12.

Conflict in the Family Business

Two brothers sharing ownership in a successful fourth-generation concrete business had a bitter falling-out triggered by an unlikely issue: a sailboat. The older sibling accused his younger brother of dipping into the company till to support his racing habit. The younger brother countered that since he often entertained customers on the boat, he was following the same pattern the older brother had for years by having the company pay for expenses that had both a personal and a professional use. The younger man pointed to the ski house that had long been expensed to the business. This conflict, which revealed long-standing concerns over their roles and contributions to the company, had been simmering just below the surface. As their standoff continued, they refused to be in the same room together, making it nearly impossible for major business decisions to be made and leaving employees caught in the middle. Ultimately, they sold the business at a deep discount and both men went to their graves without speaking another word to one another; their children grew up as strangers instead of cousins. And the family business was gone.

As we have described earlier, family owners wield the power to destroy their businesses. In fact, nothing can undermine a successful company faster than an unresolved conflict among its owners. No organization is immune to narcissistic leaders or difficult relationships among employees. Most nonfamily businesses, however, have rules that govern behavior for everyone from the bottom of the corporate ladder to the top.

But conflict is different in family businesses because the owners make the rules and therefore can also break them. Once a major battle gets started, it can be difficult to stop. Until the owners agree to stand down, conflicts will continue, with potentially devastating implications for the business and family.

Understandable fear about the potential impact of conflict causes many families to focus on maintaining harmony. But the quest for constant peace can backfire. Some disagreement is normal in a family business, and the ability to work through it is healthy. Avoiding clashes at all costs can have dire consequences, too. Both too much and too little conflict are unsustainable. In this chapter, we will help you develop the following skills in working with conflict:

1. Identify the “Goldilocks zone” of conflict
2. Move from fake harmony to constructive conflict
3. Recognize the downward trajectory of the conflict spiral
4. Escape a family feud if you are in one
5. Adopt strategies to avoid family feuds in the first place

Finding the Goldilocks zone of conflict

For most people, conflict is uncomfortable. That can be especially true in families who have watched family arguments tear successful businesses to pieces. Consider the Ambani brothers in India, who bitterly fought for control of the family business, Reliance Communications, after their father died without a will. Or the Adidas founders, whose quarrel led the brothers to separate their German company into rivals Adidas and Puma. Then there is the Redstone family in the United States; the family’s battle for control of its media empire has been in the headlines for years.

For many families, the fear of conflict is so pervasive that they go to extraordinary lengths to avoid it. But less often recognized is that too little conflict can have an equally destructive impact. In fact, the effects of both too much and too little conflict on the family and the family business are almost identical. In both cases, the business can suffer from limited growth, poor decision-making, a loss of competitive advantage, and, in severe cases, the sale or split of the company. Similarly, at either extreme, families tend to break into factions and suffer poor relationships. The mechanisms are different, but the results are the same.

Conflict is a Goldilocks problem. Both ends of the spectrum are ultimately unsustainable, so the best place is in the middle. While Goldilocks may bring to mind the fairy tale, a better analogy may come from our solar system. The earth is in what astronomers refer to as a Goldilocks zone. Much closer to the sun, and the planet would be too hot to sustain life. Much farther, and the earth would be too cold. Though the causes differ, both extremes would make life uninhabitable on earth.

Conflict in a family business works much the same way. When the dynamic in a family is too hot, the level of shouting, screaming, and outwardly expressed anger makes it impossible to do the work of owning and running a business. When the level of disagreement is too cold, there is quiet seething, a Pandora’s box of emotions waiting to be unleashed when opened. Between these two extremes is a healthy middle, where difficult issues can be raised, addressed, and resolved without the parties doing lasting damage to relationships or shared assets.

A family’s interests are rarely perfectly aligned. As described in chapter 1, people have different objectives simply because they are in different places in the system. As a result, some conflict of interest is inevitable. Therefore, the priority is to manage that conflict, not simply tolerate or eliminate it.

