Family Business Paradox

April 29, 2015

Families working in business together live in a world that is definitely not black and white. While all business owners make decisions that have far-reaching impact, families operating in business together must also consider the complexities of the family unit. Anyone involved in a family business understands that family and business overlap; a stone dropped in one pond will ripple into the other.

In an article entitled The Ten Hidden Arts of Successful Business Families (Family Business Magazine, Autumn 2009), John L. Ward cites what he believes are the keys to the success of long-lasting family businesses. Among the hidden arts is “skill at resolving paradoxes”, or the ability to balance the many dilemmas and contradictions encountered by families in business together.

Paradox is not a commonly used word. Paradox describes an inconsistency between two elements that appear to be mutually exclusive, but can be mutually supportive. For example, do we believe in tradition or change? These would at first appear to be complete opposites yet both represent great strategic alternatives. The skilled business person may use one or the other to their advantage, or find a balance between the two: “building on our tradition of change” or “building for the future while respecting the past”.

A business family faces numerous paradoxes that have implications far beyond their face value. Let’s look at a few. 

1. Family first or business first

This is the quintessential family business dilemma. Neither is wrong, but a family’s position between these two philosophies impacts several important decisions. A family-first approach may guarantee jobs for all family members regardless of their abilities or the needs of the business. A family-first philosophy may compensate a family member based on their personal needs rather than their value to the business. A family-first philosophy can maintain harmony in the family but may jeopardize the health of the business.

A business-first approach may promote a more qualified non-family employee over a family member. A business-first philosophy may exclude some family members from working in the family business if they lack the necessary skills or don’t fill a need. A business-first philosophy helps to maintain a healthy business but may cause conflict in the family.

Somewhere along this line there is a balance that meets the needs of the family while also sustaining the business. While the family unit is the number one priority in most family enterprises, it is important to note that it is the business that enables family members to live their chosen lifestyles, fulfil their need for achievement, and support their communities. The business must stay healthy.

2. Fair versus equal

Most parents struggle with the concept of whether equal is fair, or whether fair is something other than equal. While the idea of fairness is somewhat philosophical, the concept of equal implies some form of measurement - often in terms of money. This paradox further implies that one can actually measure fairness.

If a father loves his children equally should he not treat them exactly the same in all matters? Does that mean everyone who works in the business is paid the same or that all children receive equal shares in the family business? If fair means equal then all family members working in the family business would be paid equally regardless of their skills and market value. If fair means equal then each child would inherit the same amount of wealth or shares of the business in their parents’ wills.

If fair is not necessarily equal then children who are given or left shares of the family business could end up receiving a much higher proportion of the family wealth than their siblings. If fair is not equal some children would receive a higher payout based on their employment value rather than on their gender or birth order.

In the paradox of fair versus equal the goals of the business can sometimes challenge the values of the family. In many cases the majority of family wealth is embedded in the business. Carving up the family business equally may not actually be fair. It can result in an accidental partnership of siblings who may not have otherwise chosen to be business partners. If, however, the family’s values equate fairness to equal measure, then to be truly fair business owners will need to find other ways to equalize the distribution of family wealth among their children.

3. Merit versus entitlement

Ask most parents whether their children must earn the right to advance in the business and the answer will be an emphatic “yes”. Observe the reality in many family businesses and you may find this is not necessarily how things work. The measurement of merit may be influenced by the irresistible power of entitlement. While a small measure of entitlement can be healthy in a family business, too much can be very damaging.

Next generation family business leaders are not necessarily chosen because of their leadership skills, but rather because of their DNA. Family employees are often not subject to the same performance evaluations as other employees. This can be frustrating to non-family employees who find their careers limited as family members move up the ladder. 

Business families can go to extreme lengths at either end of this paradox. In some family businesses there is an obvious hereditary right to lead the business, earn high income and enjoy special perks. At the other end, family employees can be subjected to far more rigorous performance standards than other employees. It can be very oppressive to be a family member employed in a family business that stands at the latter side of this paradox.

Entitlement in its extreme can be destructive in a business family. Unearned power or wealth can be the root cause of the demise of a successful business family. Yet, why is it wrong for family members to benefit in some way from a family’s success in business? How do we maintain a culture of achievement while we simultaneously enjoy the fruits of our efforts? The family that can balance this paradox is truly skilled.

Family first versus business first, fair versus equal, merit versus entitlement; these are just a few of the many paradoxes business families must manage. A successful business family understands that communication is the key to finding balance between these paradoxes. Families should spend time together discussing and documenting their values. These agreed-upon values can then be reflected in their philosophy around how the family will be involved in the business. In turn, this philosophy can be used to develop clear policies or guidelines on how family members participate as employees and as owners of the business. As they develop these policies and guidelines together, family members will begin to understand and manage paradoxes in a way that will successfully shape their family and their business for generations to come.

Brent VanParys CPA, CA, FEA
Brent is a Partner of BDO Canada LLP and a Regional Practice Leader with The BDO SuccessCare Program™

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