Conflict in Family Business
Transcript of Conflict in Family Business
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Identifying and addressing
the causes of conflict
in family business
Nigel Finch
May 2005
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ABSTRACT
This paper describes the conflict that is typical in a family business and highlights
some of the major factors that make family business conflict unique from other types
of interpersonal conflict in the workplace.
Conflict is inevitable in any business, and often its not a bad thing. Few people in
business enjoy conflict but without it a company may not have the impetus to change
and develop.
However many suggest that the failure to adequately control conflict in family
business may contribute to the high mortality rate of family-owned firms.
The reason for this high level of failure is almost always due to a management failure
to come to grips with the inevitable discord that arises when family members work
closely together.
The difficulty for family business arises when family rules do not apply after they are
transferred to the business system. This paper makes recommendations that assist
practitioners in working towards an amenable resolution.
The focus of this paper is to identity common causes of conflict and it explores ways
to manage or resolve this conflict in family business, with the view to preserving the
existing business, ensuring its continuity in the short term and assuring succession for
the long term. It also identifies some of the factors that make family business conflict
difficult to resolve and highlight pitfalls for third parties or other non-family members
working in this area.
Keywords: conflict, family business, non-family managers, non-executive directors
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INTRODUCTION
This paper is intended to aid practitioners and third party or non-family members,
such as non-executive directors, identify some of the common root causes of conflict
in family business.
This paper comprises three sections. Section one defines conflict and categorizes
family business within an Australian context. It defines conflict in the family
business, introduces some common types of conflict in family business, and identifies
the consequences of conflict to the family business. While there can be a positive role
for conflict in the workplace, when family is included in the workplace mix, this adds
complexity to traditional workplace conflict and may increase the chance that the
conflict will be destructive.
Section two identifies some of the unique causes of conflict in family business and
defines the following conflict drivers; rules, roles, dual relationships, differing vision,
succession, jealousy, poor communication, poor conflict management skills,
introducing fulltime roles, equality in rewards and spillover theory.
Section three offers some techniques for practitioners to address the conflict
including; solving issues promptly, effective communication, separating family and
business, succession planning, formalizing the family business, sibling succession
teams, defined roles, third party involvement, rewards systems and retirement
planning. This section also addresses some of the common concerns faced by
founding family members when considering retirement and succession.
Finally this paper concludes and offers a summary of key recommendations for
practitioners to consider.
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SECTION ONE
In this section we define conflict and categorize family business within an Australian
context. We define conflict in the family business, and introduces some common
types of conflict found in family business. We also identify the predominant
consequence of destructive conflict in family business as being business failure. We
acknowledge that there can be a positive role for conflict in business, but when family
members are included in the business workforce mix, this dynamic adds complexity to
traditional workplace conflict, which may increase the chance of business failure.
What is conflict?
At the root of John Burtons universal model of conflict resolution is the premise that
unmet needs results in a greater likelihood of conflict.
Tillett (2001, pp.8) says conflicts relate to deep human needs and values. Sometimes
they are expressed through problems or disputes, which may be superficial
manifestations of a conflict, and unless the conflict is addressed, the dispute or
problem will continue, or new disputes or problems will arise.
Tillett (2001, pp. 24) explains, it is essential to recognise that almost all conflicts have
both visible, manifest aspects and invisible, unmanifest aspects.
undisclosed
unconscious
manifest
unmanifest
visible
invisible
focal conflict
Figure 1. Manifest and unmanifest conflict
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Tillett (2001, pp. 24) differentiates the two interdependent aspects by describing them
as:
The visible conflict is usually the one described by the participants. It will
probably involve a focus or focal conflict, and there will often be a further
level of manifest conflict underlying the focus. The unmanifest conflict
includes both disclosed and undisclosed factors (which are nevertheless known
to either or both the participants) and factors that are unconscious. The
participants may or may not be prepared to discuss the underlying or
unmanifest conflict, and, indeed, may not be consciously aware of some of the
manifest aspects.
What is a family business?
The family business is the oldest form of multi-party business enterprise. In fact the
world's oldest continuously operated family business, Japanese temple-builder Kongo
Gumi, began in 578 (Hutcheson, 2002, pp.119).
