In Pursuit of Family Business Success – Avoiding the Road to Destruction

In Pursuit of Family Business Success – Avoiding the Road to Destruction

by Sasha Lund and Dominik von Eynern

 

More often than not, business families turn to consultants and coaches when business is tough. Over the years we have spoken to a vast amount of families, who mostly blamed the failure of the family business on bad wealth planning.

The more we engage with these families, the clearer the pattern becomes: Money is rarely the reason behind the failure. The main reasons, in fact, are all related to complicated relationships leading to problematic family dynamics.

In this article we are exploring three issues that – according to our experience – create family discrepancies, which are common causes for family business destruction.

This article will be alternating between narrative and analysis.

 

Inter-Generational Conflicts

To anyone even remotely involved in the family business world, it is not surprising that inter-generational conflicts are one of the most common causes for family struggles. Often, (and sometimes naturally), the Old and New generations have a vastly different vision on tactics, strategies and company policies.

One of the most troublesome setbacks is the issue of retirement. While it is relatively straight-forward for non-business families to manoeuvre their way around succession policies, for a family business, retirement planning entails meticulous preparation:

Plan or die. As simple as that.

This is much easier said than done, however. Frequently, the Family Head will not be ready to give up the reins – especially when an offspring is next in line to take over. The fear of the New, and a common trial-and-error approach practiced by many Next-Gen CEOs, often raise red flags for the still serving Heads, and makes passing the torch a challenging task to solve.

This brings us to another closely related concern: One of the most common reasons for an inter-generational clash is the fact that the old generation often finds comfort in the Status Quo:

“It has always been this way, it is working this way and hence it stays this way”.

The Status Quo bias is well established and deeply rooted in human beings. At the bottom of the problem is the resistance to change. The economic argument is, that every change- signal initiates neural calculations of expectation values: “What do I win, what do I lose?” While this cognitive process is laborious and already biased because we believe we have more data on what we lose than on what we could win, we employ emotive processes that evaluate the expectation values, i.e. what does lose ‘this’ and winning ‘that’ actually mean for me? Experiments in behavioural economics revealed that our evaluation is asymmetric: we hate losing much more than we love winning! Other unconscious, behavioural biases have been identified in corporate change management:

  • Negativity Bias, which means we would rather be safe than sorry
  • Availability Bias, which helps us make fast decisions based on readily available information, because we are too lazy to ask for more information
  • Attribution Bias, which allows us to blame our resistance to change on someone else
  • Confirmation Bias, which gives us a sense of self. Once we hold a belief, we prioritise belief-confirming information and neglect disconfirming information.

These biases lead to a situation where we dig in our heels and resist change with all we can.

But what does the Family Head have to lose? It is the status which the individual finds quite rewarding, the significance and the identity, which sits on a very deep, neurological level and is worth fighting for. Thus, the individual exhibits a natural self-protection bias.

Next-Gen leaders are happy to challenge this perspective. It gives them the opportunity and power they desperately seek to display their abilities, while exhibiting their daring side and showcasing their leadership skills.

As difficult as it may be for the older generation to hand over the reins, it is crucial for family business survival. Lack of planning can in worst case lead to the demise of the entire family enterprise.

A problem that often goes hand-in-hand with Inter-Generational conflicts are Intra-Generational clashes.

 

Intra-Generational Conflicts

One of the most common causes for family struggles is sibling rivalry. When personalisation of matters and emotions dictate decisions, rather than rationale, discussions tend to get heated. One could argue that working in a less emotionally-charged environment, would be more efficient.

An example: Three siblings of whom two are very interested in the family business, whereas the third does not want to get involved. All three are shareholders and have a board seat (which they are entitled to, based on the family constitution). The two siblings who are involved in the business are on continuous rivalry mode and instead of pulling on one string, stopping for a second to see the greater picture and contributing towards family business success, arguments tend to be about responsibilities, roles within the company and who has the ultimate decision power.

The Ego takes over.

This is a natural reaction to lowered self-esteem and driven by the Self-Enhancing bias. From day one, siblings compete for emotional attention from their mother. This is deeply rooted in evolution, because being close to mother secures food and increases the chances of survival. During development, we strive to become autonomous and take control, as well as to belong to a group, be seen and contribute.

The siblings will compete on all levels as long as they don’t see their needs satisfied and before their self-esteem takes too much of a hit, they compensate for the lack of it by regulating it higher until the point where we say “Ego takes over”.

