Saving the Life of Your Family Business - Management
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SECTION: Management

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Saving the Life of Your Family Business

By Dana Telford

Article Date: 02-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Building clear policies for governance, merit and transparency will keep the family-owned company healthy, even if symptoms of peril are not yet evident.

It was the last day of a weeklong family business seminar at Harvard Business School. The 54 international participants had come with parents, spouses and siblings to learn the best practices and principles of successful family companies. During the last session, they were sharing their secrets of success with each other.

Vic, the second-generation leader of a restaurant chain in the Philippines, raised his hand to speak. The chatter in the room quickly subsided. Vic hadn't said anything all week, so participants sat forward in their chairs, anticipating true wisdom. He stood and turned toward his two sisters, brother, brother-in-law and mother. With a slow, sweeping gesture he smiled and said, "In my family we have a saying." He paused for emphasis, cleared his throat and continued, quite dramatically, "Alone we are weak, but together we are...confused."

The laughter in the room that day was as strong as it is every time I tell that story to families around the country. The laughter flows after the punch line in the story; but the sympathetic laughter tells the real story. Clearly, Vic and his relatives aren't alone in feeling overwhelmed by the complexities of owning and/or managing something with family. And for good reason. Every family business is a melting pot of life's most delicious and dangerous ingredients - family, money, power, control, love, fairness.

Family businesses are the engines that drive the world's economies. Over 70 percent of all companies are family companies, including 35 percent of the Fortune 500. They employ 60 percent of U.S. workers; provide 78 percent of all new jobs and account for over 50 percent of U.S. Gross Domestic Product. From giant, publicly held corporations like Wal-Mart, Marriott and the New York Times down to local home builders, furniture companies and farmers, the economic and social influence of the family business engine is undeniable.

How can a family business leader best manage and mix the ingredients to create something delicious rather than noxious? To find the answer, we need to go back to a quiet beach in Southeast Asia on the morning of December 26, 2004.

Mary and her family are the fourth generation owners of a large construction company in the western U.S. Every year during the Christmas holidays they go to a private resort on Phuket Island, Thailand. It was 9:30 a.m. on Dec. 26, 2004. Mary and her sister sat on beach chairs near the seashore, enjoying the quiet morning while their children played tennis. As they chatted, Mary noticed the water's edge receding dramatically. "This looks odd," she said, "what's happening?" They stood and followed the retreating sea and were shocked to find fish flopping on the sand, boats aground, and large sections of coral reef completely exposed.

As they stood awestruck, a New Zealander who managed the resort harbor ran up and said, "We believe there's been an earthquake, move to higher ground - quickly." They immediately turned and ran up a long, steep embankment toward the tennis courts, calling out for their children. Minutes later, as they watched from a cliff, the first wave of the terrifying tsunami struck beneath them. After it receded, the sisters and stunned children walked back to the beach to help clean up the scattered chairs and towels. Only when the New Zealander yelled that more powerful waves were coming did they run for safety again.

Over the next few days, the guests of the resort worked together to provide help to the stricken region. Mary soon realized that a leader of a very prominent American business family was working along side her (we'll call him Steve). Mary knew that Steve's family had recently suffered through a well-publicized, multi-hundred-million-dollar shareholder lawsuit brought by two cousins against their father and uncle. Courageously, Mary broached the subject and Steve was kind enough to talk about the lawsuit. Over dinner that evening, Mary asked Steve what he would do differently in the family business realm if he could turn back the clock.

Steve had clearly thought through the question prior to that night. With little hesitation he said, "I would do three things. First, I would start a governance process for managing the family's relationship to the business. It was the unmanaged family dynamics that did the most damage. Second, I would base the system on merit, where you earn your rights and privileges by creating value rather than relying on birthright. Finally, I would make things very transparent. There were too many secrets, too much information that was withheld."

A New Zealander who had survived a tsunami saved Mary and her sister's lives. Steve helped Mary's family avoid making some very costly mistakes by imparting his family-business wisdom, gained through a painful, expensive lawsuit.

Do you have a governance system in place to manage your family's relationship to your business or assets? Are you creating a system of merit in your family and ownership group? What steps are you taking to increase transparency and improve communication? Who will lead the business and the shareholder group when you are gone?

These questions are certainly daunting, but the family and financial costs of leaving them unanswered can be substantial. Family business leaders too often choose to avoid making the tough decisions today that can keep their family and business together tomorrow. The idea that siblings and cousins can figure things out when you are gone is a theory that has been disproved time and time again in courtrooms around the world. n

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