Will the business end when the cousins take over? (Part 2)

FAMILY business comprises three overlapping circles. One circle is family, another circle is business and the last circle is ownership.

Depending on where you stand on those circles, the issues can be predicted. According to family business expert Ivan Lansberg, the challenge is learning to manage the diversity of people, as more and more of the territories (in the different circles) become populated with family members, cousins, in-laws, etc.

Entrepreneurs and founders in general are fundamentally skilled in running and growing the business but as Lansberg highlighted, “very few people stop to think that families are every bit as important and complicated.”

Founder/Controlling Owner: Unilateral decisions, authoritarian, quick and simple

In the startup days or the stage known as the founder/owner stage, understanding the circle where the owner is easy. One owner, or the spouses, stand in the area where all three circles overlap: they are the family, the business owner, and the management team rolled into one. The founder calls the shots and is revered by everyone in the organization. But clearly, that setup is not sustainable.

Sibling rivalry stage: Consensus decision, diversity, volatile, higher risk of conflict

As the sibling partnership joins the business, the need to create rules on practically all decisions requires consensus among siblings. This can take its toll on the founder. Working in a structure that checks and balances the founder’s authority does not come naturally to entrepreneurs. There will be many cases of conflict related to decision making and overlapping. And as the business gets passed down to another generation, the field becomes more complex.

Cousins stage: Democratic decision, dispersed ownership, rules, fairness, others lose interest

By the third generation, most businesses have evolved into “cousin consortiums” and fragmented ownership and as what Lansberg describes the third stage members.

“They’ll be into the world of coalitions, politics, branches—complex structures that allow the cousins to collaborate.”

In a cousin consortium, the depth of involvement of each of the cousins varies. There are those who would be active in the business and there are those who would be passive. The scope of ownership could also be different. Some of the cousins could be majority stockholders and some could be minority stockholders. In this case, the control over the business would not actually be equally balanced. Therefore, my most basic intervention is for active family members to formulate rules and protocols and align ownerships. Otherwise, expect cousins to draw swords on the most petty issues.

Initiate a governance structure while the parents are still around

As part of instituting changes, it can be expected that certain entitlements of cousins/shareholders, both active and non-working, will need to be clipped as part of putting in place an enforceable governance system. Depending on the degree of civility or acrimony among cousins, I have outlined below several solutions that family members can immediately put in place with or without the need for a family advisor:

a. Engage qualified non-family members. When necessary, invite non-family members/professionals/former senior executives who can serve as advisors or independent members of the board of directors. These professionals would ensure that the objectives of the enterprise would be prioritized minus the emotion and drama that would naturally come from family members. Last year, I endorsed almost a dozen W+B consultants and colleagues from the academe to act as board level advisors or formally nominated independent directors. For family business owners averse or not being use to having non-family members becoming a regular fixture in the board, I or my colleagues would usually assume the role of a family board advisor to provide advise and guidance during meetings where the items in the agenda may be sensitive.

Common examples would be compensation, disciplining a non-family member for non-performance, direction of where the company is headed, etc.

b. Communication and conflict resolution mechanism. It is very healthy to develop open lines of communication among cousins; after all they are one huge family.

However, since they would not be coming from one and the same nuclear family, it would not necessarily follow that they would have the same ideas, background, culture, practices, beliefs, education, skills, levels of understanding and experience. These are all hindrances in achieving an open communication among the cousins but could be managed if they would specifically begin the consortium out of willingness to participate, commitment and respect to each other.

To be continued.

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