Posting by Ed Kopf, Ph.D., Principal at BMC Associates
Every business can benefit from clearly stating its objectives and, then, understanding the internal and external environment in which it is pursuing those objectives. A well-established approach to examining the environment as part of overall business planning is the SWOT technique. This acronym represents a careful assessment of (internal) Strengths and Weaknesses and (external) Opportunities and Threats.
When a family business undertakes a SWOT analysis, it has a number of family-related factors to consider that other businesses don’t. For example, to what extent may personal, spousal, intergenerational, and sibling relationships (long antedating business relationships) strengthen or weaken the organization’s ability to reach its objectives? Or, how might management and ownership succession be affected by family-based senses of entitlement and envy? The manner in which these and many similar questions are addressed as part of a planning process could have a significant impact on the success of the business. To what extent do family businesses bring these sorts of questions into clear focus when they think about their future? A recent survey of family business owners offers some insight into the answer to this question as it relates to weaknesses and threats derived from the risk of family conflict.
The PwC Survey
The 2014 Global Family Business Survey commissioned by PricewaterhouseCoopers (PwC) provides insight into the risk perceived by family businesses from conflict within the ownership family – and the degree to which they are prepared to deal with it. Among the nearly 2400 respondents to questions about strengths, weaknesses, opportunities, and threats, one in nine reported the potential for “conflict within the family” as a key challenge facing them in the next five years. In addition, over one in three stated that “company succession planning” – a frequent contributor to family business conflict – would be a key challenge in that same period.
How well prepared are these family businesses to deal with these challenges? When all of the survey respondents were asked what steps they had taken to prevent or deal with the potential for family conflict, the most common responses were that they had in place formal legal agreements such as shareholder agreements (54%), incapacity and death arrangements (43%), and entry and exit provisions (33%).
Legal agreements are part of the fundamental framework families with businesses need to begin to manage their relationships. The fact that nearly half of the businesses surveyed lacked even a shareholder agreement (providing basic rules of governance and ownership rights) clearly should be a source of concern for those firms.
But legal agreements alone can’t offer family businesses assurance that the relationships in the owning family will function smoothly. Many key sources of disputes exist outside of a legal framework. Even when there is an issue that can be resolved based on legal rights, the outcome can leave strong feelings of unfairness and bruised emotions. Families are held together by understanding, communication, and a collective sense of fairness – not by law. Resolutions based on a legal adjudication can’t assure these.
This is why effective management of family conflict requires robust mechanisms going beyond legal agreements that provide for real transparency, communication, and mutually recognized fair play within the family. However, the proportion of families surveyed reporting the existence of such mechanisms is relatively low: 32% for family councils, 27% for use of third-party mediators, and 22% for a family constitution or charter. Only 16% reported that they had “robust and documented” succession plans in place.
Obstacles to effective preparation for conflict
Why are these critical structures serving family harmony and, therefore, business success, so often given short shrift? There are many plausible explanations. Perhaps the most obvious is the pressure on family business leaders to attend to pressing operational and competitive challenges. In the PwC survey, conflict management and succession planning were on the list of key concerns surfaced by the SWOT-like questions asked. But they ranked well below commercial matters including hiring and retaining key staff, containing costs, innovating, managing competitive change, and coping with globalization. Where can a leader find time to address seemingly less “practical” questions?
In addition, very few family businesses have built-in advocates for attending to family-related issues. According to the American Family Business Surveys (conducted by MassMutual Insurance, Kennesaw State University, and the Family Firm Institute in 2002 and 2007), family business owners’ top two most trusted professional advisors were their accountant and lawyer. Under these circumstances, tax strategies get ample attention. So does drafting the legal agreements referred to above and others. However, advisors who are charged with focusing the attention of the owner (or owners) on assessing readiness to deal with family dynamics, potential conflict, and long-term issues such as succession do not even appear on the American Family Business Survey’s list of seven key advisors. (The only category of advisors identified that is likely to be highly sensitive to family matters is “spouse!”)
Finally, many family business owners are far more comfortable dealing with business issues, narrowly defined, as opposed to complex questions of relationships, interests, and emotions in the interlocking spheres of family and business. Companies, counselors, and individuals often use typologies of personality to explore the “fit” between individuals and the social and professional roles they might play. The most prominent of these typings is the Myers-Briggs Type Indicator — summarized as widely-known (but often misunderstood) groups of four letters. Of course, all successful entrepreneurs don’t have the same Myers-Briggs type. But the “ENTJ” type is often identified with business creators and leaders. The ENTJ is, in short, extroverted, imaginative, cogent, and decisive. This certainly fits our intuitive sense of many successful family business founders and leaders and of the qualities required for entrepreneurial success.
Psychologist Robert G. Heyward has described the other side of the coin of these positive traits: the limitations that ENTJ’s may bring to a working relationship (see https://www.personalitypage.com/html/ENTJ_per.html), including being unable to understand other people’s needs where these differ from their own, becoming petulant or angered when confronted by situations which require feeling judgments, becoming so engrossed in a plan or ambition that personal needs and the needs of others are forgotten, and taking every decision not made in agreement with their rational beliefs as a personal rejection. These shortcomings certainly are not universal among all entrepreneurs or family business leaders, but they may exist in sufficient degree in many instances to cause family and other personal issues to be uncomfortable and to take a backseat to commercial challenges.
Bringing the Family into Focus?
It was a recognition that family businesses needed more help focusing on family-related issues than could be provided by conventional advisors or an owner’s instincts that led to the emergence of an advisory category known as “family business consultants.” Perhaps the most visible sign of the emergence of this new field was the organization of the Family Firm Institute in 1986, dedicated to “educating, connecting, and inspiring professionals who serve family enterprises.” FFI’s philosophy highlighted the need for family business consultants to integrate behavioral, financial, legal, and management expertise and experience with a focus on their application to the family enterprise.
The organization, now approaching 30 years of service, encourages academic research on family business and offers training that sensitizes professionals in many fields to the peculiar needs of family businesses. A key function has been the promotion of the highly professionalized, full-time family business consultant — who is fully prepared to help family businesses address their most challenging issues of conflict prevention and resolution, succession, and more.
The emergence of the family business consultant was a creative and positive approach to providing family businesses with the help they needed. But how effective has this initiative been in meeting the special family-related needs of millions of family businesses in the United States? FFI has approximately 800 members in the United States. Many of these are academics or others who do not provide services to families. (For comparison’s sake, the U.S. Department of Labor reports over 1.2 million lawyers and 750,000 accountants in the country.) In 2011, Family Enterprise USA estimated that there were 5.5 million family businesses in the United States. If this number were correct, we could estimate a rough ratio of one qualified family business consultant per 10,000 family businesses. This number speaks for itself.
The Family Business Challenge
With the existence of a massive potential market, a critical need for services and the emergence of a profession designed to meet that need, was hasn’t the family business consulting field exploded? Why did the family businesses participating in the PwC survey still lack many of the essential tools needed to help them deal with the complex challenges of family conflict and succession?
The answer to these questions is important, not only to these families but also to a national economy which depends so greatly on the success of family businesses. Family business consultants should also be concerned with the answers. The profession would greatly benefit from a dramatic broadening of consciousness of the need for its services — and awareness of its existence — by the great mass of family businesses. Hopefully, FFI and others dedicated to the family business consulting field will place its failure to become a standard component of the vast majority of family businesses’ advisory teams high on their agenda.