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Good governance is key to a fair share for all the stakeholders

Andrew Keyt is president of the US chapter of FBN International and executive director of the Loyola University Chicago Family Business Center

Deep-rooted resentments among siblings can stem from childhood and blight the running of a family's business. Andrew Keyt explains how effective systems of regulation and open communication between all parties can smooth the path of a company's trajectory

Fairness is a core issue to most family businesses. Perceived inequalities in a family often lead to deeper conflicts later in life. Families commonly look to the family council to "solve" these conflicts that arrive from perceptions of inequality. The challenge for the family council is to shift the stance of the family to see that these fairness conflicts are an inevitable part of being a family business and that their job is to help the family identify and manage the conflicts before they interfere with the family and business in a negative way.

The origin of fairness conflicts
The seeds of conflict around fairness are sown at a young age. When one child gets a greater serving of ice cream we get the "he got more than I did" performance from the children. If only it were so clear later in life. As children grow, they do not always express hurt and resentment over perceived preferential treatment as clearly as in that moment as a child at the dinner table. As adults, family members often express their resentments in more subtle ways, a shrug of the shoulders here, a nasty look here and there. In a family business we often see these silent expressions of anger build to a deeper resentment, where family members actually work against their siblings or cousins to try to make up for the perceived hurts and injustices.

One of the most common areas of conflict in a family business is ownership. We hear of the family member working for the business who does not feel that it is fair that their sibling, who works outside the family business has ownership and a voice in the company. On the flip side, those not working for the business often complain that those working for the business treat them like second-class citizens and get greater benefits than they deserve.
 
The enmity and mistrust that have built from small injustices as children, blossom into situations where family members active in the business marginalise or discount the ideas and opinions of the outside shareholder. Another scenarios is that family members outside the business, make accusations about the operations of the business and seek to dictate decisions on operational issues.

So, how does a family deal with the conflicts surrounding fairness such as the issue of ownership? Many see the family council as the vehicle to solve these conflicts. The reality is that the family council cannot solve the underlying issues without playing psychologist, which is not their role. The family council should be able to identify and manage conflicts so that they do not interfere with the family or the business in a destructive way. This may involve seeking outside help. The family needs to shift from seeing the conflict as something that the family council should solve, to seeing that conflict is an inevitable part of business and the family council's role is to manage and contain the impact of these conflicts. So how should the family council approach an issue such as the fairness of ownership?

The compensation challenge
A frequent comment from active family members is, "Why should my siblings have ownership? They haven't done anything to contribute to the business. All they do is get a dividend cheque." Comments such as these come from a feeling of being underappreciated and that it is unfair that someone who does not appreciate their work should benefit from the fruits of their hard work. But this view confuses the issues of ownership and compensation.

The reality is that with ownership that is being passed from parent to child, each sibling has just as much right to ownership as any other sibling. Ownership is being transmitted within the family based on family and blood reasons rather than business performance. A family can choose, however to offer ownership as a tool to motivate active family members' business performance. The role of the family governance system is to recognise and address these feelings of inequality. Family shareholders not working for the business likewise can feel a sense of injustice, as they often perceive active family members as receiving perks that are above and beyond what they would get elsewhere. Again, the feelings of inequality pervade. Statements such as these are an expression of a feeling of being disconnected from the family business and those working in it. As a reaction to active family members discounting the role of inactive shareholders, the inactive shareholder seeks to find legitimacy by showing that they are being mistreated.

The reality is that active family members have a right to be fairly compensated for their positions. Their compensation for their role in the business is separate and apart from their compensation as owners. To under compensate them hurts the individual family member, and to over compensate them hurts the business and blurs the line between compensation based on ownership and compensation for their role in the business.

The family governance system has to manage this dynamic. It needs to help shareholders understand the compensation issues of the corporation, and establish a compensation policy that is understood by all. The family council needs to assure that the board is following the compensation policy and implementing a salary and benefit structure of the business that is benchmarked against industry standards. Similarly, the council has to ensure that family members understand the difference in ownership based on inheritance versus ownership that is achieved as a form of compensation.

Responsibilities of shareholders
The result of the battles between active and inactive shareholders is that the lines between family and business are blurred. We find that inactive shareholders who have a perception of inequality will seek to have a voice in business issues that they have no right to be a part of. These shareholders seek to have a voice in operational strategies in a way that makes it difficult for the business to achieve its objectives.

Shareholders who are not active in the business have a responsibility to educate themselves about the important issues facing the family and the business. It means that they need to be able to read a corporate balance sheet. It means that they need to know the role of the family council, and the board.
 
The council is the way to make sure this happens. First through educating thre family about the responsibilities of ownership, then through establishing systems of accountability to ensure that the lines between family and business are clear.

Have clear expectations
When families are not communicating clearly, they often develop expectations of the business or other family members that are unrealistic. It is easy for a family member, in the absence of any information being shared with them, to develop expectations of the business or other family members that are overblown.

For an active family member this may be expecting outside shareholders to feel their same passion for the business, to invest heavily in the business, or to be willing to accept the same level of risk. For the inactive shareholder, it often means thinking that family members make a lot more than they do and do not have to answer to anyone. When those lofty expectations are not met, the old feelings of preferential treatment from the childhood years can explode like a volcano.

Governance and the process
The task of the family council is to ensure that family members have realistic expectations for the firm and other family members. They do this by establishing policies and procedures through which expectations are set and disputes can be resolved. The family governance system is responsible for uncovering dynamics that evolve between active and inactive shareholders and building the foundation of trust.
 
The family governance system must educate family members about their roles and responsibilities, set appropriate expectations about what will get done when and who is responsible for it, develop systems to share information, and, above all, have fun. It is this attitude that binds people together and builds the trust to carry a family through hard times.

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