Conflicts in Family Firms and how to deal

Conflicts in Family Firms and how to deal with them May 2009 Bahrain www. peter-leach. com

Famous family businesses

Family businesses around the world AMERICA “SHIRTSLEEVES TO SHIRTSLEEVES IN THREE GENERATIONS”

Family businesses around the world MEXICO “FATHER-MERCHANT SON -PLAYBOY GRANDSONPEASANT”

Family businesses around the world CHINA “PEASANT SHOES TO PEASANT SHOES IN THREE GENERATIONS”

Family businesses around the world ITALY “FROM THE STABLES TO THE STARS AND BACK TO THE STABLES IN THREE GENERATIONS”

Family businesses around the world GERMANY “ERWERBEN, VERDERBEN”

Succession Around 70% of firms have a life expectancy of 24 years Only 30% of family businesses reach the second generation Only 13% of family businesses survive through the third generation 60%-70% of family companies have no succession plan Family companies employ 54% of the private sector The average tenure of a CEO in a non family business is 4 years, whereas in a family business this is 24 years

A thought…. . 'We do not inherit the business from our parents but we borrow it from our children' Hermes Family

Centurians Solvay Jose de Mello Cargill Peugeot Gerdau Bertelsmann George Weston C & A Todd Corporation levi Strauss SC Johnson Bacardi Kohler Milliken Henkel Schindler Lhorst Bekaert Agnelli Wrigley Hartwell Firmenich Ahlstrom Roche J M Huber Timken

More Centurians AP Moller- Maersk Michelin Haniel Bonnier Swire Pacific Jardine Matheson Murugappa Group Hillenbrand Industries Wendel RPG Enterprises Timpsons Berry Brothers & Rudd Flemmings YBA Kanoo

Family Unity To come together as a family to preserve family relationships and to preserve the family business. . . because it is inevitable that the business or the money will erode family relationships. . . it is just a matter of time.

Conflicts Entanglements are normal to all of our families. If there is turmoil in the family, the business becomes even more vulnerable. It is important that the family is good to itself and takes care of itself. …but also, because it is good for business.

PRINCIPLES FOR MANAGING DIFFERENCES Differences are inevitable. Therefore it is important to accept and commit to manage and sort out differences quickly. Family and business values must be kept in mind while resolving differences. A win-win situation must consistently be aimed for. Members must be committed to promoting honesty, fairness and mutual respect. Differences must be resolved quickly and face to face. Triangular communication should be avoided. However third party expert facilitation/advice/mediation can be used if necessary. Trust and understanding must always be promoted. Either individually or in a group setting.

PRINCIPLES FOR MANAGING DIFFERENCES A. Face to Face: Within 72 hours of the incidence B. Facilitation: If not resolved face to face within 72 hours, a mutually acceptable internal/external facilitator should be tried for next 3 days. The facilitator is expected to influence only the process of communication and content must be neutral. C. Mediation: If the resolution is not achieved in step b) the Family Council will appoint a mediator acceptable to both parties for 3 days. The mediator is expected to get involved in the merits of the issue, in addition to the process of communication. D. Final Say: If the dispute still remains unresolved even after mediation, a final binding decision will be given by the Family Leader for the family issues and Business Leader for business issues.

Difficulties in Family Businesses • Personalities • Business Issues • Structural Issues

Institutional Effectiveness Governance requirements for the mature family business • Balanced and Professional Board • Strong Executive Team • Aligned Leadership • One Family Voice • Enlightened Ownership

Complexity Five People; 10 Relationships

Complexity! Nine People; 36 Relationships!

Paradox “ The test of a first-rate intelligence is the ability to hold two opposing ideas on mind at the same time and still retain the ability to function. ” F. Scott Fitzgerald

3 Organisations- 3 Structures in one System • Family organisation • Business organisation • Shareholder organisation

Purpose Family Business • To help family professionalise its • culture, activities and values • To help build and continue the • enterprise Shareholders • • To recognise and resolve shareholder issues To prepare family for business

The Three Circle Model Ownership Family Business

Governing the Network of Families Ownership Shareholders Assembly Boards of Directors Holding Family Office Family Council & Committees Family Assembly Family Boards of Operating Companies Career Development Committee Family Management Team Business

Case Example Family Assembly Family Council Education Committee Charity Committee Shareholder General Meeting Shareholder Committee Board of Directors Audit Committee Remuneration Committee

Family Business Syndromes • Procrastination • Selective amnesia • Paranoia/ fear • Conflicts of interest • Sibling or Cousin Rivalry

Typical Conflicts of Interest • Trustees of settlements v Directors • Minority shareholders v Directors • Mum / Dad v Boss

Understanding Family Systems • An approach to working in complex systems • The cause and effect are not obvious • The whole family is the system • All actions are both a cause and effect

Sheetal Mafatlal's Family Saga

Managing Conflict from the Company's point of view Separation of ownership and management

Overlapping systems FAMILY Emotion based Subconscious behaviour Inward looking Minimising change BUSINESS Task based Conscious behaviour Outward looking Exploiting change

Client example Family Assembly Family Council Group Board

Case Example Family Non Business Forum Family Office Family Council Family Fund Family Business Board Holdings Company Business 1 Business 2 Business 3 Family Charitable Foundation Business 4