Imanol Belausteguigoitia1 outlines the competitive advantages of family businesses
over non-family business as being (i) greater loyalty, (ii) stronger commitment, (iii)
easier understanding, (iv) respect for authority, (v) low staff turnover, (vi) longer-term
vision and (vii) plenty of time to train employees and groom successors (Fastag,
2002, pp.1).
Rosenblatt, de Mik, Anderson, and Johnson (1985, pp.4) define a family business as:
any business in which majority ownership or control lies within a single
family and in which two or more family members are or at some time were
directly involved in the business.
With this definition, family empires such as those founded by the Rockefellers, or
Australias Murdoch or Packer families sit side by side amongst the most modest of
rural farms and mum-and-dad corner stores.
1Professor Imanol Belausteguigoitia is the director of research at the Centre for the Development of
Family Businesses in Mexico City's Itam University.
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Hutcheson (2002, pp.119) reminds us that Ford, Campbell's Soup, Cargill, Siemens
and Mars are all essentially family businesses, and all are multi-billion dollar
enterprises, among the largest on the planet.
Clearly, family businesses can, in at least some instances, be as big and sophisticated
as any non-family firm. Not all are, but neither are all of them crudely managed and
poorly led. Family businesses are as diverse as business itself. They come in all kinds
and generally defy useful categorisation.
Family Business in Australia
There is little conclusive data on the size or scale of family business in Australia. Inthe United States however, family businesses dominate the economy with research
indicating more than 75% of all enterprises in the United States are family-owned and
controlled, and they contribute half the gross domestic product. Moreover, the United
States is actually less dominated by family businesses than many other countries.
Especially in more traditional cultures and less-developed countries, family
businesses may account for as much as 95% of a national economy (Hutcheson, 2002,
pp.120).
In Australia, the Bureau of Statistics (ABS) estimate that there were 1,233,200 private
sectorsmall businesses2during 200001 which represented 97% of all private sector
businesses. These small businesses employed almost 3.6 million people, 49% of all
private sector employment (Trewin, 2002, pp.10).
While these ABS statistics on small business do not relate directly tofamily business they
serve as useful guide3 to give us an indication of the size and scale of family business in
Australia.
2 The Australian Bureau of Statistics defines a small business as a business employing less than 20
people. Categories of small businesses include (a) non-employing businesses sole proprietorshipsand partnerships without employees, (b) micro businesses businesses employing less than 5 people,
including non-employing businesses, (c) other small businesses businesses employing 5 or morepeople, but less than 20 people.
3
The Australian Bureau of Statistics note that small businesses tend to have the following managementor organizational characteristics (i)independent ownership and operations, (ii)close control byowners/managers who also contribute most, if not all the operating capital, and (iii) principal decision-
making by the owners/managers. These same characteristics are often found in family business.
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Conflict in family business
Despite the absence of quantitative data on family business in Australia, they do play
a vital role and are unique institutions in the socioeconomic environment. They also
have a complex set of problems not completely addressed by classical managementtheory (Davis and Stern 1980). One such problem is the effect of conflict in the
family.
The type of conflict in family business
A critical problem faced by family business is the tension that exists between their
personal lives and career pursuits of the family members. This tension may be viewed
as a form of interrole conflict4 in which the role pressures from the work and home
domain are incompatible. Essentially, involvement in one role becomes more difficult
because of involvement in the other role.
The consequences of conflict to the family business
The consequences of conflict in family business can be extreme, resulting in
behaviors destructive to both the firm and the family, and conflict within the familyfrustrates adequate planning and rational decision making (Levinson, 1971, p. 96).
Beckhard and Dyer (1983) suggest that the failure to adequately control conflict may
contribute to the high mortality rate of family-owned firms. Family businesses are, in
fact, rather fragile. Roughly two-thirds of family-owned and family-controlled
businesses do not survive the founders' generation (Beckhard and Dyer 1983; Dyer
1986), with only 10 to 15 percent surviving to a third generation (Applegate 1994).
The role of conflict in the workplace
The incidence of conflict in the workplace is high and dealing with it is time
consuming. Managers have been found to devote more than 20 percent of their time to
managing conflict, which they rate as equal in importance to their other managerial
activities (Thomas and Schmidt 1976).
