The Biggest Threat To Family Businesses?

ropesAt Cornell’s second annual Families in Business Conference, we were excited to hear from Cornell alumnus and founding partner of Continuity Family Business Consulting Doug Baumoel (’78). Doug discussed his book, Deconstructing Conflict: Understanding Family Business, Shared Wealth and Power, as well as participated in a panel on cybersecurity threats to the structure of a family business. Below, Doug shares his insights:

“Family businesses get a raw deal. Often viewed as the poor cousin to ‘real’ businesses, most everyone I meet has a story of the disastrous end of a family business – replete with the family war over the business. Researchers point out that most family businesses ‘fail’ to pass to the next generation. With all these strikes against them, you would be justified in thinking that family business is dysfunctional business.

The truth is that family businesses are not dysfunctional; they’re just different. 

The family business system is the oldest and most widely employed type of business.  When compared to non-family enterprise, the family business is actually more robust. (After all, fully 80% of the Fortune 500 companies are no longer around). They face the same risks as other businesses, answer to the same market forces and still need good business plans and ample capital. And because many family businesses are small businesses that have an inherently higher failure rate due to thin capitalization, statistics against them may seem over-weighted.

So why do we single out family firms for their failure rate?

Just because a family business ‘fails’ to transition to the next generation doesn’t mean that it has indeed ‘failed’.  Many family businesses do not make it to the next generation for good reason.  Like their non-family owned counterparts, they may have been sold for a good price, enabling the family to redeploy their assets in new and creative ways.

Not surprising, however, the biggest threat unique to family business is poorly managed conflict.  These struggles stem from the high degree of interdependence among family stakeholders that is inherent in family businesses. With family members potentially active in so many roles (such as employee, shareholder, director), overlapping and competing interests abound.  The potential for conflict is woven into the very fabric of the family business.

What makes stakeholder conflict even more of a threat to the family business is that when conflict arises, it is rarely a simple dispute over something simple and negotiable. Roles in a family business often connect strongly to identity or sense of self. A stakeholder may believe that he/she was groomed for the top-slot at the firm or that ownership in the family business is an essential part of who they are. If these roles are threatened, stakeholders will go to great lengths to defend them.

Recently, Cornell and the Smith Family Business Initiative held their annual Cornell Families in Business conference.  I was honored to be a sponsor and moderator of a panel on the Implications of Trust, Fraud and Cybersecurity for Family Business.  While all businesses face these threats, they take on a whole new dimension when coupled with family stakeholders.  In addition to security threats from outside the company, family businesses are subject to security threats from the inside; from family members fighting over control, position and wealth.  When family members feel that their role in the business is threatened they routinely snoop on each other’s email and hack into each other’s computers in an attempt to further their own agenda.  The panel explored both common and unique security threats that family businesses face and the panelists provided helpful tips, such as the use of Password Vaults, on how these threats can be managed.

Understanding the nature of conflict in family business and developing the ability to avoid, manage and recover from conflict is often the most important factor in achieving family business success. “

 

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