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Business Observer Friday, May 1, 2015 5 years ago

Avoid sibling rivalry in your family business

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From creating solid ground rules to making sure compensation is fair, set your kids up for success in your absence.
by: Denise Federer Bottom-line Behavior

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, reality may not be quite as rosy. In fact, most family businesses do not make it to the third generation. Research has shown that one of the key factors contributing to family businesses not surviving is sibling conflict.

Differences between values and perspective between siblings may be exacerbated when they are working together. While they may tolerate each other's idiosyncrasies in a family setting, it is not as easy when their livelihoods may depend upon one another. Factored into this equation might be power struggles and competition for parental approval. These dynamics can become even more complicated when there are difficult past histories, protective spouses, step brothers and sisters and other siblings who may or may not work in the business.

Often times the conflict between siblings can be managed when the parent is there to make the final decision. In fact, not wanting to hurt their mother or father can be the catalyst for adult children putting their differences aside. However, when a parent leaves the business, whether through retirement or an untimely death, it can throw the family and the business into chaos. All these factors build the case for developing strategies for ensuring strong relationships and transparent communication between siblings.

Let's examine the case of a business owner with two sons who must make decisions on issues such as 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 matter 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.

Other strategies to avert sibling-sibling issues include:

Ensuring siblings do not report to one another — encouraging them to find their own areas of expertise.

Defining the pay scale, whether it's based on ability, responsibilities or birth order — or everyone gets paid the same.

Providing a clearly defined path to entering the business and equal opportunities once employed.

Establishing boundaries between work and personal relationships.

One critical 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; and

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. According to Aronoff and Ward, a good compensation plan should be based on motivating everyone involved in the business working for what is best for all. Therefore a plan should reflect the business's core philosophy.

Some of the key questions to consider when making a compensation plan are: “Will you pay your children at the market value for their role in the company?” and “What are the perks, bonuses and incentives you will offer your children?” Once you have formally made these decisions it is critical that you communicate them to your family.

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 business. Creating family governance rules is essential to the long-term success of the family business.

Denise P. Federer, Ph.D. is founder and principal of Federer Performance Management Group. She has 27 years of experience working with key executives, business leaders and Fortune 500 companies as a behavioral psychologist, consultant, coach and trainer. Contact her at: [email protected]

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