Families on the too-much side of the spectrum struggle with how to reduce the intensity of the conflict so that constructive conversations can occur. Families on the too-little side must learn how to disagree outwardly to release the pressure that builds up internally. In our experience, the too-little side of the spectrum is much more common in families, even though it receives less attention from the media. Most families are conditioned not to fight with each other. Ask almost anyone what matters most to them, and they will tell you it is their family relationships, including the ability to spend time together to celebrate holidays, weddings, and other milestones.

But 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. Much like an iceberg, the surface seems pleasant enough, but the danger is not far below the surface.

What constitutes excessive conflict (as opposed to constructive disagreement) depends on personal interpretation and the family culture. Some families can more easily tolerate conflict than others, and the extent to which people will stoically put aside their personal interests to support the common cause also varies. But the Goldilocks zone shares some characteristics across all families. Here’s a three-part quiz you can use to see if your family has found the zone:

1. Is there general satisfaction with the direction of the family enterprise? You may not be happy about every aspect, but you are unequivocally better together than apart.
2. Are decisions about critical issues being made? You need not address every single point of disagreement, but everyone would agree that there is no elephant in the room.
3. Are family relationships good enough to work and celebrate together? You don’t have to be best friends to own significant assets together. Instead, you have to be good business partners, which means you agree on the big issues and can enjoy each other’s company, at least most of the time.

If you answered yes to all three questions, you are likely to be in the Goldilocks zone. If not, you have work to do, either to lower the temperature or to raise it.

Moving from fake harmony to constructive conflict

Sierra Nevada Brewing Co. is a family-owned beer company. Its tagline, which shows up on every can and bottle, is “Family Owned, Operated & Argued Over.” Ken Grossman, Sierra Nevada’s founder, told us, “It’s funny, but it’s the truth. We can get together and argue over what’s best for us as a company moving forward, but we all do it in good faith, knowing that everyone wants what’s best overall.”

Can you say something similar about your family business? If not, you may find yourself in a difficult position precisely because you have avoided conflict. Take, for example, the experience of one family in the retail business. Throughout the years, tempers would begin to flare—not because there was too much disagreement, but because leaders were avoiding important decisions rather than dealing with potential disagreement. For example, although every member of the third generation worked in the business, there was a major discrepancy in their commitment levels and contributions. Those who worked overtime to get their work done began resenting those who showed up at their leisure, but the family resisted setting any standards that might alienate someone. Eventually, the leaders of the business decided to sell the company rather than tackle the disagreements that would threaten to disrupt family harmony during the transition to the third generation. Unfortunately, selling the business did not solve the problem. There were grievances about how the proceeds were divided and a feeling among many that they had given up the family legacy too easily. And without the business to keep family members together, they started to drift apart. Within a few years, many members looked back on the sale as a mistake. Both the business and the close relationships were gone.

If, like this family, you find yourself on the too-little side of the conflict spectrum, here’s some advice on getting into the Goldilocks zone:

• Agree on meeting ground rules to help guide healthy discussions. For an example, see the box “Sample meeting ground rules.” You should agree on these ground rules before you get into substantive discussions. And then review them before each meeting. When someone’s behavior deviates, gently but directly use the specific ground rule to call it out.
• Start with building shared purpose. Talk about what you are trying to accomplish by owning the family business together. Doing so helps create the foundation for collective action and sacrifice. You can also articulate a negative purpose—identifying outcomes you are trying to avoid by dealing with them now. Use this shadow of the future to help motivate action and retain cohesion.
• Create beachheads to build momentum. Often, the sheer scale of change is daunting, and it can be valuable to have a small place to start. It’s usually better to be evolutionary rather than revolutionary. With one family, we were exploring ways to integrate in-laws into the governance structures. There was a reluctance to put them in the family council, so we used a next-generation taskforce to create a starting point. Make sure you work with the current sources of authority rather than trying to overthrow them.
• Focus on principles rather than people. Try to avoid making decisions with particular people in mind, since each person’s position will be shaped by how it affects them. Instead, start with broader principles that you can then apply to a particular situation. Try to develop the principles before you need them. For example, businesses wisely come up with a family employment policy well before the next generation is ready to enter the workforce and before people start advocating for their children. If you are having to deal with a “live” issue, try to frame it as a precedent that could ultimately affect anyone in the future.
• Graft new ideas onto existing ones. In the plentiful research on how ideas spread, one of the key findings is that new ideas are more acceptable if they are added onto existing ones rather than being seen as brand-new.¹ Change is hard for most families and is more readily accepted when it is perceived as being connected to already-embraced wisdom. This practice employs the notion of grafting, or consciously integrating a new idea into what is already in place. For example, we were trying to help a family to change a rule set down by the father. It was easier for family members to accept it when they could connect this change to exceptions he had made previously on the same subject.
• Affirm the value of what came before. In a change process, leaders should resist the tendency to make the case for a new idea by denigrating the current one. This negative approach often creates defensiveness among the people who created the current system. Instead, start with identifying why what exists today is entirely rational given the prevailing set of circumstances when the choices were made. Then explain why the change in circumstances makes those approaches no longer viable.

