The most difficult job: The CEO of a family business

Have you heard the one about the only non-dysfunctional family being a family of one? The joke is more poignant when discussing family businesses. But it isn’t funny.

I recently started working with the CEO of a small family business. His wife, six children and granddaughter worked in the business.

On the outside, it looked like a successful business enterprise. On the inside, there was chaos, dissension, fear and mutual unhappiness. The CEO didn’t know what to do about the family’s business problems. But he knew the conflict posed a risk to the continued success of the business and also threatened his family.

I am sure anyone who has been around family businesses can share their own war stories, from family members with management titles based on nepotism rather than merit to family members who no longer speak to each other after the breakup of the family business.

If we start with the assumption that all family businesses are dysfunctional, how might the CEO of a family business mitigate the dysfunctionality?

Open, honest communication

Bob and his two brothers run a chain of dry cleaning stores. The company was started by Bob’s father. The family recognized early on that there was a direct relationship between effective communication and how well the business functioned and the brothers got along.

Based on information they received from the Family Business Institute, Bob and his brothers put in place several communication tools to let them talk openly about business and life on a regular basis. The tools included an independent outside board of advisors to help with the overall governance of the firm. The board met quarterly.

They created a family council to discuss family projects and resolve business and family issues. That group met quarterly, too. It made sure that family fairness was carefully considered in all business decisions. Members of the family council suggested that the CEO be responsible for establishing and maintaining family harmony in addition to running a successful business.

They scheduled monthly family meetings to inform all family members on the status of the business and the status of the family. Family members, including those who were not active in the business, were encouraged to participate fully.

Distinction between owners and managers

Mark is the CEO of a mid-sized machine shop. He and his two brothers and sister who are active in the business each own 25 percent of the stock. The parents sold it to them as part of their business succession plan.

Mark’s parents also made sure that the family understood the distinction between owners and managers. A family member may be an owner, but not necessarily a manager. Mark’s parents encouraged their children to think of owners and managers as if the firm were a publicly traded company. People become owners of publicly traded firms when they buy stock.

Owners/shareholders elect a board of directors. The board hires the CEO. The CEO manages the business. Shareholders earn dividends and a potential return on their investment when they sell their stock.

Mark and his parents made sure the family member managers fit the descriptions of their positions. Compensation was determined by the position and the family member’s performance in it. Looking at the business as a non-family business made the idea of unequal pay “fair” to equal owners.

Conflict resolution

According to the Family Firm Institute, 20 percent of family firms report family member conflict once a week. Another 20 percent report conflict once a month, and 42 percent report conflict once a quarter.

That’s a lot of conflict. The Family Business Institute defines conflict as a higher level of disagreement: “The belief of two or more people that their positions are mutually exclusive.”

At this point, the best option might be to work with a family business consultant certified by organizations such as the Family Firm Institute (FFI.org) or the Family Business Institute (FamilyBusinessInstitute.com). The consultant meets with the entire family and explains how the process works because every family member’s buy-in is critical.

The consultant then conducts confidential interviews with key family members, their spouses, key managers, and key expert advisers to determine the real underlying issue and why the family is stuck. Next, the consultant helps create a plan of action and helps the family implement it.

Even highly dysfunctional families can accept most decisions if they believe the process is fair. Because most people are committed to their families, they want to find a way to make the family business work. And with a consultant’s help, many do.
Dennis Ellmaurer is a management consultant working primarily as a TEC chairman, leading three CEO mastermind groups in southeastern Wisconsin. He is also a speaker and executive coach. He can be reached at (414) 271-5780 or dennis@globenational.com.

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