Have you watched the show “Succession?” It’s the show on HBO about the Roy family and their global media business Waystar Roy Co. In the show, all of the nuances of family business succession show their stripes, and usually not in a nice way. Part drama, part comedy, the storyline tracks the struggles of the family and the business as they navigate the uncertainty of succession – because Dad (Logan) is ancient and could kick the bucket at any time. But Logan isn’t done messing with the kids yet. Episode after episode, there is always a food fight and cake is thrown in at least one person’s face.
According to Price Waterhouse Coopers (PWC), family businesses are responsible for half of the global GDP and employment. Domestically, it is estimated that family businesses employ 60% of all workers. Family businesses are the most trusted form of business according to the 2022 Edelman Trust Barometer. One a scale of one hundred, family businesses ranked the most trusted of all businesses with a score of 67 compared to privately-held’s score of 58 and publicly traded at 56 in 2022. This trend has been consistent over the past nine years. Family businesses are a valuable contributor to our communities and economies.
Being a part of a family business is not for the faint of heart. While Succession is an act of fiction, the challenges it depicts can hit too close to home for some family enterprises. It takes more determination and commitment to making it all work, facing issues that a business owned by unrelated parties or even a single party don’t have to deal with. Employment within family business is different as well. Having been a non-family member leader in two different, sizeable family businesses, I can attest first-hand that there is a big difference in the dynamics and culture.
Think about it. Every company has two systems it navigates between ownership and operations of the business. As an owner, you may or may not work in the business. Conversely, as an employee, you may or may not be an owner. Those that are both rely on understanding the rules, roles and responsibilities that come with each system to guide their actions and decisions. Like a two-layer cake, this understanding provides the frosting between the layers, holding it together so you can make good decisions for the overall quality of the whole.
Now layer in family. The introduction of the third system creates another layer to contend with that will either make the cake better or worse. The frosting, or the governance structure, needs to be much stronger to hold it all together.
For most family businesses, all the layers are piled together, one indistinguishable from the other. As a part of The Family Business Consulting Group, I encourage you to pull the layers apart and look at it as a Venn diagram:
When you view it this way, you can see how everyone involved with a family business will be in one of seven different possible positions across the three layers. As they overlap, the complexities and the need for good governance increases.
Like the three-layer cake, there must be a centered balance between the systems for the frosting to hold it together. There should be governance systems for the family, the owners, and the business:
Whenever there is a business ownership interest in a family, there are certain family structures that follow. In the beginning, the structure is informal and, well, unstructured. For example, as a solo owner, you have our own vibe around what you share with other family members and what you don’t, where you need spousal support and where you don’t, and where and how you’re sensitive to what they need. It’s more of a traditional division of family needs and work needs.
Should one of your family members become involved in the company, you would reset the rules and expectations around how this changes the dynamics of the family and decision making about the business. You might establish a family council to promote communication – as a family – around challenges, conflict resolution and education of the next generation around what it means to be a family that also happens to own a business.
As involvement expands to include siblings and/or cousins, additional tools for governance, such as family summits or assemblies, family constitutions, family norms of behaviors, and family employment policies should be adopted to document and explicitly share what and how the owners and the family branches will function together.
Ownership governance guides the family business in two areas: participation in ownership and participation in decision making. Ideally, the owners have adopted a shareholder agreement that outlines, at a minimum, the basis for individuals to enter or exit ownership, on what basis of valuation, and under what circumstances. Other operating agreements may also exist to direct certain actions and activities of owners, such as reporting, decision making, accounting and others.
Decision making is traditionally 100% vested in the owners. When a family business moves into second and third generation ownership, serving the interests of the entire ownership group demands stronger governance practices. It may benefit from the creation of a Board of Advisors (BOA) or a Board of Directors (BOD), inviting people that are entirely independent of the business and the family to provide an additional layer of direction to the owners.
The level of authority vested in the Board depends on whether it is a BOA or BOD. A BOA is purely advisory. The owners lean on their BOA for advice and guidance but are under no obligation to act on the advisors’ direction. The BOA has no decision-making authority or power whatsoever. A BOD, however, serves with a fiduciary responsibility to the entire ownership group and does have decision making authority. Decisions made by the BOD are binding, regardless of whether all the owners like it or not.
Business governance takes the form of policies, procedures, handbooks, and other systems that guide decision making within the business operations itself. Ideally, it is well integrated with the values, goals, and objectives of the other two systems. Based on inputs from the other systems, business leaders are charged with developing and executing a strategic plan that meets the family’s and owners’ goals.
The common ingredients in all three forms of governance are communication and continuous education.
But they are the ficklest ingredients.
Communication is the toughest as it invites people to be open and vulnerable, to listen to and see the other family members’ perspectives and navigate their histories and conflict in a productive way.
Education may be viewed as a luxury or unnecessary. Too often, the generation in control assumes the next generation knows (or doesn’t know) certain things simply because they are family or have worked in the company since they could walk. The current owners may be steeped in what they know and aren’t open to learning new information, techniques, and methodologies that could improve one or more systems and ease the transition of generational leadership.
If you’re looking to strengthen the systems in your own family business, start with these two ingredients. They make the frosting and hold the cake together. Used properly, they deliver the joy when you have your cake and eat it too.
Some say the frosting is the best part of the cake. Others prefer the cake. When it comes to family business though, it all belongs together. Three layers, standing strong, and held together with frosting. A work of art, love, and dedication.
By the way, if you’re into Succession, let me know. We can watch it together as we celebrate International Family Business Day! I’ll bring the cake.
Special side note: In December, I officially became an independent Consultant with The Family Business Consulting Group, complementing the work at Provenance Hill Consulting. Please share your comments on the post or feel free to reach out to me at either [email protected] or [email protected].