Feature: Avoiding family feuds

Family can be both a big plus and a minus for family run businesses. Domini Stuart provides some tips on how to turn the minuses into pluses.

Challenges for family businesses include:

• Nepotism and family conflict
  
• Succession planning
  
• Different shareholders with varying aspirations
  
• Making sound business decisions as opposed to emotional ones
  
• Accepting outside directors
  
• Understanding the director’s liability of family members on the board
  

Family-owned businesses dominate Australia’s commercial landscape, accounting for around two-thirds of all businesses operating in the country. Emerging research also indicates they outperform their publicly-owned counterparts, with higher returns on investment, better profit margins, more stable earnings, better cash flow and higher earnings per employee.

It’s surprising, then, that so little is known about them.

“These firms have, on occasion, attracted the attention of the popular press, but it is invariably because of their ‘dark side’: family feuds that escalate and affect the business operation, frequently ending up in the courts,” says Professor Ken Moores FAICD, founding director of the Australian Centre for Family Business (ACFB) at Bond University.

We do know family businesses are extremely diverse, ranging from the relatively small to very large and successful public companies. Also, their one defining attribute – that one or more members of a single family own and manage the business – can be both a strength and a weakness.

“The biggest plus is family; the biggest minus is family,” notes Peter Poulos, managing director of Poulos Bros, one of the largest distributors, processors, importers, exporters and retailers of fresh and frozen seafood in Australia. The company was founded in 1968 by brothers Con and Denis, who made it clear from the outset that they were a family with a business rather than a business owned by a family.

“We always try to put family first and that means occasionally doing things a full commercial operation wouldn’t do” says Poulos. “Of course, it’s a balancing act – you can’t have everyone freeloading, but for us, the solidarity among ourselves is where we gain our strength.”

As CEO of Grocon, Australia’s largest privately owned development and construction company, Daniel Grollo GAICD appreciates that family businesses can have a great culture, a very close relationship with their customers and be very nimble in responding to market or customer forces. Typically, they are also more focused on creating value over the long-term.

“On the other hand, family businesses have a very different set of shareholders with varying aspirations,” he says. “Particularly as generations move on and families grow larger, responding to everybody’s needs becomes more difficult.”

In the wine industry, strategic planning must be particularly long-term.

“Our Whole of Estate Environmental and Development Plan has timelines and actions attached to those timelines through to 2025,” says Alister Purbrick, fourth-generation winemaker and CEO of Tahbilk. “The plus of being involved in a multi-generational family business is that we can plan our long-term future without the pressure of having to perform financially at short-term, unrealistic levels for the benefit of shareholders. Accountants don’t run family businesses.”

Fellow winemaker Mitchell Taylor, managing director of Taylors and grandson of the founder, observes that family businesses can have good morale and a strong competitive spirit, and that customers relate to businesses with a face and a personality. On the downside, they may not have access to the same capital as a publicly listed company. And, of course, there can be problems with nepotism.

“It is written in our family constitution that to be considered for the family business, you must have the relevant skills and qualifications and must have at least three years’ experience outside of the business,” he says. “I think it’s important for the younger generation to know it’s not their birth-given right to leave school and start working here.”

Dealing with conflict

David Green FAICD is a partner at Deloitte Private who specialises in family and owner-managed businesses. He describes a family business in terms of three overlapping circles – ownership, family and business.

“This creates seven different ways for someone to be involved in the business – and that’s just for one generation,” he says. “Overlay that with one or two more generational levels and you start to get a feel for the complexity and potential for conflict.”

Succession lies at the heart of many of the most serious disagreements.

“The people the previous generation see as natural successors may not want to do the job and people who do want to do it may not be up to it, “ says Susan Rix GAICD, who heads BDO’s Family Businesses group in Brisbane and also sits on a number of boards. “There might also be competition between family members that can be very long-standing. Some rivalries start in the sandpit.

“At BDO we have independent training in relation to family business because an accountant won’t necessarily have the skill set needed to manage emotionally-charged situations. Sometimes there’s call for a multi-disciplinary approach involving other specialists such as lawyers and psychologists.”

Grollo advises talking openly and honestly about potential conflicts as early as possible and seeking different views.

“Avoiding these issues or dealing with them behind closed doors can lead to bigger challenges later,” he says. “I think the best way to avoid a family feud is to have a strong, considerate and courageous family leader who deals with issues of succession and direction openly, early and clearly, making sure everyone knows where they stand and ensuring expectations do not get out of hand.”

