Creating and maintaining accountability is one of the biggest challenges faced by family-owned businesses. An owner can be simultaneously the CEO and the father, mother, sibling, spouse, or cousin of an employee. In the absence of awareness and structure, family dynamics can challenge, disrupt, and perhaps overly influence how business gets done. When family issues go unarticulated communication can suffer either through avoidance or confrontation.
Without structure for setting boundaries and managing expectations, three outcomes may result:
- Family members employed in the business do not have clear performance guidelines, are not managed according to the business standards, and the business suffers
- Family members employed in the business are subjected to more stringent expectations than outsiders or one family member feels at a disadvantage to another. The result may be a sense of unfairness that can lead to conflict
- The non-family employees may become confused and perhaps resentful due to the multiple “standards” operating within the company culture at any one time, and productivity declines significantly.
Many business owners find balancing multiple roles within the business operation and the family unit difficult and uncomfortable. One cure is for family businesses to look at the big picture and understand that it is possible to separate company ownership and management from family membership. A performance evaluation system that everyone understands is one example of a structure that can help create the necessary environment for the business to run more effectively:
- It supports the business and protects the family dynamic by creating a process for setting baseline job qualifications, developing the requisite management skills, and assessing the individual’s progress. This levels the playing field and places similar expectations and standards on the family member as apply to a non-family employee
- Compensating family members for the jobs they perform based on industry standards helps to eliminate a sense of entitlement or, on the other hand, “golden handcuffs” that coercively bind a family member to the business
Family owners who do not work in the business feel more comfortable with compensation of family managers if performance criteria are clear and metrics are established.
Best practices for managing a family business and increasing accountability include:
- Establish a performance review system that evaluates employees regardless of family ties. Further increase objectivity by having a non-family employee or outside advisor take some responsibility for the review
- Set compensation levels that relate to performance and job function. Develop profit-sharing mechanisms outside of performance that benefit all family members according to the plan of ownership
- Prepare a non-binding “Family Business Partnership Charter” that codifies the principles and relationships that will operate in the business. Use this process to improve communication and prevent future misunderstandings. Use this as a basis to examine binding agreements such as Wills and Operating or Shareholders’ Agreements
- Prepare a “Family Business Participation Plan.” This is especially useful when children in the family join the business. The plan can:
- Set rules about who gets to join the business
- Determine if there must be a position open and with what documented requirements before adding a family member to the payroll
- Provide for how to develop family members’ skill sets
- Outline accountability and compensation rules
- Describe how non-working family business owners can learn good shareholder skills and how they are to be educated about business investment priorities.
Planning ahead even in the absence of conflict can improve the prognosis for the business and the family.