24 Jan 2003

As published in Dinero Magazine

As business owners and their businesses mature a critical question emerges. How can the entrepreneur best preserve the family’s wealth and enterprises? What will happen when the entrepreneur is no longer able or desirous of managing the family’s business and assets? If the hope is to pass the business to one or more children how will this affect the business and family harmony? If the next generation becomes not only related by family but also as joint shareholders of a company will they be able to work together as productively? Usually the number of shareholders greatly increases with each generation. And not all these shareholders work or should work in the company.

Should the entrepreneur train one or more of his children into the leadership positions? Do the children have the competencies and desire for entrepreneurial leadership? Can the next generation work as a team? Will they act as shareholders, managers or both? Perhaps the family business is already in the second generation and beginning to prepare for the third. How can challenges of promoting business health and welfare as well the complexity of dealing with more and more family shareholders be dealt with well? Can this be covered by a shareholder’s agreement? And, when should this process begin?

Many families find that the development and signed commitment to a Family Protocol is one of the key ingredients to sustaining the family and business. Writing the Family Protocol is a process that should include all family members in understanding the legacy and core values of the development of the family and business, a Mission and Vision Statement and the rules of governance for the family business. It should include the shareholder agreements. Family Protocols are larger then shareholder agreements. They set the context not only from a legal and business perspective but also from a position of respecting the nature of the business as a family enterprise.

A family protocol is a document that details specifically how the family and business will be governed and major decisions will be made. Further it is a process whereby the older and next generation dialogues the central issues and decides how critical decisions will be made, conflicts will be resolved and the relationship of the different bodies such as the Board of Directors, Family Council and Family Shareholders. The final document represents a blueprint for succession and a commitment as to how the next generation will work together to achieve shared goals.

The issues of succession are paramount. In the USA less then 33% of all family businesses continue from the first generation to the second and only 13% make it from the second to the third. The breakdown of numerous families as well as the host of unresolved hurts and anger tend to come to the forefront at the time of succession planning. It is not just that succession planning is difficult and often avoided it is truly a more complex process in each succeeding generation.

The autocratic leadership style prevalent in most first generation family businesses usually worked quite well. One of the major reasons for the success of the business was often the entrepreneur's aggressive and autocratic approach to the business. Business was carried out, jobs got done and there was a feeling of stability in the organization. However, resentments and hostilities between family members were often brewing beneath the surface. Typically, the children have held critical allegations and attitudes towards each other for years, which were never confronted, dialogued, or resolved. These attitudes often emerge as the family faces or avoids facing the need to plan for the future.

The key is for the family to learn how to dialogue and resolve conflicts and issues through democratic principles, empathic understanding of each person’s, family’s and business’s needs and a healthy respect for the changing needs of each.

As every family brings its unique history and character – so it is with each family protocol. The Family Protocol is the formal agreement to be signed by all family members that govern how the family and business will be managed. The protocol must be written by the family! It is the process of working together in creating it that will build the foundation of communication and trust that is so needed. The Protocol then becomes one of the tools for family and business stability during the the difficult times of leadership change.

Marc A. Silverman, Ph.D. principal of Strategic Initiatives Inc. a consulting form that specializes in Family Business in USA and Latin America. He can be reached at Marc@sii-inc.net.