Family businesses: family, company and shareholders

Family businesses differ in a special way from other organisations, just as business families differ from other families. What always has to be managed at the same time is a company, a family and a circle of shareholders. These are three very different systems that are also constantly developing.

The three systems grow, and with them their complexity grows. An owner family with four members is easier to keep track of than a circle of 35 shareholders, or even of 120 or more. Management thus faces the task of balancing three complex, growing systems and aligning their respective needs with one another.

If this succeeds, and it succeeds surprisingly often, the “familiness” can be fully used. This means the bundle of resources that the owner family provides to the company. This form of company then enjoys considerable competitive advantages over other companies, and the owner family and the company develop constructively together.

The particular challenge lies in the different logics of family, company and circle of shareholders. They expose those involved to special demands, because the logic of the family calls for different behaviour from that of the company or of the shareholders. A business decision can be experienced as a slight in the logic of the family. A family decision can turn out to be a dramatically wrong decision in the logic of the company.

The transformis service portfolio for family businesses therefore covers five areas: shaping transition processes, establishing decision-making ability, family governance, shareholder qualification, and selection and qualification during generational change.

It is often in situations of transition that family businesses are particularly vulnerable. Transitions always arise when a company reaches the point at which familiar ways of doing business reach their limits and fundamental strategic reorientation is needed.

This can happen at very different moments in the life of a family business and can stem from economic or from family changes. Transitions always mean self-renewal of the organisation, that is, of the company. This goes hand in hand with the need for a sharpened strategic positioning.

In a family business, this process is particularly complex, because the three systems of company, family and circle of owners are affected at the same time. All three therefore face a number of tasks.

First, stock must be taken of business to date. Second, one’s own ways of observing the environment must be critically reflected on. This includes questioning previous paradigms, premises and one’s own “mental models”.

Third, the feelings that arise in the various subsystems, ranging from concern to fear, must be taken into account and balanced through appropriate forms of communication. Fourth and finally, on this basis, the aim is to arrive at creative and forward-looking decisions about the company’s direction.

One of the most critical transitions for success is business succession, whether operational or within the ownership system. Many dramatic changes happen here at the same time: roles change, communication and decision-making routines are put to the test, new structures are formed and much more.

In the family system, strong feelings can arise that have to be handled, such as disappointment and hurt. Turbulence is also to be expected in the company, which requires sensitive management.

Often less clearly defined, but no less significant, are rapid growth and the internationalisation of the company that often accompanies it. Both put pressure on familiar organisational routines. Established leadership structures and leadership cultures, sometimes developed over generations, are called into question, and complex changes become necessary.

The owner family is particularly challenged here. It must, for example, adapt to new financing needs and, where applicable, submit to external standards of evaluation.

Growth and internationalisation are a particular challenge for any company, especially when they happen quickly. Familiar routines have to be adapted rapidly, and structures sometimes prove “too narrow” very suddenly. Family businesses, with their established, family leadership culture, are indeed particularly vulnerable here if they cling to the familiar for too long.

At the centre of work with family businesses in such transitions is therefore the question of the extent to which the planned steps fit the “DNA” of the organisation’s previous forms of growth. Family businesses are particularly known for aligning their growth with their core competences and not infrequently achieving world market leadership in a specific niche. Growth either connects closely to these core competences or complements them.

Together with the company, transformis examines to what extent it has the ability to integrate the otherness of a new, possibly acquired unit. Where necessary, work is done to build up the organisational competences needed for successful integration. This also includes reflecting on the steps of change with the owner family.

In the family, shareholder and leadership circle, various circumstances can lead to paralysis and an inability to make decisions. These include smouldering conflicts, misunderstandings, differing ideas about the company’s strategic positioning and other ambiguities.

Within the business family, the circle of shareholders and the company’s management, there may be blocking patterns of conflict that make decision-making difficult or even impossible. To resolve these conflicts, it is necessary to disclose differing interests, values and goals, to bridge existing differences of opinion and to overcome the inability to decide. Only on this basis can the search for a jointly supported solution begin.

Overcoming the inability to decide takes place in several steps. First, the views of all those involved are made explicit. The feelings of those involved are also included, so that the emotional level is considered alongside the factual level. This is followed by clarifying needs and developing options for action, so that all parties get a clear view of possible solutions.

When there is clarity for all those involved, decisions can be made and their implementation initiated. As a result, the company is able to act again. It can develop positively, with the support of all the people involved in the decisions.