4Interrole conflict occurs when an individual is assigned simultaneous roles with conflicting
expectations.
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Conflict is inevitable in any business, and often its not a bad thing. Few people in
business enjoy conflict but without it, a company may not have the impetus to change
and develop.
Conflict can be beneficial when it helps to expose all possible solutions to a problem
and forces business leaders to think through their options in an effort to deal with any
objections and reservations (Hutcheson 2002). Conflict can act as a valuable sounding
board for ideas and help keep the overall vision of the company alive (Davies 1998, p.
113).
When there is family in the workplace
But conflict within a family is a different matter. Conflict that energises a business
may destroy the family that created it. Put business and family together and the
potential for trouble is clear.
In the next section we identify some of the causes of conflict, which are often unique
to the family business environment.
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SECTION TWO
In this section we identify some of the unique causes of conflict in family business as
well as other contributing factors that contribute to conflict in family business. These
causes include; rules, roles, dual relationships, differing vision, succession, jealousy,
poor communication, poor conflict management skills, introducing a fulltime roles,
equality in rewards and spillover theory.
Unique causes of conflict in family business
The unique relationship
The key difference between family business and non-family business is the unique
nature of the relationship between family members and their co-workers, employees
or employers. This unique relationship poses three complex factors that can be the
cause of conflict: rules, roles and dual relationships.
Rules
Rules are an important concept in family and Rosenblatt et al. (1985) have stated thatverbalized or assumed rules are something all families have. The difficulty arises
when family rules do not apply after they are transferred to the business system.
For example, at home, a parent may be nurturing, solicitous, and advice-giving to a
child. Although these may not be the best rules, they are the accepted rules in the
family context. In the business, these parenting style rules may be embarrassing to the
offspring and disrupt a productive working relationship between parent and child.
Roles
Cole (2000, pp. 352) says that a common assumption exists that family business
relationships pose many problems for family business members. Some believe that the
potential for problems arises because family businesses encompass business and
family, two competing systems (Lansberg, 1983; Rosenblatt et al.,1985). The business
context encourages productivity and profitability, whereas the family context
encourages nurturing and acceptance.
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For example, a husband and wife who are co-owners of a company may not be able to
make business decisions without marital problems turning the discussion into an
argument. They may confuse their roles of spouse and business partner.
Dual Relationships
Cole (2000, pp. 352) says family business members share a bond dealing with each
other in both a work and family context and this creates a dual relationship in which
two people are managing two relationships simultaneously.
For example, when a mother works with her son, she is a mother/boss working withher son/employee.
Other contributing factors
The underlying problem with conflict in family business stems from confusion or the
inability to manage the complex rules, roles and dual relationships that need to be
maintained between family and business.
Yet the focal conflicts in a family business may revolve around a different set of
issues, such as money, personalities or trust. The focal conflicts in a family business
will be as diverse and varied as each enterprise is unique. These focal conflicts will
range from the trivial to the disastrous.
We will look at only a few of the focal conflicts in family business; differing vision,
succession, jealousy amongst family, poor communication, poor conflict management
skills, introducing a full-time role for a family member, equality in rewards, and
spillover theory.
Differing vision
As Beckhard and Dyer (1983, p. 59) note, family members often differ from the
founder and conflict frequently results. For example, while founders usually want to
continue family ownership, this may not be true of their immediate family or later-
generation family members.
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Succession
Professor Randel Carlock5 explains that one of the biggest obstacles for the family
business founder is succession. He says:
Entrepreneurs are very strong people. They tend to have a high need for
control and low need for social support - not the best kind of parent. They are
typically not very good at training others to be entrepreneurial and their
children often feel unworthy and powerless in comparison.
A parent who refuses to retire may unconsciously feel that the children are notcapable of running the business. This creates tension between the child and parent
over the leadership position, and the child may leave the business in frustration.
Jealousy amongst family
Deciding who will follow the CEO may be the single most significant act of any
reigning family business leader. If this decision is not handled sensitively it may result
in conflict and hostility amongst siblings who are jealous of the final decision. Left
unresolved, jealousy has the potential to divide the family and destroy the business.
