Creating accountability is one of the biggest challenges faced by the family owned businesses.
At times accountability can be difficult to maintain for family members. When businesses mix
family and business relationships without a structure for separating those very different areas two things can result:
- Family members are not managed according to business standards and the business suffers or
- Family members 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.
Business owners may find it difficult or be uncomfortable to balance the multiple roles he or she plays in the family business. An owner can be simultaneously the CEO and the father or mother of an employee or sibling, spouse or cousin. Family businesses should look at the big picture. They should be aware of the difference between the ownership of the company and management and that the two can be separated. Family membership needs to be considered in its proper place in both. If a family member is in management, there should definitely be a system of evaluating:
- Are they competent to be a part of management? Often there is no process for deciding on qualification or a formal program for developing the management skills of the family member and assessment of their progress. Is the evaluation fair to employee or are they
subject to excessive expectations that would not apply to a non-family employee? - What is their accountability to the owners of the company? Ownership may include
siblings or other relatives who are not active in the business. - How is their compensation being paid?” When the family member is not paidfor
performance the job can create the unintended consequence of either becoming an
entitlement or “golden handcuffs”.
Best practices for managing a family business can be implemented which increase accountability including;
- Have a performance review system that effectively evaluates family members as well as non-family employees. Consider having a non-family member take some responsibility for the review to increase objectivity.
- 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 if the children
joining the business are younger. This plan defines rules around who gets to join the
business, whether there must be an opening and with what qualifications, how their skills will be developed and the rules around issues of accountability and compensation. Also the Plan addresses whether a prenuptial agreement is part of the family business rules. This avoids future conflict among the betrothed around feeling singled out for a prenuptial requirement.
Planning ahead even in the absence of current conflict can improve the prognosis for both the health of the business and the health of family relationships.
If you have any questions about these issues as they relate to your own business, please do not hesitate to hesitate to contact us for a no-obligation consultation.
