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PART ONE
Cracking the Code of Your Family Business
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1.
Decode Your Family Business
Who cut down Mom’s rosebushes? Rosebushes! This fight nearly derailed a successful second-generation family business. We had scheduled a meeting with the company’s owners to discuss whether to retain their under-performing nonfamily CEO. Instead they spent almost the entire time arguing over whether one of the brothers had the right to “prune” or “kill” (depending on whose version you believed) their mother’s prized rosebushes at the family cottage. Despite our efforts to change the subject, they couldn’t move past the rosebush incident. The meeting ended in a deadlock, the group unable to make any decisions together.
It’s hard to imagine a public company’s board coming to a standstill over landscaping. Outsiders often scratch their head at how family businesses seem to defy conventional business rules. That’s because family businesses are different. If you’re part of such a business or working for one, the business’s uniqueness will be no surprise to you. But that doesn’t mean you always understand how and why the business operates the way it does. You just know that conventional business wisdom doesn’t always apply. But what are the rules?
We have good news. Family businesses can be understood if you stop scrutinizing them like conventional businesses and instead use these three levels of analysis:
- Individuals, especially owners, have a huge impact.
- Relationships are multidimensional and interlocking.
- System dynamics shape everyone’s behavior in ways you might not realize.
In this chapter, we will help you identify and understand the influence of critical individuals in your family business, decipher and map key relationships, and recognize the often-unseen system dynamics at play that will shape your future.
The impact of individuals
For all the talk of “imperial CEOs” of public companies, these executives can’t touch the influence of a family business leader backed by ownership power. The owners, a relatively small number of people (most family businesses are owned by far fewer than a hundred people), have ultimate authority over every decision in the business. They can fire the CEO, add or remove board members, change the strategy, sell the company, decide who can be an owner, and even cut the rosebushes, to name just a few things in their control. Family ownership keeps power in the hands of a few individuals. Who these individuals are and what they want will have a profound impact on their family business. And that impact will vary, of course, from business to business and family to family.
One US entertainment company has been quietly owned by one family for generations and has managed to grow and thrive with just one global brand, a rarity in the fickle, consumer-driven entertainment business, which is dominated by multibrand conglomerates such as Disney. While the family CEO has had numerous opportunities over the years to buy competitors and diversify his portfolio, he held firm in his stance. This CEO—we’ll call him Frederick—is clear: he just wants to own and run one company. Frederick is a man of routine. His calendar is set a year in advance, lunch is always served at 12:45 p.m., and he leaves the office on time to see his family and read books. “Owning many brands would be a pain in the ass,” he told us. “Someone would need to run the businesses. And that someone would be me.” Not one for surprises, he structures his life and his business in predictable ways. He likes to perfect his family business incrementally, prudently, and meticulously. And as long as he’s in charge, that strategy will never change. Frederick would not have chosen to run his company any differently. His approach is fundamental to who he is.
By contrast, a European family business has a CEO we’ll call Ian. During his thirty-year reign as CEO, Ian’s family business acquired more than twenty-five companies in industries as diverse as automotive parts, insurance, information technology, and furniture manufacturing. The industry did not matter. Ian would buy low, upgrade management, find where price could be raised, and be off to the next acquisition. He would check in on the previously acquired companies only twice a year in day-long reviews of the firms’ balance sheets and profit-and-loss statements—fancy strategy documents were left untouched. “Our strategy is to make money!” Ian would declare. He loved the thrill of the hunt and knew what he needed to be successful. After “retiring” at seventy-five, Ian purchased several businesses in Africa to keep himself busy.
You will find Fredericks and Ians in the story of every successful family business—leaders whose strategies deeply reflect their personalities. Without that person, without their “singular genius,” the family business would probably be dramatically different. Put Ian into the entertainment company or Frederick into the conglomerate, and you would probably get radically different outcomes. The average CEO tenure in a family firm is at least thirteen years, compared with five years in publicly traded firms. With both more time in the seat and more decision power as an owner, these family CEOs put their personal stamp on their companies.
Despite the pervasive myth that only founders can have supersized influence on a business (think Sam Walton at Walmart), subsequent generations can also have a profound impact. For example, Rupert Murdoch took the modest foundation of his father’s Australian media assets and built a global, multibillion-dollar empire. People such as Frederick (G3, third generation) and Ian (G4) play a role we call creators; they sit at the power center of their family companies.1 As we’ll discuss, other owners can play significant roles, too, even if they’re not the CEO of the business.
But owners are far from the only people who, as individuals, make and shape important decisions in family businesses. Though they may not show up on the company’s organizational chart or the ownership documents, spouses, children, cousins, in-laws, nonfamily executives, and board members can all influence a family business’s direction. In a public company, it matters little who the CEO’s spouse, parents, siblings, or friends are, but in a family business, these people can matter greatly. A nonfamily CEO who has the full support of the company’s owners, even if those owners are relatively uninvolved, can also play a significant role in shaping a family business because of that support. (Think of the power and influence of Vogue’s longtime editor in chief, Anna Wintour, who had the enduring support of the legendary S. I. Newhouse, co-owner of Advance Publications, for decades.)
