Understanding Family Influence

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Lecture 3 of the Entrepreneurship & Family Business course.

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Understanding Family Influence

  1. 1. Understanding Family Influence How the Family Dynamic Affects Family BusinessHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  2. 2. In last week’s lecture, we spent a great deal of time talking about the best methods to running a family businessHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  3. 3. These methods gave us an understanding that whichever part of the business was made priority, it would have significant effects on the business ventureHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  4. 4. 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 successHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  5. 5. Reardon SupplyHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  6. 6. Reardon Supply is a $100 million-a-year manufacturer owned equally by 8 brothers and sistersHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  7. 7. Bob Reardon, President and CEO, is fed up with his brothers and sisters.HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  8. 8. Since taking over the company from his father nine years ago, Bob has done a fantastic jobHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  9. 9. He has increased revenues 700%, organized an outside Board of Directors, and implemented strategic planning companywideHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  10. 10. Reardon carries no debt and is very liquid, but its growth rate is slowing downHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  11. 11. The competition is now national and international conglomerates who are able to produce and deliver much more than Reardon canHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  12. 12. All of this is causing margins to shrink and customers to look for new optionsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  13. 13. Reardon needs extensive capital expenditures to stay competitiveHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  14. 14. 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 acquisitionHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  15. 15. Bob is fed up with his siblingsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  16. 16. All of his siblings are settled in careers and lives outside of Reardon SupplyHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  17. 17. Some have become concerned with their own lack of liquidity and have expressed an interest in cashing out of the family businessHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  18. 18. Others resent Bob’s salary, but are very glad to have “one of their own” running the companyHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  19. 19. 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 BobHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  20. 20. There is another family council meeting coming and Bob knows he needs to do somethingHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  21. 21. What should Bob do?HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  22. 22. The Problem with Family BusinessHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  23. 23. 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 ventureHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  24. 24. 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 generationHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  25. 25. 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 workersHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  26. 26. After years of not communicating, not editing/hiding financial statements, profit margins, cash flows, and market share informationHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  27. 27. The ability of next generation family members to assist in the management, or become successors, is significantly difficultHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  28. 28. Years of “Just sign here” management undermines the commitment to the dream of having the enterprise continue from generation to generationHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  29. 29. The presence of family is the essential difference between a family business and other forms of enterpriseHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  30. 30. Another problem with family business is in our business schoolsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  31. 31. 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 harderHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  32. 32. Especially when 90% of businesses in the US are family firms, employing 59% of the workforce and generating 49% of the national GDPHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  33. 33. 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 impactHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  34. 34. Another factor we must take into account is the influence of inactive family members in the businessHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  35. 35. 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 ventureHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  36. 36. When these perspectives and contributions are not considered, not deemed legitimate, or devalued – they see inequalityHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  37. 37. This inequality is the beginning of the family conflict that can destroy family venturesHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  38. 38. What Are We Going to LearnHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  39. 39. Today, we will be talking about 3 things: Family dynamics Genograms Family HistoryHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  40. 40. 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 ventureHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  41. 41. Some ExamplesHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  42. 42. Louisville Courier-Journal and the BinghamsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  43. 43. On January 9th, 1986, Barry Bingham Sr announced that the Louisville Courier- Journal would be soldHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  44. 44. The Binghams had been unable to communicate and resolve the differences between family membersHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  45. 45. On this day, an agreement was reached between the Gannett Company and the Binghams cashed out.HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  46. 46. Unlike Reardon Supply, Barry Bingham Sr. had not been able to demonstrate a visible commitment to continuityHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  47. 47. Also unlike Reardon Supply, there were no independent member of the Board of DirectorsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  48. 48. 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 controlHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  49. 49. 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 ownerHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  50. 50. 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 meetingsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  51. 51. 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 membershipHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  52. 52. 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 heirsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  53. 53. The Seattle Times and the BlethensHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  54. 54. Frank Blethen, Chairman of the Seattle Times, built a business to lastHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  55. 55. The Blethens believed in sharing information among family members through family meetings – a central governance bodyHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  56. 56. In family meetings, Frank would talk about the commitment of every generation, which had resulted in over 100 years of leadershipHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  57. 57. 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 ventureHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  58. 58. He taught them that to be successful as individuals, it was essential that they understand the individual’s responsibility towards the groupHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  59. 59. 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 onHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  60. 60. What was the effect?HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  61. 61. Members of the 4th generation were proud to report to the family council that on their watch, the company grew from 2 daily newspapersHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  62. 62. To 6 daily and 2 weekly newspapers and 2 major informational websitesHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  63. 63. 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 0HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  64. 64. 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 countryHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  65. 65. 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”HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  66. 66. The Zero Sum DynamicHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  67. 67. It is within the rights of ownership to focus on individual gain and to retain the right to immediate liquidityHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  68. 68. But in large multi-generational family ventures, liquidity does not existHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  69. 69. 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 termHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  70. 70. They will only take on this responsibility if opportunities to acquire information, be educated, and to engage with important family value are plentifulHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  71. 71. But there is a problem here…HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  72. 72. Multi-generational families are fertile ground for zero-sum dynamicsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  73. 73. Zero-sum dynamics are characterized by exchanges in which one party’s perceived gain is the other party’s perceived lossHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  74. 74. If one branch of the family uses educational assistance for next generation family members, another branch assumes that less will be available for their childrenHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  75. 75. 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 itHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  76. 76. This is called “Us vs Them”HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  77. 77. 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 lawsHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  78. 78. The only time that “Us vs Them” becomes active is when the enterprise or wealth stops growing or is in declineHTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  79. 79. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED

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