Understanding Family Influence

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Understanding Family Influence
How the Family Dynamic Affects Family Business

In last week’s lecture, we spent a
great deal of time talking about the
best methods to running a family
business

These methods gave us an
understanding that whichever part of
the business was made priority, it
would have significant effects on the
business venture

This week, we are going to go a little
bit deeper and understand how the
family dynamic affects the operations
of a business and its potential for
success

Reardon Supply

Reardon Supply is a $100 million-a-
year manufacturer owned equally by
8 brothers and sisters

Bob Reardon, President and CEO, is
fed up with his brothers and sisters.

Since taking over the company from
his father nine years ago, Bob has
done a fantastic job

He has increased revenues 700%,
organized an outside Board of
Directors, and implemented strategic
planning companywide

Reardon carries no debt and is very
liquid, but its growth rate is slowing
down

The competition is now national and
international conglomerates who are
able to produce and deliver much
more than Reardon can

All of this is causing margins to
shrink and customers to look for new
options

Reardon needs extensive capital
expenditures to stay competitive

So when Bob accumulated enough
of the company profits to acquire a
company that would push Reardon to
the next level, his siblings voted for
dividends instead of the acquisition

Bob is fed up with his siblings

All of his siblings are settled in
careers and lives outside of Reardon
Supply

Some have become concerned with
their own lack of liquidity and have
expressed an interest in cashing out
of the family business

Others resent Bob’s salary, but are
very glad to have “one of their own”
running the company

Nancy, Bob’s older sister, believes
that he is overpaid since her
husband is President of a public
company worth more than Reardon,
but makes less than Bob

There is another family council
meeting coming and Bob knows he
needs to do something

What should Bob do?

The Problem with Family
Business

Secrecy, lack of information, low
levels of family emotional
intelligence, and little knowledge of
the business among family members
all threaten the success of the
venture

These problems may be the result of
a founding culture that supported an
autocratic leadership and control or a
reincarnation of this culture in a later
generation

Or they may come from the family’s
belief that there are many benefits in
privacy including, flexibility in
responding to competitors,
minimization of tax liabilities, and
management of expectations of
relatives, employees, and even
unionized workers

After years of not communicating, not
editing/hiding financial statements,
profit margins, cash flows, and
market share information

The ability of next generation family
members to assist in the
management, or become
successors, is significantly difficult

Years of “Just sign here”
management undermines the
commitment to the dream of having
the enterprise continue from
generation to generation

The presence of family is the
essential difference between a family
business and other forms of
enterprise

Another problem with family business
is in our business schools

Business schools have typically
avoided discussing the topic of family
businesses in the study of all
business topics, which makes our
understanding and management
much harder

Especially when 90% of businesses
in the US are family firms, employing
59% of the workforce and generating
49% of the national GDP

So, not only are we unfamiliar with
the dynamics that family businesses
operate with, but our own business
education does not empower us to
be able to understand their impact

Another factor we must take into
account is the influence of inactive
family members in the business

Family members who do not
participate in the management of
business often have significant
influence on the discussions,
decisions, and long-term processes
of the family venture

When these perspectives and
contributions are not considered, not
deemed legitimate, or devalued –
they see inequality

This inequality is the beginning of the
family conflict that can destroy family
ventures

What Are We Going to Learn

Today, we will be talking about 3
things:
Family dynamics
Genograms
Family History

By understanding these 3 things, we
will understand family ventures better
and how to manage family issues to
positively influence the unique
interaction between family and
venture

Some Examples

Louisville Courier-Journal
and
the Binghams

On January 9th, 1986, Barry Bingham
Sr announced that the Louisville
Courier-Journal would be sold

The Binghams had been unable to
communicate and resolve the
differences between family members

On this day, an agreement was
reached between the Gannett
Company and the Binghams cashed
out.

Unlike Reardon Supply, Barry
Bingham Sr. had not been able to
demonstrate a visible commitment to
continuity

Also unlike Reardon Supply, there
were no independent member of the
Board of Directors

Barry Bingham Sr. also did not fully
empower Barry Jr. when he became
the President of the newspaper, by
repeatedly second-guessing him,
and retaining his majority voting
control

By never communicating his
commitment to continuity, transfer of
voting control and approving the sale
of the company, Barry Sr. minimized
his power as father, CEO and
majority owner

Many of the problems, discussions
and decisions the Binghams could
have taken to reverse course and
prevent the sale of the company
would have been in family meetings

Without such a body, the conflict was
taken directly to the Board of
Directors, which was clearly
overwhelmed by the conflict and
paralyzed by its own membership

In the absence of family meetings,
next generation family members
lacked the education, information,
give-and-take communication, and
emotional intelligence that would
have promoted understanding
among the individual heirs

The Seattle Times
and
the Blethens

Frank Blethen, Chairman of the
Seattle Times, built a business to last

The Blethens believed in sharing
information among family members
through family meetings – a central
governance body

In family meetings, Frank would talk
about the commitment of every
generation, which had resulted in
over 100 years of leadership

He stressed the need to value the
extended family over the individual or
family branch, and challenged
individuals who participated in the
family business to assume
stewardship of the family venture

He taught them that to be successful
as individuals, it was essential that
they understand the individual’s
responsibility towards the group

Frank taught the next generation that
more than money, they inherit a
responsibility to others and to
stewardship so that the enterprise
they received could be successfully
passed on

What was the effect?

Members of the 4th generation were
proud to report to the family council
that on their watch, the company
grew from 2 daily newspapers

To 6 daily and 2 weekly newspapers
and 2 major informational websites

They had overseen a 215% growth in
assets and a 33% growth in cash
flow – increasing the dividends to
over $30 million – when only 20
years earlier it was 0

The Seattle Times had been a finalist
for 6 Pulitzer Prizes and been named
the 14th best newspaper in the United
States, making it the best regional
newspaper in the country

Through education and information
sharing, they were able to increase
their patient capital slowly and
steadily without being challenged by
family members for “a bigger piece of
the pie”

The Zero Sum Dynamic

It is within the rights of ownership to
focus on individual gain and to retain
the right to immediate liquidity

But in large multi-generational family
ventures, liquidity does not exist

This lack of liquidity and the need for
selfless interest can be a burden for
family members operating in a
society that tends to focus on the
short term

They will only take on this
responsibility if opportunities to
acquire information, be educated,
and to engage with important family
value are plentiful

But there is a problem here…

Multi-generational families are fertile
ground for zero-sum dynamics

Zero-sum dynamics are
characterized by exchanges in which
one party’s perceived gain is the
other party’s perceived loss

If one branch of the family uses
educational assistance for next
generation family members, another
branch assumes that less will be
available for their children

If family members in top
management are to be compensated
at fair market rate, those not active in
management assume they have to
settle for lower dividends to
compensate for it

This is called “Us vs Them”

The “Us vs Them” dynamic can be
triggered by anything – male/female,
active/inactive, richer/poorer, better
educated/less educated,
older/younger, blood relative/in laws

The only time that “Us vs Them”
becomes active is when the
enterprise or wealth stops growing or
is in decline

Understanding Family Influence

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