Imagine this scenario: a family owns an operating business, with a non-family member as CEO. In response to COVID-19, the CEO takes the necessary actions to ensure the business’s survival. That might mean cutting staff, closing stores, or putting harsh terms on suppliers/customers. The business is stabilised and able to return to a stable footing through the crisis.
But something is amiss – there is a discomfort among family members about some of the specific steps the CEO took. It starts as small talk – “I’m sure Grandpa wouldn’t have done that when he was in charge” – and slowly percolates around various family members. Eventually, it reaches the stage when the family members who sit on the board of the operating business recognise there is significant discomfort within the family regarding the actions of the CEO.
At the next board meeting, they raise the issue with him, and naturally he feels a little under fire. “You employed me to run this business, and that’s what I’m doing. We needed a very firm response to the pandemic, and as you can see, we will pull through OK”. The CEO makes a strong case – the board has given him the authority to run the business. Equally, the family also have a point – the business bears their name, and the actions the business takes are a reflection on the family and their reputation.
There are lots of questions: Did the CEO do the right thing? Do the family have reasonable grounds to be upset? With a professionalised family business, could this have been done differently or better? If so, how?
The first step is to understand the core issue, which is a clash between the family’s values and the behaviour of the professional, non-family CEO. In the past, the family values would have had a more direct link to management decisions made by family members in the operating business. With the professionalisation of the business, that link appears to have been broken. But how to re-establish the link?
The process starts with understanding the family values. While all families have a set of values, not all families are aware of them. They may have a sense of what they are, but can’t necessarily articulate them. As families grow, it can be helpful to have a process (which engages a wide group of family members) where those values are discussed and clearly spelled out.
A family business, while created for the purpose of wealth generation, often embodies the values of the founders in some way. Because the family members are deeply engaged in the business, their personal values drive business behaviour and practice. Hence “how Grandpa would do it” becomes both the unwritten operations guide for the business, and part of the family story. Values and organisational culture become embedded in the business, and transmitted to employees – family members and otherwise – who join.
The professionalisation of a family business – addition of external management, a board with independent directors, and the departure of some family members in executive roles – can lead to a loss of both corporate memory and some of the cultural/values underpinnings of the business. That may have contributed to what has happened in the case we have discussed. To resolve this, two steps are required.
The first is for the family to have those facilitated discussions about their values.
Family values are not transmitted generationally like Moses coming down from the mountain with two tablets – they evolve over time. Accordingly, it is important to involve family members from multiple generations in the discussions. The result of the values discussions may be a document like a family charter or constitution, but that is not a necessary outcome. Indeed, the discussions themselves and the journey of discovery are as important as the destination.
Once the family has a clear understanding of its values, they can gain insight into how those values have or have not been honoured by the actions of the CEO.
The second step is to formally embody those values in the family business. Usually, we think of non-profits as values-driven organisations, and for-profits being about “maximising shareholder value”. But as explained, values are an important part of family businesses, and indeed one of the things that makes family businesses special and more enduring. It is possible for those business to be both profit-seeking and true to their values.
The values can be articulated in board documents to give them the authority and gravitas to drive management behaviour. Organisational culture is driven top down, so the starting point for cultural change is always the board. How deep the board and the family want the values to permeate within the business is up to them. It can be expressed in the delegation to management, or go further through the human resources side of the business.
In conclusion, this COVID-19 scenario may be yet another source of disruption for a family in very uncertain times. However, it can be used as the trigger for improving the family’s self-awareness of its values, and its governance structures. This in turn can lead to a more robust and meaningful relationship between the family and its operating assets. For family members instead to sit back and wring their hands in despair rather than take action would be a waste of a good crisis.
With thanks to members of the KPMG Australia Enterprise team for inspiring this article.