by David Gage and Scott Meza
Family Business Conflict Resolution Handbook
This method of self-directed conflict resolution with professional assistance is an appropriate and productive way for business families to settle their disputes.
Family business owners can follow many paths into conflict, but only a few paths lead out of it. The path that owners choose will determine not only what the outcome will look like, but also who will be involved, what the process of getting from conflict to resolution will involve, and how long it will take. Mediation — a process that focuses on collaboration — is often the best path out of conflict for family business owners.
The various methods of conflict resolution span a spectrum from negotiation to litigation (see Figure 1). The methods on the left side of the diagram provide the greatest degree of self-determination for the people involved. Outsiders have more influence when the methods on the right side are used, until, at the extreme, the participants surrender complete control over the outcome to a judge or arbitrator.
Negotiation is by far the easiest way to resolve disputes — when it works. It’s what partners do constantly. Negotiation is simply talking it out, preferably with some measure of give and take. Whenever partners have a disagreement, negotiation is what they should try first.
When partners can’t negotiate an end to a disagreement, they may seek assistance from a facilitator. The mere presence of a good facilitator can do wonders for some partners because the facilitator transforms a private, intimate exchange into a more public one, nudging some people into behaving differently — and better. Actually, having any objective person sit in can facilitate a more constructive dialogue. The higher the facilitator’s stature in the eyes of the participants, the more effective his or her presence will be.
Facilitators can do more to help the participants than just be present, however. They can carefully monitor the process and give feedback that improves the parties’ ability to communicate. They can help ensure that partners are not only transmitting but also receiving. But they will typically stay out of the content of the discussion in order not to lose sight of the process or be viewed as taking sides.
Not being perceived as taking sides — being neutral in everyone’s eyes — is at the very heart of both facilitation and mediation. Significantly, it isn’t a prerequisite of any of the other conflict-resolution methods, including those used by the counselor and the expert adviser.
Therapists and business consultants
Family counselors can play an important role in family businesses, but their role is more narrowly defined than some family business owners imagine. Therapists who are trained to work with families are experts on individual and family dynamics. They are on the right side of the spectrum in Figure 1 because they are engaged to bring their knowledge and expertise to bear on the family’s problems, not for their ability to remain neutral in the face of dysfunctional behavior and beliefs. Family counselors are expected to offer their opinions and insights so that the family can understand how to change; in doing so, they are rarely perceived by everyone as neutral or unbiased.
Resolving family issues doesn’t lead automatically to the resolution of difficulties in business relationships. Issues like ownership and management pose challenges even for businesses in which no family members are involved. It’s difficult for experts who have entered the picture as therapists to shift gears and deal with complex and sometimes technical business matters. This would involve shifting from being one type of expert (therapist) to being another type (business consultant). Similarly, it’s difficult to shift from being an expert of any type to being a mediator because clients expect very different things from mediators and experts. They hire expert advisers to recommend ways to resolve issues. On the other hand, they expect mediators to maintain neutrality on the substance of their disputes.
The role of family business expert is farther right on the spectrum in Figure 1 because business owners surrender some degree of control when they engage such professionals. Some business owners won’t hire consultants because they aren’t willing to surrender any control. Likewise, some consultants “fire” business owners as clients because the clients are unwilling to follow their advice.
Family business consultants, who have backgrounds or training in business and specific experience working with family businesses, can be immensely helpful to families on a wide range of business issues if the families are open to receiving help. The process is relatively straightforward. Experts assess the situation by interviewing everyone involved, apply their knowledge and experience, and recommend specific courses of action. Family members have the option of either accepting or rejecting the consultant’s advice.
This process is very efficient when family members are getting along well and the advice is aimed at a business issue, but it isn’t effective in two types of situations.
The first is when a family has lost the ability to make simple business decisions together. A third-generation family in the resort business recently told us that they had “more of the best consultants than you’d ever imagine” to help them plan the future of their resort. Each time, they explained, one person or another did not like the plan, so the resort continued its slow but inexorable deterioration. Even the best business advice can fall between the cracks of a family’s conflict when the principals are not addressing their conflict directly.
In the second type of situation, the advice is meant to end a festering conflict between family members. Because of the dynamics of interpersonal conflict, someone involved in the dispute inevitably resists recommendations from others — whether from a sibling, a parent or an expert. The expert may be well qualified and the recommendation may be ideal, but the expert process is not optimal for entrenched conflict situations.