The Poulos family has always taken the view that shares are more likely to trigger a feud than salary.

“Whatever the position in the company, there’s not a big difference in how much the family is paid,” says Poulos. “When it came to shareholding we took the easy option and put everything into a family trust. That means we all have to agree to any changes and nobody can sell out unless everybody sells out. We all have an equal say.”

Rix agrees that discretionary trusts can be useful.

“Trusts came into their own in the 1970s to avoid death duties and a lot of families hold assets in trust as the vehicle for longevity,” she says. “Some people don’t like them because they feel they leave them with no control. And, if you transfer assets you already own, you are in effect selling those assets, so you will have issues with stamp duty and capital gains tax. At the moment, we’re waiting to see whether the Henry review will have any effect on the way trusts are taxed and operated.”

The family board

Not all family companies have a board of directors and some “boards” are little more than ad hoc collections of advisers, friends and family members. This can put the company and the individuals at risk.

“Our particular challenge was that we had a number of family members on the board, aunts and uncles, and few had any idea of what their roles were,” says Jane Stott MAICD, former CEO of the fourth-generation business Stott’s Correspondence College. “Their inclusion was an emotional decision as opposed to a sound business decision – what we should have done was explore other ways for them to feel engaged. We ended up having to sell the business.”

If a business does have to face a forced sale or bankruptcy, anyone listed as a director on the company books could face personal liability for debts incurred.

“It is important, even for those using advisers and trusted friends, to ensure all are aware of the role of a director or even those ‘deemed to be a director’ by their involvement at a strategic level,” says Richard Owens OAM, national chairman of Family Business Australia.

Introducing a non-executive director (NED) to the board who isn’t a family member can help a larger business become more professional, commercial and outwardly focused.

“I think it’s absolutely critical to have independent, sage advice offered at board level,” says Purbrick.

“It certainly helped us to manage the transition from founders to the next generation as well as the corporatisation of the business,” says Poulos. “Another minus of a family business is that, by definition, you are navel-gazers; the NED gives us a ‘non-fish’ perspective. As directors, we’re really good fish traders; the NED is helping us learn to be really good directors.”

Of the challenges facing an “outsider” on a family board the most fundamental is winning respect.

“If you don’t have the family’s respect, your input is totally wasted,” says Poulos. “People who have been in the business since they were children can be quick to treat you as an interloper. And, unless it’s a very mature and large family business, it’s unlikely to be as corporate as you think it should be. For instance, it’s conventional etiquette that what happens in the boardroom stays in the boardroom. In a family business, a boardroom is anywhere three directors happen to meet.”

Grollo notes that non-family NEDs need to understand the dynamics of the various generations in the shareholder base. “They need a good understanding of the history of the business and to balance that with an appreciation of where new generations would like to take it. They must also understand the emotions of family businesses and not get themselves aligned or alienated somewhere where their skills become sidelined. If they can find that balance, their skills will be of great value; any organisation should challenge the status quo.”

“There are issues for family company boards to deal with that are different from those in more widely-held companies but for the board to function effectively in these cases, it is best if ‘family issues’ are kept away from board discussions,” says Moores. “In short, best practice family business governance involves using family and business governance structures and processes and ensuring these entities cooperate to ensure a strategic plan is developed to direct the business in ways that respect the broad expectations of the family owners. If governed correctly, the potential advantages cannot only materialise as superior performance but also prevent the downsides of family firms undermining their performance.”

Going forward

Other than land-based businesses, most of Australia’s successful family concerns were established by post-war migrants.

“We’re only just starting to see significant wealth being passed from one generation to the next,” says Rix. By way of a sobering comparison, Florence-based wine producer Antinori is now in the hands of the 19th generation, while the Japanese innkeeping firm Hoshi Ryokan, founded in 718, is being run by the 46th generation of family members.

“We’re a very young country with a very young focus on the way we develop our business,” says Taylor. “In a lot of cases, people are building businesses with an exit strategy in mind.”

For those who do want to take a longer-term view, Taylor believes business organisations such as Family Business Australia and the international Young Presidents Association have a crucial role to play.

“Everyone thinks their issues are unique
but there is always someone who has had a similar experience,” he says. “When you’re a member of these kinds of organisations, you can talk to people who have been through the same process.”

The Australian Institute of Company Directors runs several courses of benefit to directors on family boards. These include Foundations of Directorship, the Company Directors Course and our tailored In-Boardroom programs.