Understanding Family Influence How the Family Dynamic Affects Family Business
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In last week’s lecture, we spent a great deal of time talking about the best methods to running a family business
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These methods gave us an understanding that whichever part of the business was made priority, it would have significant effects on the business venture
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This week, we are going to go a little bit deeper and understand how the family dynamic affects the operations of a business and its potential for success
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Reardon Supply
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Reardon Supply is a $100 million-a-year manufacturer owned equally by 8 brothers and sisters
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Bob Reardon, President and CEO, is fed up with his brothers and sisters.
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Since taking over the company from his father nine years ago, Bob has done a fantastic job
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He has increased revenues 700%, organized an outside Board of Directors, and implemented strategic planning companywide
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Reardon carries no debt and is very liquid, but its growth rate is slowing down
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The competition is now national and international conglomerates who are able to produce and deliver much more than Reardon can
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All of this is causing margins to shrink and customers to look for new options
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Reardon needs extensive capital expenditures to stay competitive
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So when Bob accumulated enough of the company profits to acquire a company that would push Reardon to the next level, his siblings voted for dividends instead of the acquisition
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Bob is fed up with his siblings
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All of his siblings are settled in careers and lives outside of Reardon Supply
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Some have become concerned with their own lack of liquidity and have expressed an interest in cashing out of the family business
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Others resent Bob’s salary, but are very glad to have “one of their own” running the company
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Nancy, Bob’s older sister, believes that he is overpaid since her husband is President of a public company worth more than Reardon, but makes less than Bob
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There is another family council meeting coming and Bob knows he needs to do something
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What should Bob do?
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The Problem with Family Business
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Secrecy, lack of information, low levels of family emotional intelligence, and little knowledge of the business among family members all threaten the success of the venture
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These problems may be the result of a founding culture that supported an autocratic leadership and control or a reincarnation of this culture in a later generation
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Or they may come from the family’s belief that there are many benefits in privacy including, flexibility in responding to competitors, minimization of tax liabilities, and management of expectations of relatives, employees, and even unionized workers HTTP://EMAGINE-GROUP.COM
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After years of not communicating, not editing/hiding financial statements, profit margins, cash flows, and market share information
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The ability of next generation family members to assist in the management, or become successors, is significantly difficult
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Years of “Just sign here” management undermines the commitment to the dream of having the enterprise continue from generation to generation
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The presence of family is the essential difference between a family business and other forms of enterprise
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Another problem with family business is in our business schools
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Business schools have typically avoided discussing the topic of family businesses in the study of all business topics, which makes our understanding and management much harder
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Especially when 90% of businesses in the US are family firms, employing 59% of the workforce and generating 49% of the national GDP
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So, not only are we unfamiliar with the dynamics that family businesses operate with, but our own business education does not empower us to be able to understand their impact
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Another factor we must take into account is the influence of inactive family members in the business
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Family members who do not participate in the management of business often have significant influence on the discussions, decisions, and long-term processes of the family venture
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When these perspectives and contributions are not considered, not deemed legitimate, or devalued – they see inequality
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This inequality is the beginning of the family conflict that can destroy family ventures
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What Are We Going to Learn
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Today, we will be talking about 3 things: Family dynamics Genograms Family History
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By understanding these 3 things, we will understand family ventures better and how to manage family issues to positively influence the unique interaction between family and venture
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Some Examples
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Louisville Courier-Journal and the Binghams
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On January 9th, 1986, Barry Bingham Sr announced that the Louisville CourierJournal would be sold
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The Binghams had been unable to communicate and resolve the differences between family members
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On this day, an agreement was reached between the Gannett Company and the Binghams cashed out.
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Unlike Reardon Supply, Barry Bingham Sr. had not been able to demonstrate a visible commitment to continuity
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Also unlike Reardon Supply, there were no independent member of the Board of Directors
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Barry Bingham Sr. also did not fully empower Barry Jr. when he became the President of the newspaper, by repeatedly second-guessing him, and retaining his majority voting control
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By never communicating his commitment to continuity, transfer of voting control and approving the sale of the company, Barry Sr. minimized his power as father, CEO and majority owner
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Many of the problems, discussions and decisions the Binghams could have taken to reverse course and prevent the sale of the company would have been in family meetings
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Without such a body, the conflict was taken directly to the Board of Directors, which was clearly overwhelmed by the conflict and paralyzed by its own membership
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In the absence of family meetings, next generation family members lacked the education, information, give-and-take communication, and emotional intelligence that would have promoted understanding among the individual heirs HTTP://EMAGINE-GROUP.COM
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The Seattle Times and the Blethens
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Frank Blethen, Chairman of the Seattle Times, built a business to last
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The Blethens believed in sharing information among family members through family meetings – a central governance body
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In family meetings, Frank would talk about the commitment of every generation, which had resulted in over 100 years of leadership
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He stressed the need to value the extended family over the individual or family branch, and challenged individuals who participated in the family business to assume stewardship of the family venture
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He taught them that to be successful as individuals, it was essential that they understand the individual’s responsibility towards the group
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Frank taught the next generation that more than money, they inherit a responsibility to others and to stewardship so that the enterprise they received could be successfully passed on
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What was the effect?
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Members of the 4th generation were proud to report to the family council that on their watch, the company grew from 2 daily newspapers
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To 6 daily and 2 weekly newspapers and 2 major informational websites
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They had overseen a 215% growth in assets and a 33% growth in cash flow – increasing the dividends to over $30 million – when only 20 years earlier it was 0
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The Seattle Times had been a finalist for 6 Pulitzer Prizes and been named the 14th best newspaper in the United States, making it the best regional newspaper in the country
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Through education and information sharing, they were able to increase their patient capital slowly and steadily without being challenged by family members for “a bigger piece of the pie”
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The Zero Sum Dynamic
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It is within the rights of ownership to focus on individual gain and to retain the right to immediate liquidity
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But in large multi-generational family ventures, liquidity does not exist
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This lack of liquidity and the need for selfless interest can be a burden for family members operating in a society that tends to focus on the short term
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They will only take on this responsibility if opportunities to acquire information, be educated, and to engage with important family value are plentiful
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But there is a problem here…
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Multi-generational families are fertile ground for zero-sum dynamics
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Zero-sum dynamics are characterized by exchanges in which one party’s perceived gain is the other party’s perceived loss
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If one branch of the family uses educational assistance for next generation family members, another branch assumes that less will be available for their children
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If family members in top management are to be compensated at fair market rate, those not active in management assume they have to settle for lower dividends to compensate for it
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This is called “Us vs Them”
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The “Us vs Them” dynamic can be triggered by anything – male/female, active/inactive, richer/poorer, better educated/less educated, older/younger, blood relative/in laws
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The only time that “Us vs Them” becomes active is when the enterprise or wealth stops growing or is in decline
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