Managing conflicts in the family business

This column is the fourth in a recent series that I have written about family business. The first was about the research finding that less than five percent of family businesses last beyond the third generation, frequently labeled as the Cousin Consortium. One of the many studies on American family firms revealed that nearly 70 percent of family-owned businesses fail during the second generation. Nearly 86 percent close shop by the third generation and 90 percent are gone by the fourth generation.

I read another study about Chinese family businesses which arrived at nearly the same conclusion.

In my second and third column, I wrote about suggested family governance structures that can help address these problems of family business management. These suggestions are setting up a Family Council and writing a Family Constitution.

In the year 2005, I wrote a book, “Setting Frameworks: Family Business and Strategic Management.” It was reprinted in 2006, 2008 and 2009. One of the chapters in the book was “Managing Conflicts.” There are three ways that families usually react to conflicts.

• Avoidance. The family may choose to ignore the conflict either because they are ignorant of the extent or they may withdraw and deny its existence in the hope that the contentious issues will disappear.

• Referral. When the conflict is acknowledged to exist but the contending parties are not prepared to meet it head on, then many families resort to referral. This is a popular practice among Chinese families who sometimes refer to family associations, if they exist. In most other families, the family may refer to another relative who is not involved in the business, a close family friend a councilor or consultant or, as a last resort, a lawyer.

• Confrontation. The very word frightens many people. However, when the stakes are high and the conflict is serious, the most appropriate strategy is confrontation, which means face-to-face dialogue between the contending parties. There should be an attempt to identify the basic problem, its causes and alternative solutions. It would be advisable to have a facilitator that is respected and acceptable to all the contending parties.

Both Referral and Confrontation are acceptable solutions. Avoidance is not a healthy alternative for family businesses facing conflicts. This acceptance is critical because families mistakenly assume that conflicts can and should be avoided. It is best that they realize that Avoidance is useless because the conflict will merely escalate and resurface with greater force sooner or later.

Managing conflicts is relevant not only in family businesses but even in ordinary families. In my book, I enumerated the 15 most common situations or issues which cause conflict in a family business:

1. When family members disagree whether the profits of the business should be reinvested in the family business or distributed to the owners.

2. When the siblings have different directions or philosophies for the business. For example, one is a risk-taker and the other is overly cautious.

3. When a leader insists on pursuing his business dream in spite of adverse effects on the family business.

4. When a leader or senior is motivated by a sense of familial obligation and allows family members to work in the business even if they are not qualified and ignores family members who insist that only qualified persons should be employed.

5. When a CEO or senior executive decides to favor his immediate family to appease a spouse, this will incur the ire of other family members.

6. When there are not enough high level positions for all the family members.

7. When non-active family members believe that the decision made by active members are motivated by self-interest rather than family interest.

8. Family relationships are affected when the ownership structure changes and family members who acquire a bigger share of ownership begin to demand greater control in the management of the family business.

9. Many family businesses are also affected when marriages fail but the spouses insist on maintaining an interest in the business.

10. Personal disputes are left unresolved, which produce emotional strain that leads to conflict over minor business issues.

11. When the owners of the family business begin to divide their assets among their heirs, which causes envy and resentment among the sibling owners.

12. When there is no commonly accepted leader and one sibling or cousin takes steps to try and become the leader.

13. When the current leader tries to retain his role when it is clearly time for him to go.

14. When topics of potential disputes between siblings such as job titles, compensation, perks and other benefits are discussed and there is no conflict management mechanism in place.

15. When the number of family members increases to such an extent that it becomes unwieldy, especially if spouses and in-laws are included, thereby making consensus very difficult to reach.

Our Filipino culture is extremely family-oriented, which leads to the conclusion that family business will remain the dominant form of business in the Philippines. It is therefore essential that in order to maintain stability and long-term growth, that all family business should apply the family governance structures and conflict management strategies which I have outlined in these four columns.