A good approach in general is to “treat the business as a business, and the family as a family, and to try not to get the two confused.” Practically, such a process means that compensation for family members should follow the same guidelines that would be used for non-family members. This helps ensure internal equity across family and non-family employees, reducing sources of conflict and simplifying compensation decisions.

Using market-based compensation for all staff (including family) creates a more standard and defensible approach. This can be particularly helpful in families with some members working inside the business and others who are not. There can often be accusations that family members are getting extraordinary wages for their roles, which in turn may create tensions inside the family as some members feel all are not being treated equitably. This can be particularly tricky when the non-working family members are (or will be) shareholders in the business – leading to conflict about over-payment of company resources to family staff, which impacts the bottom line (and potential dividends to owners).

Overpaying family members (which is more common than under-paying them), also has the unintended result of distorting the financial statements: the Salaries line(s) on the income statement shows higher than what would otherwise be expected expenses for the business. In a sale of the company, a business valuator would “normalize” for this, by stripping out what was an over-payment of company funds for the work done, reducing the value of the company.

Using Market Based Compensation is just one part of a Family Employment Policy, which lays out the terms and conditions for family members working inside the business. The policy helps “make the invisible, visible” which (if communicated to the right family members and workers) can greatly reduce tensions. When such a policy is in place, it also helps family members coming into the business have realistic expectations, and understanding of how compensation is set.

Finally, when thinking about “family” compensation, it is important not to limit the thinking to only bloodline relations. In many small and medium-sized businesses, there are often family members from other (non-owning or related) families working in the business. This can be a very positive aspect of family businesses where “they treat me like family.”  While such a process can offer great upsides in hiring and retaining good staff, the principle of using market-based compensation can help all family members have good expectations, and be paid fairly. In such a case, sharing a Family Employment Policy more broadly can be a positive across the organization.

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Such a governance mechanism – whether advisory or fiduciary – has been shown repeatedly by research to improve the profitability and sustainability of the company. In fact, some banks even use the existence of an independent, properly structured board in a client firm as a positive when scoring for credit risk, as they deem such companies as more credit worthy.

One of the hallmarks of good governance is “noses in, fingers out”, which is a simple way to communicate the principle that company directors should appropriately ask good questions (being “nosy”) about the business. Curiosity about how the company is doing, what the main risks are, what management is doing to maximize the opportunities and minimize risk is the clear domain of company directors, whether independent or internal (ie. shareholders).

The flip side of this is “fingers out.” Keeping out of the operations can be more of a challenge when some of the directors are less experienced, and are used to being engaged in the details. A good example is a founder who has stepped away from the day to day, and is now sitting on the board as an owner, giving them a way to oversee their investment in the business. In such a case, the founder is a shareholder (often majority) and a director, but there can be role confusion about their function inside the management of the company.

Of course, a founder who is also a director and shareholder can have an outsized impact when they speak into operational issues. Whoever is leading the company can be understandably frustrated when the former President or CEO makes operational decisions, or speaks to staff in a way that creates confusion and/or non-aligned communications. The staff also aren’t always sure how to take the “fingers in” approach. They may have had decades of doing what the founder has said – this isn’t easily undone, and especially if the founder’s role is no longer clear.

Having good conversations around boundaries of appropriate engagement of former business leaders inside the business can really help minimize frustration and conflict. Concern on serious issues (minutiae should be clearly offside) is understandable, and a channel through the current leader – whether at the board table or outside board meetings – is reasonable. Learning to ask good questions of such a leader (and not their staff) is fair and appropriate. Watching for situations which draw the former leader outside their governance role, and taking an early position of non-interference can make the new leader better, and the team less conflicted.

A logical question some founders have is “what do I do if I see something serious going wrong?”  Discerning between serious and not-serious is the first step. The second is to go through the proper channel. If ongoing failures which are harming the company begin to show up, then it is a matter of performance management of the new leader, and this is a key board role.

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In most family business, such issues are decided informally and secretly. A family council makes these decisions open and explicit. Many families mistakenly feel that the best way to promote harmony is to avoid discussion of upsetting topics. By establishing a council, a family recognizes that very few issues get resolved by ignoring them.

The council is also an acknowledgement that old-fashioned patriarchy is dead. Father can no longer unilaterally decide everything of importance for the family. More participation, openness, information sharing, debate, and democracy are needed in today’s complex family environment.

A family council provides a means for deciding the business’s role in society; every family is judged personally by what its business does in the community. A council also provides an opportunity to explore how the family uses its wealth and provides for all its members. How will that wealth be passed on to the children? How can the parents live when retired? What portion to the community? What values does the family want to express through the power and influence of its investments?

Article written by Carmen Bianchi of Family Business Associates

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Many business families are strong supporters of their local communities and the charities they support can make a real difference.  There are many reasons why these entrepreneurs pursue philanthropic paths, including giving back to the communities that have helped them, engaging their employees and building culture, living out their values in their home town, sharing their wealth with others, giving in a tax-effective manner, and on and on. There seems to be no end to the good reasons we hear for business leaders wanting to support worthwhile charities.

