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Helping Family Businesses
Prosper Across Generations®

Conflicts of Interest

By John L. Ward, Ph.D.

Case A: The family business is a large employer in a fairly remote, relatively small town. A family shareholder joins one of the two important advertising agencies in town. Should she get some of her family business’ advertising business?

Owner-Manager Non-Employed Family Owner

I’m really uncomfortable with this prospect. I feel pressure from our parents to give her more of our business. But I worry about what if she doesn’t do a good job?

What do you mean? Who could do better? Who cares more? Who could know the business as intimately as I do? Don’t you think I can do a good job? Are you just trying to make life easier for yourself?

I think it puts the non-family managers in an awkward spot.

Because of my connection to the family business if I don’t get the business people may infer I’m incompetent.

Case B: The family business is a successful manufacturer. One of the family members says he wants to run a sub-assembly as a separate business that he would own. He says he can do it cheaper and better and will only take some of the savings as profit in a new company he proposes for himself.

Owner-Manager Non-Employed Family Owner

I think that puts us in a real conflict. We would be dependent on you, and after a while, you could price the unit however you want.

All I’m asking for is a chance to prove I can save the company a lot of money and a chance to prove myself in a business. After all I can’t get the CEO job there. You have it!

I think it puts non-family managers in an awkward spot.

Don’t I deserve some breaks as a faithful shareholder?

 

Like all conflict-of-interest situations there’ a lot of gray. And, of course, family has the instinct to help family and to feel help is deserved. Besides,it is good for the family business to have as many “connected” family shareholders as possible. In Case A we’re tempted to be empathetic with the family member in the advertising business. Her vocation is sincere; her options are limited; and she’s paying a price by losing other opportunities because she’s a family member and wants to live in her home town.

In Case B we probably side against the guy wanting to subcontract. He could do it from within and his proposition creates a lot of dependency between him and the family’s business. There are several legitimate issues that the family owners need to always be aware of:

  • What if it doesn’t work out?
  • How does it affect the perceptions and professionalism of the non-family managers and employees?
  • How does it affect the family business’ future options (i.e., to sell, to go public, to change technologies or product design)?
  • What precedent does it establish for other family members to do business with the family business?

While there are probably no clear-cut, absolute rules on such matters, we suggest you consider the following criteria:

  • What are the intentions of the requestor? To pursue their chosen profession or to strike out on their own? Does the requestor feel “entitled” or is it just a coincidence of overlapping interests?
  • Where does the bargaining power end up? The family’s business should keep its options and flexibilities. The family’s business, after all, serves the greater whole.
  • How well can the arrangement be conducted on an arm’s length basis? Are competitive bids possible? Are the results expected able to be pre-established and objectively monitored?
  • Is an increasing dependence created? Or can the family supplier promise in good faith that he or she will make every effort to reduce his or her dependency over time?

In the best of all worlds, conflicts of interest should be avoided. The risks can be painful and unnecessary.

But the world is not always that simple. We do encourage you to review all such circumstances openly, annually. The sooner that process starts, the easier future communications will be. We also encourage you to make the terms and conditions as explicit as possible and share them openly with the other family shareholders, the non-family management, the independent directors on your board, and your professional advisors. The less comfortable you are with complete openness, the more likely you are to be approaching difficult problems.

 

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