A Family Creed

It may just be the thing that allows you to keep the business together without blowing the family apart

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If you're in a family-owned business, you probably know firsthand how tricky it is to manage the mixture of love, money, power, jealousy, and greed that is often intrinsic to such businesses. The emotions and tensions that are carried over from family to business and back again are major reasons for the high mortality rate of family-owned companies: a study by Professor John L. Ward of Loyola University estimates that even with established businesses, only 13% ever make it to the third generation.

Questions about who will lead the business, work in it, own stock, and how family members will be compensated are usually the major causes of conflict. Still, it's not surprising that so few families establish policies on these critical issues. The decisions are often difficult ones, and there is a fear, often unfounded, that unpleasant confrontations will be provoked. But the penalties of not facing up to the issues are even greater.

I have seen adult children who could well make valuable contributions to a company seek careers elsewhere because policies weren't discussed openly. In one case, a daughter erroneously assumed that her brother had been preordained to succeed Dad when he retired. Viewing the business as Dad's rather than as the family's, she felt that it would be pushy to ask about her chances. The result was a loss/loss situation for both the family and the business.

In another family, a daughter's marriage was put under great strain when her new husband belatedly learned that there was no place for in-laws in the company. In still another, an adult child ran the business for years and then found to his consternation that he would never be entitled to more compensation or stock ownership than his incompetent younger brother.

If you're running a family business, you can minimize, and even avoid, many of these problems. What it takes is your setting aside a day or two for family members -- those in and out of the business -- to get together and thrash out a family creed, a sort of constitution that reflects both your family and your business values. In my experience, consensus works best. It's not nearly so effective when the chief executive officer, often Dad, hands down the rules to the rest of the family. There are several reasons for that, not the least of which is that CEOs often get some interesting insights from these drafting sessions as they learn how other family members look at them, the business, and the family.

Probably the most important overall consideration is whether the family or the business takes precedence in the family's value system. With some family businesses, the family is first, and its concerns frequently outweigh those of the company. With others, the company comes first. Some parents, for example, would consider firing a son or daughter to be out of the question. Others, for the sake of the company, would do it without thinking twice. Most families try to find a balance that will allow them to run the business properly while not disrupting family harmony -- a delicate task.

Whatever your priorities -- and there's no right or wrong -- you'll have a much greater chance of gaining acceptance and commitment within the family if your rules are crystal clear. And the sooner you get to it, the better. You can include whatever you want to in your family creed, of course, but I would suggest that at a minimum you establish policies on the following issues, which can be complex and emotional.

Ultimate objective

What do you plan to do with the company? Keep it in the family? Sell it? Be acquired? Both your family and business agendas will depend upon your objectives.

Succession

Frequently, the biggest hurdle in family-owned businesses is getting the founder to recognize that he's not immortal. Failure to identify, train, and install a successor is almost a sure prescription for future chaos. Choosing among your children, of course, is difficult at best, but you can alleviate conflict if everyone understands what you're looking for. You may decide that competence should be the criterion -- or position in the family. Whatever you agree to, the qualifications will be clear to those who have their sights on the job and to the rest of the family as well.

Stock ownership

This is often a thorny issue because what constitutes a fair distribution of assets among family members and what's fair for the success of the business can be at odds. And again, there's a wide range of positions to choose from. Many families restrict stock ownership to bloodline descendants, with restrictions on sale or transfer. They may decide to have buy-sell agreements, for example, providing for the sale of the stock back to the company under certain circumstances. Others may want stock available for key employees. Many distinguish between family members who are active in the business and those who are passive, giving voting control to those who are active. Whatever your choice, it should be spelled out.

Compensation

Although many businesses compensate family members at market levels, you may decide to pay significantly above -- or below -- the market. Some companies pay all family members the same, regardless of their contribution to the business (which, of course, can be a turnoff to the high performers). Again, whatever policy you choose, it will cause less turmoil if it's understood by every family member inside the business, as well as by those who may be contemplating joining the company.

Participation in the business

Few things are more jarring to family relationships than confusion about who can and who can't join the company. Some families make the business a haven for any relative. At the other extreme are families who have higher entry standards for relatives than for outsiders. Some only allow family members who are qualified to be managers. Whatever your position, you can probably avoid grief by being clear about who may enter, what their qualifications must be, and what it takes to remain. And you can't ignore in-laws. Are they included in the family, are they excluded, or is each case decided on its own merit?

I don't mean to make the family constitutional assembly sound like an easy affair -- it may be the first time your family has faced some of these issues. Yet I've found that most families are healthy enough to deal with any confrontations that arise, and that the process is more apt to bring the family closer together than to divide it.

In the end, of course, all family members may not agree with the creed that you adopt, but at least the rules will be clear and you can avoid the turmoil that so often results from ambiguity. Also, you can, as a group, change your creed as circumstances change. The point is to think through the issues and arrive at what best reflects your family and business values. If more families talked through these basic questions, I'm convinced that the mortality rate for family-owned businesses would be much less devastating than it is today.