No one aims to have conflict in a business and, even worse, in a family. But some disagreement is actually healthy. It provides a chance to clear the air of lingering resentments and potential issues and perhaps to even find a productive process for disagreeing and still making decisions. Conflict doesn’t have to destroy a family—managed well, it can make the bonds even stronger. But when bad feelings are allowed to fester, the descent to irrevocably broken relationships can be swift.

The conflict spiral: from diverging interests to family wars

As we have discussed, conflicts in family businesses can spiral out of control like mighty tornadoes that destroy everything in their paths. No family sets out expecting to get into a feud. And yet fights do happen. That conundrum led us to explore how family feuds unfold. We discovered seven standard stages of conflict (figure 12-1). While people tend to believe that if you leave a conflict alone it will stay the same, we have found that far more often, it will worsen over time. Major conflicts have a gravity to them, pulling families down the spiral, as each step makes sense after the previous one failed to resolve the situation.

1. Interests diverge. In their book Getting to Yes, Harvard negotiators Roger Fisher, William Ury, and Bruce Patton define an interest as a broad desire that a person or group of people have for something. Some interests are shared; others are individual. Most business families are united primarily in their wanting to protect the golden goose—to keep the business healthy. However, given that family members have different roles and responsibilities as the family business grows, interests naturally diverge. Some family members work in the business, and some are owners. And some members both work in the business and own it, while others belong in none of these groups. Those employed in the business will be more inclined to channel profits into reinvestment and bonuses, while owners not in the business may be disposed to pay higher dividends. Where anyone stands on an issue will be influenced by where they sit in the family business system.
2. Positions harden. Once interests diverge, individuals or groups typically adopt different positions on issues. A position is the specific way that people try to get what they want, and positions become clear when decisions must be made. Again, all families have to make important decisions (such as where to live and where to send the kids to school), but business families are called on to make significant decisions more frequently. Because these decisions often involve the allocation of resources, people’s choices can degenerate into zero-sum games: they want more; therefore, we get less. Positions harden, and suddenly everyone feels that the matter can be resolved in only one way—their own way. Positional bargaining begins, and even if a solution is reached, one party often comes away feeling that the solution is unfair. Consequently, positional bargaining typically leads to outcomes that are neither successful nor sustainable.
3. Communication breaks down. When the parties fail to recognize common interests and when positions harden, communication becomes badly muddled. Family members start shunning one another or sending flaming emails. Typically, the situation is neither a silence nor all-out fighting but rather a tense dynamic where people break away and don’t talk for a while. Then the tension bubbles up to the surface again, and things explode. In one client family we worked with, three brothers would get into huge screaming matches, hurling verbal abuse, before lapsing into silences that threatened the business because no decisions would be made. Although the brothers were effectively the CEO, the chief operating officer, and CFO, they wouldn’t talk to one another for months after a fight, not even on business matters.
4. Alliances form. When people stop talking directly to each other, alliances inevitably begin to take shape. Everyone feels forced to take sides, and partisan camps spring up, often starting with the spouses of the “wronged” family member. Alliances harden as confirmation biases set in. All actions of the other side are interpreted through a lens that confirms the righteousness of the alliance’s view. In this stage, things get very personal, and each side labels the other as irrational, stupid, lazy, or worse. This polarization makes compromise even more difficult. In business families, five kinds of alliances are common: (1) family branches (e.g., brother’s side versus sister’s); (2) owner groups (e.g., voting versus nonvoting shareholders); (3) participation levels (operators versus investors); (4) gender; and (5) generations (current versus next).
