The Complexities and Challenges of Family Businesses

What is a family enterprise? There are many variations in definition, but two key points stand out: control by a family member, or members, through leadership, or a controlling stake; and the intention to pass such control onward to future generations of the family.

A second key question is: what are the strengths and weaknesses of family businesses? What characteristics of family business provide them their current niche in the business world?

How are the best family businesses able to handle disruption, and move through various economic cycles? 

In this article, we’ll touch on how family businesses are able to survive in today’s world of chaos and economic uncertainty. We will also examine the complexities and challenges to running a family enterprise. 

The Unique Structure of an Enterprising Family 

There are a number of unique characteristics common to family businesses that differentiate them from other company structures. By dint of their nature, the multiple individuals who are responsible for the company’s decisions, as well as its day to day operations are related. Such control could be exercised through various means, such as management positions, ownership rights, or other roles, but it is generally distributed among various family members.

That is not to say that family members are the only employees in such enterprises (even the largest families are insufficient for this). And even ownership is sometimes shared by individuals outside of the family for various reasons. 

One way to visualise how family businesses are structured is through the three circles model.

The Three Circle Model

The Three Circle Model serves as an organizing framework to understand family business systems. It shows the three interdependent and overlapping groups that comprise the family business system: family, ownership, and business. 

Through this model, the behaviour of various family business stakeholders can be understood. It is an easy way to visualise the complex dynamics of the family business system, and what impacts the actions any individual stakeholder might take.

The Three Circle Model shows us that there are 7 distinct interest groups with a connection to the family business. These include:

• Family members not involved in the business, but who are descendants or spouses/partners of owners
• Family owners not employed in the business
• Non-family owners who do not work in the business
• Non-family owners who work in the business
• Non-family employees
• Family members who work in the business but are not owners
• Family owners who work in the business

Understanding these concepts is key to productive dialogue between stakeholders, dialogue that may have been previously taboo or seen in rigid terms under traditional organisational structures. It is especially important for family members and other managers to be able to understand each other in the business environment. 

Integrating such different viewpoints, on the understanding that all the seven groups within the model mutually support each other, is the key to a functioning business and long-term success.

Why You Need Clear Segregation Between Family, Ownership, and Business

Dealing with such a complex and integrated structure means that clarity is important. A structure that clearly defines the governance of the business, and how the various parts relate to each other, is key to day to day functioning as well as to long-term success.

The need for clarity applies to both the business as a whole, and on the individual level. For the  company, the roles and responsibilities that lie under each section of The Three Circles must be clear. If a question exists, it must be obvious which stakeholders are responsible for making decisions. 

Clear structures can exist separately for the family, the ownership, and the business management. Each can have their own mission, vision, and values, so long as they fit within the broader framework of the family business and are clearly laid out. 

On an individual level, when a decision is made, it should be made explicitly within the right context — under the right ‘hat’. An individual may be a family member, an owner, a business manager, or a combination of two or three. Nonetheless, they need to be clear how each of these ‘hats’ function differently. This applies not only to decisions, but to everyday roles and interactions, as well. When speaking, individuals need to be clear which ‘hat’ they are wearing. Handling a relative is quite different from handling an employee. So if one person has both those roles, it is best if everyone is aware of the specific framework of each interaction. Are they speaking as a father, or as the company boss? Tensions between these ‘hats’ are inevitable, but being aware of context helps improve relationships within the family.

One clear example of the need for clarity is in ownership stakes. It is important to know exactly who owns what. If the ownership structure changes, these changes need to occur through clear and standard financial channels. The fact that property is often shared between family members, without a clear transfer of ownership, makes such clarity necessary to prevent misunderstandings and future difficulties. Clear rules regarding liquidity and potential exit strategies also help with this, and provide existing avenues to resolve disputed situations.

This is important even in smaller families, with four or even perhaps two stakeholders. While in such small structures there may not be a need or possibility to have separate governance bodies for the family, business, and ownership, it is important to dedicate specific time to each of those ‘circles’ during management meetings and decision making.

Strengths of Family Enterprises

There are many advantages to family businesses, both for the business and within society. 

On a society level, family businesses often have a level of stability and continuity that is hard to match with other business structures. Opportunities are available for future generations to learn about the business early on, and to grow into their leadership positions. Such leaders often have an emotional bond with their business and employees that is lacking in other business structures, bringing about a sense of responsibility and greater workplace trust. A study in the Netherlands found that family businesses not only have closer relationships with clients and staff, but also with other social institutions such as sports clubs and churches. These translate to better talent retention, with reduced turnover and overall higher morale and productivity. This, in turn, allows family businesses to enjoy a whole suite of positive benefits to the company’s operations. 

On the business side, family businesses are often at the forefront of innovation and change. They are able to handle disruption in ways other structures are too inflexible to accomplish. Concentrating decision making among family stakeholders can make companies more agile. A generational view also leaves such businesses better able to focus on long-term planning, rather than on quarterly or annual reports. This allows family businesses to take a long term view, and make investments that do not pay off until years later. Such elongated timeframes can be useful for venture capital, for example. A longer-term focus also means family businesses use debt financing less than others. This results in overall lower debt, making family businesses less vulnerable to sudden economic shocks.

There is a strong benefit to branding too, as the business is intrinsically linked with the family name. The business’ reputation directly affects personal reputation, and vice versa. In the Philippines for example, businesses such as the family-run Ayala company partnered with the local government to purchase vaccines for the country. Such actions were prominent examples of the charity work Philippine companies undertake to improve their consumer image in the country. Indeed, it is easier to leverage family businesses towards achieving societal or value goals compared to other structures with more diffuse or indirect accountability. This also ties into the strengths above, with family businesses perceived as being more stable than other business types. Family brands also often develop strong local and regional ties, building relationships with communities that can last through economic downturns.

