A fresh look at family business values (and hiring your Values Director)
26th October 2020
Successful family businesses deserve to be celebrated because their success is evidence of doing many things well. If we want to learn from success, and we should, we need to describe what happens in these family businesses, including how their values develop.
Not many families start business by writing down their values, but it would be ludicrous to conclude that this absence equates to an absence of values. Values develop naturally in a family business, as in other groups or social settings. If this process can be described, family businesses who want a written values statement can create one that is based on how their values have already developed in practice. This approach can then be extended to create the post of a Values Director.
How values develop, naturally
We do not choose the family, or family business, into which we are born. Our parents may be exemplars of moral business practice or co-leaders of a crime syndicate, but either way we inherit a set of values.
As social beings, our pursuit of self-interest is constantly moderated by the desire to do what gains acceptance from our family. This is encouraged by parents praising and rewarding behaviour that is consistent with the family’s values and thus considered to be good, while bad behaviour is punished in the expectation that this plus the resultant shame and remorse will reinforce the family’s values. This process of establishing and reinforcing values is effective because most of us prefer praise to criticism and reward over punishment, and to avoid feelings of shame where possible.
The same type of behaviour is demonstrated by how we seek to emulate those whose authority or standing we respect, or any social group beyond our family whose acceptance we seek, such as friends, colleagues, or other social grouping like a club. For example, I may want to join a networking group to advance my business interests, and in order to gain acceptance I readily adopt the group’s values in relation to some of my behaviour. Or, if I move to a new country, I may choose to adopt values that enable me to have good relationships with my neighbours.
These examples show that values are partly derived from the social process of watching each other and adjusting our behaviour to do more of what is acceptable to others and avoiding unacceptable behaviour that causes them distress. This process of mirroring, however, does not guarantee values that would be considered morally upstanding. For example, if I am born into a crime dynasty I may be tasked with actions that are illegal and morally reprehensible; however, I may decide to fulfil them in order to please the family, gain some reward and avoid the severe punishment that comes with failure.
But this is not the end of the matter. It is not uncommon to find that the pleasure we derive from doing what gains praise and recognition from others (even when it is legal) is diluted by pangs of conscience and unease. Adam Smith, the philosopher and economist, - author of The Wealth of Nations (1776), a book that can be said to have changed the world, - attributes this reaction to the influence of our Impartial Spectator.
In Theory of Moral Sentiments published in 1759, Smith explained how our moral ideas and actions – our values – develop because we are social animals who naturally care about what others think about us. This influence, however, is not limited to those in our immediate circles, be that family, friends, or colleagues. When struggling to decide a course of action that reconciles self-interest with family or social obligations, we are endowed with an ability to stand apart and imagine other moral choices. We do this by using our imagination to create a role model, or Impartial Spectator, whose praise we seek and whose disapproval we dread and whose help is valuable whenever we are faced with difficult value judgements.
The Impartial Spectator we each create using our imagination will be based on our social experiences, such as our family background and who we meet, and other sources that feed our imagination, such as education, the arts, and media. For example, I can decide I would like an Impartial Spectator that is as heroic and entrepreneurial or as upstanding and courageous or as kind and loving as a parent, or teacher, friend or colleague, or a character in a favourite play, movie, or book, or someone I have seen in the media. Smith argues that in imagining this Impartial Spectator I start to adjust my behaviour to achieve these standards. The Impartial Spectator becomes a role model who reminds me of the morality of my intentions and actions and who is committed to my self-improvement by helping me to see myself as I would like others to see me.
My Impartial Spectator, and yours, is not a universal source of morality against whom everyone can judge what is good or bad. Smith describes the Impartial Spectator as the man within our breast, an abstract and ideal spectator of our individual sentiments and conduct. I think, however, that our imagination empowers us to create an almost tangible presence of any gender who can sit alongside us – even in the family business boardroom - and constantly provide feedback on our decision-making using the values and characteristics with which our Impartial Spectator has been endowed.
If we want to feel good about ourselves or our business, we need to feel good about our Impartial Spectator who praises and blames the right things. The useful Impartial Spectator, therefore, is not a laid-back friend who readily endorses whatever we choose to do when trying to balance self-interest with obligations to others. Living or conducting business in accordance with values is bound at times to be hard work, and the Impartial Spectator helps by making us work harder rather than giving the thumbs up to every decision, or compromise, we make.
Smith argues that this is virtuous because it helps us achieve contentment and tranquillity. Since we are concerned about what others think of us or our business, our happiness partly depends on evoking the desired reactions in others. If I want others to admire me for being honest and fair in all my dealings, my happiness will be promoted by an Impartial Spectator who holds me to account whenever I am tempted to follow a course of action that falls short of these values.