People’s personal character plays a key role in directing the fate of a family business. For example, we met a family that is one of the largest landowners in Colombia. The father loved the game of business and passionately pursued creating more family wealth. Because his wife grew up in another, but conflict-ridden, family business, she was determined to give away their family fortune before she died. She urged that the profits from their family business be distributed, instead of reinvested, and then given to charity. Their son was indifferent to both the business and the family’s wealth, happily pursuing a career as a ranch-hand on one of the family’s cattle ranches. He is probably one of the world’s richest cowboys. Their daughter, feeling profoundly guilty about her family’s wealth, married a minister, and together they moved to the slums of Bogotá. None of these family members are on the same page about what the family should do with the wealth their business creates—but they all have a say in what happens to it.
To anticipate what will happen to this company in the next generation, we have to understand what the daughter and son want for their family business. Will they divide it so that each of them can make a personal decision about what to do with their wealth? Will they move out of their current professions and take an active role in leading their business? Will one sibling want to sell to the other? The only thing that is certain is that their choices will be driven at least in part by their personal priorities, which have little to do with the business itself.
The seemingly irrational decisions of family businesses often reflect rational choices of thoughtful people who value things beyond higher profits. And since they own the company or influence those who do they can “want what they want”—be it growing through a personality-fitting strategy such as those that Frederick and Ian applied, or focusing on distributing money out of the firm, or directing the firm to combat climate change or poverty. As individuals with unique goals and desires, they get to chart their own course.
Make-or-break relationships
You can also decode your family business by examining the relationships inside it. Unlike in a nonfamily business, where clear boundaries usually separate professional and personal relationships, a family business involves multidimensional relationships that influence each other in profound, often unexpected, ways. In fact, three distinct types of relationships are simultaneously at play.
Family relationships are at their best when they are inclusive, forgiving, protective, and supportively challenging. They “trade” in emotions—love and some more negative emotions at times. Families are emotionally connected. And family relationships are the longest relationships of most people’s lives.
Business relationships, on the other hand, are hierarchical; there’s a boss and a reporting structure. They are usually meritocratic. If you don’t make the cut, you are fired or you leave. The average tenure of US employees is now less than five years. Businesses “trade” in competencies. You hire a vice president of manufacturing for the executive’s knowledge and experience in the business issues you face. And the person is in the role only as long as the mutual investment makes sense for both parties.
Owner relationships come down to who has the voting control of the firm and who has influence through their voice, even without a vote. Owners “trade” in power and are part of an exclusive club: you are either an owner or not. In family businesses, unlike, say, at Apple, ownership is sticky. Most companies have limits on whom you can sell your shares to, and how. Exit and entry are not simple, quick options.
In your family business, each big decision you make—to curtail a dividend payment to your mom to protect your balance sheet, to buy out your cousin, to skip your family reunion, or to fire your brother—is within a complex expression of family emotion, business hierarchy, and owner power. Your decisions are never just straightforward business or family calls.
This complexity plays out in a staggering number of important relationships, each with a distinct tenor. For example, Ian, the conglomerate creator, is a son, a brother with two siblings, a husband, a father, an uncle, a cousin, a father-in-law, and a grandfather. In the business, he was the CEO, with twelve direct reports, and was chair of the board. As an owner, he has been a trustee, a beneficiary of the trust, an investment partner with his siblings, an investor who bought additional shares from his other family members, and a board member of their foundation. When you add it up, Ian has more than fifty important relationships.
And each family member plays multiple roles with each other. Look at Ian’s relationships with his sister, Alison. With Alison, he manages seven relationship roles: (1) her older brother, (2) a fellow board member, (3) the brother-in-law of Alison’s husband (who served as CEO of their firm for two years and reported to Ian as board chairman), (4) a fellow trustee, (5) a fellow beneficiary, (6) a fellow foundation board member, and (7) uncle to Alison’s son who is a board member. Such multifaceted relationships often lead to role confusion. Famously in the family lore, in a pique of frustration at Ian’s domineering stance during a discussion, Alison once told him, “Ian, I’m your sister, not your employee. I don’t report to you.”
Family business genograms
To begin to understand the complexity in your family business, identify the individuals in your family system and their relationships with each other. The system is probably more complicated than you think. Start by sketching a genogram (a family tree) with all your family members, including spouses, and going back to the generation that founded your business. A genogram helps you map a business family at a glance—and identify potential issues in the future (see “Further Reading”). In figure 1-1, we map the Dillons, a typical third-generation family business in the pet care industry.a
a. The name and the nature of the business are fictionalized.
Two years after retiring as CEO, Ian, as chairman of the company board, was dissatisfied with the performance of his brother-in-law CEO, who was also Alison’s husband. If Ian ousted his brother-in-law, a move that Ian felt was best for the business, how would the change affect his relationship with Alison? Relationships often involve triangles among three people (see “Further Reading” at the back of this book for more on this topic). With his brother-in-law in the hot seat, would Ian, Alison, and her husband still share holiday traditions at their family estate? Would the family fracture into branches? If the demotion were not handled well, would Alison’s branch want to sell its shares? Would it trigger conflict among their children?
A single decision can reverberate for years—or even generations. Only family businesses face such relationship challenges.
System dynamics
A family business is a system, meaning that the people who are part of it exist within an interconnected environment that affe...
