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Thursday, Nov 21, 2019

The art of dealing with conflict in family businesses

Prepare for conflict when relationships are smooth. Dispute suppression is the surest way to serious rift.

columns Updated: Sep 01, 2019 18:03 IST
Janmejaya Sinha
Janmejaya Sinha
Family businesses are complicated because two strands intersect. What underpins a family is love, affection and equality of treatment. What underpins the business is hard metrics and financial performance. One is a meritocracy, the other is not
Family businesses are complicated because two strands intersect. What underpins a family is love, affection and equality of treatment. What underpins the business is hard metrics and financial performance. One is a meritocracy, the other is not(SHUTTERSTOCK)
         

Every family has fights. Sometimes they are big, sometimes small. Small fights are to be expected, and at most times, are easily resolved. They usually take place between a couple but could also be among other members of the family.

But fights between families that own and run businesses become more material in terms of their disruption to the business. Their conflicts assume different shapes and forms, each with its own unique dynamic. They are generally predictable, over issues such as succession, sharing of wealth and decisions related to the business. Conflicts may be intra-generational (such as between siblings or cousins) or inter-generational (such as between uncles and nephews) or even a combination of both. As an interesting aside, divorce and separation between the owner and the spouse, for some reason, tend to be the least disruptive to the business, possibly because there are few cases of couples jointly running businesses. But the other fights within the family, if allowed to drag on, can tear apart the businesses. In fact, the Indian family business landscape has seen very public feuds between members of prominent business families. In this piece, we explore both the causes for conflict and robust mechanisms to manage them.

It is rare that such disputes within a family escalate suddenly. It typically starts when interests begin to diverge. Initially, they are not large divergences, and members seldom want to highlight the differences as they are not that material, and to do so causes discomfort and friction. But a clear progression is usually visible after that, with tensions gradually building. As this happens, communication between members deteriorate. This is the worst possible development because then there is no vent, and tensions start to build and simmer. Of course, conversations at this stage are uncomfortable, but to suppress them in the hope of postponing conflict is the worst strategy. Families then set themselves up for far sharper disagreements in the future. Families must recognise that such disagreements are not to be feared or avoided but,in fact, to be planned for.

All great companies, whether family or non-family, require open discussion in different management forums on business. There will be a management committee and a board of directors that provide diverse perspectives. These are critical for the success of the company in the long-term. But typically, these bodies only need to worry about the business and its performance. While conflicts do happen in such forums, they are easier to tackle because discussions are generally based on facts, not emotion, and revolve around the business.

In comparison, conflicts in family businesses are much more complicated. Here, there are two strands that we need to recognise and they create complex disagreements. A family is based on unconditional acceptance. What underpins a family is love, affection, fairness and equality of treatment. A family is not a meritocracy. A mother will not love her smartest child more than her other children. And yet the business of the family is different. It is judged on hard metrics and financial performance. If it is listed, its shareholders expect a certain return. They expect top-class talent to be hired by the management to ensure the company succeeds and thrives. So while the business of the family is well served by its board of directors, they essentially deal with the performance of the company and conformity with the rules of the land. A family which owns and manages a business finds performance issues sometimes in conflict with other filial requirements. Every member of the family desires to be equivalently and fairly treated. They seek roles and want returns from the business for themselves. For most families, a majority of their wealth is in the business. They want to have a say in how it is run. They can also have issues on who runs what parts of the business and what investments they make. The complexity is higher and the basis of decision evaluation is more complicated — love and fairness versus simple performance. So it is even more important for the families to have the structures by which they can agree on the principles and precedents on how decisions are made. They also need to uncover conflicts at an early stage and tackle them before they escalate.

This requires family businesses to create special forums where these principles can be agreed upon and disagreements aired. They also need to define the mechanisms to resolve them. It needs agreement from separate family members on what rules they should create for themselves in respect to family member involvement in business. They also need to agree what dividends are due to them and how they may exit their share and do something different with their lives. We recommend families in business consider creating:

1. A conflict resolution mechanism: This should be set up before conflicts have surfaced. Doing so once a conflict is underway skews the entire process.

2. Establish agreed principles in respect to succession, entry into and exit from the family business, wealth sharing and other predictable issues on which there may be conflict.

3. The family forum must be seen as fair by family members in its constitution, representation and decision rights for it to be effective in airing and resolving disputes (nothing should be out of the realm of discussion).

4. The family forum must always involve a few independent,neutral advisers from outside the family to ensure they can get a truly unbiased opinion.

5. Finally, the family charter must be bespoke and created by the family but be open for discussion and refashioning in every succeeding generation.

The nature of conflict in family businesses changes with the size and age of the family – where shareholdings fragment and relationships get more distant. We will examine this in greater detail later. But for all families, the biggest lesson is preparing for conflict and having sensitive discussions when relationships are functioning smoothly. Dispute suppression is the surest way to serious conflicts.

Janmejaya Sinha is chairman, BCG India. This article was written with support from Varun Govindaraj. This is the fourth of a six-part fortnightly series on family businesses.
The views expressed are personal