Family businesses: some important insights

Family type businesses are very dominant in most economies, including here in SA where there are large JSE listed companies that are owned and controlled by families. Similarly, there are many successful and profitable medium sized businesses falling into this category. As such ‘family issues' invariably arise which, if not handled appropriately and timeously, can create many personnel and monetary difficulties in a business, causing high levels of stress both in the business and between family members.

Many of these family businesses encounter similar problems especially when ownership and management control passes to the following generation(s). It is precisely these types of issues which are highlighted in the case which follows below. Taken together with the contents of the concluding section, this case study provides important and critical insights on these issues. The case itself is based on research conducted in a Cape Town based family owned and controlled business – the identity has been altered in order to respect confidentiality.

Introduction:

While searching the Internet for information on family businesses one is struck with the enormous volume of reference sources on this topic. Some are much generalised articles while others might deal specifically with one topic e.g. succession planning.
In addition, many international Business Schools run courses where family members are exposed to the realities that confront many family run and owned businesses. The participants are encouraged to bring along to these courses all family members directly (e.g. shareholders) or indirectly (e.g. heirs-to-be) involved with the business. The programmes are broken down into lectures, presentations by CEOs of successful family businesses, and intimate family discussions facilitated by psychologists who have specialised in this field. The issues discussed and matters decided at these meetings form the foundations around which participants return to their businesses and implement, over time, the aspects agreed upon.

Rather than deal with the ‘theory' which can be readily located on the Internet, a case study follows based on the ‘real-life' situation at a long-established family business. An ‘outsider' was brought in to deal with the many sensitive issues which were surfacing in and outside of the business. What was done is described in the sections that follow.

Organisation background:

ALLWORLD (Pty) Ltd is a medium sized engineering business set up in 1924. Since then there have been three Managing Directors all of whom were first born sons. The present Chairman is Bertie, aged 63, who has occupied this position, as a third generation family member, for over 30 years. Prior to1998 he was the MD but unilaterally decided to take on the role of Executive Chairman of the company and appointed Neville, his brother-in-law, as the Managing Director. Other Directors in 1998, all appointed by Bertie, were Brian (Finance/Administration portfolio) and Albie (Distribution portfolio). Both of them were non-family but key senior managers.

The shareholding in the company has evolved over the generations. Currently Bertie holds 36% in his own capacity and another 18% through a family Trust. His two sisters each hold 18% through this Trust. The remaining 10% is held directly by Neville who is also a Trustee. Whereas Neville was actively involved as both the MD and Production Director, Bertie's sisters did not participate in any aspects of the business. They are, however, Trustees of the family Trust. The only other Trustee is George – he is a non-practising lawyer, and trusted family friend, who has been in this capacity for over 20 years.
The fourth generation comprised ten children. Bertie's family was made up of three males and one female, and both his sisters had two sons and one daughter. They ranged in age from 28 years upwards. Only three of the children were employed in the business and all of them were Bertie's. Two of the children qualified as Mechanical Engineers from the University of Cape Town thereby enabling them to integrate quite easily into the business. Roger, the oldest son, dropped out of University after two years, then travelled and did part-time jobs around Europe and America for five years. On his return to South Africa he joined a marketing firm offering packaged local golf tours to foreigners, and became national Marketing Manager. He did this for five years. Bertie decided in 2003 that Roger should join the business as their first Marketing Director. Roger jumped at the opportunity. This happened despite objections from Neville and the sisters. Bertie, as a majority shareholder, thought he had every right to make this decision and pushed it through. It was evident that he intended, over time, to hand over the Chairmanship of the business to Roger thereby continuing this family tradition. 

Through Bertie's initiative, capabilities and passion the business has grown steadily over the years both in turnover and profitability. In its niche market it was widely acknowledged as a leader and its products are widely distributed throughout retail outlets in South Africa.

From a business perspective things were looking very good. Evidence of this included solid organic growth, improving profitability, a highly positive cash flow, product innovation, and two family members firmly in control as Chairman and MD. But beneath the surface there were many family issues needing to be resolved.

A family view:

For the first time in many years a full-day family meeting was called in late 2004 at the request of Neville and the sisters, and with the backing of George who also attended. All ten children, plus spouses if they were married, were invited and all attended. Bertie chose to be the facilitator of this meeting and drew up an agenda that he believed was appropriate. This dealt primarily with a sharing of information about the business and where it had come from. Lots of operational issues were presented by Bertie.

