The Golden Rules To A Successful Family Business
by Mario Alonso, Ph.D.

Family businesses are the economic backbone of this country.

 Over 80% of US businesses are family owned
 One third of companies in the Fortune 500 are family controlled
 Family firms employ over 50% of the total workforce in the US
 Family businesses generate over 40% of the national income

The interplay between family dynamics and business demands produces a multitude of conflicts. Some of these conflicts, when unresolved, can eventually cause the downfall of most of these family businesses. Family members can become so busy fighting with each other that there is little energy left to fight in the marketplace. The facts are that only three out of ten family businesses survive into the second generation and only one of ten survives into the third generation.

Steering any business through the minefield of economic competition and the maze of government regulation is an overwhelming task, especially during these harsh economic times. When you add the intensity of family relationships and history, the strong identification of the entrepreneurial founder to the business, and the potential succession dramas, you have a recipe for a potential disaster.

However, there are many important potential advantages to running a family venture.

For instance, a private family enterprise enjoys a degree of independence that publicly owned companies don’t have. Also, there is little or no takeover risk. With no Wall Street shareholders to please, the family business can have a long-term orientation and design business strategies that last.

A family business can limit bureaucracy from establishing a stranglehold. Flexibility to act can be extremely advantageous. A family business can show more resilience during harsh economic times. The owner and family can circle the wagons and tighten their belts when survival is at stake. This passion can not be expected in impersonal businesses where key figures can easily leave during crucial times.

In a successful family business where growth seems assured and a state of harmony exists, younger generation family members who show an interest to join can receive valuable early training and obtain the kind of thorough knowledge of the business that would not be available in a non-family business. Last but not least, a successful family business can be a source of pride for generations of family members.

What makes some family businesses succeed where most fail? The good news is that there appear to be a set of “golden rules” that, if followed, increase the chances of success. The bad news is that if any one violation of these rules occurs, it makes for a tense, unrewarding situation and possibly the failure of the business.

Here are the rules and a brief description. I will pay especial attention to the last three.

1. Business first attitude. To institute permanence, the founder, at the very start, must have the survival of the business as his main focus. This passion lays the foundation. As the business matures, this intensity must be modified (see rule #6). However, at all times, the business is considered an entity unto itself. It’s a business first, and a family business second. The business cannot accommodate family needs if they are going to threaten the survival of the business. Thus, it is a mistake to make Uncle Bernie the CFO if he flunked math in high school or to let a cousin borrow a no interest $10 million note.

2. Be fair to all. The company leader must not permit the perception of inequities, especially financial inequities. For instance, a norm should be established where allocated business expenses are not abused. Employed family members must earn what they make. The family should want to preserve peace and harmony so the focus can remain on the business. The leader must spot potential conflicts between family members over fairness issues and act aggressively to resolve them. A proactive avoidance of these types of conflicts maintains a high level of trust among family and non-family members of the business.

3. Money isn’t everything. One doesn’t have to be Scrooge or be blinded by money to run a profitable family business. In the long run, a balanced view of the importance of money is best for the business and the family. When financial rewards are not the sole driver of the business, family members are more able to enjoy life and all its non-monetary rewards. A values-driven company that keeps the best interests of family and non-family employees, customers, and the community, can succeed and reap rewards that are good for the wallet as well as the soul. However, sometimes a business does have to make tough decisions in order to survive financially.

4. Maintain a clear sense of role differentiation and division of duties. As with any business, but particularly in family enterprises, it is essential to clearly define roles, jobs, and responsibilities. Due to family dynamics, it is especially difficult to exercise the required restraint needed to keep out of someone else’s role territory. It’s tough to firmly remind Uncle Joe he needs to keep his department’s expenditures down when he is the one who taught you to throw the curveball that made you a high school hero.

5. Empower both family and non-family members. A business leader should want motivated employees who feel a sense of purpose and meaning in their jobs. Success comes to learning organizations where management’s primary mission is to cultivate the human talent of the company and to develop future leaders. You have this and you have synergy – where the individual’s goals match and deliver the organizational mission. Unfortunately, many corporate leaders share a mechanical model of motivation, the carrot and stick. Family businesses have the flexibility to be innovative and use models that generate a sense, in both family and non-family employees, of psychological and emotional ownership of the company. Fairness, clarity, delegation, participative management, and leadership development empower and make for a more effective workforce than the usual “top down” approach.

6. Have a life besides business. Succession is another key to the permanence of any business. In family businesses this gets particularly sticky when the founder or leader of the business has his/her identity tied up with the life of the business. It is clear that those leaders who do not see the business as a monument to themselves, who have other life roles, and are more well-rounded, have a much easier time of letting go of the business and enjoying the distance afforded by the role of “Consultant”. This, in turn, allows them to share the power and engage effectively in the succession process.

The next three golden rules are at least as important as the previous six but they often seem to go unmentioned.

7. The leader must respect the power of personal dynamics and understand how they affect the business. The first place we must start when talking about the psycho-dynamics of a family business is the founder or leader. Most of the time, the founder will have an entrepreneurial mentality. This often means someone who is not easy to work with. Why? Because their strengths are traits that can get in the way of collaborative interpersonal relationships.