Poor communication
The founders of family business tend to control and manage dissent, permitting very
little input from others in the decision making process (Dyer 1986). People who start
companies from scratch and build them up into profitable businesses are usually hard-
driving workaholics accustomed to doing things their way and intolerant of dissent
(Ellin 2001).
This is a symptom of poor communication and a cause of tension that leads to
conflict. For example being equal partners in family or marriage and unequal partners
in the family business leads to conflict.
5 Professor Randel Carlock is Berghmans Lhoist professor in entrepreneurial leadership at Insead and
co-author with John Ward of Strategic Planning for the Family Business: Parallel Planning to Unify theFamily and Business.
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Poor conflict management skills
Growing up in a family doesn't make one an expert on solving family problems
especially problems in ones own family (Hutcheson, 2002). Many conflicts arise infamily business because of the lack of skills in conflict management or resolution
amongst family members.
Introducing a fulltime role for a family member
When family businesses are founded, they are typically expressions of an
entrepreneur's desire for independence (Ward 1987) and family businesses are often
founded without the intent of being family businesses.
A unique source of conflict for first-generation family businesses is where a family
member assumes a full-time role alongside the founder. Often issues only begin to
arise when the second family member enters the firm on a permanent basis (Hoy and
Verser 1994).
There is a long history of case studies of family businesses that suggest that because
family dynamics are often acted out in organizations, the presence of added family
members in these organizations seems only to intensify the eruption of conflict
(Levinson 1971).
Equality in rewards
Many siblings are left equal shares in a family business despite different management
roles, and this is also a cause of conflict, especially where some children are not
interested in taking part, whether as managers or as shareholders.
The natural parental tendency to ensure that all the children have an equal share. But
this is at odds with the natural business tendency to reward those who are contributing
most.
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Spillover theory
Another contributing factor for conflict in family businesses is the phenomenon that
has been labeled Spillover theory.
Spillover theory (Evans and Bartolome 1984) is used to explain how work influences
family life. Positive spillover involves the spread of satisfaction and stimulation at
work to high levels of energy and satisfaction at home.
With negative spillover, the problems and conflicts at work drain and preoccupy the
individual, making it difficult to participate in family life. For women, the family role
intrudes into the work role more than the work role is allowed to intrude into thefamily role; for men, the opposite is true.
With so many unique causes and other contributing factors to conflict in a family
business, and with evidence to suggest that conflict is a major contributor to family
business failure, practitioners in this area would be served by effective techniques for
managing this conflict. In the next section, we offer several techniques designed to
abate destructive conflict and to address the root cause of the conflict.
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SECTION THREE
In this section we offers some practical techniques to address the family-business
conflict including; solving issues promptly, effective communication, separating
family and business, succession planning, formalizing the family business, sibling
succession teams, defined roles, third party involvement, rewards system, retirement
planning. In this section we also identify some of the common concerns faced by
founding family members when considering retirement and succession.
How to address the conflict
John Gatrell6 says: Families often maintain a myth of harmony, when everyone
knows there is a simmering discontent. It is often only when pressure is applied to the
business that the conflict comes into the open - and that is the worst possible time to
address it.
Solving issues promptly
The best time to address the potential causes of family business conflict is before theactual conflict manifests. Because when it does, there will be high levels of emotion
and external pressures will create additional tension. This may have a catastrophic
impact on the family business if it is not dealt with correctly.
Gascoigne (2003, pp. 16) suggests that the best thing is to tackle family issues before
a crisis, such as the sudden death of a senior family member, and not to shy away
from potentially scary discussions.
To achieve this it may be necessary to bring in a neutral third party, perhaps one with
experience of the psychological impact of family conflict. The reward for such effort
could be a healthy business - and a happy family.
6John Gatrell is the head of the Family Enterprise Centre at Bournemouth University Business School
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Effective communication
Ellin (2001) says communication-building is a necessary management tool and one
that is especially important in family business. She says;
It's a real competitive advantage to work through problems the minute they
arise, because it's much easier when times are good and you're building off
everyone's strengths. When family members are quarreling or making personal
decisions, that's a heyday for the competition.
But managing or resolving the conflict before it derails the company is difficult to
achieve especially if there are blocks in place that inhibit effective communication or
blur the lines between family and business.
