A fascinating story emerged at a recent seminar on managing family businesses, presented by two distinguished members of a privately owned, third generation family business that generates over
$250 million in revenue per year. Their story captured the attendees’ attention, as the business owners described how a small newspaper business, founded two generations before them, was transformed into a massively successful company that is now diversified into the food and energy industries. The key to their success — besides having bright business minds — was the role that family governance played in keeping the business and family together while they all prospered together.
Like many family businesses, theirs experienced leadership transitions, family feuds, and the challenges of including the wishes of an ever-growing family tree in business decisions. Yet in the end they produced a framework for managing family and business together that has resulted in a company they hope will be passed down for many generations to come, as well as a family that is strong and unified.
There were four steps that were essential to establishing a framework for building a bulletproof family business:
1. Hiring a family business advisor
2. Creating a family council
3. Establishing checks and balances
4. Passing the baton to the next generation
Hire a Family Business Advisor
In the late eighties and early nineties, the third generation of this family experienced a baby boom, with more than a dozen children born in the family within six years. It was about this time that they started thinking about family governance. How were they going to teach the next generation about the family business and get them involved once they got older? How were they going to get each individual nuclear family on the same page and create a comprehensive plan that everyone agreed upon? Each family unit had a unique communication style, vision, and opinions. The answer was to hire someone who could help.
A family business advisor can help families wrap their heads around how to create a unified family plan by helping to establish a structure for regular meetings and create governing documents, such as a constitution and mission statement. Codifying family beliefs and values can help with decision-making and eliminate some of the emotional conflicts that arise when making business decisions. Not to mention the benefits of bringing everyone together to engage and have some fun. Over time a family business advisor can be a valuable facilitator of discussions amongst family members and serve as an uninterested party who can moderate disputes that will inevitably arise.
Create a Family Council
After the basic family governance structure was in place, the family was able to take its planning and processes to the next level by establishing a family council. The family council met twice a year and homed in on the goals and vision for both business and family. It was very inclusive — spouses that married into the family and family members not active in the business were encouraged to participate and share their thoughts and opinions. They established an employment policy for family members that wanted to work in the business and the criteria they had to meet to do so. This helped to clarify how much education and experience the next generation needed to become a contributing member of the business, which placed everyone on a level playing field.
However, the family council meetings also exposed differences and tensions among the senior leaders of the business, and after years of festering, they eventually came to a head. Family members chose sides and abandoned the family council, while continuing to be in business together. The family business advisor even quit after deciding they were a lost cause. For years this separation persisted and probably would have continued forever had it not been for the third part of their bulletproof framework: checks and balances.
Establish Checks and Balances
During the years that the family had an active family council and a family business advisor, they created two structures that would eventually save the business and reunite the family. The first was an independent board to watch over the business. These weren’t golf buddies or friends of the family. The board consisted of bright and wise individuals that were appointed to keep the company’s best interests in mind. (Smaller companies probably don’t have a need for a full board, but having non-family members with authority in the business can help keep it running when family relationships break down.)
The second structure in place was a trust to hold all the voting shares of the company . The trustees were equally divided along family lines, and between those working in the business and those not working in the business. Unanimity was required for all voting decisions. If there was one dissenter, the decision went to two neutral trustees on the independent board and was completely taken out of family hands. If the resulting votes of those two trustees still left the total votes tied, the sanity test was a coin flip. Nothing brings you to a compromise better than putting millions of dollars at stake for a coin flip!
The trust was integral in keeping the business together when the two factions of the family weren’t speaking, because neither side was willing to take the risk of bringing their disagreements to the board for a decision and potentially be ousted from the company. Instead they had to find creative ways to make compromises and keep the business running. It was only one piece of the puzzle, because eventually the feud started to hurt the business. After seven years of poor communication and struggle among the family executives, the independent board gave them an ultimatum: figure out your differences in the next six months or you are all fired. The checks and balances they put in place nearly twenty years prior had now come full circle and forced their hands, serving as a catalyst for the family to reinvent itself.
Pass the Baton
When the board stepped in it was a wake up call for everyone in the family. They were about to lose leadership of a highly profitable company started by their grandparents because they couldn’t reconcile their differences. Not only that, the fourth generation was now in high school and college, and valuable time had been lost to educate them about the business they would eventually inherit. The leaders of each family unit decided to bring everyone back together to spend a few weekends trying to resurrect the family council. It quickly became clear to the third generation family members that a fresh perspective was needed to move forward.
Enter generation four, which was now a budding crop of educated young people that were extremely enthusiastic about being a unified family and learning about the business. They were provided complete freedom by G3 to hire a new family business advisor and kick off a renaissance of the family strategic process that was started almost twenty-five years ago. Essentially, generation three passed the baton.
Now, with more than twenty members at family meetings, they have enough people to create committees within the family council for various family initiatives. One example was a committee to advance the career development of the fourth generation members, both inside and outside of the family business. In addition, the fourth generation family members now have a significant ownership stake in the business and are quickly joining the ranks, as they meet the requirements of the family employment policy. By sticking to the process, the family has prevailed.
Family businesses have many challenges that other businesses don’t because of family dynamics and emotions that get mixed into matters that should be strictly business. In addition, matters that are strictly business-related are inherently intertwined with family relationships. This circular relationship is why it is pertinent to put structures in place that will keep the family and business together when struggles inevitably arise. It is a beautiful thing to see family members help one another grow and prosper towards a set of common goals and values over multiple generations.
So, how do you make your family business bulletproof? Use this family’s successful roadmap and hire an advisor, create a family council, establish checks and balances, and pass the baton.
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