According to Smith, the way to a more tranquil and therefore happier life is by upping our game to a level above pleasing our immediate social group, such as family or colleagues, and constantly monitoring and seeking to honour feedback from our Impartial Spectator. Family and colleagues might indeed occasionally tell us, out of kindness, that some decisions are good enough and that slight aberrations in moral conduct are justifiable, but this is not the feedback to be expected from our Impartial Spectator who we invited to hold us to account by a higher standard.
Living with a constant awareness of values and trying to use them in decision making is a dynamic experience. Every time we make a values-based decision we are weighing up, is this decision right for me; how will it affect others like my family or business colleagues, employees or suppliers; and how do I justify it to the Impartial Spectator who represents what I would like to become. As a result of this process, values are always developing through judgements being made daily to fit actions to values within specific contexts.
Over time the value choices we make with the help of our Impartial Spectator and the changing context of our life and society might motivate us to challenge an established set of values, such as those we have inherited from our family and which are acknowledged as applying in the family business.
A current set of family business values, for example, might reflect established or inherited attitudes to gender, race, religion, the purpose of wealth, sexuality, social class, ethnicity, patriotism, and citizenship, including paying taxes. Maintaining these values might lead to a quiet family life and even progress and reward in the family’s business. I may be told I fit in well and this might bring recognition in the form of a welcome financial bonus or much sought-after promotion. But this joy might be tempered by the hard-working Impartial Spectator, a quiet voice within that questions whether the values I am upholding remain correct in the current social context. In due course this voice might become insistent enough to motivate efforts to change these existing values.
Making this challenge, however, might be difficult when it threatens to disrupt existing harmonious relationships that are based on acceptance of these values. Those who promote change run the risk of being accused of breaching orthodoxy and may suffer sanctions such as being overlooked for promotion, and even rejection by those who prefer to uphold the existing values and defend behaviours that are based on them.
This reminds us, if such is necessary, that the process of creating values through how we interact with others and reflect on our actions with the help of our Impartial Spectator is bound to be challenging. Smith, however, argues that excellence in doing this comes through practice and is a form of virtue that ultimately contributes to our happiness and success. It could be said that the goal of being an individual or business that truly adheres to a set of values is, ultimately, worth all the effort.
Hiring a Values Director
Smith offers a practical way of understanding how values develop in a family business that can be used in the following way.
You intend to advertise a new role in your family business.
‘Our family business wants to recruit a Values Director as a senior full-time role. The director will provide impartial feedback to help individuals work out what is expected of them in sometimes difficult circumstances versus what would lead to disapproval.
The Values Director will attend board meetings and participate in the annual performance appraisals of key stakeholders in the business, such as the current owners and board of directors.'
The task is to draft a description for the Values Director, including the following.
• The areas of business and types of situations where you would like the Values Director to be most active. For example, in relation to how profits are made, funding, employment practices, environmental and social impact, tax policy, terms of business, dealing with customers and suppliers, and personal conduct by family members inside and outside the business.
• Give examples in each area of business you have chosen of the type of behaviours that would be approved by your Values Director and others that would be rejected as unacceptable.
• Now, describe the personal qualities and characteristics that are suited to the role of Values Director.
If doing this exercise in a group, now compare your draft job descriptions and agree the best version. By this feat of collective imagination, you have now created a Values Director (or Impartial Spectator) for your family business.
The performance of the Values Director is now down to you. If you work the Values Director hard, they will help guide decisions that need to be made on a daily basis by different people in the family business. If the Values Director attends every board meeting, they will remind the board that it is necessary to justify decisions by the standards personified in the Values Director. In maximising the role always remember that the Values Director tends to be in favour of what could be called ‘tough love,’ but only because they want key individuals and the business overall to do well and ultimately be successful in a way that honours certain values.
On the other hand, if the Values Director is rarely seen or heard, their role will diminish along with the importance you attribute to values in your business. Remember, if you want to criticise the performance of the Values Director, their failings and lack of performance are due to what you made them.
Finally, when passing ownership and leadership of the business to the next generation, ensure you introduce the Values Director and explain their current roles and responsibilities. Also introduce the process that created the Values Director so that the next generation can decide if the job description for this role needs to be reviewed in light of their ambitions for the future and the current state of contemporary society.
Adam Smith: What He Thought, and Why it Matters (2018): Jesse Norman
The Infidel and the Professor: David Hume, Adam Smith, and the Friendship That Shaped Modern Thought: (2017): Dennis C. Rasmussen
On The Wealth of Nations: Adam Smith’s Book that Shook the World (2007): P. J. O’Rourke
To a Louse, on seeing one on a lady's bonnet at church. (1786): Robert Burns
Ken McCracken is Family Business Consultant at MFBC Ltd. Prior to that, he was Head of Family Business Consulting at KPMG UK. For over 20 years, Ken has worked with family firms around the globe on issues including succession planning for family businesses and family offices; creating effective governance for these enterprises; helping clients to implement their succession and governance plans; education and training for the different generations in an enterprising family and for their advisers.