Many years ago I was commissioned by a leading financial institution to conduct a study covering hundreds of wealthy families in Asia and discovered an 80% failure rate in several areas notably, succession, sibling rivalry, and trust. In a way, the study galvanized what we knew all along that the “shirtsleeves to shirtsleeves” phenomena, where wealth disappears in three generations was so pervasive yet preventable. The study also concluded that the major causes of family collapse were within the family itself, having more to do with behavioral issues rather than external or global or regional economic upheavals. It also further showed that most family meltdowns were caused primarily by a collapse in trust and communication followed by the failure of parents or key business leaders to adequately prepare the next generation offspring for creating and managing the wealth.
As Family Business expert David Bork expressed in his Family Business Matters article, “relationships in a family business are like the wheels on a chariot. When the wheels are in balance, there is energy and productivity, but once broken, everything slows or shuts down. If one person in a relationship discounts another, it breaks the success momentum with differing levels of cost. The breakage can come from anywhere or anyone, from the oldest to the youngest, even from family members outside of the business environment.”
We also discovered in the study that there were many strengths inherent in a family-run business. Foremost to these strengths are the following:
a. At an early stage, a remarkable leader, a super-entrepreneur emerges and guides the business with extraordinary passion and insight
b. Decisions are made quickly minus the bureaucracy
c. A simple structure that makes the organization nimble
d. Family members are collectively focused and committed
e. And for as long as the leader is around, the business will remain stable
But successful growth comes at a cost. As the business grows in size and scale, it becomes increasingly harder for the leader to manage. When the enterprise reaches this tipping point—it is swamped with internal struggles, regular family skirmishes, and conflicts as well as challenges due to the complexity and overlapping nature found in these organizations. As new family members join the business, conflicts further escalate and strained family relationships continue to wreck the business. It takes only one aberrant family member to hurt the family and the business. As Bork said, ‘while it takes only one broken dowel to hurt a relationship, it takes many branches to create and maintain it. The Germans have a term for this person whose behavior departs substantially from the standard, “ein Haar in der Suppe, or a hair in the soup.” It takes several ingredients to make a good stew and only one fly to spoil it.
A major reason why all of these internal issues are happening is that while the business generates wealth, the family continues to be governed by informal structures. More often than not, when these informal structures break down, trust and betrayal rear their ugly head. These issues necessitate the loss of direction and derail the business causing more discord. And when an unexpected event happens like the death or incapacity of the key business leader, a long period of chaos within the family and the business will follow. There is a saying, “things built on a weak foundation will eventually crumble.”
Family-owned businesses that are united and resilient have one thing in common. They have institutionalized trust and communication based on fairness and respect, not power and control. Institutionalizing trust and communication simply means the transition of the enterprise from an informal to a formal structure where decisions are based on pre-agreed rules of engagement, collective decision making, board activation, and objective data. In short, it is the set of structures (embedding governance, a constitution, ownership agreement) reinforced with a sense of purpose, strong values, and a clear sense of direction that will take the business to the ‘next level.’