7 Rules for Avoiding Conflicts of Interest in a Family Business
Conflicts are part of a normal experience for many small start-ups and family-owned businesses. But even more so when those businesses don't follow a formal management structure that encompasses standard policies and practices. Starting out, most businesses have an informal management style, says Don Schwerzler, a family business expert in Lawrenceville, Georgia. But this can actually inhibit the growth and profitability of the business—a kind of glass ceiling that keeps the family business from reaching its true potential, he says. It also impedes conflict resolution.
When it comes to conflicts of interest in family businesses, Schwerzler believes these matters are more difficult to resolve, because there are three levels of interests at play—family issues, business issues, and ownership issues. "A dispute that occurs in one area can quickly cascade into the other areas." If you are involved in a family business where everyday seems like a battlefield, then you should consider outside counsel, he suggests. Seek out a mediator or consultant—family business therapists much like a marriage counselor—to help deal with family feuds, clashes about business strategy, and decisions about succession. By understanding the family dynamics, this person can act as a negotiator and devise productive resolutions.
Schwerzler says that every family business is unique and complex in its own way, so boiler plate solutions don't always work. Still, there are common rules of engagement for handling employees who are related by blood or marriage. Here are seven rules to follow to help you stave off some family business blunders.
Rule No. 1 - Don't put family members on the payroll if they're not working in the company or can't make a real contribution to the business, advise SCORE small business counselors. In a start-up or family business, everybody does everything. But this is where a lot of conflicts occur. Make sure that everyone has a role and responsibilities that are spelled out and are very clear, says Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of Consulting to Family Businesses. Establish each person's title, job function, and compensation. And make sure that you have performance reviews for family and non-family employees alike, she adds. Moreover, think twice about offering a contract to a supplier who is a relative. Award contracts based on merit.
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Rule No. 2 - Don't create two classes of employees—family vs. non-family. Be careful not to show family members special treatment. Be aware that, in a small or family-owned business, special favors given to family members and friends de-motivate employees and set a bad example, caution SCORE counselors. Also, you don't want non-family members to feel like a raise or promotion is out of their reach because they aren't part of the family bloodline.
Rule No. 3 - Be careful not to abuse family relationships. Meaning, don't either reward or punish someone because they are a relative with whom you have personal history, says business and tax consultant Augustus McMillan. "If others are disciplined for bad behavior, your family member must be disciplined also." At the same rate, you need to reward and praise exceptional work. "Treat any employee, including family members or friends, special if they deserve it," says McMillan, who started his career working with business clients as a bookkeeper in his mother's firm in the mid 90's before launching his own, McMillan Consulting in Baltimore.
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Rule No. 4 - Communicate honestly and openly with employees. Don't keep it a secret or hide the fact that you have relatives or friends working for you, says McMillan; otherwise when it eventually comes out, and it will, you'll appear like you were being deceitful. Also, non-family employees shouldn't feel like family members are more 'in the know' about what is happening with the business. The ability to have an effective communication with all members of the organization is critical. To foster a better climate among employees and improve continuous two-way communications consider holding company retreats in addition to family retreats. Hilburt-Davis also suggests that family members attend industry workshops or conferences. "These are a great opportunity for them to learn how to work together and to communicate better."
Rule No. 5 - Don't confuse family decisions and business decisions. SCORE counselors suggest you avoid letting family members borrow company vehicles or allowing them to ask the company's IT person to set up their home offices. It's also a bad idea to pass off personal expenses, such as family vacations, as business expenditures. These are perfect examples of meeting family needs with business resources, says Hilburt-Davis. "You don't want to do that. You have to professionalize the business. Ask yourself what you would do if this person was not a family member." For example, do all employees have access to the company car for personal use upon request?
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Rule No. 6 - Establish healthy boundaries between family and business. This especially applies to copreneuers (husband-and-wife teams). Running a business together with your spouse is a balancing act. Agree and adhere to some kind of system, for example, some couples refuse to drive to or from work together. Others won't talk about the business after 6pm, at home on the weekends, or during family vacations. Try to get away from the business quite a bit, advises Wayne Rivers, president of The Family Business Institute in Raleigh, North Carolina. "Turn off the cell phone, leave the laptop at home, and go to the island for ten days," he says. "If you don't tend to the relationship outside of the business, you won't have a relationship."
In general, it should be a rule not work with other family members off the clock and outside of the office. McMillan says it's perfectly fine to ask someone a question about a project or client when you're at the family cookout. But ideally this should be a five minute conversation, he says. If it goes well beyond that—15 minutes or more—you may be crossing the line, because now you are infringing on someone's personal time.
Rule No. 7 - Use family councils to address family matters. Some family members will share the same values but not the same vision. One sibling may want to grow the business and keep it privately owned while another sibling may want to sell it or take it public. Hilburt-Davis says a structure that more and more family businesses are creating to help resolve these types of conflicts is a family council.
A family council comprises members who may be owners but not company employees. They meet monthly, quarterly and/or annually for the strategic planning of the business over the next year to next 10 years. The more dysfunctional the family is the smaller the group to begin with, cautions Hilburt-Davis. Ideally you want to reevaluate the council after two years, at which point you may open the membership up to other family members and the next generation.
The council does not micro manage the business but addresses family issues or concerns relative to the business. If a family member is working in the business buts needs a car this is something that the family council will address. Or if a family member needs to borrow money, the council will decide if it wants to create a fund for the purpose making family loans. It's not uncommon for family members to sacrifice income or take a pay cut to keep the business afloat during tough times. Again the council would examine how best to compensate these family members going forward.
Some family councils help establish three sets of plans: individual ones that help each member of the family determine his or her own professional goals; family plans that determine the overall goals of the family and the resources needed to achieve those objectives; and, business plans, which address such issues as ownership, management control, family involvement in the business, and long-term strategic direction of the business.
Typically one family member of the council is appointed to report to board members or shareholders. He or she would present family decisions about any type of policy procedure for the board's stamp of approval. Think ahead. If you plan to seek private investors or go public in the future, dealings with family members outside of a business environment will be questioned and scrutinized.
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Family business experts concede that family ownership does have its privileges. But you have to really be careful and run the business in such a way that it's fair, it's transparent and it doesn't hurt company morale, says Hilburt-Davis.