In the literature, steering the complexity of family businesses is often referred to by the somewhat unwieldy term “family business governance”. The term is retained here because it is more comprehensive than “running a family business”. What is meant is a consistent focus on the connection between the three systems of family, company and shareholders.

This includes formulating a family strategy, which can be reflected, for example, in a set of rules adopted by the family. It also includes all questions of concrete family management, the settlement of contentious issues and the development of routines that connect the owners, the family and the company.

In the sense of “parallel planning”, all solutions found are viewed and reflected on from the perspectives of the other systems. Family business governance is thus an umbrella term covering the various measures for the integrated steering of the three social systems.

In many cases, the members of the business family lack a shared understanding of how the family business is to be continued successfully across generations. Drawing up family governance strengthens and consolidates the sense of belonging among the members of the owner family and their identification with the company.

First, membership of the business family must be clarified: who plays a role in the decisions and processes and who does not. In addition, family values, goals and guiding principles are important elements on which clarity must be created. Communication rules and platforms must also be defined.

Added to this is a set of rules for conflict management within the business family, containing binding guidelines for action for everyone. This makes it possible to regulate how conflicts are handled and to avoid new conflicts arising. Another important topic is the self-understanding of the business family. A so-called “family charter” can be drafted for this.

Family businesses are so diverse that there is neither one single family governance nor one single process for developing a family charter. What is needed is an individual process in which the values and goals of the family and those of the company are worked out.

The result is a cross-generational consensus within the owner family and the identification of all family members with the direction of the family business. On this basis, the company’s further development can be defined.

Family businesses face the challenge of qualifying the members of the shareholders’ meeting so that they have the skills and knowledge that their role in the company requires. If there is no targeted qualification process, companies expose themselves to the risk of destructive influences.

Awareness of the need for shareholder qualification has grown in family businesses. However, most companies that undertake relevant activities concentrate primarily on teaching business administration.

At first glance, this is understandable. Anyone who has a vote in the company should be able to read a balance sheet and get to grips with important economic topics. In family businesses in particular, however, it is equally important to know and internalise the culture and values of the company and the family in order to protect their interests and act in their spirit.

The group of shareholders is divided into two segments: those who hold an active role in the company and those who appear only at the shareholders’ meeting. In most cases, the second group is completely neglected in qualification efforts. This runs counter to the goal of fully informed decision-making.

In addition, many companies only provide further qualification for those shareholders who have already taken on their role. It is advisable, however, also to include the people who will hold a corresponding position in future and those who shape the next generation.

It is therefore advisable to offer qualification opportunities for all shareholders and to follow them up. Only in this way can a goal-oriented continuation of the company be ensured while preserving the values of the family and the family business. Corresponding requirements can be laid down and formulated bindingly in a family governance.

At the end of this process there is a shareholders’ meeting that can perform its task competently: comprehensively trained and at the same time familiar with corporate culture and values.

At some point, every entrepreneur and every company faces the topic of generational change. To ensure that the right people are available for important positions, it is essential to address succession in good time.

Putting the right person in the right place in the company is one of the most difficult and consequential tasks of corporate management. New people move into decision-making functions and have to connect with existing structures. At the same time, they must critically reflect on the extent to which the existing structures and routines fit their own personality, disposition and leadership style. In the short and medium term, this can lead to changes that are certainly experienced as serious and unsettling.

In the succession process in family businesses in particular, those responsible are under special pressure. Making a decision in the logic of the family can be fatal for the company, and vice versa.

On the one hand, a family business cannot and does not want to miss the opportunity to use the human potential that lies within the family, whether in management or in supervision of the company. On the other hand, it is confronted with the reality that the necessary resources are sometimes available neither in the family nor currently in the company and must therefore be recruited from outside. In any case, the decisions taken can be associated with tension and hurt.

The selection and qualification of suitable shareholders therefore requires objective decision-making aids in order to defuse the potential for conflict associated with personnel decisions. For this, transformis uses instruments that allow valid personality measurement.

This form of aptitude diagnostics goes beyond an “assessment”. It makes it possible to match organisational requirements specifically with personality profiles and with the competences needed for the respective function.

In the succession process in particular, it thus becomes conceivable to defuse the question of the suitable successor through a system of objective assessment. Such a system clarifies the question of fit. It is also able to identify the strengths and weaknesses of the respective personality, determine needs for compensation and derive targeted support measures from them.

It is advisable to introduce a structured process with which the relevant people are identified and prepared for the intended roles. This makes it possible to ensure that the departing generation looks forward to the change optimistically and that the next generation starts its task confidently and fully equipped.