As family business owners watch their children grow up, they may dream about the day when their offspring join the business and work as a team to ensure its ongoing success. Unfortunately, in my experience in family business consulting, reality may not be quite as rosy.
Let’s examine the case of a business owner with two sons who must make decisions on issues like compensation and succession. The brothers have different skill sets and ideas about how the business should operate; they’ve always been close, but issues regarding leadership are straining their relationship. What can the owner/father do to mitigate this situation? He can employ family governance rules to ensure there is less room for ambiguity and conflict—even in his absence.
What is family governance? It’s a mechanism to find consensus on matters where the owner’s wishes matters most, and to provide family members with a sense of identity and mission that transcends their role as owners of the business.
Family governance should focus on areas of concern such as setting policies for family behaviors, actions, and decisions; articulating vision and mission or motivating values; setting up a framework to promote learning together, sharing decisions, and communicating; and setting family ownership policies. Additional areas of focus include resolving conflicts; fostering family education and information; coordinating civic, political, and philanthropic roles; and ensuring family fun.
Another area that must be addressed is compensation, one of the biggest points of contention between siblings working in a family business according to Aronoff and Ward, leading experts in the family business consulting field. They identify some of the common causes of compensation-generated angst as:
- Role confusion (making payouts to family members for their role in the family, rather than based on their performance in the business)
- Using pay to maintain parental control
- Using pay to resolve emotional issues
- Preserving secrecy at all costs
- Paying everyone too little or too much
Creating rules and policies to address these issues related to compensation—in addition to focusing on the family governance issues noted above—is essential to prevent potential sibling conflict.
Having compensation rules in place and employing family governance support transparency and ways to manage expectations so everyone is on the same page. This is especially important when it comes to siblings who may have wildly different styles, areas of expertise and thoughts about the future of the family business. Creating family governance rules is essential to the long-term success of the family business.