It is a norm that the values which drive business owners personally tend to also show up in the way they conduct their business. Family values are generally very evident in companies these same families own and lead. As a result, the generosity of many of these owners (which also is seen inside their firms) becomes clear in the way they contribute to causes outside their firms.

We see companies giving financially of course, but we also see them getting involved in cleanup activities in the communities, helping build houses for lower-income families, or giving their staff time off to support homeless shelters and food bank drives. Some companies offer matching donations to charities their staff give to, while others promote or give to causes in the arts, social agencies, kids programs, hospitals, and many more.

Why is this important? Well, the fact that they want to do it is enough in itself, and clearly the community is stronger for the involvement of these businesses and their owners. However, it also demonstrates to the employees and family members the value of caring for others. This can have a significant impact on the development of the staff, and next generation, and is part of the stewardship business leaders are responsible for, quite apart from the benefits received by those who are directly on the receiving end of the philanthropic effort.

Interestingly, we also regularly hear that the leaders who initiate the giving also receive much in giving the gift and business owners consistently find they get much satisfaction and joy from their giving. This should not be a surprise to anyone, since we have all had experiences where givers get as much back (and more) from being generous.

Some families in business move the philanthropy into the family circle as well, creating dialogue with their kids about giving, and engaging them in activities which help them learn how to be “good givers.”  This is important, since it is possible to inadvertently cause harm by giving to others in ways that do not have the intended effect (or have unseen adverse impacts). We see families who create forums for the upcoming generation to give away funds or time to causes they are passionate about in a thoughtful way. It can start small, with relatively tiny amounts of funds (for a five year old, one hundred dollars is a very big amount!) being dedicated to give away. These families often have a once a year meeting, where the next generation are encouraged to bring forward ideas for recipients, and a rationale (adjusted for their age and ability) for why the recipient would be a worthy way for the family to invest. The conversation around possible places to give, how much, and why, are generative and important ways to teach younger family members about the value of giving, and wise ways to do so.

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For more information about governance, Family Councils, Advisory Boards and how we can help you read more at Autumn 2019 PFI Generations Newsletter

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The key difference from a non-family business is of course, the addition of the family dynamic, which can interact with the business, but also the ownership group. Conversely, the business and ownership also can affect the family. I have met many owners and business leaders who try very hard to insulate their families from any adverse effects of the business (“not taking the business home with me”), which is an understandable and well-intentioned goal. Many succeed to a large extent, sometimes to the end, and then often the spouse of the now-deceased owner needs to deal with ownership and possibly leadership of a business they know nothing about.

The truth is, there are almost always impacts of the business on the family, and impacts of the family on the business. Take for example a business with a husband and wife leading the firm, who decide to divorce. Even if only one works inside the business, the impacts of the relational change can be felt inside the company (though staff and peers tend to not mention it, fearing they will only add to the trouble). Similarly, if a business is failing or working through a hard  period (even of growth), the impact on the leader often ripples into their home life and family. The family may not know the source of the stress they feel, but it is there regardless.

The key with understanding the 3 circles within the system is to take the time to think about them, understand what they are, and how they are operative. Doing this on a proactive basis can be especially helpful, when changes in the system are foreseen. This can allow the leadership (whether of family, the business or the shares) to consider the likely impacts, and set in place a plan to manage and mitigate them in a way that is best for all three spheres.

One of our favorite sayings at PFI is “try to treat the family like a family, the business like a business – and try not to get the two confused too much.” It can be hard for owners and leaders who live in the “eye of the hurricane” – the centre of the three-circle model – as members of the family, leaders of the company, and owners. The truth is, such leaders simultaneously wear all 3 hats, and engage with the issues from all three sub-systems. While this is not avoidable, what can be extremely helpful is taking time to think separately about each of the sub-systems, the role played in that sphere, and how to best lead with all three in mind. It can also be helpful for the rest of the company, shareholders (if there is more than one) and family to be aware of the differing challenges the leader needs to address, and how dealing with a topic in one circle in a way that is appropriate to that sub-system need not undermine the validity of the leader’s role or status in another sub-system.

For example, a father who is setting up compensation plans for children who are working inside the business may design these plans based on market realities and benchmarks. While he may be aware – as a father – of specific needs of one of the children which might (from a purely parental perspective) call for a significant amount of funds to flow to the child with greater needs, it would be inappropriate for the father, as a leader of the company, to use the business to fund that family need through the compensation system. Doing so can potentially set up imbalances across the children’s compensation, as well as across the other employee compensation plans. What might be seen as “fair” in one circle (family) might end up not being at all “fair” in another (Business). Dealing with compensation issues solely based on the business sphere (where the compensation is driven out of, based on work performed) is appropriate, just as providing money to a needy child within the family (but outside the company) might also be appropriate.

