Weaknesses of the family business and possible courses of treatment

The family business can hold great strengths, but the model can become a weakness in the pursuit of superior business performance if held in the hands of those unaware of their own actions. Self-awareness is crucial in business management from founder entrepreneurs to members of more established businesses. Law cannot give you that, but legal advisers can assist with the solutions identified by the possession of self-knowledge.

Family businesses may stagnate. This often happens when, against the odds, the Nietschean entrepreneur has successfully established the business and it has been running for a number of years. A cause may be the entrepreneur’s unwillingness to delegate. Self-awareness will reveal this tendency to the entrepreneur. All major decisions are their decision. Dynamic and entrepreneurial managers who could help the entrepreneur with their – probably heavy – workload are not actively headhunted or recruited. If the business does have such managers, they probably leave after short periods of service to work where their talents are appreciated.

An entrepreneur or family business that notices managers not staying more than a year or two, and bravely asking hard questions about themselves, can consciously recharge the business’ non-family management. The family’s thinking about career structure, responsibilities and incentives can be documented in company policy, employment contracts and forms of awards for recognition of good work. Some businesses may even consider having employee representation on the board as a means of monitoring workforce attitudes and morale whilst benefiting from their ideas and professionalism to develop the business. Remember, the boardroom is a place of creative tension resulting in wise decision making, not a place for comfort.

Even if talent is retained in management, the risk of groupthink is real. Management may try to minimise conflict to attain consensus decisions without arriving at good solutions through rigorous assessment of the options. As well as risking a loss of vigour, groupthink also risks a loss of creativity in decision making to the long-term detriment of business performance. This becomes entrenched if the enduring consensus results in the management overrating their own decision making and underestimating the rationale of outsiders like competitors, intermediaries or customers who think differently. This illusion of control gets cracked when business performance suffers. The risk can be reduced by the use of independent directors so at least at the strategic level the decision making is rigorously considered. Legal advisers can assist with the appointment of those directors and can even serve as independent directors themselves. They can offer board training to directors to ensure an effective boardroom operates within the business.

Family businesses may also not grow as fast as they could if they never acquire other businesses. There is a lot of sense in organic growth most of the time. However, some opportunities need to be taken when they occur. This might be for scale, new market entry or related diversification. Proper legal due diligence of that business alongside financial and business due diligence as well as prudent sale and purchase documentation ensure that planning prevents poor performance subsequently.

The above issues are examples of turning resource disadvantages to advantages. Family businesses often have strong identities and become attached to their products and/or services. There is a risk that they become staid. All is not lost as strong family business identity can be used through corporate social responsibility initiatives to rejuvenate the products and/or services. Often corporate social responsibility initiatives from family businesses are perceived as being more authentic in local communities. Such initiatives might relate to material in the product or their recycling. They could be to ensure the value chain of the family business fosters responsible suppliers, encourages entrepreneurs or supports family businesses. Legal advisers can assist with drafting the policies for such initiatives. They can also ensure suitable terms are included in framework agreements and supply contracts within the value chain.

The family business model has strengths and weaknesses. Self-awareness is key for diagnosing if the weaknesses of the model are apparent in your family business. Delegation, talent retention, carefully considering the membership of the board, growth through strategic acquisition, corporate social responsibility are all methods to counter those weaknesses. Legal advisers can assist with each of these initiatives. My colleagues and I at Nexa are available for consultation to discuss such issues relating to your family business.

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