Learning through conflicts (Part 2)

 Reading time: 5 mins

Adam, Betty, Clark and David are siblings and second generation owners of a mechanical engineering company with 600 employees. They have decided to involve a mediator to sort out their ongoing conflict (see part 1).

They have explored together their interests and needs, and have come up with a list of priorities to help them move forward, stop having emotional discussions, respect everyone’s needs and avoid further conflict. They include:

• Financial stability
• Personal growth and independence
• Communication and involvement in business matters
• Family peace
• Growing the family firm and continuing their father’s legacy

But how did they get there? The process involved looking together at a series of issues that are core to family business success, but that sometimes can be overlooked, especially when owners are busy running the business. These are values, structures, communication, tasks and processes. The four siblings worked on these together through a conflict framework and established guidelines that would help them and their family business going forward. Thus, they could stop the emotional discussions in the family that could have destroyed family relationships.

Values

• Family businesses are underpinned by strong values. But when family members do not grow up with the same set of values, or when there is no clear family legacy in place, conflict can arise.
• In our case study, the four siblings decide to think about their common family values, and what this means for their family business. They agree that values like tolerance, support, success, openness and honesty are important to them. They also focus on their values in relation to risk and change: “We agree to change the business model, but without risking the financial stability and the legacy of our father.” They also decide to write a company and family history that should be sent out to customers and suppliers. To do so, they draw on skills within the family. Clark, the painter sibling who has never been involved in the business, will make some drawings for the book. As this case shows, open conversations can really help drive engagement in the family business.

Structures

• When ownership and management structures are not well defined and communicated, structural conflicts can arise. They may be due to a lack of effective leadership, competition for limited resources or divergent priorities.
• In our case, the family business governance was very much organised as the way their father used to manage the business. He made all decisions and he had all the knowledge. Adam took over from him and followed his steps. But he forgot that there are three other owners to involve in the decision-making process. This became clear to Adam during the mediation process. Thus, they decided to formalise the board, appoint a non-family executive and two non-executive board members. They decided all owners should be involved when making decisions like about acquiring another firm, changing the logo of the business, or making investments of more than £10m. In addition, Adam, David and the non-family executive established clear roles and responsibilities: David became the “interior minister”, responsible for R&D, production, logistics; Adam became the “foreign affairs minister”, responsible for sales, marketing, and lobbying work; and the non-family executive took charge of the finances. They also set out yearly dividend goals, to make sure that all owners get what they need to sustain themselves. Clark, the painter, will therefore be able to sustain his career whilst keeping his shares.

Communication

• Transparency about decisions and wealth is crucial as trust defines the relationship among family members. It is problematic if there are lack of communication, misinformation, unaligned interpretation of data or procedures and contradicting views.
• In our case, Adam agrees to set-up a reporting and controlling system for all owners, his siblings. Together with David and the non-family executive, Adam will have regular discussions about the strategy of the business. They will try to make decisions together and, if this does not work, they will ask their non-executive, non-family board members to decide.

Tasks

• Conflicts about goals and strategy are quite normal because owners can have different points of view about their goals for the family business. These can become problematic if they are discussed at an emotional level, rather than an objective one.
• Besides the dividend distribution, the four siblings agree on goals for growth (revenue growth rate of minimum 7 % per year), profitability (EBIT margin of more than 12 %), and stability (equity ratio of more than 40 %). This is done against the background that they want to keep their business in family ownership and Clark will not sell his shares. Adam and David also decide to start a strategy process with their executive board colleague, as well as some employees and managers to further develop the firm. They want to explore the “Why” and discuss this within six months with Betty and Clark. If there are difficulties between Adam and David in this process, they decide they would involve the mediator..

Processes

• Conflicts about the way of doing things are about whether to take a taxi, bus, train or plane to reach the preferred destination. It is quite normal that family members have different opinions about how to reach a goal. If you set a goal of 7 % growth rate, different strategies can be chosen for how to achieve this. Process conflicts become problematic when family members have, for instance, different views about succession.
• Besides policies for profit distribution, decision-making, rights and obligations of owners, the four siblings discuss quite a lot about a leadership succession policy for the third generation. They want the most competent family members from the third generation to lead the business in the future. And if there is no right fit within the family, they would hire external managers and the third generation would then monitor them via the board of directors. In addition, they introduced a list of services that can be requested from the family business by the owners. Furthermore, Betty suggested to introduce a family weekend and when the children are some years older she suggested to establish an education programme that also includes company visits, internships etc. Betty wanted to develop an agenda for all family governance issues. Her brothers were fine with that.

Thanks to a facilitated mediation process, the owners were able to overcome damaging conflict. Discussions about reaching consensus helped to re-establish mutual respect and strengthen their relationships. The owners decided to create a family constitution which summarized all the aspects they agreed upon, the commonly defined strategies, rules, procedures, and policies. They decided to have a meeting every year about the future development of the family and their family constitution. And when things would change, they would revisit and establish new guidelines.

Dr. Alexander Koeberle-Schmid is an expert in succession planning, family constitution, family business governance and has been advising more than 100 entrepreneurial families in Europe, Asia and the Middle East. He holds a management degree, is a licensed mediator (BM®), certified succession and executive coach (ICF), and studied at the WHU – Otto Beisheim School of Management where he earned his doctorate in "Family Business Governance".

Alexander is an author of several books and a lecturer in strategy, governance and medium-sized companies at the EBS University of Business and Law. On a scientific level, he designed and published the KPMG study series "Leadership in the Context of Feeling and Business" together with the Friedrichshafen Institute for Family Business of Zeppelin University and participated in the INTES study "Family Constitution". He makes his expertise regularly available to various media such as Frankfurter Allgemeine Zeitung, N24, Handelsblatt, Wall Street Journal, Manager Magazine, wir-Magazin, Süddeutsche Zeitung and WirtschaftsWoche.