Family business: conflict resolution

Business News - Tuesday December 18, 2007

Leading THE WAY

Family business: conflict resolution

PRICEWATER HOUSECOOPERS

Family firms play a crucial role in the global economy. One measure of their importance is the proportion of registered companies that are family controlled _ a figure that ranges from more than 50% in the European Union, to more than 95% in the US. A second is their economic power. For example, family businesses generate between 65% and 82% of Asia's gross national product.

In short, the family firm is the world's dominant form of business structure.

It has produced corporate giants such as Wal-Mart and Samsung, as well as many millions of more modest operations. Yet this structure presents some unique problems. Family firms combine all the tensions of family life with those of business life, so it is hardly surprising that conflicts sometimes erupt.

This is especially likely when the management of the business is about to change hands or where ownership has already passed to the second or third generation. Most entrepreneurs are strong characters and enjoy a greater degree of control than their descendants by virtue of the fact that they set up the business in the first place. Moreover, as a company matures, it is increasingly probable that some of the shareholders will not be involved in the day-to-day running of the business _ and that they may periodically disagree with the way in which their relatives are managing it.

PricewaterhouseCoopers recently conducted a Family Business Survey, which canvassed the views of the top management of 1,454 family businesses across 28 countries. In the survey, "family businesses" are defined as those companies in which at least 51% of the shares are held by a family or related families; the family members comprise the majority of the senior management team; and the owners have day-to-day responsibility for the management of the business.

Fortunately, most of the family businesses in our survey experience comparatively few conflicts but, when they do, there are several issues that generate heat. At least 20% of respondents report that decisions about who can work in the family business, failure to consult with the wider family on key issues and the role of "in-laws" have sometimes caused strains. But it is discussions about the strategy of the business and the competence of family members actively involved in the business that are most likely to trigger a dispute. Around a third of respondents say that they have quarrelled about the future direction of the business and about the performance of family members.

More than half the family businesses in our sample employ relatives without requiring them to compete for the jobs. It comes as no surprise, perhaps, that preferential treatment of family members is quite common in small firms. But the prevalence of such behaviour in larger companies seems more noteworthy.

Sixty-four percent of North American companies award family members a role in the business without measuring them against external candidates. Given the absence of formal hiring procedures in many family firms, then, it is probably inevitable that conflicts about which relatives can work for the business and how well they perform should sometimes emerge. It is also vital for the health of the business and family alike that such disagreements be effectively managed. However, barely a quarter of the companies we surveyed have introduced any procedures for dealing with disputes between family members.

Conflict resolution procedures include "family councils", "shareholder agreements", "family constitutions", and "third-party mediation" (see table).

Formal rules for the management of a family business have several advantages; they clarify the expectations of different family members, depersonalise sensitive issues and avert many disagreements before they emerge.

Third-party mediation can take many forms. It might, for example, entail calling in an independent consultant to provide a completely objective perspective and develop the best solution for the business. Alternatively, it might involve delegating a decision to non-family members of the management team or even nominating a specific individual to act as a "tie breaker" _ although it is clearly essential that any non-family executives should be genuinely free to express their views. However, third-party mediation is a predominantly Western practice. North American and European respondents regard it as one of their main options for resolving disputes, whereas respondents in the emerging economies typically prefer family constitutions or councils.

While the family firm is the dominant form of business structure worldwide, it is arguably more difficult than running any other kind of business, precisely because it involves family ties as well as commercial relationships. In part two of this article, which will be published on Jan 8, we will look at why succession planning is crucial for the family business.(The above is based on the report "Making a difference: The PricewaterhouseCoopers Family Business Survey 2007/08" which is available to download at www.pwc.com/th)

Kulvech Janvatanavit is a Partner at PricewaterhouseCoopers. We welcome your comments at leadingtheway@th.pwc.com

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