2. ▸ Family businesses are the most common and least
understood types of business organizations.
▸ Organization development practitioners have
recently begun to recognize that their ability to
understand the dynamics of human and family
relationships can address many needs within this
context.
▸ This section explores the definition and model of
- the family business system,
- outlines critical issues facing family firms,
- describes a typical planned change process.
4. “
▸ The most common definition of a
family business is an organization
where ownership and/or management
control rests with a family (or
families).
▸ Some families retain 100% of the
ownership while employing
“professional management” to run
their business.
The Family Business System
5. “
▸ Business, Ownership, and Family Systems One of the principal
advantages of a family business is the increased potential for
unity of purpose and action between owners and management.
▸ The business system may consist (depending upon the stage of
development) of family and nonfamily managers, the strategic
business plan, and a governance structure including a board of
directors and sometimes a nonfamily advisory board.
▸ The strategic plan should outline the business goals, objectives,
strategies, and organization design. The board of directors and
advisors counsels the business’s leader(s) on strategy
implementation, organization form, and other key business policy
decisions.
The Family Business System
6. The Family Business System
▸ The ownership system consists of the business’s owners
(family and nonfamily), a shareholders agreement (preferably
a legal document), and a governance structure that may be
represented in a formal shareholder meeting.
▸ The shareholder agreement should outline the owners’
business goals and objectives including risk tolerance,
expected return on investment, liquidity goals, and a buy–sell
mechanism.
6
7. ▸ A shareholder meeting can provide a structure
for owners to meet to develop and oversee their
mutual interests in the business.
▸ Shareholder assumptions, including the buy–
sell agreement, ownership succession, dividend
policies, and investment options for business
proceeds, are relevant topics for this forum.
▸ Shareholders are responsible for reviewing the
family enterprise plan (discussed below) and
determining the relevants goals and policies to
communicate to the board of
directors/advisors.
The Family Business System
8. ▸ The conventional
wisdom of family
business around the
world is often
summarized as
“Wealth doesn’t go
beyond the third
generation.
Family Business Developmental Stages
▸ This can be demonstrated
with research that shows
fewer than one-third of
family businesses are able
to make the transition of
ownership into the second
generation and only 12%
of all family businesses
survive into the third
generation of ownership.
9. Parallel Planning Process
▸ When a family owns a valuable asset, such as a business,
their relationships can become much more complex.
Deliberate planning is required to preserve the natural
bond that exists in families and to make it possible for
them to develop a shared vision for their mutual
enterprise.
10. Values
▸ The center of the family business system model
is a set of core values held by the family.
▸ Research shows that family members internalize
family values, such as long-term reciprocity,
filial obligation, and hard work for one’s family.
▸ However, values also best illustrate the
differences between family and nonfamily firms.
The complexity of the family business is a
function of not only the interplay among the
family, business, and shareholder systems, but
the different (and often opposing) values that lie
at the core of each system. 10
12. Critical Issues in Family Business
1. The interaction of the family, ownership, and business subsystems,
particularly at generational transition points, can be problematic.
2. Where these systems overlap, as family members come together as owners
both inside and outside of the business, there are potential interface issues,
potential conflicts, and always dilemmas to be faced.
3. Transitions, particularly those from first to second generation and second to
third generation can present even the most successful families and businesses
with monumental changes.
4. The change from an owner-managed business to a small group of sibling
owners to a larger group of cousins can challenge the basic assumptions that
have been the basis of trust and unity in decision making.
13. Entering or Leaving the Business as a Family Member
• Family members often report choosing the family business as a place to
work with comments like “It just happened” or “I fell into it.”
• Family members are a convenient workforce and may be the only option
in the start-up phase of the founding generation but businesses that
successfully integrate family members over the long run do not base
selection practices only on genetics.
• Policies on entering the family business, options for career paths, and
multiple points of exposure to the family firm are a few of the best
practices.
• There must be clear roles, recruiting processes, and training and
development to give every family member who chooses to be part of the
business a clear sense that they have earned their place.
