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At a recent meeting of the shareholders of a very successful family clothing business that has operated in California for more than 35 years, one major topic of discussion was the challenges created by a recent, but continuing trend toward non-family members assuming key management positions in a business that had been run exclusively by family members for most of its operating history.
 
At the end of the meeting, a very influential family member/shareholder asked me to provide some “rules of the road” for promoting peaceful, harmonious and productive working relationships among a management team that now consists of both family and non-family members. The following is a list of several of those “rules of the road”:

    1.  Avoid Creating a “Glass Ceiling” for Non-Family Members.  Do not create two classes of key employees based solely on bloodlines (see “7 Rules for Avoiding Conflicts of Interest in a Family Business” by Carolyn M. Brown, Inc.com, February 7, 2011). Best practices suggest that showing family members special treatment (e.g., promotions based on family lineage; performance reviews for non-family members, only) erodes the sense among non-family members of the management team that they have the same opportunity available to family members to move up through the ranks. Make sure that performance, rather than bloodlines, is the key ingredient to success and upward mobility at the company. This will ultimately benefit the business in reaching its true potential (see again “7 Rules for Avoiding Conflicts of Interest in a Family Business” by Carolyn M. Brown).

    2.  Separate Out Family Decisions from Business Decisions. Avoid the appearance and actuality of family members realizing benefits and perquisites that are not available to non-family members. For example, allowing senior management family members to write off purely personal expenses, like family vacations, as business expenses, while requiring non-family members to bear those same expenses out of their own pocket books, is a sure way of financially and emotionally dis-incentivizing non-family members from giving the company their absolute loyalty and “100% effort.” Over a period of time, this will inevitably lead to an exodus of top talent from the company (see again “7 Rules for Avoiding Conflicts of Interest in a Family Business” above, and “Consulting to Family Businesses,” Jane Hilburt-Davis and W. Gibb Dyer, Jr., Jossey-Bass/Pfeiffer, 2003).

    3.  Promote Effective Communications among All Members of the Management Team. Key employees of a family-owned business need to be privy to the flow of information about important matters affecting the company. One example of a good way of fostering this flow of information is periodic retreats that include family and non-family members. Equal access to important information among all senior executives helps the company avoid creating a “them and us” atmosphere, particularly as the company becomes more and more dependent on upper level management that includes family and non-family members. The failure to close a “communications gap” between the company and non-family members of senior management ultimately can result in alienation of the non-family management team members, which is the quickest way to subvert the feeling of being part of the growth, development and expansion of the business. The continuation of a “communication gap” over a period of time will likely create a severe impediment to the effective function of the key management team and of the business itself.

    4.  Use Family Councils to Address Family Matters. The above “rules of the road” are not intended to suggest that the founding family and its members discontinue the unique ties that have bound them and the business together over the years. Vital to the continuation of the business is the shared values and vision among members of the family that built the business. Family councils, which are comprised of members who are owners (but not necessarily company employees) of the family business, afford the family an opportunity to meet with some regularity (e.g., monthly, quarterly, annually) to discuss similar as well as differing views about the future of the business, shared commitment to the business, conflict among members of the founding family, involvement in joint investment activity, charitable commitments and other matters affecting the family. One (or more) family council members can report to the board of directors about the family’s views on various issues pertaining to the business in order to keep the key lines of communication open between the family and the business it founded (see again “Consulting to Family Businesses,” Jane Hilburt-Davis and W. Gibb Dyer, Jr.).

John Lande is the Isidor Loeb Professor Emeritus and former director of the LLM Program in Dispute Resolution, at the University of Missouri, School of Law. He received his J.D. from Hastings College of Law and Ph.D in sociology from the University of Wisconsin-Madison. He is also an avid writer and contributor to Indisputably.org