Family Relationships and Business Succession

Family relationships add an emotional dimension to running a business, but if improperly handled, may become “a time bomb” for a family business.

A family business is a company based on family relationships. Without this distinctive aspect, family businesses would face the same challenges as their non-family counterparts. It is relationships among family members that lie at the core of family business governance.

Relationships, Governance, and Management in Family Business

Although family relationships can bring benefits to a family business, such as strong member cohesion, efficient centralization, low-cost psychological contract, low managerial costs, rapid decision-making and members’ great commitment, there are potential negative side effects that cannot be ignored. These include an inevitable conflict of interest between the family and the family business and top management’s values, a role conflict for decision-makers between top executives and family members, a preference for male leaders, insufficient innovation and a shortage of talent.

Family relationships may not appear critical to the success of a family business, but they often result in its collapse when crisis breaks out due to bickering, backbiting or outright conflict between family members. For this reason, the greatest threat to the survival and success of any family business isn’t so much linked with external factors like technologies, customers and competitors; it’s rather more associated with the relationships among family members.

The complexity and intensity of family conflicts in a business depend on the overlap of duties in day-to-day management of the business, its ownership and the family. The risk tends to be the highest when the ownership, management leadership and family control completely overlap. If there are multiple family branches and family members involved, the threat of family conflicts will be a time bomb for the business. After the death of the first generation (often when both parents have been involved), the bomb often goes off among sibling families in the second generation, or among the cousin families in the third generation, where their interests are often difficult to reconcile due to the increased distance in blood ties.

Family businesses in China don’t like to be openly seen as a family business, partly due to social prejudices and jealousy towards individual and family wealth. The social-political environment likely helps suppress conflicts in family businesses. Firstly, the one-child family lowers the complexity of family relationships and incidences of conflicts; secondly, the relatively short history of family businesses in China helps defuse family conflicts. Although succession has captured much attention in recent years, the focus is not so much on wealth as on the capability of the second generation.

The next one or two decades will be a peak period of wealth transfer from first-generation entrepreneurs to second-generation business owners. Therefore, succession will pose a considerable challenge. The complicated succession process necessitates a well-thought out plan that includes a programme for successions, distribution of ownership and recruitment of professional managers. All these factors may determine the success or failure of generation-to-generation succession. Properly training successors is widely regarded as the most critical factor for family business succession. Family relationships are closely tied to the second-generation family member’s propensity to join the family business as well as his happiness and job satisfaction.

Family relationships include family adaptability and family cohesion. The family cohesion refers to the first-generation family members’ emotional ties with their children. Strong family cohesion indicates the first generation dotes on the second generation, but does not necessarily mean the second-generation family member is ready to pick up the baton. Research has found it is family adaptability that determines whether a child will join a family business. His willingness to take the helm speaks volumes for high family adaptability rather than strong family cohesion.

There are four types of family relationships:
•Disengagement - members make no commitment to their family
•Separation - though emotionally separated, members exchange views with each other
•Attachment - members show intimacy and loyalty toward each other
•Enmeshment - over-involvement in each other’s lives results in imbalanced relationships

Under these four scenarios, flexible and adaptable relationships are required for a family to successfully steer their way through through difficulties. Thus, the family’s preparations and decision-making process for adjustment of family relationships will have a bearing on its overall adaptability.

In a rigid family business system, the first-generation family member reigns supreme while the second-generation family member is loath to succeed his parents as he is in no position to bring his talent into full play. The so-called standardization means the independently formulated regulations can be effectively enforced, leaving little room for alteration. The corporate flexibility we look forward to refers to democratic decision-making on an equal footing, with wide scope for improvement of rules. Nevertheless, excess flexibility will be accompanied by roles or institutions that are not clearly defined. Therefore, it is critical to strike a balance in family relationships, where the family and the business are interwoven with each other.

Relationships, Governance, and Management in Family Business

It is important for a family business to keep a standard but relatively flexible family system in place. A balanced family system features open leadership, candid communication, clearly defined role sharing and democratic decision-making, which can generate commitment and satisfaction among second-generation family members. If someone keeps an iron grip on leadership and power or if business members’ roles are not clearly defined, the second-generation business owner’s satisfaction will be greatly undermined. Open leadership and mechanisms for coordination will enable the second-generation family member to honour his promise to join a family business. Indispensable traditional values need to be instilled in the second-generation business successor when he is a child. The second-generation family member who identifies with family prosperity will be better placed to take over the family business from the first generation.

Traditional Chinese values, which place a premium on parental authority, involve family harmony, family prosperity and family belonging. Research indicates that the more orthodox the family business founder, the more likely that his family member will be appointed as a successor as his values highlight family harmony and continuation of the family lineage. In other words, the founder sets store by family prosperity and family belonging. What’s interesting is that a well-educated founder tends not to pass on the baton to his child, while the founder who starts from scratch is inclined to hand over his power to his child. In addition, the founder who attaches great importance to family prosperity tends to recruit professional managers to ensure his business is built to last. The first-generation helmsman of a family business may employ family relationships as a tool for corporate governance, while the second-generation entrepreneur needs to exercise professional management while downplaying family relationships. As for the third-generation business owner, he should go beyond family relationships to improve corporate governance based on professional management.

Family values need to be inculcated into the second-generation family member early on. When he grows up, his ideas can be brought in line with development of the family and the business so as to minimize frictions in business succession. Research has also shown that the second-generation entrepreneur who has been educated abroad is more willing to take over his family business by putting what he has learnt into practice, provided that he upholds traditional values and is on good terms with his parents.

Regarding the continuation of family relationships, it is important for parents to manage the relationships with their children well, a process that necessitates interaction between the two generations. The first-generation founder’s leadership serves as a prerequisite while the second generation needs to be imbued with traditional family values at an early stage so that they are well aware of the hardships their parents have suffered. In addition, the first-generation founder must be open to new ideas from children who have been educated overseas. Both the first and the second generation should strive to develop balanced family relationships that are in alignment with their long-established family values, in order to ensure the long-term prosperity of their family business.

Source: Address titled “Development of Family Businesses: Relationships, Management and Governance” by Prof. Jean Lee at the 1st roundtable meeting of the CEIBS Kaifeng Centre for Family Heritage on March 12, 2013; relevant research findings.