Expert advisers who have existing relationships with business families, such as accountants and lawyers, are sometimes called in to resolve disputes among the family members. These professionals are in a seriously compromised position. Even though everyone may consider them trusted advisers, they are unlikely to be perceived as neutral by everyone when negotiations become difficult. Being perceived as neutral is imperative to effectiveness in resolving most disputes.
Arbitration and litigation vs. mediation
At the far right of the spectrum in Figure 1 are arbitration and litigation. The two are actually very similar. Both are adversarial processes that take decision-making out of the hands of business owners and put it in the hands of third parties who base their decisions on laws and legal precedents, not family needs or subtle business realities.
As a Harvard Business Review article (May 1994, p. 120) noted, “The bad news is that [arbitration] as currently practiced too often mutates into a private judicial system that looks and costs like the litigation it’s supposed to prevent. [It] typically includes motions, briefs, discovery, depositions, judges, lawyers, court reporters, expert witnesses, publicity, and damage awards beyond reason.” One of the few reasons to use arbitration, as opposed to litigation, is that arbitration usually results in a verdict in less time.
Mediation is often confused with arbitration because both are called “alternative dispute resolution” techniques, but they are as different as night and day. The only similarities are that both employ a neutral third party and both occur outside the courtroom.
Arbitration and litigation both necessarily create winners and losers — and both often leave families in shreds for years and sometimes for generations. Rather than foster greater communication, these methods diminish and sometimes squash all direct communication among the principals. People are often instructed not to speak to one another, which leaves the lawyers the only ones talking directly to anyone.
A highly respected Superior Court judge in the District of Columbia, Judge Rufus King III, presided over a family business dispute of textbook proportions a few years ago. The Haft family business empire — the Dart Group — ground to a halt over a father-son dispute. In short order, the parents were divorcing, siblings were on opposite sides of the father-son battle, and legal bills passed the $30 million mark. It became difficult for family members, board members, key employees and others to find Washington lawyers who had no involvement in the case.
Judge King took the unusual step of remanding the family members and their attorneys to mediation. In an interview, he said that mediation is much more appropriate than litigation in most business partner conflicts because “even a ‘win’ in court can be a loss for everybody involved.” Even when one side prevails in an adversarial contest, the people involved often emerge severely damaged. Arbitration and litigation force participants to spend time, energy and money looking back at what has happened and trying to prove that the responsibility for anything bad rests with the other side.
Judge King saw what was happening to the Hafts and their multiple businesses and tried to stop the bleeding by forcing the family into mediation. The Hafts ultimately lost control of the business, and Dart Group wound up in Chapter 11. But the judge’s dramatic maneuver probably helped the family to cut their losses. Had they begun the mediation process earlier, the outcome might have been different.
What distinguishes mediation from the other methods of resolving disputes is its emphasis on collaboration. Getting family members to shift their mindset from one of antagonism, blame and suspicion to one of we’re-in-this-mess-together is key to achieving resolution. That is why mediators plan at the outset of every engagement how they will create a spirit of collaboration among the parties involved. They do this in a number of ways.
- They try to involve everyone who has a stake in the problem or might be instrumental in its resolution. Sometimes that means that spouses, key employees or advisers participate in part of the mediation. Additionally, anyone who has the power to block an agreement needs to be part of the mediation. We learned this once when three key employees threatened to quit rather than accept the buyout of one partner by the other. The 50/50 owners had to develop a new solution that these key constituents could live with. Involving everyone who may contribute appreciably to a solution creates an energy and spirit of collaboration that is essential to resolving disputes.
- Once the participants are together, mediators engage them in constructive dialogue. Families are often skeptical that constructive dialogue is possible, either because they have been having plenty of dialogue but none of it has been constructive, or because they have been incapable of any conversation whatsoever. The secret to starting effective communication among people who are fighting is helping them shift from focusing on who is causing the problem to who can be part of the solution.
- Mediators know how to spot what we call under-performing partners and build them into the resolution. This, too, gets people energized and more willing to work together for the greater good. There are usually some family members who have not been identified as “the problem” but have been marginalized or are not performing up to their potential.
