by Shel Horowitz
For Nancy Upton, the key to success in wrestling with the issues that arise in a family business is simple: set up formal mechanisms to grapple with the issues, and get as much as possible written down. Upton, Director of the John F. Baugh Center for Entrepreneurship and the Institute for Family Business, both at Baylor University, spoke to the Family Business Center May 12, under the elegant crystal chandeliers and stained glass windows of the Yankee Pedlar Opera House.
Families and businesses, she points out, often have conflicting sets of needs and values. Yet, in a family business, the two areas overlap. Formalizing the corporate culture reduces the tension inherent in that overlap.
In particular, the family will impact the business at several points: through communication patterns, when emotional issues come into play, through the family’s unspoken traditions, and if family patterns and values are applied to the business.
These points of interaction are further clouded by long-held perceptions by family members of the roles that other family members ssume. If, for instance, someone had a wild and crazy adolescence, it may take the family years to realize that this individual has settled down and now deserves a seat at the table of power. And if a long-time mediator or peacemaker chooses to dissociate from that role, mechanisms have to be in place to resolve problems without his or her help.
Issues affecting both the family and the business–such as succession from one generation to another, ownership, decision-making, entry into or exit from the business, and compensation–can cause a great deal of stress if they are not addressed and codified.
Upton notes that the very act of planning a response is in itself “as important as the results.” Setting up formal processes allows the older generation to share their entrepreneurial vision, their rationale for existing ways of acting, while also allowing younger family members to demonstrate they have the skills to run the business and will be accountable to the present management. Also, working together as a team builds camaraderie and leadership among all participants.
For Upton, a critical mistake many businesses make is failing to include all those affected in the decisions. She believes firmly in working out policies on every issue area as a family, and thus creating agreements that satisfy all parties–and therefore, the crucial willingness of all participants to carry out the agreed-upon plan. And she recommends several strategic tools for dealing with these policy areas.
What are these tools? Noting that not every tool will be right for every business, Upton included these methods:
- Annual family business retreat, to identify problems and share good times.
- Monthly family business meetings, with a formal agenda and minutes, rotating leadership, and–if needed–an outside facilitator.
- An ongoing family council to make recommendations to the business (but not to actually decide policy). This group would represent all family members and explore family concerns that affect the business. It would also recommend and clarify policy. This group would be consensus-driven, future-oriented, and able to balance the interests of all stakeholders since power is vested not in any one person, but in the council as an institution. Thus, it would attempt to foster open and clear communication and provide stability during crises.
- Formalized operating policies, written collectively by all family members in the business. Of these, the family council and the formal policies it creates are the most important, Upton believes. She notes that the council will not only deal with nitty-gritty details such as where to start family members in the business, what kind of performance to expect from them and how much to pay them, but also such e communication of family culture and values. The council also provides a forum to resolve conflicts among family members.
Once the council has thrashed through a policy issue and reached consensus, it’s time to put the group’s conclusions in writing. The steps, according to Upton, are as follows: identify the topic; understand the issues surrounding the topic; solicit input; develop a statement of philosophy; develop a policy statement; develop feedback and adaptation process.
Upton showed an example of a policy developed by one company for entry by family members into management positions within the company. The four-page document specified acceptable levels of education and experience, clean criminal record, and commitment to working hard. Upton noted that it had taken this company 18 months to arrive at this policy–and that it was instituted after an unsuitable family member joined the business without a clear understanding of what was expected from him, leaving a trail of hurt feelings and dissatisfied employees.
Using compensation as an example, Upton then took the group through the first steps in the policy writing process. She identified these key trouble areas in negotiating compensation agreements: confusing family and business roles–or personal and business funds; using pay to accomplish a different agenda (e.g., parental control, tax savings, leveling out ups and downs in the profit cycle); covering over emotional issues); preserving secrecy around pay issues; salary substitutes versus actual pay; and paying everyone either too little or too much.
Then she broke the meeting into small groups, organized according to senior or successor generation. Each group had to decide a series of questions:
- Will all family members receive the same compensation?
- Will family members receive a minimum salary for working in the family business?’ Will family members be compensated below, at, or above fair market value?
- Who will determine the compensation package?
Although the larger body was broken up into about seven smaller groups, conclusions were almost identical across the different parts of the room: pay should be at market value, based on objective factors such as performance and experience, but family members may reap bonuses above base pay, and may advance faster than non-family members. Family members were also expected to fulfill their responsibilities to the business, including acquiring any necessary additional training.
However, the senior and junior generations differed about who should determine the package. The elders gave that decision to the CEO, while the younger groups preferred getting recommendations from the channels that would normally make the decision (i.e., human resource coordinator).
According to Upton, the meeting’s near-consensus was remarkable. “I find it aazing that we can all come up with the same answers, but this is one of the most difficult issues for family businesses to deal with. It can be the basis for a conversation, but each family is going to have its own way to go about it.”