“Wealth doesn’t last more than three generations”
“What do you think is the best way to deal with my father? What can I do to convince him that there are better ways of running the business? He refuses to accept that the world is very different from the time when he started the business. If our family business is going to survive, we need to do things differently.”
These are the frustrating words of Joseph, the son of an entrepreneur who had created a massive enterprise. The digital world was having a significant effect on the business, and in spite of Joseph’s pleas for new managerial approaches, his father persisted in his familiar ways. It was very clear that their disagreement on how to take the company forward was affecting the business.
Family businesses are the backbone of many countries’ economies. According to the Family Firm Institute, about two-thirds of all business around the world are family-run, a figure that some estimates put at 90% in the United States. However, only three out of 10 family businesses survive into the second generation, and only one out of 10 are handed down to a third.
Although all organisations have to deal with power struggles and conflict, these challenges can be especially tough to manage in family businesses because they’re so emotional. The most persistent complaints are that members of the senior generation refuse to share power with their children; family members are put into management positions for which they are not qualified; and that it is impossible to have a truly professional relationship with someone in the family. And all too often, the powerholders in a family business fail to address such problems effectively.
The question becomes what the family can do about it. How can they prevent these interpersonal grudges, misunderstandings, and frustrations from festering, to the detriment of the business and the family?
Focus on the Future
One way to begin to address the problems is to have the powerholder(s) reflect on scenarios for the future. Do they prefer to act with no regard for what happens after they retire or die? Or would they like to preserve the business for the following generations? If the latter, they must have the courage to face general business issues and deal with the complex emotional and relationship issues that underlie family dynamics. In a family business you need to have both a family that works and a business that works.
Focus on Fairness
Powerholders in well-functioning family businesses need to demonstrate concern for fairness in their plans and decisions, as fairness is the cornerstone of trust. A number of concrete practices include:
When a family business grows in complexity, another important recommendation is to hold regular family meetings, which (over time) should evolve into a formal family council. Such a structure can help make people like Joseph feel less alone in their efforts to induce change.
Write a Constitution
One of the early essential tasks family councils can enact is to help develop and approve a family constitution. In creating an explicit, transparent constitution, family members need to ask themselves what is the unifying purpose of having a family-controlled business. What are their values and vision? To focus on something that transcends the company —a mission which serves others beyond merely securing the financial well-being of the family members — can provide the glue needed to maintain family unity through the generations.
The family constitution should also address issues such as training and development, how conflicts will be resolved, and decision-making practices. Rules of entry and exit should be made clear and explicit, along with how business ownership should be handled and how to ensure fairness and prevent or manage conflict constructively.
Build a strong Board
Effective boards of family businesses differ from the boards of public companies; they play a critical bridging role with the family council, balancing the needs of the family and the corporate system. An effective board member needs to have a deep understanding of the relationship between the family’s values and goals and the company’s culture. Such a person can be helpful for serving as an arbiter between people like Joseph and their parents.
Harvard Business Review, 2017Read more
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