14. Conflicts and Rivalry in the Business
▸ Conflicts and rivalries are common in family firms and are often the result of
values dilemmas.
▸ If a family is relationship based and a business is results based, how is the
family member to be evaluated? If equality is valued in the family system, how
do you choose a business successor?
▸ Family member compensation, roles and responsibilities, authority, and
opportunity are some of the critical issues that ignite conflict between family
members.
▸ The family system is an emotional one, and when placed together in a business
setting, family members often revert back to the family roles they played
growing up.
15. Ownership Transfer and Estate Planning
In addition to distinguishing between family and business roles, members of the family system may
have a third role to play, that of “owner” or “shareholder.”
Owners’ rights and responsibilities are different from family and business ones.
Ownership rights typically include electing directors, creating bylaws, voting on specified major business
decisions, and realizing a fair return on investment.
Typical responsibilities include making informed decisions, creating and keeping agreements, respecting
limits of authority, and developing business competencies to adequately fulfill their role as a
shareholder.
When ownership transfer issues arise, members of the shareholder group often struggle between
transferring family business stock to members of the entire family versus only those family members
who are active in the business.
The former option can create challenges between inside-owners, who work in the business, and outside-
owners, who do not.
Owners who earn their living from the business and are responsible for the success of the business often
feel that outside-owners do not deserve any return for their investment because they inherited their
shares.
16. Selecting a New Leader
- The vast majority of family firms, 85% according to one survey,
choose successors that are family members. In addition, 39% of family
firms will change leadership within the next five years, and of those,
42% have not chosen a successor.
- Many families avoid the topic altogether due to its emotional
intensity. Some of the key reasons include
• a founder/owner who won’t “let go” of the business,
• the lack of competency in the next generation,
• rivalry among siblings for key leadership positions,
• succession timing,
• incongruent business visions of the current and successor
generation, and
• pressures from various family branches.
17. Business Growth and Family Wealth
• When the business fails, there is little chance for the family’s
wealth to grow. To grow the business and the family’s wealth
requires careful thought and strategic planning.
The company must
- move from an entrepreneurial business to a
professionally managed firm,
- develop governance structures,
- formalize systems and processes, and
- recruit talent (from inside and outside of the family).
• Owners must continually develop assets independent of the
business.
18. OD Interventions in Family Business System
• For a consultant working with family businesses, complexity is the
norm, a result of the interconnectedness of the family, business,
and shareholder systems.
• Necessarily addressing the entire family business system is a key
difference from the work of a nonfamily business practitioner.
• The skill set required for a family business advisor is comprehensive
and includes
- OD competencies
- family systems knowledge
- conflict resolution skills, and
- family meeting facilitation
• In addition, the family business consultant should acquire working
knowledge in the areas of estate and financial planning, legal forms
of organization, exit strategies, family philanthropy, family offices,
financial analysis, and multidisciplinary (professional) teaming.
19. Entering and Contracting
• The special entry and contracting issues involved in family businesses include
- the need to quickly create a safe emotional environment,
- asking sensitive questions related to the family systems early in the
engagement,
- getting permission to reconstruct as issues emerge,
- getting permission to work with other family members, and
- being clear about the requirements of collaboration.
• The mission of an OD practitioner dictates a systems approach, so any relationships
begun in this phase must integrate family issues around the business issues.
• The contract will typically be with the major shareholders of the family firm;
therefore additional efforts are required up front to ensure buy-in and collaboration in
the process.
• Trust must be established early on for the rest of the process to have a chance of
moving successfully.
20. Diagnosing the Organization
• Diagnosing the family-run organization
requires the particular tasks and skills
necessary to understand the family system in
addition to the business system.
• “Presenting” issues and problems that appear
to be business related often require careful
probing and unbundling to get an accurate
picture of “what is happening.”
• Trust building, begun in the entry phase,
continues in the diagnosis stage by bringing
the family together for an orientation
meeting.
