5 Challenges of Family Business Ownership
23rd June 2016
Responsible ownership is not only about the legal structures, roles and responsibilities of a business. It is also about capital, seen as embracing the finances, values and vision of a firm.
In family-owned firms the business often represents not only a key part of the family's monetary wealth, but also of its tradition and legacy. When the business is passed on to them, owners often perceive their participation as a heritage on loan. And to protect this heritage they act to ensure they pass on to the next generation a wealthier and stronger business than they have inherited.
However, family business dynamics and tension can often pose stresses and strains for owners. In this section we will explore some of these challenges.
Growing family branches
As family businesses evolve and their owning families expand, ownership structures tend to become more complex and include an increasingly high number of family members. As a consequence, a number of family considerations can arise.
For example, the wish of parents to treat children equally may result in equal shareholding division, regardless of individual talents and wishes.
When equal shareholding is in place, issues may also arise within the family when different branches grow differently, producing significant imbalances when it comes to individual ownership interests in the business.
Further issues may arise when the business is passed on to the next generations and one particular branch of the family assumes management control. This is often the case in third generation family firms, and it can result in tensions and resentments, especially if favouritisms are in place.
Larger groups of shareholders may also result in a decreased commitment and unity of vision if effective communication and engagement are not in place.
Sometimes even the best ownership education is not effective enough when it comes to family members who become owners not by choice. Feelings of apathy, denial or anxiety may arise, which are damaging to the family and the business.
This issue is further complicated when it comes to wealth management, especially if the financial capital is locked within the company. When individual interests or family conflicts surge, the long-term consequences of deriving the capital from a non-engaged owner can be harmful to the business.
It is key that shareholders understand the concept of responsible ownership, especially in relation to ownership versus management control. In many family firms there is often confusion between the two, and shareholders believe they are also entitled to manage the company. This can adversely impact the day-to-day management when, for example, owners make business decision based on a personal agenda, lobby individual board members or make ill-considered comments that managers can misinterpret as commands.
Inadequate ownership education
"The trouble is inherited shared don't come with a user manual, and one of the toughest challenges families in business face is in educating their members about ownership, and defining their rights, roles and responsibilities" Dr Ivan Lansberg, 2005.
On top of role education, appropriate education is needed for owners who are not employed in the business. Even if they do not manage the company, shareholders can have a lively interest in how the company is doing. However, even if shareholders have specific controlling rights, a well-structured education programme on managing wealth and responsible ownership is often non-existing in family business.
"Insiders" versus "outsiders": disparate interests
Owners that do not work in the business can develop expectations and ambitions that are very different from those of the owners running the firm, which in turn can become a source of intra-family conflict and, sometimes, outright warfare.
'Insiders' versus 'outsiders' frictions can also involve majority and minority shareholders, shareholders and non-shareholders, owners who hold their shares directly and those whose interests are held in trusts, and married couples where one spouse is an owner and the other is not.
Understanding all these complications and obstacles, which are often overlapping, helps business families frame and inform discussions on responsible ownership strategies, behaviours and attitudes, contributing to the long-term benefit of the family and the business.