appropriate level of participation for each of the members. Too often, participation in family companies requires an all-or-nothing, lifetime commitment, like joining a church. Many young family members have a deep attachment to the business but don't want to dedicate their lives to it. There are supporting roles that they can play, for example: board member; family council member; board committee member; active shareholder (getting involved when important issues need to be resolved); family ambassador (showing up when a family presence is called for in the business or community).

To participate responsibly, family members may need some education in the business beyond what they have. Sometimes when we think of succession, we forget that there are two separate processes:succession in management and succession in ownership. Children who own stock but don't want to manage must be taught what they need to know to express themselves as owners. They have to learn something about the company, about management, about finance, and so on.

Finally, there must be forums for participation. The annual shareholders' meeting is seldom enough; perhaps the meetings ought to be semi-annual or quarterly. A board of directors that includes family members not active in the business may be more important to enhancing participation than to establishing management accountability (which it frequently doesn't do anyway).

Sometimes a new forum is necessary. Many families are establishing family councils, which meet in an informal setting and encourage all members to express their feelings freely.

Some have established auxiliary boards on which younger family members grapple with real issues and learn to function as board members.

Assuring family members that they will have voice in the company affairs, that their views will be taken seriously, of course calls for leadership. When the leaders are constantly bogged down in the day-to-day running of the company, they may neglect the process. But when leaders are responsive and show concern, half the battle is won.

I currently know at least one company that will surely succeed. The patriarch of this business has made it a point to meet with young family members every Thursday at 4 p.m. without fail, no matter what. Here is a man who has built a billion-dollar company, but he always has time for members of his family. They appreciate it, and know their voices are being heard.

Peter Davis is chairman of Family Business's advisory board, and the director of the Division of Family Business Studies at the Wharton School.