It is also important to recognize that none of the sub-systems in the 3 circle model are static, and therefore, the model as a whole is also dynamic. Over time, families change and grow (and sometimes shrink through things like death and divorce), just as businesses and ownership can change. Each time one of the sub-systems changes in a given family business, the reality is that the whole system is affected. At times, it is not a major or obvious change, but at other times, the changes can be sudden and dramatic. The death of a business owner or leader can quickly call for change in the firm, with rapid impacts across the family circle. Sometimes, a change in ownership has large implications for the family (loss of control or dividends).

When businesses grow and morph, it is quite normal for the needs of the company to create change for the other circles. A fantastic growth story in the company may force the ownership group to consider opening up ownership to others in a quest for greater capitalization. Or a leader moving towards retirement may need to tap someone inside (or outside) the company who is a non-family member, if there is no one from the family available or capable of leading the business going forward. Making this decision needs to be made in the context of the values and interests of the family, just as much as the business. Failing to do so can create downstream (or immediate) issues which can derail the business, or the family, over time.

There is a clear process which creates the highest likelihood of a positive outcome for all three circles. It begins with thinking through the interests and values of each sub-system can assist in designing a plan which optimizes across the 3 circles. Next having clear goals for each of the circles is a way to help ensure the greatest likelihood of achieving the best outcomes for all. Finally, throughout the process, using a transparent and open communications process to engage the stakeholders across all 3 circles helps ensure that the interests of all three spheres are served and balanced as well as possible creates the best future for all affected.

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Many people don’t realize that in the Western world, even some of our largest publically-traded companies are essentially family-owned. The most common definition for family business generally is that it refers to firms which are primarily controlled by a family or related group of families. This would include such large global companies as Bechtel, Comcast and Wal-Mart, as well as the corner drycleaner.

In Canada, our statistics on family ownership are much the same as other western countries. These firms contribute 50% of private sector GDP, employ 7 million Canadians, and contribute a significant proportion of provincial and federal tax revenues. In other words, family business is a primary building block of our economic engines, and communities.

For this reason, the study of family business has accelerated in the past 50 years. In the 1970’s thought-leaders like John Davis and Renato Tagiuri at the Harvard School of Business began to build models of family business, to better understand the dynamics of families working together. The resulting “3 Circle Model” is widely used across the globe, as the basic building blocks of this conceptual framework holds for all families in business, regardless of context.

More recently, academic research from all over the world has added to our understanding of the issues family companies face – especially when they undergo transition from generation to generation (or not), in leadership, and in ownership. At the same time, many professional advisors (lawyers, accountants, tax and wealth advisors) to families in business have also deepened their understanding of the dynamics of family business, making them more effective in how they approach the multi-faceted issues their clients need to work through.

The good news in all of this is that there is little need to re-invent the wheel when working through the challenges and opportunities that come with this foundational form of business ownership.  The advantages, tensions, health and concerns which surround family enterprise are relatively well-understood, and there are ample examples of healthy families who work together in business over many generations. While it is not at all uncommon for families to get “stuck” from time to time with the issues that arise when working together, it is good to know that it is extremely rare to encounter challenges that have never been seen before. Solutions exist – and the task is more one of applying time-tested processes and solutions, than it is of pioneering new trails and working on one-off and unique concerns.

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Where this can work against the business is when the value of loyalty overpowers reasonable business decisions. We sometimes see staff (or family) working in the business, who are not well-equipped for their role, or who are not performing well. Though the person may be struggling, the business leadership can sometimes resist making a change (whether re-assignment, or replacement) because of a sense of loyalty to that person, who may have been with the firm for a long time.

It is always important to treat the family like a family, and the business like a business, and to try to not get the two confused. We do no one any favors when we do not deal with a performance problem due to misplaced loyalty.  Being loyal and helpful in some cases may mean dealing with a situation where the person will not succeed on their own.

In a similar way, seeking harmony can sometimes result in not dealing with issues that are better resolved. Conflicts between employees or family members are not always easy to resolve or pleasant, but if they are left unresolved, they generally do not get better or go away on their own. We always say “conflict that gets buried, gets ‘buried alive’.”  Yet, in seeking harmony, far too many family businesses fail to deal effectively with the issues that truly do need to get resolved in order for the company, and individuals, to move ahead.

As in all things, there is a balance to be struck here. There are some family businesses where loyalty is not valued enough, and harmony is secondary to the business. Each enterprise will have its own value system, which will shift over time, and harmony and loyalty can be strong values which propel a company to great success. Maintaining loyal employees and minimizing conflict are good goals, which can create a more sustainable firm that outperforms many others. Stating these as ‘Company Values” can help the team know that the company (and the family who owns it) are committed to these principles inside the business and outside of it too. This helps by creating a level of accountability within the firm to the stated values.

The key is to step back when values are challenged, to see what the right balance is, and which values may (at times) trump others, or when an intuitive commitment to one value can mislead the thinking of leadership to a path which does not truly meet the company or family values or intent.

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