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Voice and Exit in the Family Firm

By John Ward, Ph.D.

Balancing and managing an "exit" is one of the most critical issues for families in business. It is perhaps the central concern of Stage III family firms -- those owned by several cousins. Economists and political theorists have long studied voice and exit. In this context, exit is the departure of a dissatisfied owner; voice is the influence an owner can exert to rectify the cause of dissatisfaction instead of exiting. Economists typically see exit as the preferred choice. Individual freedom and competitive markets give dissatisfied shareholders easy opportunity to sell and reinvest somewhere else. Political scientists typically see it differently. They assume members of a community (i.e., neighborhood, school or country) don't have easy ability to exit and join another community, therefore they must rely more on political influence to change things. Doesn't it seem like the political model of voice is more relevant to family firms than the economic model of exit?

Family shareholders usually find exiting ownership both emotionally difficult and financially disadvantageous. They may also feel a moral commitment to fix the problem they perceive rather than flee it. Family shareholders also have greater incentives---time, money and emotion---to expand the effort to attempt to influence the business. After all, it represents a huge percentage of their net worth and of their personal identity. Conversely, economists argue that voice is an inefficient response because of all the costs and uncertainties involved in using it. Exit is so much more certain. Despite the obvious parallel between family firms and political (rather than economic) situations, most all thinking about shareholders, governance and family business best practices comes from an economic perspective, not surprising in a "protect the business first" capitalistic culture. For example:

  • Draft clear buy-sell agreements that readily facilitate exit of unhappy family owners.
  • Promote restrictive employment policies that attract only the most business competent family members.
  • Restrict the board only to independent directors, or, at most, business competent family members.
  • Work to assure shareholders don't interfere with management and, when they do speak, they speak with one (united) voice.

While those are valuable principles, if too much reliance on them suffocates and frustrates the ability of owners to express their voice, to influence things, then the whole distinction of a family business is, dangerously, ignored. If family owners feel they have unattractive exit options yet are dissatisfied with the business' performance or conduct, then, other than apathy and resignation, expressing and escalating voice is all they have. Voice efforts progress in a predictable path: concern---dissent---political action---litigation Surely there needs to be a better solution. The solution lies in a recognition of and balance of both exit possibilities and voice opportunities. To offer and encourage voice consider the following:

  • Provide opportunities for owners, directors and managers to interact and share their views. Welcome unspoken concerns.
  • Consider including family members on boards, along with a full complement of independent directors.
  • Survey shareholders anonymously from time to time. Let them know they were heard.
  • Educate family to feel competent in expressing their opinions, both with business understanding and with communications skills.
  • Accept and respect dissenting views.
  • Promote a climate of trust and personal responsibility that keeps dissent constructive rather than destructive to management's capacity to manage.

Thinkers about exit and voice urge a continuation of both. In fact, having one makes using the other more constructive and effective. If, for example, at the end of the day one believes his or her voice will be respected, then he or she is less likely to exit. And, if access to exit is easier rather than less easy, one will more likely try to use voice to reform things before choosing the irreversibility of exit. The result, ideally, is improvement of the firm and its performance with less social cost and disruption of one business being extinguished to be replaced by others. Because voice and thinking from a political theory point of view are so fundamental to the essence of family firms, these ideas should be considered for the family's constitution---the policies and procedures that govern the family---and for the charter of roles and responsibilities of owners and directors that govern the business. Frequent discussion should take place in both the family and in the boardroom on how well voice and exit are being managed. The balance between ease of exit and exercise of voice will probably shift from time to time. Perhaps the capacity to do that at artful moments is the critical element for multi-generational family business continuity.




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