One of the most common and colourful business sayings is that “family businesses go from shirtsleeves to shirtsleeves in three generations.” Usually attributed to industrialist Andrew Carnegie, it seemed to be backed by a 1980s study of manufacturing companies in Illinois.
But Josh Baron and Rob Lachenauer, consultants who advise family businesses, say we have misled ourselves by subscribing to the shirtsleeves mythology. “On average, the data suggest that family businesses last far longer than typical companies do. In fact, today they dominate most lists of the longest-lasting companies in the world, and they’re well-positioned to remain competitive in the 21st-century economy,” the duo write in Harvard Business Review.
The study that gave credence to the shirtsleeve destiny for family businesses was misinterpreted. The study actually found one-third of businesses make it through 60 years, a reasonable length of time. More significantly, it didn’t compare those operations to non-family businesses. Their staying power seems even more limited. A study of 25,000 publicly traded companies from 1950 to 2009 found on average they lasted around 15 years. That’s just one generation!
And the family business study didn’t look at why those businesses folded. Yes, some were due to family disputes and the failure to overcome business challenges. But the consultants note in some cases the owners may simply have sold their business and started a new one.
Still, family businesses have a special dynamic. In The Harvard Business Review Family Business Handbook, which those two consultants co-authored, they note that each decision made – from curtailing a dividend payment to a parent, to skipping a family reunion, to firing a brother or cousin – comes within a powerful mix of family emotion, business hierarchy, and owner power. “Your decisions are never just straightforward business or family calls,” they note.
It can be extremely complex and sometimes exceptionally volatile. To help, they recommend imagining your family business system as a home with four rooms: an owner room, a board room, a management room, and a family room. The idea is to funnel decisions to the appropriate rooms, while family members and others involved play different roles in each room and behave differently. A key principle is that family members can’t roam and enter any room they want. Everyone knows which room they can enter, depending on the established rules and boundaries.
The owner room makes the rules. It’s where ultimate power and influence resides, with the various owners of the company, beneficiaries and trustees. It may sound like but is different in composition from the board room, where the directors and their advisers meet. Not all the owners are in the board room, where formal decisions will be taken. The management room is for the CEO, management and employees – competence and execution is the essence. The family room is a gathering spot for descendants of the founders and spouses, including the next generation. Its purpose is to enhance family unity and build family talent. Love, unity and development should be themes.
People have to accept and understand their roles. In a small family business, those rooms might be informal, with the affairs of each handled in one meeting; in a larger firm separate meetings would be held. Decisions and policy must be communicated between all parties, so they can understand how to support the company.
Conflict is inevitable between different people and different interests. It can come on many issues but succession and employment of family members can be particular pressure points. They say you have to find the Goldilocks zone of conflict – not too much, but also not too little. “The pressure to be the perfect family that never disagrees often ends up sowing the seeds of destruction down the road. Whenever families tell us that they get along perfectly, our ears perk up. Most often it is a fake harmony which reflects a lack of discussion on critical issues,” they write.
To check if you have the Goldilocks formula right, they offer three questions to ask yourself. First, is there general satisfaction with the direction of the family enterprise? Individuals might not be happy with every aspect but they have to believe they are better together than apart. Second, are questions about critical issues being made? Not every point of disagreement need be addressed but there should be no elephant in the room. Finally, are family relationships good enough to work and celebrate together? They observe you don’t have to be best friends to own significant assets together. But you have to be good business partners, agreeing on the big issues and enjoying each other’s company.
The conflict spiral that can destroy everything begins when interests diverge and positions harden. Communication breaks down. Alliances form, as people stop talking to each other, and everyone is forced to take sides. The opposing sides look for ways to bolster their positions, and proxy wars are unleashed as other people are entangled in the battle. Experts are brought in from outside to advocate for the different positions. And finally, a family war begins, with lawsuits, usually in front of the media.
They offer that description so you can be alert to it and try to extricate yourself from the spiral when it is happening. As one client told them, “conflict is inevitable, but combat is optional.” Avoid combat, find the right level of conflict, keep roles demarcated, get succession right and the business can thrive beyond the third generation.
Cannonballs
- “Let’s make better mistakes tomorrow.” Liz Plosser, editor-in-chief of Women’s Health magazine, subscribes to that motto, as it gets her through tough times, knowing she can always start again tomorrow.
- If your organization is fighting to hire new talent, recruiting expert John Sullivan warns not to get confused about the offer process: It’s about selling your firm’s benefit to the prospective employee, and you need to avoid leaving it to compensation wizards. Also: Generating salary offers takes too long in most corporations. Speed up.
- Unethical practices in corporations are often the result of groups rather than individual leaders, advises Jessica Kennedy, a professor at Vanderbilt University’s Owen Graduate School of Management. Research has found, for example, that people making decisions as a group are more willing to lie than when they are making decisions as individuals. Interestingly, the higher a person’s rank in a group, the more they identify with that group, thus increasing the likelihood they will go along.
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Harvey Schachter