Separating family and business
Separating family and business means the ability to draw boundaries if combining the
two becomes confusing. This means establishing very clear rules that are respected by
the family members about what are acceptable limits to the crossover between work
and home.
Cole (2000, pp. 356) cites a number of practical examples from respondents to her
survey on this subject. One respondent says:
I made an iron clad rule. We shall not discuss business out of work unless
we're at a business meeting or business luncheon or a dinner. That goes
without exception.
Not all families in her survey are as strict about the work and family separation. Some
allow business talk at home, but usually say "that's enough," when they want it to end.
While others have a mutual understanding that if the other doesn't care to talk about
work at home, they state it, and the other respects those wishes.
Other families in Coles survey invented more dramatic signals for separation. One
man puts a newspaper in front of his face when his wife overdoes business
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discussions at home. While another moved out of her parent's home to escape talking
about business after work.
One married couple, created a variety of markers as reminders of their husband and
wife relationship. One of these includes an unlisted home phone that is off limits to
their business contacts. Also, the wife insists on a simple courtesy at work when her
husband calls her on the work phone. He must say, "good-bye" at the end of the
conversation, something he never does to other employees. The wife claims this helps
remind him that he is talking to his wife and not just another business associate (Cole,
2000, pp. 357).
Succession planning
There is increasing urgency to resolve conflicts within families seeking to pass on
their business to the next generation, since many of them began after the second world
war and their founders are now retiring.
Sol Elvira Perez7, cites statistics showing that a third of the world's wealth is expected
to change hands within a decade (Fastag, 2002, pp. 2).
Joseph Astrachan8 cites research showing that only 30 percent of such endeavors
make the transition from one generation to the next. He suggests the reason for this
high level of failure is almost always due to a management failure to come to grips
with the inevitable discord that arises when family members work closely together
(Ellin, 2001).
In studying more than 13,000 family businesses in the last decade, Astrachan has
identified three preconditions for a successful succession:
(1) a board that holds the chief executive accountable and meets three to six
times a year,
7
Sol Elvira Perez teaches family business within the entrepreneurship department at Egade University,Mexico.
8Joseph Astrachan is a professor of family business at the Michael J. Coles College of Business at
Kennesaw State University
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(2) formal family meetings in which the business and the family are discussed at
least three times a year and,
(3) strategic planning where the company and family continually get realigned as
to what the goals are and what everyone is going to do to achieve these goals.
Formalising the family business
To help avoid destructive conflict in the family business, some suggest that family
business take a leaf out of the book of non-family business and formalise roles and
procedures. Not only does this clarify responsibility and decision making, but it also
ensures that governance structures are sustainable in the absence of the dominatefounder.
Astrachan (1988) advocates formalising job descriptions, writing out family protocol
manuals, appointing an independent non-executive director to the board and/or setting
up an independent advisory board, so that actions and ideas could be judged
objectively by people outside the family.
Sibling succession teams
The Canadian HR Reporter (4 December 2000, pp. 11) reports that more family
business owners are looking to hand the leadership reins to a team of siblings rather
than to the first born child.
But creating sibling succession teams is fraught with dangers as up to one-half soon
break apart. On this subject, Carlock and Ward (2001) warn that the worst shareholder
in the world is one who doesn't want to be there.
To avoid the threat of the firm breaking up because of conflict between the sibling
heirs, they suggest that family firms taking the team succession path should consider;
(i) exit plans for siblings, (ii) board members for outside the family, (iii) a sibling
code of conduct for decision making, (iv) conflict resolution planning, (v)
compensation processes, (vi) plans for the future participation of other family
members, and (vii) a consensus on the role of key non-family executives.
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Defined roles
Family members who work closely together should develop written job descriptions.
By separating work roles (job descriptions) between each other this will aid in
clarifying and separating business roles from spouse/family roles and help reduceconfusion.
If roles lack clear work boundaries then family work colleagues will keep missing
cues from one another and this will be a source of conflict. Once job descriptions are
discussed and formalised, more clarity engenders and creates more harmonious
working relationships.