Early in the day of the meeting he was asked by one of the children, who is a CA, why no financial figures were presented? Bertie couldn't believe his ears – he was being questioned by one of his nephews! His answer was: “We don't discuss this outside Board meetings”. Then other questions followed: “Who appoints Board members?”, “Is there a Shareholder's Agreement in place?”, “What about succession planning?”, “Who decides on dividend policies?”, and many similar family related issues.

Bertie was taken aback. He had totally under-estimated the extent of these kind of issues. Yes, he was the Chairman and majority shareholder and, as such, in a position of power. But his autocratic style was being challenged. As one of the children mentioned: “Bertie, this isn't your business – it belongs to the family and you must respect it as such.” Visibly shaken he turned to George for advice and agreement was reached for a skilled and high-experienced facilitator to become involved to try to work through the issues.

It was agreed that in three months time another family meeting would be called where these and similar issues would be discussed.

The process followed:

Through George's extensive personal network he secured the services of Tony, a well known professional who had specialised in family business as part of his consulting practice. An initial briefing meeting was held with Bertie, George and Tony. Based on advice received from Tony it was agreed that the process to be followed should be:

1. All shareholders/children/spouses would receive a specially drafted questionnaire for completion and submission to Tony – full

    confidentiality of responses was guaranteed by him and affirmed as such in the covering letter that accompanied the

    questionnaires. A date was stipulated for completion and submission of the questionnaire.
2. Tony would meet individually with the four shareholders, with Bertie's three children working in the business and George.
3. Once the findings from the face-to-face meetings and the responses to the questionnaire have been collated and analysed,

    another family meeting would be called to discuss the findings. Tony would be the facilitator.
4. The outcome of this meeting will then be shared, at a special meeting, between non-family Board members and other senior

    management of the company. (Based on Tony's input it was accepted that this group should be informed of the future

    viewed from the perspective of the family. This route, he advised, would create a sense of security among the group.)
5. This planned process (points 1-4 above) was emailed to all the stakeholders in order to keep them informed regarding

    progress with what had been agreed, namely the appointment of a facilitator, at their previous meeting.
6. Bertie agreed that he would respect the outcome but that he was not bound to do so if it compromised his position as

   Chairman and majority shareholder.

Findings:

Included in the issues that surfaced from the questionnaire analysis and the interviews were the following:

1.    The poor relationship between Bertie and Neville was affecting the business. Apparently Bertie had made a bad decision in

       taking over a small engineering business ‘in financial distress' and lost a considerable amount of money. Neville was very

      upset with this; Bertie never apologised for this nor took responsibility for what happened; and the issue had never been

      spoken through or resolved.
2.   Although Bertie was the Chairman, and should have acted as such, he constantly interfered with Neville's day-to-day

      activities. In fact, Bertie, by his behavioural style was trying to be the Chairman and the MD at the same time as he had no

      respect for Neville's capabilities. He also resented the fact that Neville had been given, by his father, the opportunity to

      purchase shares in the business. This had never been discussed.
3.   Bertie's autocratic management style was singled out as being inappropriate for the business at this stage of its growth.
4.   The appointment of Roger into a senior position, and as a Director, was heavily criticised. Strong sentiment was expressed

      against him becoming the next Chairman – the perception existed that this would happen sooner than later.
5.   Children of the two sisters felt resentful that they had never been given the opportunity to join the business – in fact they

      had been discouraged from doing so by Bertie. In addition there was a perception that Bertie's children working in the

      business earned more than their non-family colleagues who had similar backgrounds and levels of responsibility.
6.   A common finding was that there was almost no sharing of information outside the Board room.
7.   Details were requested regarding the basis on which dividend declarations were made.
8.   Succession planning for the Directors and senior management was a worrying factor regarding the future sustainability of

      thebusiness.
9.   Linked to the Directors' issue was the question of who should be future Directors.
10. It was highlighted that there was no formal ‘Business Plan' charting the organisation's future focus.
11. There was a sense that there should be a retirement age for both family and non-family members in the business (but that

      family members could remain on the Board as non-Executive Directors)
12. A suggestion was made that, based on King II recommendations, a remuneration committee be formed to ensure

      reasonableness of Director and senior management earnings relative to external market benchmarks.
13. Another suggestion was made for the appointment of a new non-Executive Director in line with the move towards Black

      Economic Empowerment.
14. It was felt that, as part of Corporate Social Responsibility, the business should involve itself in community based projects
15. Finally there was unanimous agreement that Bertie had done a wonderful job taking the company forward. In doing so he

      had created much wealth for the family and it was hoped that this would continue in the future.

