Guidance on How Family Businesses Can Keep From Spinning Out of Control

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Governance is the only clutching counterforce that works

As kids, spinning out of control was a lot of fun. As family business owners, not so much. But rapid changes, coming from both inside and outside of the family business, fuel the spinning force we all must contend with.

Before we grapple with that, go back in time, back when family business was not on your mind. Did the childhood amusement park you visited have a particular ride where, in the center of a big room there was a large, smooth wooden disc that spun around and around?

If so, you might recall how the ride operator would signal when it was time to hop onto that huge stationary disc. Everyone would madly rush to sit as close to the center as possible. Bruising collisions were common. Friends would clutch onto each other.

The loud music would come on and the big disc beneath would start to move. It was like being on a life-sized record player, except without the grooves. As the spin got gradually faster the kids who were late getting on would spin off first. Those of us still hanging on would chuckle at their early misfortune. But our laughter wouldn’t last long, as we knew our fate would ultimately be the same. We never quite mastered the force of the spin.

Fast forward to today, when the family business is very much on your mind, you realize that your family business is a system – a system that also must endure the force of spin. And as the family grows generationally from the inside, and as the commercial world grows more complex on the outside, the family business system rides the virtual spinning wooden disc. It struggles to resist the inertia that would spin it apart. This time without the giggles.

The system is made up of three sub-systems: family members, owners, and managers of the business. These subsystems may begin their ride huddled seemingly close together, like young pals on the amusement ride. But individually, without something to clutch them together, the spin will prevail upon each.

The bonding counterforce that must be applied and strengthened, if the family business is to hold together and continue on, is good governance practice.

For example, what keeps the owners from losing their grip on the business and its strategy? A Board of Directors — made stronger with outsider participation. What keeps family members in sight of their shareholder responsibilities? A Family Council — also benefited by having independent facilitators. What keeps the family in constant vigil over their business investments? The Family Office — often wisely supplemented with external wealth advisers.

These are the more prominent, institutional forms of family business governance. They provide binding forces that keep the family business subsystems coupled together. Newport Board Group expert advisers foster family business system integration, and commonly serve as members of these governance bodies.

The accelerating force of spin that complexity manifests in business today is such that it makes it hard to remember when spinning ever could have been a source of fun. A family business must up its governance game. Its very continuation depends on it. First some key questions, then some simple suggestions for immediate application:

As the family generations expand, how will employment of family members be treated? What should shareholders be expected to contribute in time and effort to the cause of the business? And what do they need to fulfill what is expected of them? What criteria will go into the selection of family members who wish to serve as managers, or leaders, of the business? What should be the principle elements of a succession plan? Does that plan include what the family has set for its goals – goals that span both family cares and business concerns?

At the high end of the spectrum of governance readiness are formal documents such as family constitutions, policies and board minutes. But like the cross-limbed clutch of pals atop a spinning disc even the basics of civil discourse and the capturing of shared concerns by participating family members can get the governance counterforce underway in earnest. Coordinating regular meetings together, and gently raising the big unanswered questions are key. Documenting what gets agreed to – even if it is only agreeing to keep talking and declaring when you will talk again, in order to to advance the cause of agreement – can begin to slow the great spin.

Who knew we were getting a lesson in family business governance when as kids we held each other tight to counter the accelerating spin that would cast us off? Remembering those early lessons may even serve to make family business fun again.

Hurry, the music is starting.

Mike Evans is the Managing Director in the Northern California office of Newport LLC.

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