Third party involvement
Involving a third party in the business planning process can introduce some
independence and remove any bias or conflict of interest from the dominate
shareholder. However, with any such appointment there must be agreement amongst
the family on the selection and also on the role of the third party.
Appointing an independent non-executive director to the board will promote a reliable
and sustainable self-governing structure that is independent of the founder. This will
help ensure the business survives beyond the term of the first generation.
This non-executive director can play a key role in benchmarking, the performance
review of the business, and determining the remuneration of family employees.
The non-executive director can also act as a sounding board and objectively judge
business decisions. In times of family conflict they may also act as the peacemaker
and bring about an early resolution.
Rewards systems
By agreeing on defined roles and determining accountability for family members, a
system of rewards can be implemented that fairly reflects the effort and performance
of each member. This is especially useful for avoiding conflict with siblings who may
otherwise be rewarded equally regardless of their roles.
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This process for determining the rewards or remuneration for family employees could
also be extended to fairly distributing equity to family members based on their
contribution and responsibilities.
Planning to step down
Developing a succession plan should not simply stop at determining the next heir
apparent. The plan should also include a timetable for stepping down and this should
be communicated throughout the family and if appropriate the business.
More importantly a financial plan should be incorporated into the succession plan toensure that the departing family member has sufficient retirement funds and/or
guaranteed income streams to allow them to retire and not be dependant on the
business.
Common concerns
There are pitfalls in attempting to resolve conflict in the family business. Many of the
pitfalls relate to undisclosed or unconscious needs of the family members and will
need to be teased out by the conflict practitioner in order to resolve the issues. Two
important relate to enabling long term continuity of the existing business.
Concerns about retiring
Regardless of the good intentions of family members or on the insistence of third
parties recommending that a founder retire, conflict will prevail unless one particular
basic need is met. Simply, a founder wont retire if there are doubts about cash flow
and sustainability of business in their absence.
In order to alleviate their concerns, you will need to build up cash reserves and
alternate sources of income well in advance to fund their retirement, and this process
may take many years. Unless these funds are available the founder will be unable and
unwilling to retire.
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Concerns about succession
When planning succession or even considering the appointment of family members to
the company dont assume that the family members or even the heirs want to be there
or even continue the business.
These individuals have their own needs and ideas about independence and this may
not include a role in the family business. All family members should be asked if they
want a role in the business and if they want it to be a long-term career move.
Otherwise they will feel as though they were forced into committing to the family
business and later this will manifest as conflict.
It may also be useful for the business to create a fund to buy back the shares of those
family members, who for whatever reason in the future, do not want to remain active
in the business. This will mean that there is an exit mechanism for these shareholders
without the need to hastily sell equity in the business to a non-family investor. This
type of forced action to sell an equity stake in may also be cause of future conflict.
CONCLUSION
Conflict is inevitable in any business, but unresolved conflict in family business may
contribute to the high mortality rate of these family-owned firms when management
fails to come to grips with the inevitable discord that arises when family members
work closely together.
Practitioners and other third party or non-family members, such as non-executive
directors, are well placed to help facilitate resolution in family business conflict with
the view to preserving the existing business, ensuring its continuity in the short term
and assuring succession for the long term.
We provide a useful introduction to the unique causes and other contributing factors
that drive family business conflict, and we offer practical techniques for practitioners
to help manage and resolve the conflict, and improve business performance.
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SUMMARY OF RECOMMENDATIONS
Summary of recommendations
External Parties ~ Appoint non-executive director(s)
~ Establish an independent advisory board
~ External party can aid with prompt resolution of conflict
~ Can facilitate meetings
~ Can act as a sounding board and provide independent views
~ Develop a consensus on the role of external parties
Formalise ~ Agree on rules and procedures
~ Develop job descriptions
~ Develop a family protocol manual for decision making and conflict
resolution
~ Develop an equitable reward system
Separate roles ~ Establish clear roles in both business and family
~ Develop a system of makers to differentiate between two environments
Succession ~ Resolve conflict now to plan for future succession
~ Fund a retirement plan for founder(s)
~ Redefine board composition and reaffirm strategic objectives
~ Develop exit plans for siblings
Communication ~ Work to eliminate blocks to effective communication
~ Conduct regular family meetings where family and business matters are
discussed
-END-
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