Apart from the above issues Tony stressed the need for a:

1.  Shareholder's Agreement - he couldn't believe that this fundamental Agreement had never existed. Clarity was needed

     regarding a host of issues, including buying and/or selling shares in the business, valuation method(s), protection of minority

     rights, rules for voting at meetings, and similar;
2.  ‘Family Creed' document which spelt out, inter alia, the values of the family, employment policies for family members,

     retirement norms, appointment of Directors, Societal Contributions, etc;
3.  ‘Dispute Process' to be followed in the event of family related conflict issues needing objective resolution; and
4.  ‘Communications Forum' where shareholders would meet quarterly and shareholders with their children and their spouses

      would do so on an annual basis.

The next step:

Initially Bertie was upset with the above findings. After all, he had very successfully run the business for over 30 years and why now the need for all these changes?

He first consulted with George who saw the above comments in a very positive light. “Bertie” he said, “be quite honest with me. You are no longer 40 years old and the way businesses are being run, including your family business, needs to change to be more inclusive, participative, transparent, and in-line with transformation developments taking place in South Africa regarding BEE and Employment Equity. It won't be easy for you to adjust to the many suggestions but give it a go for the sake of future generations, let alone the existing stakeholders”.

In their meeting Tony was far more direct. “Without, over time, changing the culture of the business you are courting trouble. The world has changed as to management practices and you, with the greatest of respect, have not adjusted your style to accommodate this. And being in a family business only complicates the issue more in this regard. I do know the emotional attachment you have to the company. To ensure its continuity business logic must prevail to embrace change for future generations. I don't see the requests being made unreasonable at all. If you don't move forward with them to everyone's benefit you run the risk of what happens to most family businesses, namely a generation or two create and grow the business, the next generation consolidates the business, and the following generation sells it. Is this what you want to happen?”
Tony ended his discussion in an open and frank manner. “Bertie, I'm sure you fully appreciate that what is good for the business is also good for the family. Business logic must prevail over family emotional issues.”

The future:

Bertie decided to take a few days off work to contemplate the overall situation. During this period he went to his well-stocked wine cellar, took out and opened one of his better bottles of wine to share with his wife and, as usual, confided in her: “I must confess that I have very mixed feelings about so many things. Maybe I'll get extra inspiration from this wonderful vintage wine. What do you think I should do?”

Conclusion:

The above case study deals with the kind of issues that frequently arise in family owned and managed businesses, included are:

1. The leadership and management styles of the (usually dominant) family Chairman who could also be the MD. This is

    frequently motivated by ego issues and retention of power within the family structure. Sometimes business decisions may be

    made on the basis of family politics rather than the best interests of the enterprise;
2. Nepotism regarding employment and/or promotion based on family considerations rather than on merit;
3. Overlap, and sometimes conflict, between business and emotional issues;
4. There could be differing priorities, goals and expectations of the various stakeholders who are, or are not, working in the

    business;
5. The extent of participation of shareholders and their off-spring in the business;
6. Succession Planning for Directors and senior management;
7. Equity ownership by family and non-family members and what happens to this on their death; and
8. Processes and criteria for the appointment of Executive and non-Executive Directors.

In taking things forward Bertie will need to continue the process agreed between him, Tony and George. Bertie obviously needs to make many personal and business-related decisions and set processes in motion to deal with the numerous issues. These will need to be prioritised with time-frames set for completion and responsibility given to individuals to drive the numerous issues forward to completion. There will be no over-night miracles. Everything will take time to work through.
Of extreme difficulty will be, as in all similar situations, the conversion of the leadership and management styles in the business into a format where family members and their heirs are fully respected as such. This is over and above the issue of profitability and good business practices. Failure to achieve this balance will, inevitably, lead to on-going family conflicts and probably, in time, to the sale of the business to ‘outsiders' by fourth generation family members. 

Extracted from Accountancy SA – written by Professor Paul Sulcas, UCT Graduate School of Business

In terms of the governing rules at the University of Cape Town Professor Paul Sulcas will be retiring from the Graduate School of Business with effect from 1 January 2010. He was appointed Dean of the School in August 1987 a position he held until November 1990. Subsequently he worked as a Professor at the GSB doing teaching, research, administration and becoming involved in community-based projects. Over the years he undertook a wide range of consultancy services focussing on family businesses. In addition he handled numerous assignments such as facilitation and mediation, strategic management, executive level personal placements, team building, executive coaching and participating at Board level for JSE and non-listed companies. 

Looking to 2010 and beyond he would like to retain links with the GSB,continue doing consultancy work including taking up appointments as a non-Executive Director, increase his involvement in communal work, make time to travel and enjoy recreational and sporting activities.