5. Proxy wars are unleashed. As alliances become entrenched, the opposing sides look for ways to bolster their positions, and inevitably they entangle other people in the battle. Family members enlist insiders, nonfamily managers, and employees, for example, to serve as pawns in a game that nobody will win. Proxy wars take multiple forms. In a very large firm, businesses aligned with, or led by, the other side are sold; aligned senior managers are fired; and dividends are withheld to hurt a few investors at the expense of many other people. At one client family, for example, a board member threatened to unleash an out-of-the-ordinary audit of the work of a CFO aligned with the other branch, not too subtly accusing him of fraud.
6. Advocates are called in. After involving innocent insiders, the next move down the conflict spiral is to bring in expert outsiders as advocates for a particular point of view or position. For example, at one family, warring co-CEOs, who were cousins, called in a compensation consultant, whom one cousin accused of being biased. The cousins dismissed the consultant, but the tension between them mounted. Even worse, family members lawyer up. Since lawyers are obligated to advocate for their clients, they make the strongest possible, uncompromising case for why their side is in the right and the other side in the wrong. The nature of the dialogue changes, too, as the search for unlawful behavior takes center stage over reconciliation. For this reason, even the best-intentioned lawyers almost always ratchet up the conflict. We remember one painful board meeting with seven family board members, each with a personal counsel sitting behind them. As the meeting degenerated into one legal objection after another, all attempts at making important decisions were smothered.
7. Family war begins. The final stage is the all-consuming fight for supremacy, where only one side can win and where the ends justify virtually any means. Often, these family wars take the form of lawsuits. The suits are almost always counterproductive and expensive both financially and psychologically. Recall the Market Basket grocery chain feud earlier in the book. Our colleague, Steve Salley, himself a former attorney, summed up the situation: “Family litigation is the ugliest form of warfare: civil war. Hostages and casualties vastly outnumber apparent winners, and the scars are permanent. Any victories end up being tragically unsatisfying.” When families think of lawsuits as the remedy, they are not taking into account the likely regret they will feel for the next five to ten years, or longer, as well as the impact on their employees and the community.

These stages are predictable, but they’re also avoidable if the owners of family businesses are aware of them and know how to extricate themselves when they get caught up in a spiral. As one client told us, “Conflict is inevitable, but combat is optional.” Not every situation follows the pattern precisely, but families in a conflict situation have found it useful to understand where they are in the spiral. It helps them to recognize that the conflict has not been caused by any one individual but is an escalating process that affects all of them. Understanding where you are in the spiral can help you address the situation with the other members of the family business, since continuing down the spiral could mean that all of you could easily lose control and end up in a family war that no one wants.

Escaping a family feud

Unfortunately, many business families see the tragic unfolding of these seven stages of conflict. We have observed great anguish and frustration, families fractured, careers and businesses ruined. But that doesn’t have to be your fate. There is a difficult, but possible, path out of the conflict spiral—a few important steps that can get you on the right path again.

Create alignment for change

As a rule, conflicts do not end until interests change. That is, the combatants need to conclude that their common interest in finding a solution outweighs the competing interests they were fighting over. Usually this kind of change happens through some level of suffering, whether it’s financial, emotional, or both. If family members feel enough pain, then they become willing to see their interests in a new light. When those interests shift, warring factions can come to the table and find compromises that didn’t exist before. At some point, whatever people are fighting about becomes less important than ending the conflict.

If you find yourself in this situation, look for opportunities to agree on common interests. That doesn’t mean you suddenly put aside everything that had brought you to this point. You don’t have to agree on much other than, as one family we worked with said, “the status quo is not an option.” Often there is some residual family bond that can be accessed. Families can tap into a visceral, almost biological, reservoir of family connection, usually one focused on preserving family ties into the future. As one family member put it, “Let’s work out our differences so that we don’t poison the next generation.”

