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Helping Family Businesses
Prosper Across Generations®

Family Business Policies: Why You Need Them

By Craig E. Aronoff, Ph.D., Joseph H. Astrachan and John L. Ward, Ph.D.

Consider these questions:

  • What happens if my brother thinks my nephew should be promoted, but I disagree?
  • What happens if my cousin gives his wife company stock and then they get divorced?
  • What happens if we have to fire a family member?
  • With eleven family members on the board, shouldn't some be getting off?
  • How can I tell my daughter that she needs to get more work experience before joining the family business?
  • Even if I'm not in the business, I own shares. Why shouldn't I get the same financial information as family who are in the business?
  • Why should your spouse get paid more than mine?
  • What do you mean, you took a $100,000 loan from the business?
  • Why can't I be on the board?
  • How can your son work in the family business and run another business at the same time?
  • Shouldn't the business buy its group health policy from me? After all, I am family.

Such questions can be the stuff of family business nightmares. Agreeing on solutions to such problems in advance can depersonalize issues and insure greater objectivity. Those agreed-on advance solutions or agreed-on processes for finding solutions are policies which guide relations between the family and the business. Here are some reasons why you need them:

Policies help avoid problems and conflicts before they happen. They eliminate or reduce future tension. When families take the time to identify and discuss issues that might lead to future disagreement and tension, they are actually determining the most important areas in which policies might be needed.

As one family-business owner once told us, "I've learned that successful family businesses do a good job of anticipating future issues and talking about how to deal with them as a family before they become issues."

Families that go through the policy-setting process actually affect expectations and therefore, we believe, moderate and possibly eliminate the prickly issues that typically arise in family businesses. Family members have already contemplated the issues, they know what the consequences will be, and they know what the family stance is on each. As a result of their deliberations and the fact that they have a good battery of policies in place before the need, sometimes the issues just don't even arise.

The policy-setting process strengthens and unifies the family. Some families avoid creating policies because they fear the conflict that might occur as a result of addressing a sensitive issue. But if a family can't handle conflict during a policy-setting process, imagine the conflict when the issues are live and real-time. When family members work on creating policies, they learn to communicate with each other on difficult issues, solve problems together, address issues as a team, put their thinking together on paper, and resolve differences.

The process of policy setting helps the family build skills, gain confidence, and increase its ability to face issues as a family. And because no family can ever anticipate every problem it will face or develop a policy on every issue it must deal with, the skills and confidence gained by developing policies can help it cope with unexpected issues.

Further, policies unify family members by helping them run in the same direction, not only now but in the future. We find that when families re-read certain policies together at family meetings, such as a code of conduct or a mission statement, it solidifies them as a family. It helps family members all understand what they have agreed to and brings them a little bit closer to one another.

Policies make things explicit. Families often set policy without intending to. Any decision that sets a precedent creates policy. But it is an implied policy. No one really talks about it or questions it openly. Family members just adhere to it because they think that's what's expected of them or because "that's the way we've always done it."

When family members go through the process of consciously creating policy and putting it in writing, however, they are making policy explicit. The process enables family members to question assumptions and understand differing perspectives. And all can participate in making decisions about how they will govern themselves in the future.

When policies are not explicit, family members are free to interpret decisions any way they choose. The chances for misinterpretation, misleading information, and miscommunication increase. But if policies about how future decisions are to be made are fully discussed and laid out in advance, the family has a template from which to proceed. And chances are increased that family members will all be on the "same page."

Family members become more educated on many levels. Creating policies requires them to become even more knowledgeable about the business itself but also necessitates becoming familiar with and knowledgeable about the issues being discussed. Employment policies, for example, require investigation into employment practices. Compensation policies mean learning what compensation practices are being followed in the family's industry. Shareholder agreements call for educating yourself as a shareholder so that you can participate effectively in the discussion. In other words, when done right, the process of developing family business policies requires thought and homework.

The family-business continuity-planning process is enhanced. In the largest sense, policy development is about continuity planning -- that is, how we prepare and educate the family to continue into the future as a successful, healthy and strong business-owning family.

When a family creates policies, it is looking at all the elements that go into family-business continuity -- the family's mission and vision, its values and beliefs, its principles and philosophies, its covenant or pledge (that is, what the family expects from the business and what the business has a right to expect from the family), and the business' strategy, culture, performance, and governance.

When family members work together to create policies, they discover what is important to them as a family and what is important to them as individuals. They gain major skills in communicating with one another effectively. They learn the art of compromise, in its finest sense. Creating policies helps the family sort out its values and know what it stands for.

REASONS TO DEVELOP A POLICY GUIDE

  1. Avoid problems or solve them before they occur.
  2. Reduce future family tension.
  3. Strengthen the family with experience in coming to agreement.
  4. Clarify your family's positions and reduce misunderstandings.
  5. Help the family sort out its values and know what it stands for.
  6. Improve future decisions by insuring that policy formation is informed and objective rather than made in the heat of battle.
  7. Create more enthusiasm for and knowledge of the business.
  8. Increase the likelihood of long-term business and family success, survival, prosperity.

Adapted from "Developing Family Business Policies: Your Guide to the Future"

 

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