What should come first, family or business?

The impact of family-first decisions on other stakeholders ranges from "it doesn't matter" to "catastrophic".

By Léon Danco

Years ago as a young man I owned a small chemical business in Connecticut that took almost every minute of my time and every ounce of my energy. My wife, Katie, and our two children suffered greatly from the price that my constant absences imposed on them. Now I could have said, ÒSorry, this business is my life and it needs my full attention.Ó But that might have ended my marriage and all it meant to me. So, instead, I sold the business to my partner, moved to Cleveland, and joined academe.

Everything in life has a price, and because I have always given top priority to my family values, I was willing to give up a dream of building a business of my own in order to go into a field that would give me more time with my family.

Giving priority to family needs can sometimes be carried to extremes, however. Many family business owners, for example, still run their companies as only a cash cow to be milked for the benefit of family members or as a vehicle to satisfy their personal ego needs. That, of course, is their prerogative. Within limits, owners of a business have great power to run their company as they see fit.

But unless that business is a one-chair barbershop, it also depends on the loyalty and support of many othersÑnonfamily managers and employees, customers, suppliers, shareholders Ñwhose needs cannot be so cavalierly ignored. And owners donÕt win any loyalty by sending them the message that the company is directed by an egocentric ownership which manages it predominantly for their own selfish gratification or the ÒentitlementÓ of their relatives. In the world of the 1990s, employees no longer have the same fealty toward employers that they may once have had.

It has become fashionable today to classify family businesses into two types: those that embrace a business-first philosophy and those that lean toward a family-first approach. Like many generalizations, this one does more to confuse than to clarify the issues. In reality, owners must always weigh family values against business values on a case-by-case basis. There are many tough calls.

Is it wrong to give your daughter a job after sheÕs just gotten a divorce, has a little baby to take care of, and needs money? Of course not. What will rub other employees the wrong way, however, and put the business at risk, is if you make her a vice- president of marketing and pay her an excessive salary when she clearly doesnÕt have the requisite experience. ItÕs when inept relatives are put in positions of authority where their incompetence can adversely affect the work and performance of others that morale is sabotaged.

When you get older, thereÕs nothing wrong with spending more time with your family; taking more vacation time, learning to fish, or moving from Chicago to Tucson because the climate is better for your wifeÕs asthma. YouÕve earned the right to relax a little and enjoy life. But youÕre likely to have real problems running your company from such distant Òheadquarters,Ó and therefore you have to leave someone in charge who can make the necessary day-to-day operating decisions.

When your priorities change, the best advice is: DonÕt rationalize, reorganize; donÕt abdicate, delegate. Owners must see themselves as stewards of a business that can function without themÑand after them. They must develop an open accounting system and a viable governance structure for their company and learn to delegate to trusted, informed managers. Only business owners obsessed with their own ego needs insist on keeping all decision-making authority in their own hands, even when they are absent or otherwise preoccupied.

The impact of Òfamily-firstÓ decisions on other company stakeholders can be placed along a spectrum that ranges from ÒIt really doesnÕt make much differenceÓ to Òcatastrophic.Ó One that is potentially catastrophic (and not uncommon) is the decision to split up a company in order to keep warring siblings apart. Yes, sometimes dividing a business can be an effective way to give multiple talented and capable successors an opportunity to manage their own show. When such a division doesnÕt make economic sense, however, it can put the company at riskÑand set off a dash to the exits by experienced nonfamily managers.

Is it wrong to allow Mom or Dad to hang around the office and offer advice after retiring? Of course not; in most cases their experience can be helpful. But, in order for Mom and Dad to satisfy their desire to remain involved, should they be constantly makingÑor vetoingÑ major decisions about the strategic direction of the company, such as whether or not to expand into new territories or diversify the product line? No strategy is the prerogative of the new leadership.

Family and business values frequently clash over the question of how much the company should grow and how fast. I recently advised a company owned by a brother and sister who were agonizing over this issue. The brother, who managed most of the operation and owned 60 percent, saw real opportunities for growth in which he wanted to invest most of the companyÕs cash flow. However, the sister, who handled personnel and finance and owned 40 percent, did not want to risk everything on her brotherÕs projections. Although happy with the status quo, the sister wanted security for her future and to spend more time at home with her children. If she wanted to do that, I suggested that she leave the business, cash out her stock which was her patrimony, and invest the money instead in securities more suited to her needs.

The woman had thought about this alternative but had been reluctant to propose it herself, perhaps fearing her brother would view her departure as a betrayal. Both she and her brother happily agreed to a buyout. They thanked me as if I had rendered the judgment of Solomon, but the ease with which their dilemma was resolved simply demonstrates once again the value of outside review. Whether from a nonfamily board member, a professional advisor, or simply an objective friend, an outsiderÕs perspective can be most helpful in deciding where to draw the fine line between family-first and business-first philosophies.

Tender offers can quite often be the best solution to many of these family dilemmas. In a well-known agricultural business, two brothers ousted a third brother who was clearly not pulling his weight in his management role. When the third brother demanded that the company buy out his one-third interest, his brothers refused. The third brother then sued the family-only board for violating his rights as a minority shareholder. As a result, the two brothers who owned two-thirds had to sell the company.

When the continuity of the business is at stake, the majority has a moral obligation to buy out those whose dissent threatens the integrity of the company. Business owners have no right to destroy on the way down what they built on the way up. For if the business does not survive, everybody losesÑfamily and nonfamily alike. In this sense, the business must get first priority.

L·on Danco is the founder of the Center for Family Business in Cleveland and the author of four books on family business.