Family businesses and family conflict

Families are not always harmonious, so it is unreasonable to expect family businesses to always be harmonious.  A dispute between family members in a large family business is wonderful material for the media with its human dimension and with the wider significance of the issue at the heart of the dispute.  Similarly, it is the staple of the script writer.

There are many forms of family that are in business together: spouses, siblings, in laws, cousins, extended family and combinations thereof.  Each contains strengths for business growth and survival, and potential points of weakness that may cause business decline and break up.  With time, the form of family in a family business will alter and thus the strengths and potential weaknesses of the family component of the business will change.

Spouses can offer loyalty, trust, solidarity, care and harmonized interests which is a strong foundation for a business team.  Yet the family business realm may produce conflicting demands which cause tension.  Furthermore, tension in one area may permeate the other area.  This may erode the firm foundations of the spousal relationship if not properly managed. 

Unlike spouses, siblings cannot divorce.  Unlike spouses, adult siblings may not see each other as the focus of their own families despite the blood connection.  Yet their common family heritage along with trust, respect and companionship also provide a solid foundation for a family business.  Whilst spousal teams are typical first generation family businesses, sibling partnerships are typical second generation family businesses, as the parents hand the business down to them.  Consequently, businesses have a degree of division of labour and administrative process that should be able to contain any sibling differences.  Nevertheless, sibling rivalry and tension can spill over, especially if siblings feel forced into something or constrained by their role.  As they may live separately as adults, they have less harmonized private interests than spouses.  Indeed, they may have a nuclear family – extended family latent division of interest that may tax them personally.

Extended family businesses, often cousins, are typical of third generation or later family businesses.  At this point family branches may be sending selected members into the business under a family protocol that defines suitable candidates.  Branches sending members into the business balances family interests and retains the business as a family business.  The strength of family relationships is diluted by their extended nature (at least in an Anglo-Saxon context) so it is important that corporate governance is explicitly addressed, and processes implemented to ensure family members perceive that the business is run fairly.  Despite this, there is not the tension of more closely related and siblings who crucially are not self-selected (a phenomenon with step siblings too).  So, with cousins there may be less background relationship tension that could be the fuel for a fire if a disagreement does arise.

Each of these sets of family relationships in business have their unique strengths and weaknesses.  These sets of family relationships in a family business setting interact with ownership and management with particular styles of communication, sense of justice, principles for decision making, behaviour tendencies and ideas of membership.

Families try to be inclusive.  Businesses’ management communication is more formal and selective.  Ownership is based on contractual rights and the rights of the individual, again resulting in more formal communication.  Families are based on equality with an element of respect for elders.  Business management appreciates and rewards performance with remuneration and managerial power.  Ownership provides contractual equality for shareholders, but it is based on particular rules and the size of their equity holdings.  Therefore, business and family links three settings (family, ownership and business management) with different norms resulting in many potential misunderstandings which will be shaped by the particular business and family setting of the family business. Where other people have a clearer division between work, family and savings/ investment, the member of a family business has more blurred lines.

The misunderstandings may fuel a sense of grievance and injustice which is the foundation for conflict.  The context of communication is challenging: is someone speaking in their role as family member, business owner or as a manager?  Equally the sender of the communication – whether verbal or written – has to assess how the recipient will take it: as a family member, business owner or member of business management.  With participants each wearing three hats, clarification of context before discussion becomes important to avoid ambiguity and misunderstanding. 

Disputes bleed from one sphere into another.  A dispute in the business sphere may be seen to be reasonable to have, but the porous borders of the business with the family means from a family viewpoint that having the disagreement appears excessive or overbearing.  A dispute in the family might be resolved by a measure in the business sphere which has no form of origin in the business sphere and could raise concerns and protests from uninformed, more distant family members (or professional management).

To complicate matters, a family member may hold several business roles.  They may be a shareholder and a manager.  They may even hold several management portfolios.  Sometimes it may be unclear which platform they are speaking from.  The blurring of family and business heightens informal power in the business of some actors based on their family position rather than from their formal office in the business itself.  The flow of insider information – or not – can be a source of informal family member power to influence decisions.  Conflicts sparked in these contexts can be difficult to put out as necessary regular interaction to run the business fuels the flames of conflict.

Conflicts may cause family members to leave the family business.  Yet many such businesses are private concerns with an illiquid share market.  This makes both the pricing and the timing of such withdrawals challenging.  This may depress the sale value of the shareholding being sold.

The conflicts in each of the spheres are essentially relationship based or task based.  Relationship ones are more personality driven.  It results in more time on office politics than the business task in hand.  It detracts from focusing on what is relevant to the business.  The more senior the personnel who are party to this dispute, the more likely it will have wider impact on the business. A task conflict is a dispute focused on differing ideas about a task to be performed.  A task conflict, if localised as just that can be beneficial to a business.  It contributes to the important need for the strategy and operations of the family business to be seen from different angles so that strategy and operations evolve into more robust forms for the renewal, profitability and survival of the family business.

That said, task disputes need to be managed well to avoid their escalation and transformation into relationship disputes.  Family members need to be aware that discussions should focus on the task and people should perceive such discussions in that light.  Furthermore, a family business with excessive task disputes may have management and/or owners that profoundly disagree on the strategy or the state of the operations of the business.  Therefore, there needs to be task disputes, but not too many of them. 

In short, family businesses need a moderate level of task disputes within management and between management and owners.  This is for creative tension, accountability and transparency.  Beyond that, disputes are generally destructive affairs.  My colleagues and I at Nexa have experience of many types and settings of disputes as business professionals and dispute resolution professionals.  We are keen to focus on the practical and the pragmatic to resolve matters and de-escalate situations.  If you have a tension, misunderstanding or conflict in your family business that concerns you, Nexa may be able to assist in its resolution.

For more information please contact Henry Clarke using henry.clarke@nexa.law