These layers of tension lead to increased frictions between the siblings which can have a damaging effect on the business as a whole and – more importantly – on the family. Ultimately, siblings competing with each other often affects decision making and strategy implementation negatively and can send a wrong signal to the employees: We are not united at the top.

The more time we spend with business families of different backgrounds, cultures, and demands, one fact manifests itself: Being able to openly address any issue, and truly being heard, is key to success:

 

Communication is Everything.

This is easier said than done. Communication is often inefficient. The signal-to-noise ratio is low because of a multi-layered, incongruent structure of communication. The actual point of discussion is overlooked because of misunderstandings based on different individual, mental models of the world. This leads to transferences, counter transferences and projections based on previous experiences of personal interaction. The noise is produced by other-than-conscious processes and makes communication inefficient. The good news is: communication is a social skill, that can be learned by all family members.

Scheduling regular meetings and occasionally updating the family constitution, allows for the family to align the members’ individual belief systems, visions and needs with the overall family purpose and values. Thus, helping the members to form a strong unifying bond, creating a common path and a goal everybody is working towards.

 

Relatives by Marriage

A third common cause for conflict is the involvement and employment of relatives by marriage. Often, direct blood relatives will want to involve their spouses in the business, which can lead to frictions between the blood-related family members. And there is plenty of anecdotal evidence, that nepotism is a reliable recipe for disaster.

Over the years we have observed an increased amount of problems stemming from factors surrounding relatives by marriage. Although one can argue that it is advantageous to involve one’s spouse in the business, there are also plenty of arguments against spousal employment and business involvement in general.

Oftentimes, the spouses will have a deep understanding of the family business culture, which makes them strong advocates for the business itself. Some families we work with tend to believe that the more family members are actively involved in the family enterprise, the stronger the family’s influence will be. Mind you, the ‘family effect’ can be advantageous in business governance, but where you find light, you will find shadows.

Experience shows, that spousal involvement can be as detrimental as it can be beneficial.

Detrimental. How?

The son in the family marries. His wife does not only start working in the family business, she also sits on the board and becomes a shareholder. After having raised two children together, they decide to get a divorce. Divorce in itself tends to be a messy matter, with all the emotions – controlled and uncontrolled – that come with it. Add to that the complexities of the business and you have a great recipe for potential destruction.

A few years later, the son decides to remarry. The second wife wants to get involved in the family business, too. Knowing that the ex-wife is part of it, makes her want to contribute even more.

Once again, the Ego takes over.

And once again, we see a reoccurring pattern of behaviour we discussed above: rivalry is not confined to siblings!

The interesting question is, why do spouses agree to pursue a career in the family business? One of the reasons is the need for belonging. Spouses often don’t feel part of the family. This creates fear of social exclusion and rejection, which stimulates the brain region responsible for detecting physical pain. The brain does not distinguish between psychological and physiological pain. Naturally, we want to avoid the pain of social exclusion and rejection. This makes sense from an evolutionary perspective, because there is safety in numbers. Being part of a group increases the chance of survival. Naturally, spouses will feel compelled to be recognised as a full member of the group.

It is advisable for personal relationship issues faced at home not to be brought into the family business and to find alternative ways of social integration. The risk of spillover is incredibly high, however, and can lead to colossal organisational problems and challenges.

Ultimately, it is up to each family to create their own rules, and chose to abide by them.

A family constitution is a superb solution. If set up and followed correctly, it can not only save the household and business plenty of potential trouble, it can strengthen the core of the organisation, be it at work or privately. Implementing appropriate strategies, governance structures and succession planning policies will create a deeper understanding of the family ethos and – in an ideal scenario – create family harmony.

 

Conclusion

Where there is conflict, individual beliefs, desires, and opinions aren’t far away and this is simply within human nature. No matter how complex or trivial the issue, the aim should be to address it immediately. Being able to clearly understand the difference between ownership and management will further help with clarity.

Realising that the family wealth is just one thread of a very intricate and delicate spiderweb, contributing to success, will also assist the members in gaining a more profound understanding of the structure as a whole and will provide them with a deeper meaning.

Setting up and following a constitution which outlines the family’s values, commitments, motivations, business model and ultimately ethos, will enable both the family and its business to flourish.

Aligning one’s needs with the vision and mission of the family is the key which will help both the family and the business. When human beings congregate behind a common purpose, they are more likely to reduce their ego-dominance. This is important, not only to survive – but to thrive!