“The Causes and Cures of Five Destructive Family Business ...



The Causes and Cures of Five Destructive Family Business Conflicts

James Lea, Ph.D.

In my more than 20 years of working with, writing about, speaking to and – most important for me – learning from family businesses of all types and sizes in different parts of the world, I’ve become convinced that the family business owner who says “Oh, we never disagree about anything” does not speak the truth. It is uniquely human to disagree, to make choices and to argue. That capacity comes with the intelli-gence that allows us to imagine what we cannot see, to hold opinions, to make long-range plans, to be optimistic or pessimistic, and to get involved in politics.

The interactions among family members in business together reflect those uniquely human capacities, and it’s use-ful to start by sorting them out. First there are differences. The differences among us are generally healthy and constructive. They bring diverse capabil-ities to discussions, decisions and the work that we do. There can be great value in differences among family members in business. Consider this: no one can make a winning football team out of eleven quarterbacks. A company with ten salespersons and no production workers, or five executives and no middle managers, will not be in business very long. Similarly, a family whose members all have the same interests, viewpoints and abilities may be so one-dimensional that it’s unable to deal successfully with the complexities of

today’s global business environment. So we should accept, respect and even encourage differences among family members in the business.

Then there are disagreements. Families often disagree, and family members in business sometimes dis-agree quite loudly. We disagree about things ranging from growth strategies and investment priorities to which of us should get the sheltered parking place nearest the office door. Family business disagreements have to be controlled, of course, and not allowed to distract or stall decision making and management operations. But there is energy in disagreement and it can be channeled to very positive purposes. We can learn and benefit from our disagreements, from the competition between ideas or perspectives, and from the analytical thinking that dis-agreements often force upon us.

But some family interactions descend to the level of conflict, and conflict within or surrounding a family owned company is almost always wasteful, destabilizing and destructive. In my experience, there are five common and persistent causes of conflict among family mem-bers in business together, and those five causes make great trouble for family businesses all over the world. They may account for the failures of more family owned businesses than any other individual factor or combination of factors.

The five common causes of conflict are compensation, competitiveness, control, confusion and carry-over.

Compensation – The first common cause of family business conflict is money and its equivalents. I’m speak-ing here not only of salary, but of compensation, which is the sum of salary plus benefits plus perquisites plus ownership value, which may include distribution of profits and long-term appreciation of assets. In some fam-ilies, conflict over compensation takes the form of open warfare; in others it’s more like a guerilla campaign.

In many cases, compensation conflict arises not over who gets paid how much, but over who gets paid how much for doing what. The classic case is the family member who contributes very little to the performance of the company but is compensated at the same level as one whose effort and productivity are the very heart and soul of the business. The justification is often “I’m in the family, too, and I should be paid as much as other family members are paid.” If that argument carries the day, the arrangement will be seen as blatant-ly unfair. Either an open policy or a private agreement that allows unbal-anced compensation will fuel anger and conflict at many points and levels in the business and the family.

If the potential for compensation conflict exists, that potential increases when family business management passes down to the second generation or flows out to cousins and others in the extended family. When the founders or other first generation owners are in charge, the family usually acknowledges that they have the authority to set compensation, even if not everyone agrees with their decisions. When the authority of ownership and management is distributed, however, it is often weakened, and the potential for conflict is transformed into actual conflict.

Conflict over compensation issues in the family business really heats up when spouses become involved. “Why does your brother drive a Mercedes when we can’t afford anything better than a Toyota?” In the absence of a rational and believable answer to that and similar questions, the conflict can escalate and become a fixed feature of family life. Sons and daughters under pressure like that may leave their families’ businesses and even leave their families.

A final flash point of compensation conflict that can destroy a family owned business is the failure of understanding between family members inside the business and those outside the busi-ness. The family members working to manage the business, build it and make it profitable often feel they are entitled to comfortable compensation: good sal-aries, nice automobiles, bonuses. After all, by keeping the business successful they are ensuring the financial security of other family owners and stakeholders. The outsiders who have none of that responsibility but nevertheless demand a share of the profits regardless of the business’s financial needs look to the insiders like beasts circling the sheep-fold. They look like predators.

On the other hand, family members outside the business, especially if the business does not distribute dividends or other shares of the profits, may feel that those inside the business are compensating themselves too comfort-ably. When there’s not enough liquidity to make life comfortable for everyone, those outside may see the insiders as living on the lifeblood of the business and excluding the rest of the family from the benefits – they look like parasites. The predators versus the parasites: a classic conflict over compensation in family owned companies.

The cure for compensation-based conflict in a family business is perform-ance-based compensation. Each family business should develop, disseminate and enforce a policy that sets up compensation schedules and criteria for increases for all executives and em-ployees, that defines eligibility for benefits and perquisites, and that states under what conditions dividends and other financial benefits will be distributed to stakeholders who don’t work in the business. All compensation should be tied directly to the company’s profit performance and to the measurable contributions to that performance of each individual family employee and shareholder.

