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. “

 

Embracing patience is key to creating an innovation culture

cornell-prof-allan-filipowiczNew executives can lead innovation at family firms by accepting failure as a necessary part of the innovation process, Cornell University innovation expert Allan Filipowicz said at a CKGSB-Cornell University event in New York.

“Innovation is going to be very, very slow,” said Professor Filipowicz, who is the Clinical Professor of Management and Organizations at the Samuel Curtis Johnson Graduate School of Management at Cornell. “You will do something, nothing will happen; you’ll do it again, nothing will happen. And so what happens is we give up, much too soon.”

Companies, he told an audience at the CKGSB Americas learning center, should focus more on process than outcome – no small task. “Process goals are a measure of effort,” Professor Filipowicz said. “We love measuring outcomes. We hate measuring effort.”

Professor Filipowicz’ lecture helped reinforce how family enterprises represent a growing force in the economies of China and other emerging markets. With family-owned businesses expected to represent nearly 40 percent of the world’s large enterprises by 2025, they also come with built-in challenges – developing global leaders for the future of the enterprise and sustaining wealth into the next generation and beyond.

Daniel G. Van Der Vliet, Executive Director of the Smith Family Business Initiative at Cornell, began the presentation by saying that in China and Latin America, it is estimated that 90 percent of businesses are family-owned. In India, 98 percent of businesses have family ownership. In the United States, 70 to 90 percent of businesses are family-owned.

If innovation is important to an emerging leader, then he or she must track daily and weekly how much effort is being put into developing innovation, Professor Filipowicz said. A leader needs to answer these questions: How much time have I spent setting low expectations? How much time have I spent giving people time autonomy? How much time have I spent developing psychological safety, developing a belief in one’s ability to get the job done?

Originally posted in: CKGSB-Cornell Session: Embracing Patience ‘Key’ to Creating an Innovation Culture

It’s Not What You Think: Five Myths About Family Business Conflict

All families, and particularly family business will face some level of conflict. While many will avoid conflict at all costs, often facing these challenges will have numerous positive outcomes. Continuity Partners and Deconstructing Conflict Co-Authors, Doug Baumoel (78) and Blair Trippe share some of their recent findings based on years of work in working with family businesses and dispel a few of the myths surrounding conflict.

Myth #1: A Family Business Experiencing Conflict Is “Dysfunctional”

It is only through being challenged by conflict that we learn, grow and advance as individuals, families, companies and societies. Therefore, a healthy family system processes conflict constantly. Well-managed conflict can lead to new approaches, innovative strategies, and resilience. In a family business, it is completely normal for deeply-caring individuals to struggle in coming to consensus over the governance, succession and growth of their enterprise. Sometimes, external factors that are beyond a family’s control can cause stress and conflict in their company. While there are no easy answers, it is absolutely possible for families to learn to manage family business conflict in constructive ways that ensure the success of their families – and their businesses.

Myth #2: A Family Business That Never Has Overt Conflict Is in Optimal Shape

The absence of overt conflict is often a cause for concern since it usually indicates that families are ignoring or avoiding difficult conversations because they worry that they will lead to disagreements. When families spend a lot of energy avoiding conflicts, it can often drain their enterprise of innovation and resilience, leaving them “stuck” in patterns that may no longer serve them well.

A stuck family system will miss valuable opportunities, because paralysis often prevents important decisions from being made (e.g. planning succession to the next generation, growing the business, adapting to new economic circumstances.) Furthermore, a stuck family can ultimately experience more severe strife and infighting than if they had acknowledged their differences earlier on and found ways to manage them.

Myth #3: Conflict at Work is Just About Work

Being family often complicates the management of conflict in business. In addition to managing the substantive business issues at hand, family members are trying to negotiate how they will stay together as a family in the process. Disputes in family enterprises are unique because these continuing relationships matter greatly, and parting ways is usually not an acceptable outcome for most family members.

Emotions run high in every family, and these emotions are amplified when a family experiences conflict over running the business. Sibling rivalry and complex struggles over power-sharing – along with rebellion – are all normal family processes that don’t show up in the average business, but they are common phenomena in family businesses. Ultimately, failing to acknowledge and manage the unique family aspect of these conflicts will lead to greater discord, and the wasting of precious business resources like time, money, human capital and the family’s good name.

