Scott McCulloch is editor of Families in Business.
The best way to avoid conflict is to have good systems of communication. Transparency is key. But, argue the experts, it is also part of life and, rather than avoid it, it is possible to harness it creatively and bolster the company's productivity. Scott McCulloch reports
Succession is often at the root of family business strife – and sibling rivalry, inheritance booty, share ownership and so on. After more than 60 years in business, things were beginning to unravel for Arnold's Factory Supplies, a family-run Baltimore company founded in 1933. The long-time president died in 1995 without a clear succession plan and precipitating a struggle between the late president's son Mick Arnold, and another family member. By 1999 Mr Arnold's family business partner resigned. The relatives have not spoken since then.
For the past three years, brothers Mukesh and Anil Ambani have been bickering for control of Reliance Group, the billion-dollar textiles to telecoms group they inherited after their father died three years ago. The sibling scuffle has dominated news in India as both camps promoted their positions though leaked company documents, anonymous news briefings and accusations of everything from bogus accounting to phone tapping.
In other cases, long-term vision – for which family businesses are often lauded – can diverge so wildly that flashpoints are inevitable. The recent power struggle at Cablevision between chairman Charles Dolan and his son, CEO James, riveted Wall Street. As the younger Dolan sought to close the US company's satellite TV venture, his 77-year-old father – the founder of the satellite arm and Cablevision itself – fought back. With a speed that shocked observers, he replaced three board opponents of the satellite business. Father knows best? Probably. Raffi Amit, a family business specialist at the University of Pennsylvania's Wharton School, recently completed a study of 508 family-controlled companies' performances from 1994 to 2000. His conclusion: "When the second generation takes over, they destroy value."
Do they? Not necessarily, says John Ward, a professor at Kellogg School of Management. "There is data that suggests that performance weakens and is weakest in the second generation." But, he qualifies, there are findings to the contrary. "It is important to understand the context of the question," says Ward. "Founder businesses are the most profitable of any. So anything after that is less, public ownership, sell it, pass it on, whatever. And founders usually have‑extracted maximum value out of their visions, strategies, and philosophies and underinvested in the future." The successor, says Ward, must develop a transformation‑strategy and increase investment in a more mature industry with a deeply entrenched culture against change. "But many succeed despite these special challenges." Succeed they may, but unscathed in the transition? Rarely.
Rifts are not uncommon in family-run businesses, and that's not necessarily a bad thing, say experts. The modern tactic is to become comfortable with intellectual sparring matches but with a view to extracting value from disputes. Harmony, though cosy, does not oil the cogs of creativity. "Families can get into group-think pretty easily for a lot of reasons," says Sam Lane of the Aspen Family Business Group, a US consultancy. "Conflict can be helpful if it comes from someone saying out loud what no one else is willing to say." A blazing row, says Lane, clears the air. Throwing down the gauntlet enables families to "hash out a new direction" for their businesses.
So speak up or suffer in silence. Ward believes conflict makes sense but only when managed properly. "It builds a tension of differences and diversity.‑Without conflict there can be no real creativity or change or satisfaction." The key, he adds, is to see conflict as a neutral concept to be managed. "In some family businesses, we as consultants, forthrightly, work to increase the level of conflict, particularly in families who deny it and haven't yet developed the skills to deal with it." The rough idea is what doesn't kill you will make you stronger. Forgo pistols at dawn but by all means argue, and with one goal in mind: resolution.
Lane agrees. "Improved conflict resolution skills would be one of the most major factors in improving survival rates [of family businesses]," he says. "There is no forum for safely airing issues.‑Things come up, emotions are aroused, conflict escalates, it blows up and there is no mechanism for pulling it back together." A facilitator, he says, can perform this function.
So what of non-family employees? They must realise that as outsiders they are playing by a different set of rules, says Jane Zalman of Zalman Family Business Solutions in New York. Siblings that work together have a way of communicating that dates back to childhood – a kind of code that outsiders cannot share. But familiarity can be a double-edged sword: a professional discussion can suddenly morph into bickering that goes back years and cuts to the marrow. When a sibling sends an adversary packing by suggesting an act that is anatomically impossible, it may be time to call in the professionals. Joachim Schwass, professor of family business at IMD in Switzerland, believes few consultants have the expertise to grapple with the both soft and hard issues that commonly come into play. Conflict resolution, he adds, can play a major role in sustaining a family business over time. But there are caveats. "Conflict is the outward, visible sign for a disagreement or misalignment," he explains. Resolution is a major factor in family business survival only if it addresses "the real underlying issues" which, on one hand, are emotional and about relationships. On the other hand, they involve hard business issues such as ownership and management. "Thus a conflict is the tip of the iceberg and a true impact on survival rates can only be achieved if the whole iceberg is analysed."
