Who's In, Who's Out? The Case for Clear Rules

By Gerald Le Van

GENERATIONS

Too often, family businesses practice what I call birdcage management. Outside blood is rarely brought in to help the company grow or to tackle tough business problems.The same family members, with the same old limited skills and experience, try to solve problems they couldn't solve before.

The problem perpetuates itself every time another relative wants to join the firm. Instead of establishing rules of entry, the business owner shakes up the birdcage and forces everyone in the business to fly around and perch, willy-nilly, wherever they land.

The dilemma begins when teenagers get their first summer job at the family business. That is when they confront being regarded by other employees as the boss's kid. This is also when they start wondering whether people really like them for themselves. The boss's children laugh uncomfortably at the late comedian Alan Sherman's ditty about his rise in business: "I thank old Yale, and I thank the Lord, and I also thank my father, who is chairman of the board."

More serious issues arise when the child chooses a college; courses; majors; graduate school. If he or she is thinking about a future in the family business, you need to establish some clear ground rules about educational requirements. In some families, the rules are very simple: Every family member who wants a job, gets one. The birdcage is expanded to set a perch for everyone. Other businesses refuse to hire any family members, or at least require family members to compete for jobs and promotions on the same basis as other employees.

In most families, though, the rules aren't very clear. Each family member is handled as an individual case. This approach might work in the second generation, but usually breaks down in the third generation and beyond, when the sheer size of the family becomes unwieldy. In third and later generations, it's likely that significant blocks of stock will be owned by relatives who are not active in the business, perhaps triggering what I call the "parasite vs. plunderer" conflict (see Family Business premier issue).

Hiring family members mixes business and family issues. If approached strictly as a business decision, only entry qualifications would be considered. This sounds good, but it's unrealistic. So is hiring every single member of the family. The morale problems created by underperforming or disgruntled family employees who are retained only so they can receive a paycheck are invariably disruptive.

A mixed approach works best. This requires a separate set of family rules for entry, which begin with basic job qualifications: education, training, and experience. I see too many college dropouts returning to the family business.

Some may have learning disabilities or simply be unsuited for higher education. Most, I fear, are just taking the easy way out. To discourage dropping out, some families impose educational requirements over and above those required by the entry-level job description. For example, a younger-generation member may meet the business's entry requirements as a junior bookkeeper, but family rules may also require an accounting degree.

Some families require a certain amount of time to elapse between education and entry. One family requires a wait of at least five years after the last year of formal education before a relative may enter the business. Technically, this rule would not bar a family member who had taken a five-year "vacation" after college, so there should be a back-up rule requiring minimum training and experience before entry.

In some lines of business, there are formal training programs for the younger generation. For example, members of the Jewish Young Men's Apparel League hire each other's children for long and rigorous apprenticeships. In my view, it's not important for the younger generation to gain experience in the same industry as the family business. It is important that they be required to fly or fall in a different birdcage, without the family safety net.

The most important reason for requiring outside experience is self-image. Outside the family business, a child must face the traumas of transfer, promotion, termination, competition, evaluation, company politics, and so on. He or she will acquire skills, training, and experience simply unavailable to one who spends all of his working life in the family business. Of course, there are special situations. A child may be needed during economic reversals, or because of the sudden death or disability of the founder or another key employee. But by and large, a rule requiring significant outside experience is a good one.

Family rules can prevent a great deal of misunderstanding and conflict, especially if the rules are fully discussed, written down, and circulated with good explanations. I know a third-generation CEO who will have to decide whether to admit any or all of 11 fourth-generation members. All are teenagers, including numerous nieces and nephews as well as his own children. Unless there are clear-cut family rules about entry into the business, he may be forced to decide on a case-by-case basis. The parents of those teenagers (he, his siblings, and his cousins) own significant shares in the company, though none except the CEO is active in management. Without family rules, he is bound to offend some if not all of them. I doubt that he could solve his problem by making case-by-case decisions, no matter how hard he tries to be objective.

This CEO is also looking ahead. He hopes his successor will be one of the fourth-generation teenagers. He hopes to shake the family birdcage and have the most qualified member fly to the top perch. He must look beyond mere entry. That future leader, whoever he or she is, needs experience and challenge outside the business in order to return and run it successfully. It might be a good short-term business decision to hire a talented but inexperienced young family member to fill a job that is not particularly demanding. A good long-term family business decision would be to deny a nephew or niece that job until he or she acquires some experience outside that would prepare him or her for eventual leadership. Tough love? Perhaps. But good business, or rather, good family business.

The best family employment rules, like the best family decisions in general, are made when all participate, communicate, deliberate, and vote. Hammering out clear entry rules in an intergenerational forum leaves all family members feeling that they've been hseard and treated fairly. Your goal is for everyone to feel like a winner in the process.

Family members who work in the business cannot escape the birdcage; it's always there. Your challenge is to develop birds who have earned their wings.

—G.L.

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Issue: 
February 1990

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