CHAPTER 7
Increasing the Professionalism and Effectiveness of Family Firms
Improving Decision Making
For effective business performance, and for the continued success of the firm through multiple generations, decision making is a vital skill (Aronoff and Astrachan 1996; Alderson 2009). Decision making is a skill and it needs to be learned. For the next generation of family business members, some of the learning occurs in their professional education at college and by working for other companies before joining the family firm. Much of the learning takes place as they work at the company. Other learning takes place in the form of mentoring from one generation to another. History, values, and stories of the business are passed down by previous generations. If the previous generation does not effectively mentor and show how decisions are to be made and allow the next generation the freedom to make decisions to practice their decision-making effectiveness, decision making is likely to be poor, or delayed; at worst, it could be ineffective.
In the early days of the business, the controlling owner makes most or all the decisions. This can continue into future generations if there is a powerful controlling leader. This is very common in family business (Feltham, Feltham, and Barnett 2005). Research has shown groups of people are better decision makers than single individuals (Colquitt, LePine, and Wesson 2018). Instituting proper governance structures is a vital requirement to improving decision-making effectiveness. Having other people challenge the status quo or discuss new viewpoints when making decisions is a very effective way of increasing debate, discussion, and exploration of different and possibly better ideas. Having more interactions with a variety of people, especially experienced outsiders, helps increase the effectiveness of decisions. Boards of advisors, boards of directors, having family meetings, and instituting a family council are some of the governance tools that can help increase decision-making effectiveness.
As an example of improved decision making that could have an impact on profitability, Block (2010) showed that family-owned firms exhibited a reduced likelihood of employees being laid off in a downturn or recession. However, in a professionally managed family firm with proper governance structures installed, the likelihood of a layoff was the same as a nonfamily firm. This provides evidence that family-owned and family-managed firms often practice altruism when they are able. This provides evidence for the socioemotional approach as family owners care more about their reputation in the community. By having professional management and governance, the firm acts in a more professional manner.
Improving Communication and Preventing Conflict
Communication is an area of improvement for many families, especially those families in business with each other. Many families do not have a healthy way of communicating, and this can lead to conflict. Proper governance tools allow for increased dissemination of information and ideas and foster increased discussion. When members can voice their view concerning an issue, and feel they have been heard and treated fairly, even if the discussion and eventual decision does not align with their views, there is an increased amount of acceptance or “buy in” for the decision. It is best for families in business together to have an agreement that decisions are supported by all and that discord is not propagated outside of the discussion. By having buy in with decisions, the family can speak with a unified voice and prevent dissent. This helps to prevent destructive conflict. Conflict can occur when people have serious concerns about an issue and occurs regularly when those concerns are not addressed. Good governance structures enable positive channels of communication, which can head off conflict.
Family Business Professionals and Consultants
There are many professionals who often specialize in helping families in business, such as family business consultants, family therapists and counselors, accountants, insurance professionals, lawyers, tax attorneys, and estate planners.
Many family firms do not utilize professional family business consultants. Some may not know the role exists. These professionals are often scholars or researchers, and some have been certified as a family business practitioner by the Family Firm Institute (FFI). Others came from the finance or estate planning fields and specialize in family-owned businesses.
When a family business has a crisis of succession, they often reach out to a family business professional for help. As discussed earlier, it is very late to be asking for help. Another time family firms utilize consultants is when they have intractable interpersonal conflict between family members and it has become destructive. Often, the family business consultants have an entire team of family business professionals, so they can handle all aspects of a client’s needs. The consultants all have a psychologist or family therapist/counselor either on staff or one they can recommend. Many would be surprised at the myriad of family issues a counselor deals with at family firms. Once a family utilizes a family business professional, they form a relationship built on trust and the consultant becomes a valued advisor at many firms. It is priceless for the business to have the benefit of experienced and knowledgeable professionals who have gone through similar situations before.
Accountants are extremely important to family-owned businesses, especially in the founder’s tenure. They were found to be the most trusted advisor for small firms. Having a good working relationship with an accountant who can communicate well is a requirement, especially for the founding entrepreneur who may not be comfortable with financial statements and how to read and analyze them. The local banker is important in this regard as well when firms are small.
Insurance agents and estate planners are important to have a proper plan in place and an insurance benefit for the inevitable death of a key family member or family CEO, which could trigger tax and estate issues. The estate planner can create a long-term estate plan to decrease taxes and ensure the wealth passes on to family members. Buy–sell agreements are financed by life insurance and insure key family members. The family buys life insurance policies on each other, and when there is a death, the beneficiaries can buy their company shares from the departed family member and possibly pay for any taxes using the life insurance proceeds. As an example, the O’Malley family, the former owners of the Los Angeles Dodgers, were forced to sell their beloved team after the death of their longtime controlling owner and patriarch of the family and had to pay a significant tax burden. Good estate planning is vital to intergenerational success of the family firm. Mostly, all family business consultants will have recommendations for tax, life insurance, and estate specialists who are knowledgeable of the unique nature and issues of a family business and can help safeguard its success.
The choice of governance structures and mechanisms depends on a variety of factors. Each family business is unique, and each family is different. Installing certain governance mechanisms will depend on the family, their culture, their goals, the size of the family and the business, what generation of leadership they are presently, company age, complexity, and so on. Governance is specific to each company. One size does not fit all when it comes to governance. A family must do what is right for their specific situation.
Stakeholder Management
To know and understand the needs, interests, and expectations of various stakeholders of the family business, company management needs to have relationships with the important stakeholders. Some businesses have created a position to engage stakeholders: the corporate stakeholder relationship director. Their purpose is to communicate with stakeholders and then inform management of their interests (Institute of Directors in Southern Africa 2016).
Family Offices
One of the faster growing trends among family businesses has been the use of family offices. As the business matures, it becomes more complex, with several generations of ownership and multiple families involved. At the same time, the business continues to grow, and family members’ wealth increases to significant amounts. This creates the need to have a professional family office to take care of the needs of the families Murray, Gersick, and Lansberg (2001/2002). Usually the office is recommended by the corporate attorney, who becomes concerned about the amount of comingling of the family’s needs with those of the business. Inception of a family office also becomes necessary when several groups of owners with varying amounts of shares, sometimes nonvoting, are involved. The need also occurs when the family diversifies and becomes a group of family trusts, limited partnerships, corporations, or holding companies and has members with a variety of different investments. As the family business grows, its need for professional and personal services also grows. Family offices normally house the family charitable foundation and are where the family often combines its wealth or investment funds for outside investments. Most often, these offices are operated by professional management.
Events such as an IPO, an acquisition, or a divesture may increase demands for professional services or for cash. When a family business is divested or sold, family members often use the family office as a way to keep the family together, maintain their leverage and power by investing as a group, access financial and legal services at no or low cost, and keep the family legacy alive. Family offices are dynamic and change as the family grows and transitions. Private wealth management and investment firms are now targeting the family office as a very large key customer.
A more advanced type of family office is a multifamily office (MFO). This is where several separate families unite under a single-family office. The Pitcairn family of the PPG fortune (Pittsburgh Plate Glass Company) sold their PPG holdings, and most of the 200-plus family members have stayed in business together through their Pitcairn Trust Company, an MFO that manages the Pitcairn family money, as well as those of other wealthy families and individuals. Using professional wealth management professionals, the firm has been able to generate higher than average returns on capital. The trust often invests in large publicly owned family businesses because of their long-term strategies and above-average financial results.