Family Business Issues and Generational Differences
Nepotism
Nepotism refers to the process of hiring or promoting employees simply because they are family members. A commonly heard derisive comment when discussing junior family members is, “They have the right last name.” Family firms can have the view that all family members deserve jobs, regardless of qualifications. Often, this leads to too many unqualified, unproductive employees. Free-riding family members can lead to poor morale among the nonfamily employees. The forced hiring of an undeserving or ineffective family member because of pressure from other more powerful family members is a common cause of significant family conflict as well. It is also an underlying reason that key nonfamily management leave the family firm. Those who leave cite frustration and a lack of promotional opportunities for advancement.
The president of a $2.5 million third-generation personal services company described being forced by his parents to employ his sister. He described the difficulty of the issue of family employment:
My sister lost her job. I felt obligated to hire her, had to hire her. Parents wanted me to. I went against my will and let her work here. It was awful. She was making up lies about me and my dad. It finally came to a head and I had to get rid of her. That was a big decision, because now I’m the [expletive]. My parents were not happy about it. It’s the best thing I ever did. She had no respect for me or my father. If you don’t respect someone, how can they work for you? I still pay for her gas, though.1
Communication
One of the main issues for family business can be a lack of communication among family members. Effective, open communication among all family members, including the various generations, is critical. This is a critical core competency that needs to exist for the firm to develop and succeed. In studies of successful and long-lasting family-owned firms, healthy communication was found to be one of the main components of their success; it is “indispensible.”2 Without effective communication among the participants, the business will most likely fail to succeed to the next generation.
In most families, communication is not perfect, but in a family business there must be a sincere and significant effort to communicate to others who are stakeholders in the business. Many families have found it beneficial to have family meetings and institute a family council in order to make sure all family members are “in the loop” concerning important decisions, opportunities, expenditures, and in order to give everyone a voice.
Compensation
Compensation for family members in small family firms is often higher than nonfamily members receive and higher than comparable outside positions. This can lead to family member dependence on the firm, as they become accustomed to the high standard of living. It becomes a two-edged sword, as the family member often feels trapped by a lack of alternative employment choices with a similar level of compensation. More professionally managed family firms have compensation policies to decide pay grades, salaries, and ranges for each position, whether family or nonfamily. The pay grades should be comparable with comparable firms. Compensation for work performed (employment) is different than ownership dividends. A firm may elect to give owners of the firm a bonus, or dividend distribution.
Conflict
Starting with the sibling rivalry between Cain and Abel, there has been dysfunction and conflict within families. One of the first published articles on family business was on the subject of family conflict, proposing that family conflict is commonplace and inevitable.3 Since that time, the awareness of conflict and the seriousness of the issues has increased significantly. This has resulted in the creation and use of many techniques, tools, and procedures to better manage the conflict by attempting to reduce its negative impact or prevent it altogether. Family therapists and family business consultants have sprung up to provide conflict management services to family firms.
When the family system, with its often petty and frivolous but deep-seated resentments, emotions, interpersonal conflicts, rivalries, mistrust, favoritism, and nepotism, is combined with the business system in which family members’ roles, employment, identity, and financial wealth are intertwined, problems can explode in size.4 The potential for conflict can grow exponentially with the age and growth of the business and with increased numbers of family participants. By the third generation, there are typically several grandchildren working in the business. Often they are cousins, who may have a variety of goals and objectives.
Family businesses can be rife with dysfunction and conflict. An extreme example of the perils of family business conflict is the Italian leather goods producer Gucci. When the family patriarch, Guccio Gucci, died in 1953, the children and grandchildren began bitter and expensive legal battles, which finally resulted in blackmail and murder.
Ford Motor Company founder Henry Ford installed his son, Edsel, as president and then constantly second-guessed and undercut him. Browbeaten and exhausted, Edsel died at age 49. Edsel’s mother, wife, and children believed Henry was responsible for Edsel’s early death.
Napa Valley winemaking pioneer Robert Mondavi was fired by his mother from the family business after a fistfight with his younger brother. He immediately started his own family winery and became a competitor to the family business and eventually was more successful.
The Dart Group, which owned Crown Books, went through the divorce of the founders and the firing of the founder of Crown Books, Robert M. Half, by his father, Howard H. Half. Years of litigation resulted. The firm eventually went bankrupt and was sold.
The Ambani brothers of Reliance Industries, one of India’s largest companies, had a highly public struggle for control of the conglomerate after the death of their father. After much acrimony and endless legal battles, the company was split in half, with the petroleum and petrochemicals business going to one brother, and the telecom, financial services, and electricity business going to the other. The dispute went on for years until it was finally mediated by professional advisors with pressure from their mother.
In 2002, 19-year-old Liesel Pritzker (Marmon Group, Hyatt Hotels) sued her father and 11 older cousins to prevent them from misusing her and her brother’s trust funds. The family businesses conglomerate, which was developed over 100 years, was to be liquidated and split among the heirs.
The winemaking family of Ernest and Julio Gallo has entered its third generation. However, the brothers were accused of locking their younger brother Joseph out of the family business. When Joseph found success as a cheese producer, his older brothers sued to bar him from using the Gallo brand name on his products.