Put all options on the table

With alignment on the need to change, the next step is to identify a path forward. You must put every option on the table. Resolutions that may have been unthinkable before may be the only way out now, since the alternative is a return to the suffering of being stuck in a family feud.

Start by trying to surface all the available options. They will generally fall into these main categories:

• Sell the family business to an outsider
• Have one part of the family buy out the rest
• Divide up the company—or its assets—among the owners
• Construct a “grand bargain” that keeps the family together as owners but under a new agreement

The first three of these paths represents an attempt to solve the underlying conflict by changing the family’s relationship as owners of the business. Tragically, there are times when families just can’t turn their pain to their advantage. They can’t go back and find a commonality of interests; they can’t forgive the mistakes of the past. The pain is too profound. Then it’s time to sell or divide the business and to save whatever remains of the family relationships.

The last path keeps the ownership group intact but changes the nature of their relationship to the business. We call it a grand bargain because it usually involves addressing multiple issues at the same time, with each side getting what matters most to it and compromising in other areas. This path will often involve changes across all of the five rights of owners described in part 2.

One family we worked with found itself in a deadlock because of several disagreements about the future of the business. After the family worked its way down the conflict spiral, the company’s performance stagnated as the formerly close family relationships suffered. Realizing that the members all wanted to stay as owners despite what they had been through, they agreed on a grand bargain that included several decisions:

• Moving from a Partnership to a Distributed type of family ownership. This meant that family members who didn’t work in the business could now be owners.
• Building out Owner, Board, and Family Rooms to replace the loft they had been working in. This distributed decision power into groups better suited to make good decisions.
• Creating a new purpose for building the business. They shifted their Owner Strategy from liquidity control to growth control.
• Communicating to the next generation about the business so the new people could make informed decisions about whether they wanted to be part of the company as employees, board members, or owners. The improved communication substantially increased the engagement of the next generation.
• Agreeing on an estate plan that would ultimately equalize ownership across the branches. This decision resolved a decade-long feud between two branches.

Each grand bargain that we have helped construct looks different, depending on the needs of the family at that moment. If you are trying to construct a grand bargain in your own family, avoid the temptation to look for a silver bullet. Major conflicts are invariably caused by a huge constellation of factors, so a single solution is not likely to do the trick.

Rebuild trust over time

In the midst of a family feud, some members will refuse to come to the negotiating table because they don’t feel as though they can trust those who would be sitting on the other side. The lack of trust is entirely reasonable. In chapter 6 we provided a definition of trust: “one party’s willingness to be vulnerable to another party based on the belief that the latter is competent, open, concerned, and reliable.” Since trust is about being vulnerable, as the conflict worsens and people feel less safe, they often have a much more difficult time trusting each other.

The challenge is when trust becomes a precondition for making progress. That requirement is unrealistic. Greater levels of trust are likely to be the consequence of resolving conflict, not the cause. Because a feeling of trust reflects the behaviors of the other person, it can be reconstructed over time. In fact, before you even begin to negotiate details in a conflict, you should take concrete actions to build trust by demonstrating competence, openness, concern, and reliability to others. That includes defining guidelines that tie to those four behaviors to lay out how everyone will treat one another. With these actions, the level of trust will slowly start to rise. In turn, the increased trust will not only open up other options, but also raise the likelihood that you can ease strained family relationships.

Get outside help

Managing your exit from a family feud on your own is an incredibly difficult task. When trust is low, you are likely to need an honest broker who can bridge the communication back and forth and facilitate tense conversations. It also helps to have someone who can bring ideas for how to resolve the situation.