Such policies will not be universally appreciated. But they will guard against the conflict that can quickly arise around compensation issues and drag down even the best family business.

Competitiveness – Competitiveness is considered a cornerstone of success in business, but it can be a major source of conflict in a family business. How? The answer might lie in the contradiction pointed out by Boston attorney and family business advisor Richard Narva: businesses have to be competitive to survive, while families have to be supportive – that is, internally non-competitive - to survive. Families are programmed to work for the genetic and social continuity of the whole family group. Businesses succeed when they select the very best ideas and people and exclude the others. One of the results of this inconsistency is internal competitiveness. When we are very young, we try to climb higher, run faster and eat more ice cream than our brothers and sisters. But as we grow older that natural competitiveness usually turns outward toward the rest of the world. We give up teasing our sib-lings and instead begin to count on them for support, or at least neutrality, as we take on the challenges that face us outside the family circle.

In some families, however, the shift doesn’t occur. Brothers and sisters become one another’s biggest compet-itors, producing sibling rivalry. In some families the rivalry, the competition, is so intense that conflict flares up. The Gucci brothers, heirs to the Italian leather goods family, regularly ended their management meetings with fist fights in the board room. I have seen family companies paralyzed by children fighting among themselves for their parents’ favor, for the largest slice of the business pie, or simply to win while making everyone else lose.

Another form of conflict fueled by competitiveness is conflict between generations. It’s natural for children to try to model themselves after their parents and also to try very hard to dif-ferentiate themselves from their parents. Sons want to succeed like their fathers, even to be more successful, but they want to succeed in a way completely different from their fathers’ way. Daughters who love their mothers and happily turn to them for personal advice refuse to be identified with their mothers’ manners, traditions and values when it comes to business. Such competitive conflicts open gulfs between siblings and between parents and children that may over time, if they’re left untreated, be impossible to bridge.

The cure for excessive internal compet-itiveness in a family company is for all family members – the competitors and the spectators alike – to see it for what it really is: a destructive drain on the energy and spirit of individuals and the entire family. As in any other com-petitive situation, rules must be made to govern the competition, focus it on goals that are meaningful for the business, and direct it away from the family’s inner circle.

Control – The third great cause of destructive conflict in family owned businesses is control. We speak of “controls” as systems that help to keep any business operating efficiently, profitably and legally: financial controls, inventory controls, the checks and balances of good management. In most businesses, the word “control” is like the word “chair.” It describes a tool. It’s neutral.

But in a family business, the word “control” is seldom a neutral word. It often implies the ability of more powerful family members to control the choices, actions, even the lives of others. It is a major cause of conflict, especially as a company approaches planning and implementing succession of manage-ment and ownership. In some cases, parents don’t trust their children’s abilities and commitments, so they won’t delegate real management authority to match assigned responsibility. They install the children in senior positions in the company but continue to make all the decisions while criticizing the performance of persons who have no power to act on their own.

The parents may be so unsure of their own future that they resist an orderly transfer of ownership and authority to their successors. When the senior generation can’t let go, no genuine suc-cesssion can take place. If they appear to hand over control but continue to issue orders to loyal employees, they engage in what I call “double-bossing” which erodes everyone’s morale and undercuts new management when it really needs encouragement. The result can be a loss of consistent strategic business direction and destructive conflict within the family and the company.

This kind of control, and the conflict that it produces when its victims rise up to resist it, can block the growth and development of younger family mem-bers trying to work their way up to positions of leadership in the business. Traditionally, perhaps, young people in a family business would tolerate or accept such control as a matter of respect or because they had no other alternatives. But we now live in a new age. Today it is as likely that young family members will react to too much unyielding control by just getting out of the business.

The cure for this cause of family business conflict is to develop written and enforceable plans, agreements, and other procedural guidelines and docu-ments that define the extent and limits of authority. Control is usually possible when business relationships are driven by the power of someone’s personality. The cure, then, demands that business processes and decision-making be impersonal, objective and systematic.

Confusion – The fourth major cause of conflict that I recognize in family busi-nesses is a profound lack of clarity about roles, relationships, hopes, expec-tations and needs. This lack of clarity turns into uncertainty, then into con-fusion and then into conflict. Where does it come from and how does it remain a characteristic of so many families in business? Conflict is born of confusion when there is a failure of communication, or a reluctance to intro-duce and abide by systematic manage-ment processes, or a lack of transpar-ency in the way the business is run and the reasons for running it that way.

Maybe parents refuse to spell out their intentions or preferences for the future of the business and other family members’ places in it. Maybe children refuse to make clear decisions about whether they plan to enter the business or to stay out of it. In both cases, consciously withholding information and maintaining a state of confusion is a way of exercising control. And when others resist being controlled, the conflict begins.