The reason we have Adidas and Puma athletic shoes is due to a conflict between the Dassler brothers. One brother left and started the competing brand.
The conflict in the early 1900s between Alfred I. du Pont and his cousin, Pierre du Pont, over who would control their family chemical company was so contentious that Alfred built a stone wall around his property, topped it with shards of glass, and told his relatives to stay out. They also bought competing newspapers in the same town and waged war in the marketplace.
Familial conflict and bickering are associated with the poor succession rate in family businesses. Due to this conflict, the second and third generations may decide to leave the family firm. Often they are overwhelmed with guilt at the prospect of leaving the family business and feel as if they would be abandoning their family. Yet if they stay, many become bitter and contribute to infighting and a lack of productivity. Conversely, in their desire for harmony, many family businesses squelch any differences of opinion and thus stifle healthy debate. It is difficult for sons and daughters to disagree with their father or mother because such action is quickly seen as disloyal and disruptive. Such lack of open communication has the effect of limiting not only potential business options but also the entire strategic planning process. The result is often a forced dependence on the status quo, resulting in reduced market share, lack of investment in new and emergent businesses areas, and failure to recognize competitive threats on the horizon, accompanied by product stagnation and business decline.
Conflict has both positive and negative elements, and families must strike a fine balance between too much conflict and not enough. Three main types of conflict appear in family businesses: task conflict, process conflict, and relationship conflict. Task conflict is associated with goals, strategies, and the discussion of opposing strategic paths. Process conflict is associated with how work should be accomplished, the appropriate use of personnel, and how much responsibility each person should have. When these two types of conflict are present in moderation within an organization, better decisions result.
Conflict is usually expressed in communication and behavioral problems. Simple conflicts can be resolved easily and do not impede effective decision making. Common sense and reason will usually prevail. Complex conflicts are heavy with emotion, commonly resulting in lack of productivity and the failure to make decisions. This type of conflict is very often chronic and it makes its presence known as it comes and goes within a company. The remedy for complex conflict is to enlist outside professional resources. Therapists or family counselors, as well as organizational behavioral experts, can help a family work through the complex issues of serious conflict. The most negative form of conflict is relationship conflict, which is the type of conflict most often seen in family business. Relationship conflict is characterized by anger, hostility, resentment, and worry, which can result in a complete lack of productivity.
Conflict has a profusion of negative effects on the family and the business, and it is a huge disruption to effective decision making. It can lead to poor decision making or lack of decision-making ability. Irrational decision making can become rampant, and decisions may be made on an emotional rather than a logical and rational basis. Often there is no proper acceptance or buy-in about decisions from the dissenting family members. When a family-owned company cannot make decisions, it is not hard to see the effect on employees, the business, and its customers. It is a no-win situation when family members are in competition with each other. When conflict is resolved, fast decisions can take place, and most importantly, better decisions can be made from the open discussion and debate over alternate possibilities.
Family firms sometimes find themselves in a situation where the needs of the family’s lifestyle are so great that they take precedence over the needs of the firm, or the family cannot decide on the firm’s strategic direction and the management of the business. The result can be a sale of the family assets or a slow decline in the business, as financial resources are drained away, decisions are not made, and competitors eventually overwhelm the firm. The result is usually an end to the family business.
Families and their consultants should be vigilant to the negative and destructive impact of conflict on the effective management of the firm and the healthy functioning of the family. Once conflict is identified, it is best dealt with family counseling or intervention at an early stage. A common practice among many families is to ignore the conflict and not talk about it. This avoidance strategy is short term. The conflict wil l eventually come out and it will be harder and more problematic to deal with when it does. Rarely, family businesses devolve into such unhealthy situations that neither family business consultants nor family therapists can help. Many times this is due to a lack of emotional development on the part of the parents and the children’s anxiety, stemming from a desire to both please and break away from their parents. In this type of negative situation, the children should explore other opportunities for employment outside the family business because being in business together is not a healthy or positive situation for any of the members.
A study of 1,454 top managers in small and midsized family businesses found that 34% had argued about the future direction of the company and 27% had argued about the contribution of other employed family members. Twenty percent experienced tension over roles of in-laws, over who was and was not allowed to work in the business, and over a lack of consultation on key decisions with other family members.5 In a study of 15 long-lived firms, 93% of the conflict was found to be between siblings and rarely if ever between the generations. In almost all the cases, the conflict was over the roles of family employees.6
On a positive note, many family members do not report the presence of significant conflict in their business. They commonly disagree about certain issues, and they agree that disagreements happen almost daily. However, they do not experience the kind of interpersonal, destructive conflict described earlier. A retail store owner, speaking about his father, the founder of a retail chain, said, “Most of the time when we disagreed, he was right, in the end.”7 The president of a third-generation family retailer said, “Not that we never disagreed, but we never dwelt on it.”8
Lack of Planning
There is an old adage that says, “Failure to plan is planning to fail.” The vast majority of family businesses do fail to plan effectively; only 37% of surveyed firms had a strategic plan.9 This not only shows a tremendous opportunity for family businesses to improve their performance but also illuminates a need for more effective decision making. Family businesses that have a strategic plan also usually have board meetings, written hiring policies, buy-sell agreements, a formal valuation of company worth, more employees, and are more likely to have selected the successor. More importantly, they have higher sales and higher international sales as well.10 These positive outcomes point to the importance of the strategic plan in helping the company manage the business in a more rational and professional manner that can boost performance and effectiveness.