- Mediators create a safe environment by establishing ground rules and conducting caucus sessions, which are useful for breaking impasses. In this safe environment, family members can drop their defenses — their anger, finger-pointing, denial, etc. — long enough to hear what someone else is saying. In such an atmosphere, people can think more rationally and perhaps feel some compassion for another person.
In a caucus session, the mediators meet with a subset of the people involved to discuss something specific — usually something that cannot be said comfortably in the entire group. A caucus session can be requested by the mediators or by any of the participants. In these sessions, mediators might unearth a long-buried family secret or coach family members on how to say something they were afraid to say, or on how to apologize — things that might not happen, or would take much more time to achieve, without the flexibility that caucus sessions provide. What comes out in caucus can be kept confidential if necessary.
A father once exclaimed that mediation provided the structure he needed so that he could “let my craziness out” enough for his son to understand him. A son in a different business was able to hear from the mediators in a caucus session how he came across as angry, egotistical and threatening with his brother. He said he behaved that way because he felt scared. In the subsequent session with his brother, he expressed his fears, and his brother told him it was the first time in his life he felt any compassion for him.
- Mediators define the solution as one that all of the stakeholders will develop together. The stakeholders control the outcome. When people understand that they are in a process that requires them to work together to be successful, they begin thinking and acting differently and become more actively engaged. People open up to mediators in ways that surprise even themselves. They start revealing things that they have revealed only to their most trusted confidants. Then, for the first time, someone (the mediator) has all the information — all the pieces of the puzzle — and is in a perfect position to help the parties clear up misunderstandings, think creatively, and envision new options.
When family members become engaged in this way, they achieve a buy-in that makes it possible to resolve even long-standing conflicts. They develop a sense of ownership in new agreements that are carefully reduced to writing and signed by all the principals. Such buy-in makes it likely that everyone will follow through on what they have agreed to. (As an extra incentive, there should also be consequences if people do not follow through.) It is often extremely therapeutic to go through the process of reaching agreements, reducing them to writing and then having the written agreements in hand when the mediation is over. People are willing to forgive the past if they feel optimistic about the future. Therein lies much of the healing power of mediation.
Sometimes parents who own a controlling interest in a business worry that bringing everyone into mediation will result in chaos or dilute their power. Good mediators actually make situations less chaotic and help people accept who holds power. Adult children are usually quite willing to defer the final decision to a parent who owns a controlling interest if they have been allowed to be part of the process. On the other hand, parents are often willing to recognize when siblings have issues they need to work out among themselves (for example, how they will work together in the business after the parents are gone).
For resolving family business disputes, the most effective and efficient co-mediator team consists of a mediator with a background in family dynamics with a mediator with a business background. Having backgrounds in these areas is important, not because they will offer expert advice about the best resolution, but because mediators must grasp the nuances of both business and personal issues quickly. They must help family members with brainstorming on solutions that are practical and that can be implemented. They must also assist in drafting detailed written agreements that capture the understandings reached by the parties and help prevent problems from developing in the future. The specialized training in mediation, over and above the background in one of the specific disciplines, provides an understanding of the techniques and mindset necessary to function effectively as mediators.
In part because mediators dig in and grapple with the nitty-gritty of interpersonal and business issues, mediation is considered the most effective method for resolving family business disputes. Mediators will raise issues that partners may not recognize and will exert pressure on participants who are stonewalling or being unrealistic about their demands. This is the most delicate part of the entire process because mediators must continue to be perceived as neutral. Getting into the substance of the conflict in this way makes mediation very different from facilitation. It is also why business owners should look for mediators who have considerable experience with business owner conflicts.
Mediation can’t take place an hour or two at a time. A typical family business mediation lasts a few days and may or may not take place on consecutive days. Long stretches of time are necessary because participants must coordinate their schedules — not an easy task in itself — and because building collaboration and consensus takes time. The extended meetings and the intensity of effort are additional reasons why having co-mediators is so important. Even in complicated cases that take more than a few days to resolve, the cost — in time, money, energy, personal anguish and family relationships — is usually much less than the cost of taking one of the alternative paths.
David Gage, Ph.D., is founder and principal of BMC Associates, a multidisciplinary team of conflict prevention and resolution specialists in Arlington, Va. Scott Meza is a principal at the law firm of Greenberg Traurig, LLP and a mediator with BMC Associates.