When Family Gets in the Way

THE SCENARIO:

Phil works for a family business (a wholesale tool company) and began the succession planning process a few years ago when two brothers stepped down from management and Phil took over. He’s having some significant challenges with an employee who is the only remaining family member involved in the daily operations. Phil has been working with an outside consultant who has helped him to set clear performance expectations and culture norms for all employees. However, the family board (which represents the employee’s grandfather, uncle & father) seems to be a lingering issue.

WHAT WOULD YOU DO?

woodWe’ve asked James Wood, Cornell EMBA 2016, to weigh in. James was Chief Strategy Officer, and Senior Vice President for Clemens Food Group, a family owned business, for over 16 years and author of The Next Level: Essential Strategies for Breakthrough Growth. Currently he serves on the board for several family-owned enterprises.

To me this is a case of bringing clarity to the distinction of roles between: 1) Shareholder (owner) 2) Board (governance) and 3) Management. Many family businesses get into trouble because they don’t see or manage the differences between these roles and it all gets enmeshed and confusing. The way it should work is that the Shareholders give direction to the Board for meeting high-level performance expectations, and then the Management is accountable to the Board for effectively delivering on those expectations. The Shareholders are also responsible for legacy planning around next generation succession and preparation.

If I were Phil I would start by gaining alignment with the Board around the three separate roles and expectations for each.

Shareholders should be asking, “Am I getting sufficient returns from this investment?” focused on the following criteria:

  • Expected returns
  • Liquidity needs vs. reinvestment into growth opportunities
  • Exit strategy (sell vs grow)
  • Shareholder Unity (legacy planning, next gen succession/prep, family office, settling shareholder disputes, rules of engagement on family members working in the business, etc)

Board Members should be asking, “Is management delivering shareholder expectations; does the strategy make sense; and do we have the right leadership in place to execute?” Their focus should be on governance, leadership, strategy and risk: with the following criteria:

  • Integrity of strategy
  • Financial performance hurdles
  • Capital structure
  • Meeting criteria for growth Investment decisions
  • Risks assessment and mitigation
  • Executive team competency/succession

Management should be asking, “Do I have sufficient market intelligence, human capital and sustainable infrastructure to execute effectively?”– Their focus should be on operations and strategy, such as the following:.

  • Shoring up core competencies
  • Capitalizing on competitive advantages
  • Building organizational and operational infrastructure (which includes hiring/firing people)

Once Phil has gained clarity around these functional roles, he can attack the issue of the non-performing family member:

  1. As a Manager, he should have the ability to hire and fire as he sees fit, regardless of whether family member or not. The Board should support him around this decision (assuming he has well-documented rationale for why this person doesn’t meet performance expectations).
  2. However, the owners’ responsibility is to have a clear plan of where they see the next generation as far as succession/leadership and how those folks are being developed towards meeting that goal to effectively sustain the family business (knowing that typically 3rd gen destroy the business). It sounds like this has been vetted out already and this non-family person has been chosen as the successor.
  3. If the working family member is not seen as a future leader (obviously since the non-family friend is the one who is being groomed for future leadership), then it should be seen more straightforward as a performance issue. Then the owners should creatively “manage” him through the transition out of the business (keeping him whole financially, giving feedback on entitlement vs. earning your keep, helping get a job somewhere else, etc).

The outcome depends on the emotional/family dynamics between brother / uncle / grandfather and how objective they can be regarding this person. This can definitely be a sensitive area, but it can work. It does involve some orchestration and plenty of pre-game work ahead of time but gets more objectivity around “doing the right thing” vs. turning it into personal or family politics.

Do you have a family or business issue you would like addressed? Please submit your cases or scenarios to dgv9@cornell.edu.

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