The outside help may come from your personal network, a trusted adviser, a relative, a clergy member, or a mutual friend. If you don’t have someone who can serve in that role, a number of experts, such as mediators, therapists, and family business advisers, can help. “There are some systems where relationships (e.g., brother–brother) are so toxic, often for historical reasons, that trivial comments produce explosive reactions and draw attention away from a decision and onto the two individuals,” Harvard Business School’s David Ager told us. “To avoid paralyzing the system, the only way to move forward on any significant decision is through the use of a trusted, neutral third party whose responsibility is to manage the conversation between the family members, often by reframing and interpretation, with the goal to avoid misattribution in every statement uttered by the other family member.”

Avoiding the conflict spiral

Even better than knowing how to exit a battle that is spiraling downward, however, is knowing how to avoid it in the first place. If you and your family want to avoid the disastrous spiral of conflict, keep an eye open for the seven escalation points. When people disagree, they often think that the best solution is to leap into action. And the tricky thing is that this reaction is often rational. If someone in the family is not honoring a written deal, the logical step is to turn to a lawyer. It’s also reasonable that the other person will hire their own lawyer. Taken individually, all these steps make sense. Ironically, such rational actions provoking further rational reactions can send business families down the devastating spiral.

We advise you, therefore, to take a deep breath before allowing yourselves to jump to the next stage. Recognize that whenever anyone says, “I think this is the only way to do it,” you’ve taken a step toward escalating conflict in your family business system. Whenever you give up truly trying to communicate, you’re moving toward all-out war. Each of the seven stages of conflict is a step that a family member or branch can take or not take—there is a choice. All-out war is not inevitable. Each of you has many chances to keep the family and the business from self-destructing. That’s a huge opportunity and responsibility.

So, take the time to learn about conflict, both why a healthy family business needs it and how it can spiral out of control. If the situation starts to go south, get everyone on the same page about the potential impact of failing to reach a consensus. A thorough understanding of the cost of litigation—for example, how ugly it is and how much you will regret it later—can go a long way toward avoiding a vicious war. Few families remain intact after battling each other in court.

Beyond being aware of the downsides of excessive squabbling, get out ahead of the issues most likely to cause a family feud. If your family business has been successful for any period, you have clearly found the right balance between too much and too little conflict. Your success has been based on some agreement on how you exercise the five core rights of family owners. But family businesses are dynamic—people die and others join the family, families disperse and come back together, businesses go through ups and downs. These changes can create shocks that undermine what had worked brilliantly in the past. When times are good, install “shock absorbers” by carefully considering what changes will be needed to handle the likely future disruptions. For example, creating a family employment policy long before any next-generation member is considering joining the business will ensure that the decisions about any one person are not personal. Similarly, revisit the five rights of ownership with an eye to future disruptions. These forward-looking exercises are no criticism of what works today or was effective in the past. You are simply recognizing that some approaches may not work in the future. By agreeing on the changes required in advance and taking gradual steps toward them, you will significantly increase your family business’s odds of staying in the Goldilocks zone.

Conflict is necessary for any business to survive. Well-managed conflict doesn’t make for good headlines. When handled well, conflict can build up a family business rather than tear it apart.

Summing up

■Conflict in family businesses is different because of the presence of the owners. Since the owners can make the rules, they can break the rules.

■Conflict is a Goldilocks problem. Both too much and too little lead to similarly unhealthy outcomes for the business and family. While family feuds receive most of the media attention, fake harmony, where true disagreement is shoved under the rug, is much more common. In those situations, families need to learn how to disagree constructively.

■Major fights in family businesses often follow a pattern, which we call the conflict spiral. You may think that the situation will either stay the same or get better, but more often it will get worse if left unresolved. Conflict has a gravitational pull; common actions to resolve it can instead further entrench the dispute.

■If you are in the midst of a family feud, you will probably need to look for a grand bargain that addresses a series of issues rather than looking for a silver bullet. Aim to identify the core needs of each participant in the dispute, and put all options on the table as you look for a way for everyone to resolve the conflict.

■To prevent feuds from happening in the first place, get ahead of the situation. Most major conflicts arise because changes in the family business system have upended how things had long worked. For example, the death of a matriarch or the entry of the next generation into the business or ownership can sow discord. As you experience those changes, or see them coming, take a comprehensive look at how you are exercising the five rights of family owners. For example, consider changes to your governance structure or Owner Strategy.