In a survey of family business owners by the giant accounting firm KMPG, the following issues and challenges were rated as most troublesome or important:11
1. Growing profitably
2. Balancing different interests
3. Dealing with regulatory challenges
4. Planning succession
5. Determining future directions
6. Exiting by retirement
7. Establishing professional business management
8. Selling the business
9. Managing family relationships
10. Addressing international growth
Differences Among the Generations
Generation 1: Founder and Entrepreneur
During the start-up phase of the business, the founder-entrepreneur has sole decision-making ability. Entrepreneurs are generally individuals who like to create and have control. They are self-made risk takers who often have their personal identity tied up with their business, and they may feel that the business is their “baby.” The founder has enjoyed success and is accustomed to being a one-man show. The leadership style of this owner-manager is often a transactional my-way-or-the-highway style, sometimes with a paternalistic style of management. The founders are usually quite private and do not share inner workings of their firm with people outside the firm. They are also very debt averse and have a strong need for control.
A common issue among future generations in a business is the continuing influence of the founder, who towers above the entire organization, a phenomenon referred to as “founder centrality”12 or “generational shadow.”13 Such influence can have both positive and negative factors associated with it. It helps future generations in that they tend to follow the original mission or vision of the organization as set by the founder, including the importance of caring for long-term employees, the community, and their customers. The president of a $10 million retail dealership spoke about an employee who was kept on during poor economic times: “She is like family; she was here when my mother started the firm.”14 A second-generation owner of a retail gift store with annual revenue over $1 million explained,
My priorities are honesty and fairness: basic values. It comes back to my father: integrity, honesty, simple ideas like that. It’s the core character of who we are. My dad got this from his dad. Is it good for the people? Money will come if we treat people with respect and give fantastic customer service. They will be happy and loyal.15
The influence becomes negative if the successive generations are not allowed to make their own decisions or are second-guessed by the meddling founders who have not fully retired. This negative influence has been a major reason for succeeding generational members to exit the family firm.
In a study of 15 long-term, second-generation family firms, the positive contributions associated with the founders were many and they were readily apparent. Instead of a negative shadow, there was a reverence and awe for the previous generation’s accomplishments. The term umbrella of respect was created to describe this phenomenon.16
In the second-generation firms, parental influence permeated all the decisions and activities of the family business in a guiding and positive manner. Often, decisions were made intentionally to enhance the parents’ legacy and to make them proud, not to embarrass them. Decisions were often made based on what the parents would have done when faced with a similar situation. The high level of reverence the second generation had for the first generation was partly responsible for the tendency of the second generation to make decisions based on the values and mission of the family business. The founders contributed in a positive manner years after their retirement from the business, by establishing the family values and business mission used by the second generation to make business decisions. Here is the president of a $15 million agricultural firm, speaking about his parents:
They’re always behind every decision I make, in that we make the decisions how they would want us to make the decisions. We ask ourselves, “What would Mom and Dad do?” They’re such wonderful people. They don’t want to screw anyone. They want everybody to get along; very neat people. He’s definitely not the typical, “I built this before you were in diapers, and it’s my baby.” I don’t get that attitude from them. My parents are, “You’re the man!” I know if they died tomorrow, they know I love them and they love me. It’s wonderful, a great relationship. I want that man to be so proud of the work we’ve done here. I want my mom to be idealized by everybody. That, in itself, is the ultimate goal for me. They are going out in style. They’re hugely respected by the community, and respected and idealized by their friends.17
Generation 2: Sibling Partnership
In time, the second generation becomes involved in the business, consisting of the founder’s sons and daughters and, often, their spouses. The second generation, usually involving a partnership of siblings, has been referred to as “the crucial generation” for the future success of the family firm.18 Gersick et al. discussed the ability of the second generation to make decisions as a “critical capacity”19 for the continued success of the firm. In a second-generation firm, the first generation (if not retired or deceased) may still be actively working and involved. This situation creates an interesting dynamic, as the two generations learn to work and manage together as they progress through their life cycles.
Generation 3: The Cousin Consortium
Problems are compounded and become more complex when the larger third generation is involved. The larger the family is, the greater is the possibility of separate motives and agendas, disagreements, and conflicts. This generation is referred to as a cousin company or cousin consortium. Made up of the grandchildren of the original founders—that is, the sons and daughters of the second-generation siblings—there may be numerous cousins. For example, consider a sibling partnership made up of two brothers and a sister, each of them having three children. Now, there may be as many as nine cousins involved in the family business, with each one having equal ownership rights. The management of the family firm under a cousin consortium like this can often be overwhelming. The family business needs to implement proper governance tools, such as creating a family constitution and initiating a family council with a majority vote.