Developing policies can save your family business

“WHEN we mix emotional and economic criteria, we open a Pandora’s Box of problems. Few families are spared these unique challenges. Many of these families have ultimately torn their families apart. How sad. But how unnecessary.”

POLICY development cannot be put off forever. Family members must formalize and set down on paper the structure and guidelines under which the family will own and operate their business. Having agreed policies in place and abiding by them reduce the chances that family conflicts will destroy your family business. If you procrastinate, brace yourself for the downfall.

Without agreements on how family members work together in the family business and with different views of what the family business should be about and what should take place, conflict is almost inevitable. Businesses need rules by which to operate – and if they don’t have them, they fail.

What are rules? Rules are authoritative statements of what to do or not to do in a specific situation, issued by an appropriate person or body. It clarifies, demarcates, or interprets a law or policy. Likewise, rules are statements that establish a principle or standard and serves as the norm for mandating action or conduct.

What are rules for, anyway? Rules replace thought and discretion. If you know the rules, you always know what to do. Rules are comfortable. If you know the rules, you never have to stretch too far. Rules are safe. You probably won’t get fired for following the rules.

So how can siblings make some fair rules that will help them live with – if not solve – their differences as they run the family business? In a given setting, they may be relating to one another as siblings, as business shareholders or as operational managers. Again, each relationship must have rules.

And here lies the dilemma, “the business context encourages productivity and profitability, whereas the family context encourages nurturing and acceptance.” To stress this point, is it a Family First Business or a Business First Business?

To overcome this confusion, the family must agree and choose which one is best for the business.

With the choice of either Family First or Business First, the rules set forth for the family business will inevitably move towards the family’s philosophy, mission, size, industry, and resources available. Those guidelines must be consistent with the family’s values.

The next step is to recognize that “the relationship” is not just one relationship – it’s three.

The family: Siblings need to decide, and preferably put in writing, what kind of family they are. What is the nature of the bond? What does the family stand for and what kind of legacy does it want to leave, if any? In short, what are your family values?

The shareholders: The owners of the business – who are not necessarily the managers – must decide what their goal is, and determine the requirements of future inheritors.

Who can own shares? Should the business leave a legacy for the owners’ children or should it be sold before the next generation grows up?

The family business managers: These are the rules for running the business. Can one sibling report to another? What is the compensation for each job? What information will be shared, and in what time frame?

With the relationship divided into its parts, protagonists can decide whether a particular conflict is a family, shareholder or managerial issue, and go to the rule book. Note that this also means that if you can’t abide by one set of rules, you can bow out without affecting your status in the other categories. If you can’t work for your brother and the rules say you must, find another job. You are still a shareholder and a member of the family.

In my work as family business coach in Asia, I have recognized the importance of crafting family policies. These rules or agreements when done correctly can save the business from unnecessary conflict. Family Business Asia lists several advantages:

a) Avoid problems or solve them before they occur

b) Reduce future family tension

c.) Strengthen the family with experience in coming to agreement
d) Clarify your family’s positions and reduce misunderstandings
e) Help the family sort out its values and what it stands for
f) Improve future decisions by ensuring that policy formation is informed and objective rather than made in the heat of battle
g) Create more enthusiasm for and knowledge of the business
h) Increase the likelihood of long term business and family success, survival and prosperity.

The rules highlighted must be applied consistently and clear. When applied fairly, you’ll be able to stop the fires before they start – the key to keeping any company profitable and well-perceived by investors and the public eye. To quote Prof John Ward, “Developing Policies before they are needed creates an opportunity for families to address potentially sensitive issues before they become personalized—that is before they actually apply to someone.”

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