To complete our exploration of the top seven complexities facing business families, this article examines some of the issues that stem from the conflicting objectives of family and business.
Business owners in most small to medium-sized enterprises have to wear many hats. In the business circle, they typically play the role of majority shareholder, chair of the board, partner, CEO, manager, salesperson and mentor. In the family or personal circle, they are likely cast in the simultaneous roles of offspring, sibling, parent, spouse, and colleague. Where these two worlds overlap, the business owner can face conflicting responsibilities and have some difficult decisions to make.
Making decisions that impact both the family and the business is never easy. An action that is tailored to meet personal or family expectations can negatively impact the business and vice versa. The most common example is when under-qualified family members end up in key positions in the company, either from a sense of responsibility on the part of the owner, or a sense of entitlement on the part of the relative.
Even entrepreneurs themselves can struggle to perform in roles that are outside their core strengths. Such a situation is detrimental not only to the individual's personal well-being, but also to the success of the business. Consider the following strategies to addressing this complexity.
Find the right role
Bringing family members into the business because they 'ought to' or 'need to' can be damaging. We recommend ensuring that a family member is hired because they 'want to', i.e. he/she sees an alignment between his/her vision and that of the company, and there is a fit between his/her abilities and the requirements for the role.
We all have different natural instincts, or what we call 'core strengths' — i.e. what you love to do and do extremely well. Incredibly, only 12% of the work force has the opportunity to utilize its core strengths. The rest do not have a strong passion for the role they perform and often feign interest or exhibit cynicism. They watch the clock and can become jaded and bored. When disengaged, most people suffer in silence but, for some, the dissatisfaction escalates to absenteeism, low morale, or hostility at home and on the job. Some leave to find greener pastures or take early retirement. Others might be fired for their lack of commitment to the job. For many, the boredom eventually manifests itself as stress. Although the human body tries to adapt to the strains, it cannot keep it up indefinitely. If the situation is not addressed, the result is burnout.
Hans Selye, a doctor who devoted much of his life to researching the issue of stress, noted that people have a natural urge and need to work for their own benefit. In other words, our physical and mental health depends on our inner satisfaction.
Therefore, when bringing family members into the business or choosing next generation leaders, it is important to ensure that the role they will play will afford them the opportunity to enjoy work and achieve personal and professional success.
Rights and responsibilities
It is widely acknowledged that, to have rights to anything in life, we must also accept the responsibilities that accompany those rights. We all know that there are conditions or duties to uphold in pursuit of our rights to 'life, liberty and happiness.
This basic philosophy permeates all areas of our lives. For example, in both business dealings and personal relationships, we have an expectation of respect — however, with the right to receive respect comes the obligation to show it to others. If we ignore our responsibilities, we must be prepared to accept the consequences.
I believe that every right implies a responsibility; every opportunity, an obligation; every possession, a duty.
- John D. Rockefeller, Jr.
As the founder of Penmaenship Tool and Die, Thom Penmaen has the privilege — the freedom and the right — to take the business in whatever direction he chooses. However, as the employer of 150 people who depend on him for their lifestyle, Thom has bestowed upon himself a level of responsibility to his employees, as well as to the families and communities they support.
Balancing rights and responsibilities is not always easy, especially when it comes to planning for the transition of your business. Study after study has shown that entrepreneurs fail to plan far enough ahead to ensure continuity. At BDO, we have found that fear and uncertainty about who can lead a business into the future is often behind owners' reluctance to plan.
Defining the ground rules for participation will ensure a balance between the rights and the responsibilities that can cause considerable complexity in family businesses. The best way to achieve this balance is through the establishment of policies that address potential conflict situations before they arise.
These policies or ground rules should be developed from the overreaching family and business philosophies and should support the family's objectives associated with:
- Maintaining family unity
- Building family legacies
- Participation in the ownership and management of the business
- Reinvesting in the business versus wealth distribution
- Authority, responsibility and accountability
Once developed, these ground rules should be documented and shared through such mediums as a shareholder agreement, family charter, family participation plan, and an Authority, Responsibility and Accountability (ARA) document.
ARAs
For each decision-making role, we recommend creating a document that maps out the terms of:
- Authority: The legitimate power given to a person to exercise discipline and use specific resources to reach an objective
- Responsibility: The ownership of duties or assignments that are associated with a function or position can be delegated, but not shared, and must be linked to accountability
- Accountability: Being answerable for the performance of duties within the assigned authority
Essentially, ARAs are the ground rules, or rights and responsibilities, for anyone who plays a key role and is invaluable in balancing the differing objectives of family and business, thus addressing the seventh complexity
If you would like assistance to formalize the roles, rights and responsibilities as you plan for a business transition during any stage of the business lifecycle, please contact your personal BDO advisor or call our BDO Business Transition Services team at 1 800 598 6400.
We can help you find the right tools for identifying core strengths so you can put together the most effective team that is qualified to take your business into the next generation.