Connecting the Family – The Planning Process • Addressing the issues and assumptions • Create a family “governance” structure • Draw up a Family Constitution • Establish a Family Council • Maintain regular communication – retreats and accept differences. . . • Spend quality time together • Monitor progress

Types of Family Business cousin syndicate sibling partnership owner managed C. John Ward Ph. D

Types of Family Business CS SP OMB C. John Ward Ph. D

Types of Family Business Football CS SP Tennis OMB Golf c. John Ward Ph. D

Constitution • It articulates our Mission, Vision and Values • It prescribes a process for managing differences in the family • It provides a Family Code of Conduct • It records the rules for entry of family members into business

Why Have a Constitution • Harmony • Clarity • Avoids conflicts • Gives a clear message to family & staff • Sets expectations at an appropriate level • Solve tomorrow’s predictable problems today. . . .

Creating Family Unity: The Traditional Way © Tom Hubler

You must agree how to agree!

“IF WE OPEN A QUARREL BETWEEN THE PAST AND THE PRESENT, WE SHALL FIND THAT WE SHALL HAVE NO FUTURE” Winston Churchill

A Family Constitution • Family Mission and Values • "Family" job specifications and remuneration • Performance appraisal • Non - family managers • Role of women and in-laws • Leadership • Voting & share ownership • Buy - sell agreements • Board of Directors and their power • Code of Conduct

A Family Constitution • Family Mission and Values • "Family" job specifications and remuneration • Performance appraisal • Non - family managers • Role of women and in-laws • Leadership • Voting & share ownership • Buy - sell agreements • Board of Directors and their power • Code of Conduct

A Family Constitution (cont) • Establishment of family council if appropriate • Establishment of family office if appropriate • Communication • Ethical guidelines • Education and development • Charitable policies • Requirements before joining • Procedure for amendment of Constitution

Personal Issues

Some Fundamental Dilemmas • Love all children equally • Each is not equally talented • Need to work harder than anyone to lead by example • Need more time away for variety, to release stress, for family • Work from the bottom up • Attract most competent into challenging jobs • Parents live longer, healthier, smarter • Kids are better prepared, sooner, eager to take over

Family Process The Core of Culture The Adaptive family ü Authoritative parenting ü Flexible roles and styles ü Open communications ü Love and cohesion The Malfunctioning family v Parent-child conflicts v Triangulation & scapegoating v Sibling rivalry v Spouse splits Source : London Business School research

Family Firm Cultural Weaknesses Research results Type 1: Enmeshed. In-grown, over-involved, overloaded cut-off & nonfamily locked out Type 2: Deficient. Short-sighted, bad judgements, amateurish, lack management skills & leadership talent Type 3: Cautious. Risk-averse, excessively consultative & polite, slow, un-ambitious Source : London Business School research Type 4: Uncontrolled. Too loyal, informal, soft, personal, honest, with emotional overspill Type 5: Over-controlled. Authoritarian, command & control, tough, low delegation, inflexible Type 6: Adrift. Uncertain, dislocated systems, fragmented culture & strategy, absence of planning

Addressing Conflict • Understanding/ empathy • Separating myself from other person and from problem • Putting “meat on the table” – “I” statements

“I” Statements • Used to communicate our feelings, thoughts and needs – what you own • An “I” statement starts with “I” and then stated a feeling or a thought and a need. • Example, “I” feel anxious and a little scared about what will happen when we move forward.

Scenario You are working for your father and he dismisses an idea that you have and tells your employee to do something a different way. • One possible path is a “you” statement. - “ Dad, you make me so mad when you override my decisions” • Another possible path is the “I” statement - “Dad, I really felt undervalued and sabotaged when you told my employee to do things your way. I need my employees to respect me ”

“I” statements continued • The first statement has judgement and blame attached to it, the latter, or “I” statement simply states your feelings and needs. • All “I” statements generally follow this form: - “I really feel. . . ” - “I need. . . ”

Importance of Culture According to Stephen Covey, the only sustainable competitive advantage is…. “An organizational culture of common people aligned to a common vision” What keeps culture in place? • Leaders set the tone • Structures and systems establish the patterns

Distinctive Cultural Strengths – Research findings

Great family businesses create financial, social and emotional capital for their stakeholders Cargill • Largest global agribusiness corporation • 124, 000 employees • Sales over $ 70 billion • Owned by over 100 Cargill and Mac. Millan descendants and an employee trust

Cargill treats the business like a family • • • • Developing employees for a lifetime career at Cargill Strong culture based family values Global business network Developing qualified non family executives for top management Organisation built on innovation and managing risk Maintaining family liquidity and control Effective governance system with three types of directors Employee commitment based on ownership Committed family ownership Family Council for aligning family demands Family representation on board of directors Internal family stock market for liquidity Family education and seminars Family Foundation to express values Waycrosse Family Office

Values The principles we hold and stand by when making decisions

Values - Why Are They Important in a Family Business? • Values are the rules for living…. • Create a code of behaviour that builds and supports the vision and mission • Create common way of behaving • Create a legacy • Build knowledge and trust in the Business and the Family • Values “talk” Behaviours “walk”…….

An example of a Family Business’ Values