Mastering family dynamics: Hold them accountable for results

Human dynamics in business are challenging at the best of times. When your business involves family, a spouse, significant other or a friend, the stakes are even higher.

By Carl Bates

Picture this scenario. A father hands over his business to his son and then retires. Then the son discovers that his father has been continuously overriding his instructions to his team behind his back. Or, the married couple who start a business together and years later, as they approach divorce proceedings, their entire business faces collapse over their battle for control. Does this sound familiar? Have you seen this before? Human dynamics in business is challenging at the best of times. When your business involves family, a spouse, significant other or a friend, the stakes are even higher.

In my book, The Laws of Extreme Business Success, I approach this challenging aspect of business through the Law of Family and Whanau. In New Zealand, my home country, whanau (pronounced farn-oh) refers not only to your immediate family, but also to your extended family within the community, who may not be blood-related. This law acknowledges the critical role family plays in getting a new business off the ground and supporting the business owner through the very challenging experience of growing that craft business into an enterprise. At the same time, poorly managed family and whanau relationships can quickly become the deathblow to what could have been a successful business.

The statistics are startling. The common consensus is that a family business is one where family hold at least 51 percent and the management team are largely comprised of members of the same family. The Cox Family Enterprise Center reports that an estimated 80 percent of all businesses worldwide are family owned. A survey conducted by Laird Norton Tyee in 2007 revealed that less than 30 percent of family owned businesses have a succession plan in place and only 56 percent have a documented strategic plan.
Furthermore, 64 percent of family businesses did not require family employees to have the same qualification as expected of non-family employees. In the US, only 25 percent of family businesses survive the second generation and this dwindles further, to 13 percent, by the third generation. With family businesses contributing 64 percent to the US GDP of $5+ trillion, the need to radically change the way family businesses approach their growth, is painfully obvious.

The three main areas that present stumbling blocks for family owned SMEs are shareholders, employees and ineffective decision making.

According to Eugene Botha, Attorney of the High Court and Sirdar Legal Associate “Shareholders tend to dissolve companies faster than creditors do”. This is because the core foundation of the business, the shareholders agreement, is either non-existent or inadequate for dealing with disagreements between, or changes to, shareholders. Once a dispute occurs, without a reference point to manage it, the shareholders soon find themselves faced with having to wind down the company altogether – a decision often driven by emotion rather than logic.

This is even more critical in the case of SMEs founded by spouses, friends, family or associates where the tough conversations that should occur early in the life of the business do not happen. As a result, if the relationship turns sour, there is no reference point to guide parties forward. Even a successful business can quickly deteriorate from protracted legal or personal battles between owners.

The statistic on the qualifications expected of family employees points to the second challenge. Family owned businesses are often characterised by a high level of family employees not qualified or experienced to fulfil the roles they are employed in. The only result for a business that recruits its team in this way is impaired performance and the destruction of value. Decisions based on rationalisations such as ‘they cost less’ or ‘they needed the job’ will not enable the enterprise to flourish. In addition, family members are frequently not held adequately accountable for poor performance, if at all. They may be family, but if they are not delivering they should be performance managed the same as any other employee.

A family business that does not have an effective governance system in place will also continue to struggle with the third stumbling block – ineffective decision making. Directors of a family owned business, just like any other business, are responsible for the decisions made and results delivered. All too often, the real decisions in a family business are made around the dinner table. When the spouse is also a director and carries the same responsibilities around the boardroom table, then their input is appropriate. If they influence decisions through informal opinion and carry no responsibility for the results of those decisions, then the Law of Family and Whanau needs to be applied.

Effective governance is a key tool to support overcoming all three of these challenges. Family business owners may argue that the complexity and cost of governance and directors are beyond the capacity of an SME. However, a practical and step-by-step approach to governance can deliver incremental returns through improved decision making and business results. The effective system of accountability to performance and conformance provided by governance will ensure the business remains sustainable, employs the right team, holds all employees to account and delivers the expected return to its shareholders.
In the next article we explore yet another law for extreme business success, the Law of Business as a Game.

Sirdar
www.sirdargroup.com
carlbates@sirdargroup.com
+27 21 418 0752