Myth #4: Family Members are the Only Ones Suited to Understanding and Handling Their Conflicts

While family members are most-definitely the experts on what is going on in their family business, being stuck usually comes with limited ability to see beyond themselves and find creative ways to move forward. In these situations, a trusted outside party can often offer new ways of analyzing the data and looking at the big picture. Seeking outside help with assessing and managing family conflict can enable stakeholders to gain new understanding and perspectives on their conflicts and work together to find ways to move forward.

Myth #5: Family Business Conflicts Need to Be Severe to Benefit from Conflict Management Guidance

When families gather to brainstorm and problem-solve in less stressful times, they often can discuss more “loaded” topics and better plan how they might handle a situation when it unexpectedly arises. This is a golden opportunity for forward-thinking families to convene and use their strengths and talents to plan for the future. There are many strategies and tools that families can deploy to help them manage unanticipated conflict and ensure that their enterprise will run smoothly.

Reprinted with permission. 

 

 

Developing the Next Gen

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The Family Business Consulting Group has compiled a helpful list of recent articles aimed at development of the next generation. Shared here are their 10 top articles written by their team:

  1. Introducing Teens and Young Adults to the Family Enterprise
  2. Family Champions: Energy for Success
  3. Vaccinating with Values: Family Business Antidotes to “Affluenza”
  4. Developing Next-Generation Leaders in Family Business
  5. Empowering the Next Generation with the Future
  6. The 80/20 Rule: Balancing Ownership and Management Responsibilities
  7. Achieving Balance: Individual Rights and Family Interests
  8. Passing the Baby: The 8 Must Haves of Successful Continuity Planning
  9. Enabling Incompetence Among Family Employees: Good Intentions Gone Awry
  10. Next Generation Development with a Mentor Team

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.

Participate in family business research 

Two family business surveys are currently being conducted. Participants should either be business owners or leaders of enterprise.

1. Family Enterprise USA conducts an annual Family Business Survey to take the temperature of family business owners; where they are succeeding and where they remain challenged.

2. Alice Brawley is a Ph.D. student at Clemson University researching small family businesses’ success for her dissertation. Specifically, she’s studying how a few ways of managing employees could enhance employee performance, employee retention, and customer service quality. If you have 1-9 employees in your business, please consider completing this short survey. Alice looks forward to sharing a short report of her findings with the Smith Family Business Initiative.

The survey focuses on a few ways of managing employees and how that enhances employee retention, employee performance, and customer service quality. This is also a project I’m very passionate about – I got into this area based on my own experience growing up in my parents’ family business, so I’d like to contribute to the success of these really common, really critical businesses in the US.

All surveys are confidential and their findings are important data points in our understanding of what makes family enterprise unique. Please feel free to forward and share.

 

The story of Nurse Next Door

The story of Nurse Next Door: Uncovering your values and putting them into practice – a matter of sheer survival!

Having grown their start-up to 1,000 employees, John DeHart (Cornell ’96)  and his co-founder knew their company was doomed if they didn’t make a major shift. They dismissed 40% of their corporate staff and embarked on a journey to identify what their values are. Most importantly, they decided how these values would be implemented in daily operations. Following through was everything. They hire their people on 50% skills and experience, and 50% value fit. The value-interview is done by a different person who can’t be the future supervisor. Today they have 140 offices with 7,000 employees. Keeping seniors out of nursing homes!

Key Lessons:

  • Identify your values and make them intentional
  • Operationalize your values: You don’t want your employees to be cynical about values that are only declared but not lived.
  • Integrity and passion are entry conditions, not core values
  • An intentional culture vs. one by default (direction dictated by circumstances)
  • Once values are clear, decisions are easy (Walt Disney)
  • Everything and everyone that doesn’t fit your values should go! You can’t be everything to everyone. This also means firing customers.
  • Go through all your policies and delete or change those not compliant with your values.

Shared from Stefan Voswinkel (http://familybusinesscatalyst.com/)