Confusion conflict can result when a family in business has too little freedom to communicate. Several years ago I was asked to advise a family business whose senior owner was proud to tell me at our first meeting that he con-ducted a family conference once each quarter where family members working in the business and others were called on to raise questions, voice opinions and even challenge his management. I attended one of the quarterly meetings as an observer. I noticed that the senior owner did most of the talking. When at last a member stood and asked a legitimate question about a financial report, the senior owner responded with a torrent of abusive ridicule. That family member sat down, remained silent and was not invited to attend another meeting.

What do we see there? There was no freedom of communication, there was no useful exchange of information, no clarification of procedures or intentions. There was only confusion out of which grew conflict that over the next few years drove family members away from the business. Without family support, the company eventually withered and died.

Conflict results from confusion because nobody understands anybody else, and true to our human nature that which we do not understand we fear and that which we fear we either flee or we fight. Or conflict results because confusion generates false assumptions that are never clarified and corrected – example: “I couldn’t learn his views on selling the company, but I assumed he wanted it to remain in the family. I was outraged when he said he had accepted the purchase offer.” – and that give way to anger and to bitterness that simmers and corrodes and may destroy the business and the family.

The cure, again, is a commitment by the business’s leadership and family stake-holders to systematize, objectify and professionalize, to establish a rational organizational structure and to publish descriptions of responsibility and author-ity, to draw up strategic plans and suc-cession plans, to be clear and trans-parent among family members and others who have a right to know.

Carry-over is the fifth major cause of the conflicts I’ve seen in family owned businesses, when old hurts, disappoint-ments or disputes are carried over from one time of life to the next and continue to eat away at the mutual trust and respect that families in business must have to achieve success and satisfy-action. I call conflict from carry-over the tragedy of unforgiven sins.

In carry-over conflict, family members hang onto the posture of conflict even when the original cause has been forgotten. Relationships and percep-tions of one another become locked in time like an old photograph or an insect fixed in amber: A young family member continues to be perceived and treated as the 10 year-old who wouldn’t pick up his toys or sit politely at dinner. The parent continues to be perceived and treated as the aloof and over-bearing authority figure who was the family’s center of power and was never, ever wrong. Siblings insist on thinking of one another not as the vice president in charge of sales or as the manager who has created a wildly successful new product line, but as the pesky little brother who did something embar-rassing at a birthday party and the rude older sister who never listened to anyone else’s opinion.

The conflict created by such carry-overs of emotional and psychological baggage is especially destructive because its causes are so difficult to identify and to remedy. One younger brother in a family of constantly feuding siblings told me, “I don’t know why, but we seem to listen to one another with negative ears. Since childhood we’ve always expected to hear insults and criticisms from one another, and so that’s what we’ve always heard.” Such families never learn to see one another as adults, as people with both strengths and weak-nesses who are doing their best in this day and time, as partners. They never escape from yesterday and so yester-day’s sins are never forgiven.

The cure that I frequently recommend for this cause of conflict is a structured program, facilitated by a professional, to identify, understand and work through carried over resentments and disputes that feed continuing conflict and may ultimately bring down the family busi-ness and also the family that owns it.

Compensation,competitiveness, control, confusion and carry-over – five causes of destructive conflict in family busi-nesses. No cure that I’ve suggested is a magical potion that will improve the situation immediately and painlessly. Each one requires genuine family willingness to take such problems in hand, recognize their destructive power and work very hard to find and implement remedies. The greatest mis-take that any family business can make is to do nothing, to resolve to just live with their conflicts and hope that the business and the family can somehow survive.

My physician friends tell me that while some diseases or conditions cannot be cured, almost all of them can be ameliorated, relieved, made bearable in some way. My psychologist friends tell me that most human beings can bear anything if they know that it will end at some point. They also observe that most of us would rather suffer at the hands of the known than make a change and face the fearful unknown.

My story-telling friends tell me about the frog in the pan of water. If you put a frog into a pan of hot water, the frog will react and jump out. If you put a frog into a pan of cool water and then put the pan over a heat source and increase the temperature gradually, the frog will not jump out. The frog will adapt to the rising temperature of the water – adapt again and again and again.

As the water gets hotter and hotter, who knows what goes through the frog’s mind: “Well, maybe it’s not as bad as it seems.” Or “I’m tough. I’ll show them I can take it.” Or “If I jump out and go hopping around, it will just upset everyone in the room.” Or “You know, sitting in a pan of very hot water is a tradition of my family, so I’ll just have to sit here and pretend I don’t mind it.”

The result, according to my story-telling friends, is that the frog sitting in the water accepts and adapts and rationalizes his increasingly worsening situation until, of course, he dies. It is tragic when refusal to confront and cure conflict has the same effect on a family owned business.

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© James W. Lea, 2006

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