Understanding Family Influence

Understanding Family Influence
How the Family Dynamic Affects Family Business

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In last week’s lecture, we spent a great
deal of time talking about the best
methods to running a family business


These methods gave us an
understanding that whichever part of
the business was made priority, it would
have significant effects on the business
venture


This week, we are going to go a little bit
deeper and understand how the family
dynamic affects the operations of a
business and its potential for success


Reardon Supply


Reardon Supply is a $100 million-a-year
manufacturer owned equally by 8
brothers and sisters


Bob Reardon, President and CEO, is fed
up with his brothers and sisters.


Since taking over the company from his
father nine years ago, Bob has done a
fantastic job


He has increased revenues 700%,
organized an outside Board of Directors,
and implemented strategic planning
companywide


Reardon carries no debt and is very
liquid, but its growth rate is slowing
down


The competition is now national and
international conglomerates who are
able to produce and deliver much more
than Reardon can


All of this is causing margins to shrink
and customers to look for new options


Reardon needs extensive capital
expenditures to stay competitive


So when Bob accumulated enough of the
company profits to acquire a company
that would push Reardon to the next
level, his siblings voted for dividends
instead of the acquisition


Bob is fed up with his siblings


All of his siblings are settled in careers
and lives outside of Reardon Supply


Some have become concerned with their
own lack of liquidity and have expressed
an interest in cashing out of the family
business


Others resent Bob’s salary, but are very
glad to have “one of their own” running
the company


Nancy, Bob’s older sister, believes that
he is overpaid since her husband is
President of a public company worth
more than Reardon, but makes less than
Bob


There is another family council meeting
coming and Bob knows he needs to do
something


What should Bob do?


The Problem with Family Business


Secrecy, lack of information, low levels
of family emotional intelligence, and
little knowledge of the business among
family members all threaten the success
of the venture


These problems may be the result of a
founding culture that supported an
autocratic leadership and control or a
reincarnation of this culture in a later
generation


Or they may come from the family’s
belief that there are many benefits in
privacy including, flexibility in
responding to competitors, minimization
of tax liabilities, and management of
expectations of relatives, employees,
and even unionized workers


After years of not communicating, not
editing/hiding financial statements,
profit margins, cash flows, and market
share information


The ability of next generation family
members to assist in the management,
or become successors, is significantly
difficult


Years of “Just sign here” management
undermines the commitment to the
dream of having the enterprise continue
from generation to generation


The presence of family is the essential
difference between a family business
and other forms of enterprise


Another problem with family business is
in our business schools


Business schools have typically avoided
discussing the topic of family businesses
in the study of all business topics, which
makes our understanding and
management much harder


Especially when 90% of businesses in
the US are family firms, employing 59%
of the workforce and generating 49% of
the national GDP


So, not only are we unfamiliar with the
dynamics that family businesses operate
with, but our own business education
does not empower us to be able to
understand their impact


Another factor we must take into
account is the influence of inactive
family members in the business


Family members who do not participate
in the management of business often
have significant influence on the
discussions, decisions, and long-term
processes of the family venture


When these perspectives and
contributions are not considered, not
deemed legitimate, or devalued – they
see inequality


This inequality is the beginning of the
family conflict that can destroy family
ventures


What Are We Going to Learn


Today, we will be talking about 3 things:

Family dynamics
Genograms
Family History


By understanding these 3 things, we will
understand family ventures better and
how to manage family issues to
positively influence the unique
interaction between family and venture


Some Examples


Louisville Courier-Journal
and
the Binghams


On January 9th, 1986, Barry Bingham Sr
announced that the Louisville Courier-
Journal would be sold


The Binghams had been unable to
communicate and resolve the differences
between family members


On this day, an agreement was reached
between the Gannett Company and the
Binghams cashed out.


Unlike Reardon Supply, Barry Bingham Sr.
had not been able to demonstrate a
visible commitment to continuity


Also unlike Reardon Supply, there were
no independent member of the Board of
Directors


Barry Bingham Sr. also did not fully
empower Barry Jr. when he became the
President of the newspaper, by
repeatedly second-guessing him, and
retaining his majority voting control


By never communicating his
commitment to continuity, transfer of
voting control and approving the sale of
the company, Barry Sr. minimized his
power as father, CEO and majority owner


Many of the problems, discussions and
decisions the Binghams could have
taken to reverse course and prevent the
sale of the company would have been in
family meetings


Without such a body, the conflict was
taken directly to the Board of Directors,
which was clearly overwhelmed by the
conflict and paralyzed by its own
membership


In the absence of family meetings, next
generation family members lacked the
education, information, give-and-take
communication, and emotional
intelligence that would have promoted
understanding among the individual
heirs


The Seattle Times
and
the Blethens


Frank Blethen, Chairman of the Seattle
Times, built a business to last


The Blethens believed in sharing
information among family members
through family meetings – a central
governance body


In family meetings, Frank would talk
about the commitment of every
generation, which had resulted in over
100 years of leadership


He stressed the need to value the
extended family over the individual or
family branch, and challenged
individuals who participated in the
family business to assume stewardship
of the family venture


He taught them that to be successful as
individuals, it was essential that they
understand the individual’s
responsibility towards the group


Frank taught the next generation that
more than money, they inherit a
responsibility to others and to
stewardship so that the enterprise they
received could be successfully passed on


What was the effect?


Members of the 4th generation were
proud to report to the family council
that on their watch, the company grew
from 2 daily newspapers


To 6 daily and 2 weekly newspapers and
2 major informational websites


They had overseen a 215% growth in
assets and a 33% growth in cash flow –
increasing the dividends to over $30
million – when only 20 years earlier it
was 0


The Seattle Times had been a finalist for
6 Pulitzer Prizes and been named the
14th best newspaper in the United
States, making it the best regional
newspaper in the country


Through education and information
sharing, they were able to increase their
patient capital slowly and steadily
without being challenged by family
members for “a bigger piece of the pie”


The Zero Sum Dynamic


It is within the rights of ownership to
focus on individual gain and to retain
the right to immediate liquidity


But in large multi-generational family
ventures, liquidity does not exist


This lack of liquidity and the need for
selfless interest can be a burden for
family members operating in a society
that tends to focus on the short term


They will only take on this responsibility
if opportunities to acquire information,
be educated, and to engage with
important family value are plentiful


But there is a problem here…


Multi-generational families are fertile
ground for zero-sum dynamics


Zero-sum dynamics are characterized by
exchanges in which one party’s
perceived gain is the other party’s
perceived loss


If one branch of the family uses
educational assistance for next
generation family members, another
branch assumes that less will be
available for their children


If family members in top management
are to be compensated at fair market
rate, those not active in management
assume they have to settle for lower
dividends to compensate for it


This is called “Us vs Them”


The “Us vs Them” dynamic can be
triggered by anything – male/female,
active/inactive, richer/poorer, better
educated/less educated, older/younger,
blood relative/in laws


The only time that “Us vs Them”
becomes active is when the enterprise
or wealth stops growing or is in decline


Understanding Family Influence

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