Weaknesses of Family Enterprises

Family businesses face challenges and risks that are, in some cases, more pressing than they would be for other types of businesses. Understanding such risks are key to managing them.

First, the direct link between personal and business interests is a double-edged sword. While it provides a sense of responsibility and trust, it also creates entanglements that can lead to tensions and misunderstandings. If a segment of the company — or even the company as a whole — begins to underperform, it will be difficult to sell it or otherwise restructure in ways that other companies might employ. The Tong Garden group fell into a dispute as the company began to falter, disagreeing over the transfer and management of the various trademarks they owned. In the end some of the group’s companies failed. These situations increase the risk for family stakeholders, as business failures damage personal wealth and assets. Emotional links also make it harder to make some difficult decisions.

The joint investment and ownership that necessitates consensus-based decisions, also brings about certain challenges. Decisions are stronger when everyone is on board, but sometimes this can be difficult to achieve. In one of my previous interviews, the manager of one Hong Kong family firm noted that due to their consensual decision policy among involved family members, “we are the slowest group of people at decision-making. But we are very safe.”

Such decision making difficulties are further exacerbated by the risk of passive shareholders. These occur more frequently in family businesses than others, as ownership may fall on an individual who has not actively sought it out, and is not actively invested. Passive investors often will not understand the business or industry. Furthermore, they may become financially dependent on the company. As a result, these passive shareholders will be incentivized to maximize output while minimizing risk, despite not facing the professional challenges of those more involved. It may become impossible to buy them out, and they may resist large, but necessary, changes. Yeo Hiap Seng Limited saw a family feud in the 1990s as family stakeholders disagreed with the management direction of the chief executive who had inherited control in 1985. The family’s stake in the company ended up being broken up in court, and as other investors bought large numbers of shares, the family lost control of the company.

Challenges of Family Enterprises

Internal Challenges 

In the long-term, the clearest challenge is managing succession. It is difficult to know when to turn over responsibility, and when not to hold on to leadership. To prevent passive ownership, it is important to encourage and foster succeeding generations’ interest in the family business. There are no shortcuts to this, but the sooner succession is planned for, the more successful it will be.

In day-to-day management, it is important to consider what roles family members are put in, and what roles are assigned to talent from outside the family. This is a decision that can have substantial repercussions for the business, as outsiders will have different priorities and incentives than family members. Choosing between different family members can be even more fraught, especially in a large family with many competing family members. The McCain food company saw a dispute over outside and inside talent between the two brothers managing the company. Eventually one left the company to lead a competing business. Handling such decisions is where the clarity of responsibilities and roles mentioned earlier will be most important.

On the other hand, a small family means a small talent pool. This will cause problems when it is decided that certain roles are best occupied by family members. 

Even worse, an already small talent pool can shrink even further if succeeding generations become disinterested in the family business, or have a different cultural attitude to the business. While it is true that fresh cultural attitudes can inject vitality into a company, they can also make succession between generations more difficult. Some family members may be completely disinterested in the organization, prone to follow opportunities elsewhere. When the Seagram company passed to its third-generation in 1994, the new manager sold off its profitable assets to fund his personal interest in media, and the company soon collapsed. They may perhaps create their own businesses, further shrinking the available talent pool.

Changes to family dynamics will have knock-on effects on business dynamics. For example, a parent-child relationship at home may need to shift to a more adult-adult relationship in business. (Such shifts are difficult for families even without businesses!) 

Other changing relationships, whether due to divorce, deaths, conflicts, or otherwise, may also have unexpected, yet immediate impacts on business functions and ownership. For example, Walter Kwok left the Sun Hung Kai Properties Group amid rumours of an extramarital affair with an employee. Even marriages can cause issues. Singer Ozzy Osbourne married his manager, who was the daughter of the owner of his music label. An attempt by the daughter to shift her husband to a new label caused a court dispute and a decades-long rift.

Hard questions will have to be asked about who is part of the family, and should be involved in family business. Disputes surrounding in-laws, half siblings, and second spouses are common. In the current day and age, increasing lifespan and better health also present novel issues, as older family members stay involved longer than their parents would have, thus stunting the opportunities of their children.

External Challenges

Externally, family firms face the challenges all businesses face, in addition to their own unique considerations. In fast-shifting business environments, the forward thinking stance of family firms may become inhibited if it is too inflexible, and the company is too risk-averse. Rigidity is bad for any business in times of potential chaos. And in many sectors, the modern era sees significant market disruption quite regularly, as technology and governance changes year to year. In 1984, less than half of the Forbes 400 were considered self-made, whereas today, that figure is closer to 70%, showing how rapidly markets have shifted in the past few decades.

Globalization threatens the local and regional advantages family firms have, and multinationals can box out smaller players. Family firms may have difficulty merging and up-scaling in ways that make it easy for other types of businesses to handle such disruption. Additionally, consumer preferences are changing in much of the world. For example, environmental concerns are becoming more important to consumers. Family firms can have difficulty adjusting to such changes due in part to the continuity of their staff and other stakeholders.

Conclusion

Understanding and managing risks can allow a family firm to compete, and even thrive, in the modern world. The family enterprise will last for centuries more to come, and with the right decisions, your family firm may be one of them.