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Stakeholders of the family enterprise

Dennis Jaffe is a founding partner of Relative Solutions, professor at Saybrook Graduate School and author of Working With the Ones You Love.

A family firm can grow into a complex matrix of enterprises and people, all of whom need to have defined roles within the confines of the family business. Dennis Jaffe clarifies the common roles so family members can be sensitive to each other's position

While a family business may start out as a clear and simple venture, with one person with a large vision in control, if it is successful, it soon becomes a complex entity where control, ownership and benefits are dispersed, often among competing interests. The family grows – gaining new family members by birth and marriage who need to learn their place and role in the business. The business grows, or the family may diversify into several businesses, real estate, philanthropy and community service. Within a generation, a family can become a complex matrix of enterprises and people, each of whom has their own idea of what the enterprise should do for them, and what they think they can do for it. The family is surrounded by a veritable army of employees and advisors who want the best for the family, but must take into account their own personal interests.
 
Each family member has a role and status as a family member. They may be son, daughter, cousin, brother or in-law, each of which carries with it a history and expectations. Growing up in the household owning a business, they may come to expect certain benefits, such as income, support and access to resources. Their family role evolves and changes as they grow up and form their own new families. While it may have been so when they were young, family membership does not guarantee a corresponding role in the family enterprises. Yet many family members feel that there is (or should be) a connection, and even make assumptions about what being a member of the family 'entitles' them to. While unconscious, this connection is usually self-serving, and not always in line with legal or business reality.

The family enterprise (consisting of the legacy family business, as well as related shared family assets, such as real estate, investments and philanthropic vehicles) is an arm of the family, but it cannot be run like the family. A family member can participate in each enterprise in a variety of roles – as employee, director, leader or owner. Each of these roles entails different rights and responsibilities. This is a difficult lesson for a family member. When a son talks to his father, it is hard for him to remember that he is also an owner talking to a director, or a manager talking to her boss. In a family enterprise, interaction is made more complex because people may have relationships that encompass several roles.
 
To help a complex family make sense of this, I would like to specify the most common roles in a family enterprise. In the leadership role are the directors. The people who manage the various entities are operators. There are beneficiaries, who may or may not be owners. And finally, advisors offer the family their expertise for a fee. A person in any of these roles may or may not be a family member. My purpose is to delineate each of these roles, and to suggest that people within a family enterprise should be clear about which role they are taking when they engage each other. When a family member can begin an exchange by saying, "I am speaking as a director of this business, not as your father," they can avoid some conflict and confusion.

Family members grow up with different degrees of entitlement to the family assets. They benefit from its resources, and in doing so, they tend to assume they have some power to decide and make decisions about family assets. They grow to expect this to last forever. But they must discover that while they benefit from the family's wealth, in fact, they have almost no 'rights' to anything. If they also inherit ownership, then they will have some choices they can make about their assets. But these will be limited.

The difference between the status of beneficiary and that of owner has to do with the rights that a family member has to make decisions about their assets. A beneficiary may have ownership, but the responsibility, control and oversight over the asset lie with another person. An owner has limited discretion. Owners have the right to sell their ownership, but within the limits of a shareholder's agreement. The problem is that, in many families, these agreements are misunderstood or out of date. Family owners often do not know or understand these agreements, especially in relation to how the asset is to be valued when sold, and who it can be sold to.
 
A family owner (or beneficiary) has to understand that there are different degrees of 'having' family wealth. One can receive income from an asset and from the family wealth, but this does not necessarily entitle a family member to any power or control over what to do with the asset that provides the wealth, other than limited rights of ownership, having to do with sale. While many people are absolutely fine with having the benefits of wealth with no power or responsibility, others feel deeply disenfranchised about this, especially in relation to those others who have more involvement and control due to their roles as operators and directors.
 
Some families create a very clear boundary on these matters – defining an elaborate process for entering the family business, moving into the role of operator. Several things confuse the occupancy of this role. First, there is confusion about its relation to ownership. There is no formal relationship between working for a family enterprise and having ownership, other than the personal family bonds that may lead others to see their future ownership role, or their access to those who have the power. A family operator must learn to be an employee, receiving salary for their work, having their performance evaluated, and being answerable to a supervisor (not their father who may own the business, or other family members). Because of the presence of the family, family business owners find they have to make many things clear to family members about employment, lest the family member attribute additional perks, power or status to their employment.
 
Who has the power over the business? This belongs to a group of directors, whose role is to oversee the asset, making sure that its overall operation fits the intentions of the owners as a whole. They set the direction and hire the leadership. Directors consist of the family member who is the majority owner (or who holds the voting shares of the company). They often include other key family owners, from the older generation. Some family enterprises have begun, like public companies, to appoint independent, non-owner directors, who offer a deep wisdom and experience. When the ownership is in a trust, the directors are the trustees, who may or may not be family members.
 
The director role has been likened by Jay Hughes to that of the tribal Council of Elders. In a large or diversified family enterprise, the directors must make decisions about its future. They look at the emerging leadership of the family and assess whether the new family leaders, usually in the role of operators, are ready to move into directorship. The directors cannot live forever, and hence they face the challenge of setting up an orderly process of succession. They must decide when a member of the next generation is ready to become a director.
 
Some of the complexity of family business has to do with issues across different statuses. For example, what does a family operator or director do in situations where they have a separate self-interest? Many families face situations where a family member can act as an independent investor in a venture, or who receives a fee for services to the family. The directors must look at this, and they also must be transparent to all family members about their decisions. The family members who may be in one or more of these stakeholder roles are a collective entity whose life transcends these individual roles. That means that the whole enterprise has to have a great deal of communication among the parts, and exchange of ideas and feelings about what is being done. In a family these exchanges are often purely advisory, but there is an added need for greater education and communication in a family than exists in other business enterprises.

There is one final role – that of the advisor. The advisor offers expert knowledge to various parts of the family enterprise, and is often an individual who has a long-term and special relationship with a family leader. There are two issues with the advisor role: who they give their advice to, eg who is their client, and the line between offering advice and taking responsibility for it. Many advisors get drawn into roles as operators and even directors. Often the family relies on them to the extent that the advisor appears to be running the family enterprise. Another family member may not feel that the advisor works for them, or may not understand what the advisor is proposing.
 
The purpose of this reflection on family role is to suggest that family members and others in a family enterprise are joined together in complex interlocking roles, and that they need to be sensitive to the particular role they have in the family. A family member must understand the limits of their role, and those with control and responsibility must understand who they work for.

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