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A family constitution can change everything

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Family businesses comprise nearly 90 percent of all privately held businesses. They are the foundation of our US economy, as well as the world’s economy. They are not all small mom-and-pop stores, and include giants like Wal-Mart, Cargill, and M&M Mars.

 

Transitioning the family business from one generation to the next is challenging. The statistics are well known – 33 percent make it to the second generation, 12 percent to the third, and 3 percent to the fourth generation. What is going on? Why is it so hard to transition between generations?

First of all, business is hard. The statistics for non-family privately held businesses are also dismal. Nearly 40 percent of all new businesses fail in the first year. Building a business is much different than being able to do the work the business does. This is a harsh reality to many business owners. You have to be agile and adaptive, and have a mindset of growth sprinkled with some paranoia, and some luck, or you will die.

Additionally, the market takes no prisoners. The ability to stay close to your customer, to fully understand their needs and wants, and position your products and services in a manner that the customer perceives as valuable is challenging. Competitive pressures add to this challenge. It is imperative that the family be open to business-model innovation as the market demands.

 

A MATTER OF PERSPECTIVE

Secondly, family businesses have a unique structure. The world of family businesses generates a mixture of business, family and ownership concerns that can make these systems emotionally charged environments for planning and problem solving. In these systems individuals must manage issues within and across three overlapping groups: the family, the business and the ownership group. The overlap among the three groups often leads to differing points of view among individuals depending on their location.

For example, family shareholders not employed in the business often have different views about the proper level of dividends than do non-family management who work in the business. Both viewpoints are typically legitimate and must be reconciled in a respectful way to set direction for the enterprise and preserve harmony in the family. To effectively manage business, family, and ownership concerns requires communication and decision-making within and across the family, the business and the ownership groups.

 

RECONCILING DIFFERENCES

Without belaboring an oft-made point about family business, reconciling these diverse concerns can be terribly difficult. Too often, family firms employ dysfunctional and short-sighted approaches to handle tensions, such as:

< Exclusion and secrecy: keeping some family members or shareholders out of conversations and keeping too many secrets from employees, owners or family members.

< Divide and conquer: relying on the support of some allies and excluding others from information and decision making.

< Bribery: hiring relatives who do not deserve jobs, paying relatives more than they deserve, distributing more funds from the company than is responsible for the sake of preserving family harmony or maintaining certain individuals’ power.

 

It’s also important to note that the first generation comes from a life of hardship and wanting a better life – they start a business to attain that goal and work very hard to make it a reality. The next generation (G2), who was witness to that hard work and struggle, has a better life than G1, and continues to build wealth and prosperity. But G3 has no memory of want or struggle. If G2 or G3 (and beyond) are not developed properly and not indoctrinated into the values and purpose of the family business, things fall apart quickly.

Given these challenges, family businesses, if run well as a family through a strong governance program, can have an advantage. Their strong bonds, values, long-term view and perseverance can help them break through inevitable roadblocks.

The hallmark agreement in family business governance is the family constitution. The family constitution is a statement of the principles that outline the family commitment to its core values, vision and purpose of the business. The constitution is a structure to educate and facilitate communication between family members. It defines the interface between the family and the business.

This constitution also defines the roles, compositions, and powers of key governance bodies of the business: family members, shareholders, management and board of directors. In addition, the family constitution defines the relationships among the governance bodies and how family members can meaningfully participate in the governance of their business.

This family constitution creates a forum for discussion and transparency, keeping conversations out of the closet and out in the open. The constitution is the key to eliminating or working through family conflict, and building a family business that can last for generations.

Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. Compass Point provides growth and business transition consulting to family businesses. He can be reached at 610-336-0514 or tgarrity@compasspt.com.

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