Because of the very nature of family businesses, there's huge potential for emotionally charged disagreements to get out of hand, says Grant Thornton, the accountant. Conflict can arise where the business needs and the family needs are at odds. Families, the conventional wisdom goes, are typically inward-looking and so decisions are often influenced by emotions rather than commercial grounds. This contrasts with business decisions which demand rationality and results. Steve Siperstein, CEO of Siperstein's, a 101-year old Jersey City-based paint and decorating retailer, takes a philosophical line on the formidable task of running a family business. "It's a family," he states matter-of-factly. Siperstein believes regardless of your name – Heinz or any big family – there are always going to be black sheep and there will always be arguments. Succession is often the flashpoint. Ward, who has been studying family businesses for some 30 years, knows plenty of patriarchs who talk of eventually turning over control to their children. He notes as little as one in four transitions go smoothly. Relationships are so fractured by issues such as succession, inheritance and sibling rivalry that most businesses never get passed on. "So many things can happen and need to be in place and successful to make it work," says Aspen's Lane. "In my work, I estimate the actual figure comes close to the ideal in about 25% of the cases."
So is it a pipe dream to expect most family businesses to survive beyond three generations? Lane believes professionals in the family business field have "grossly underestimated" the difficulty of generational transitions.
Looking at the big picture John Tucker, a Grant Thornton fellow in family business at the International Centre for Families in Business, goes one step further. He wonders whether transitions to third generation ownership are always necessary. "Whether it is desirable for the family, good for the economy, right for the individuals involved are some of the questions that need to be addressed," he says. "The issues … are tied up with the history of the family relationships, subject to be able to discuss mortality, power, control, greed and other difficult-to-raise issues." Tucker believes, with the right support and with skilled and experienced facilitation, it is possible to create the conditions for a family in business to not only survive but ensure the most effective governance systems are in place to support sustainability.
Choosing a successor is indeed painful, particularly when emotions come into play. Alan Crosbie, chairman of Thomas Crosbie Holdings, itself a family-owned business, and author of family business guide Don't Leave It To The Children warns: "If you equate love for your kids with love of your business, you end up with the worst of all possible options on both sides. You stop making the right business decisions. You have to pick one of the family, if there is one who is manifestly best suited to run the business. In short, you have to show tough love."
Why? It boils down to money. Typically most family wealth will be invested in the business but its connection to the company is emotional as well as economic. That means the family is usually highly motivated to be vigilant and contribute. The problem, says Ward, is the added temptation for families to meddle in management and in the boardroom. Unbridled ownership and squabbling family members will chase away good managers and the best independent directors. On that front, Zalman agrees with Ward. Improved conflict resolution skills among family members, she reasons, contribute in a positive way to the survival rates of family businesses. "The failure rate of family businesses is directly related to conflict within family relationships or within the financial domain of the business."
The oft-cited turn of phrase "shirtsleeves to shirtsleeves in three generation"s might hold true for some firms but experts are reluctant write off the notion of a multi-generation family business as a pipe dream. "Continuity of the family business long-term is very difficult," admits Ward. "But it is not a pipe dream.‑Data suggests that, despite the failure rate and the extra challenges of being a family business, the expected longevity of the business as an independent institution is as long or likely longer than a non-family business." Ward believes it meaningful to strive for something. "Families in business realise this as all of them should have never have survived as entrepreneurial start-ups in the first generation if they had listened to the statistics and the advice."
Zalman offers a similar opinion emphasising the volatility of entrepreneurs in realising their dreams. "It depends on whose pipe dream you're talking about," she explains. "If it's the founder's then to refer to the goals of legacy and longevity as a pipe dream would probably be met with some fairly colourful expletives. Times change as do the markets, opportunities, family systems and the survival goals of each generation. The original goals of legacy and longevity can easily become pipe dreams or worse – simply irrelevant – if the focus of the business remains stagnant. Lifecycles and built-in obsolescence are part of today's world. Why should business, regardless of whether it is family-owned or not, be exempt from those societal norms?"