The Need to Have Structures in Place For Reducing Conflict in Family Businesses

Herbert Quandt, the founder of BMW, prioritized keeping BMW within his family and passed that value on to his successor and wife, Johanna Quandt. Even when BMW suffered losses after buying UK automaker Rover in 1994, Johanna ensured that her shareholding was passed to her two children rather than selling her shares to cover the losses. Since Herbert Quandt prioritized keeping the company within the family control, Johanna did so, with immense financial implications. From division of labor to decisions about the company’s future, family businesses need to balance what’s best for the business and what’s best for the family simultaneously.

Family businesses are quite common–and many of our largest companies started as family operations. Beside being part of the Fortune 500 list, Walmart, BMW, and Dell all have something else in common: they began as small family businesses.

There are three moving pieces within a family business that make up the whole (in what’s considered to be the “Three-circle” family business system), which include: the family, the ownership, and the management. In some cases, family members may be part of all three, and in others, family members may be in just one category. PricewaterhouseCoopers’ Family Business Survey shared that almost half of family firms reported arguing about the future direction of the family business. To develop smooth operations, perceptions, goals, and communication must be aligned.

The typical causes for conflict in family businesses include:

• Decisions about the company’s future and strategy
• The involvement of other family members in company decisions
• Performance of family members within the business
• The reinvestment strategy versus dividend payments
• Agreeing on the business’ valuation
• The option to have family shareholders or not (conflict of interest)
• Succession

To prevent conversations about these issues from becoming arguments, effective governance is required. Effective governance provides the means by which the family business can achieve a sense of direction and ensure that values are upheld. It involves knowing who to bring into certain conversations and deciding the timing in which to do so. Effective governance dictates the policies by which communication occurs within the business and the degree at which formality or informality is required to do so.

Per a PWC article titled “Understanding family dynamics and family conflicts” by Amin Nasser, the following are important conditions for a family business to flourish and sustain:

Family rules

Develop a family protocol or family constitution that dictates how the family will develop intragenerational business relationships. PWC reports that 71% of family firms don’t have a family constitution, even though it can help to settle most disputes. Morgan Stanley provides an example of what a family constitution may look like.

Separation of family and business

Decouple the family issues from ownership issues and management issues. Use contracts to set this division. Another important consideration here would be to separate conversations about business when families are together. For example, at family meals and holidays, establish boundaries such that no business talk would be brought up. Instead, keep the business talk for the board room or the office. Each family member’s role in the business should also be clearly defined, such that everyone is aware of what’s expected and has the direction they need to fulfill their responsibilities.

Establishment of a family council

Family councils and shareholder’s assemblies can be devised to offer a space for family owners to discuss matters that are separate from the board of directors. They typically consist of a committee of six to 12 family members. All family members are able to participate, no matter which category they belong to in terms of family, ownership, and management. By creating this space, all family members feel seen and heard. According to the Family Business Consulting Group, a family council addresses important matters that impact the family, such as: philanthropic initiatives, family member education, collective purpose and goals, decisions about the family’s relationship to the business, and more.

Standards for transitioning

The key to a successful passing of the torch, so to speak, will rely on aligning values between generations. The next generation should be involved in learning about the family values and family rules as early as possible so that they can be on board with what’s to come in the future, while maintaining the business’ vision and mission. For example, the late Jon Huntsman Sr., who is known to be one of America’s greatest philanthropists and entrepreneurs, founded Huntsman Corporation and successfully passed the leadership titles of Chairman, President, and CEO to his son, Peter R. Huntsman. Before he passed, Jon Huntsman pledged to donate his fortunes, and had donated a combined total of over $1 billion throughout his lifetime. And now, his eight surviving children continue to contribute to charitable projects.

There are estimates that family-owned businesses create the majority of the world’s wealth. The return on assets for family businesses is also higher than that of non-family owned businesses. Thus, stability within these organizations is critical not only for the families involved, but for the global economy broadly.