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The Partnership charter

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Resolving Disputes in Family Businesses

Chesapeake Bay Organization Development Network

by David Gage
Chesapeake Bay Organization Development Network Newsletter

As a mediator and clinical psychologist for the past dozen years, I’ve come to realize that my childhood vow to stay out of my family’s business back-fired. Being close to my grandparents and their construction company which became the focal point of their lives provided me with a behind-the-scenes view of the inner workings of their family-business relationships. While my insider’s perspective kept me out of that business, it sent me on a path to becoming a specialist in family therapy, and more recently a mediator working with family businesses and partnerships.

When teaching psychiatry residents in medical school about family therapy, several ideas came together for me. I recognized that families in business rarely seek family therapy when they get embroiled in conflict. They’re in business and correctly see their conflict as business related. However, they are still a family and have all the intricate and unique psychological dynamics of families. About that time I began recognizing the potential value of mediation and how it is uniquely suited for resolving crises in family-owned businesses (FBs). It allows everyone the opportunity to focus on business issues yet affords the flexibility to work with the very personal psychological dynamics that are typically at the heart of family disputes.

Let me provide a few facts about FBs to help paint the larger picture. About 75% of all U.S. companies are family owned or controlled. These companies produce 60% of the gross national product, and during the 80s grew at a faster rate than non-family firms. Family firms can be large or small, privately-held or public. One-third of the Fortune 500 companies are family firms, including names like Estee Lauder, Anheuser-Busch, New York Times Co., Marriott Corp., and Mars Candy Company.

There’s no question that the hostile business climate of the 80s with its avalanche of mergers and acquisitions, restructuring and subsequent belt-tightening and layoffs, has made the security of a job in a FB look better and better. What was once viewed as narrow and bourgeois by business school grads now seems appealing. Could it be that if love and work are essential ingredients in everyday life, theoretically one could “have it all” in a family business?

A young adult can usually move up the family’s corporate ladder faster than one can in a comparable non-family corporation. A recent survey of CEOs in the nation’s 1,000 largest corporations uncovered 13 CEOs under the age of 40. Five had founded their own companies; two were non-family chiefs; and six were family scions. FBs are also viewed as advantageous work environments for women family members. A Wharton study showed that women in FBs earn more and hold higher management positions than women in non-family corporations. But obviously, it’s not all harmony in FBs. There are plenty of problems.

While family members may feel more secure in their family-run companies, they are not all happy campers. A recent study by the University of Minnesota reported that half of the second generation in FBs were dissatisfied with their jobs, and far and away their biggest complaint was family-related conflict. Some 52 out of 59 family members surveyed reported tension and stress in their FB relationships. Whether it’s family problems that are creating job dissatisfaction or business conflicts impinging on family harmony, in a FB it’s all there all the time.

One major hurdle FBs must clear is leadership succession. Most companies experience a major convulsion when selecting successors and making changes at top management levels. Some 70% of family-owned companies fail in their very first attempt to transfer leadership. Only 10% of all FBs manage a transition to the third generation, and only 2% are ever run by family members of the fourth generation. (Adolph Coors and Johnson’s Wax are notable examples of fourth generation companies.)

A FB is really three distinct but intricately related systems: Family, Business, and Ownership. Part of each system is separate from the others and part is bound to the others. Conflicts can occur in a non-intersecting area, e.g., a family conflict unrelated to the business or a problem in the business concerning non-family employees.

They can be extremely complicated, seemingly intractable, and may require outside help (from family therapists or business consultants), but when the conflict occurs in the intersecting areas, another level of complexity is added.

Each system—family, ownership, and business—has certain functions it must fulfill, and where these systems overlap, more opportunities are created for their functions to clash or be confused. Untangling them requires a clear view of how each system works on its own, as well as how they mesh together.

A family going into business together quite naturally transfers its system of operation from the home to the office. The business takes on the “feeling” of the family. And really, a family which can successfully perform its family functions—establishing a sense of love and self esteem, healthy social relationships, responsibility for one’s actions, and a sense of purpose in life—has a good chance of succeeding together in business.

The business system also has functions it must perform in order to succeed. Some are similar to those of the family, but some are different. It must maintain a functional work environment, develop collaborative working styles, motivate a desire for excellence and growth, and instill a sense of mission to effectively compete and adapt to change. But the business may break down when attempting to meet its requirements, even when the family is working well as a unit.

The ownership system has its functions as well. A good example of how a FB’s ownership system can create problems in its business and family systems occurred about a year ago when a 65-year-old businessman called me fearing he had made a serious mistake. He had “gifted” each of his three children 20% of the stock in his thriving company. While only two of the three children actually worked in the business, this stock transfer effectively made him a minority shareholder. He did this without informing his wife, who only discovered it when the children informed her. Their father had instructed them not to tell her! They’d begun feuding and had stopped talking to one another directly. Needless to say, his worst fears were confirmed.

A cardinal rule in dealing with family owned business disputes is that each system must be examined separately and carefully, as well as in conjunction with the other two systems to effectively identify sources of disputes.