Entrepreneurs are action and achievement oriented. They are able to take an idea and transform it into something that works. They are energetic, take responsibility for decisions, and have a strong sense of purpose and perseverance that drives them towards their vision. They are risk-takers. It is not uncommon to find very successful entrepreneurs who’ve had one or more failures. They make things happen, however, their bias towards action may at times affect their judgment. Most entrepreneurs have difficulty sharing the steering wheel. This means they often have difficulty taking direction from experts or asking for help when they most need it.

A family business leader must have a clear understanding of issues surrounding control, trust, and a need to be admired. Powerful psychological forces can affect business decision-making. For instance, a leader with significant problems with trust may turn a business into a “suspicious organization”, a form of police state where employees feel someone is constantly looking over their shoulders. Fear of being judged or fired squelches innovation and leads to more mistakes, which leads the distrustful boss to tighten the rules further – a destructive vicious cycle.

This is an important point: a distrustful leader can turn a whole organization of tens or hundreds of employees into a distrustful organization through the process of corporate culture formation. An organization takes on the personality of the founder. The founder’s values, methods, attitudes, etc. are incorporated into the culture of a successful start-up because s/he is seen as having the winning formula. Studying corporate culture is very complex. A company’s culture changes and goes through various stages.

When a business founded by an entrepreneur becomes a family business, i.e., the founder’s family members become employees, all the complex organizational dynamics get even more complicated. The clearer the grasp of her/his own dynamics, the greater the chances are that the leader will understand the family dynamics and follow the “golden rules”. This in turn, increases the chances the family business will continue beyond the first couple of generations. This is extremely difficult for the leader to do by oneself, which leads to rule #8.

8. Engage someone as a facilitator who can provide an objective, trusted, and independent perspective. Objective means someone who is not an owner, family member, or employee. Someone who is not a friend, as the leader needs someone that will always be honest and not hold back for fear of jeopardizing the personal relationship. This is why a therapist should not have his spouse as a patient, or a doctor perform surgery on his own child.

Trusted means someone who demonstrates the necessary skills and personality traits to tackle the complex problems of family businesses. One wants an organizational detective who can grasp the rationale in the irrational. The skills required are those of an artful interpreter who can provide perspectives that allow one to grasp a very complicated problem and develop action plans to solve it. S/he has to be an educator, as lessons and new information have to be communicated in an understandable way to the leader and family. S/he has to know about business to be able to understand the financial aspects of the problems that need to be solved. Negotiating skills are necessary to establish and maintain dialogue and to find similarities and shared goals in what appear to be irreconcilable differences. Finally, s/he has to be a team player to deal with other professionals like accountants, bankers, and lawyers.

S/he must prove having patience as a trait. S/he must not only be cognitively intelligent but also possess emotional intelligence. This is the ability to identify and manage her/his own emotions; the ability to empathize; and the ability to motivate others.

S/he must be an independent agent. A facilitator can easily become embedded and lost in the family dynamics and corporate culture. The family needs someone who remains marginal, securely connected to the outside world of the business. It should not be someone who is hired as an employee or a full time consultant. You don’t want someone who is financially dependent on whatever fees are being paid for her/his service. The facilitator’s rule should be that s/he does not derive more than 30% of her/his annual income from any one business project.

9. Formalize, formalize, formalize. The most important issues that affect both family and business are: succession, ownership, decision-making, entry into or exit from the business, and compensation. It is essential to set up formal processes where the approaches and policies to dealing with all these issues are discussed and developed.

Tools that can help include:

An annual family business retreat imparts the feeling in everyone that they are a part of the business. Problems can be identified but it is also a time where family members share good times.

Open family business meetings can be held monthly with a formal agenda and minutes. The topics revolve around the five central issues above. These meetings can have a rotating chair and would include the facilitator.

An ongoing family council would represent all family members. It would discuss on central issues but also formulate an attainable vision for the company’s future. It is important that it be a vision shared by the younger generation as well. The family council can generate recommendations to the business but it would not decide business policies or procedures. The family council can generate mechanisms to resolve family conflicts that affect the business. Its recommendations would be consensus-driven and future-oriented. Its main purpose would be to foster open and clear communication and to keep the business from becoming a casualty of family conflicts. It again, can include the facilitator.

A family code of operating policies and principles can serve as a guide, especially during uncertain times. This “family business bible” can be generated through the family council. The topics and their issues are identified; input is solicited and shared; philosophy and policy statements are developed; feedback and adaptation processes are instituted. The family code can be a living organism that can change and adapt as the family and external environment changes.

A family business is never dull and reaching harmony can be an uphill battle. The key and exciting challenge is to try to make sense of what is happening. A successful family business can give many generations the great gifts of continuity and permanence.

Dr. Alonso is founder and CEO of Metropolitan Consultation Associates, a psychological consulting group formed in 1981. He is a member of the Society for Organizational Learning, the American Psychological Association, local chapters of the Society of Human Resource Management, and the American Society for Training and Development, and many other professional organizations. For questions, comments or more information please email Dr. Alonso at mca@mcasynergy.com