Bondage or Bonded: A Family Business, or a Business Owned by Family?

December 15, 2015 — Boca Grande,

We all get that conflict is to the largest degree, an unavoidable part of the human condition, right? Inequality of power and wealth, fear, envy, struggle with self-regulation, sexual desire, hostility to other groups or tribes, or hostility within our own tribe. There are only a few master plots in the library of the world’s stories, and they are almost all defined by heroes, adversaries, kinship, love, or all four. In the real world, our life stories are largely stories of conflict: the hurts, guilts, and rivalries (real and imagined) inflicted by friends, relatives, and competitors.

Steven Pinker suggests that historically, a sanctuary from this conflict has in-part been family—that thing we call a collection of individuals with shared genes and an evolutionary interest in each other’s prospering. In general and in the aggregate, biological natural selection favors the allocation of all your available resources to genetic kin. Historically, we find that societies have been organized around kinship. So naturally, in virtually all societies, political leaders—from popularly-elected great presidents to autocratic dictators—frequently seek to transfer power to their offspring. Dramatic forms of altruism such as donating an organ or startup capital are typically offered by relatives (there’s a reason it’s called the family and friends round). And inheritance, by far the largest flow of wealth after death, is largely directed to kin (which may be the single largest cause of economic equality in the world… but that’s a different journal entry). Nepotism constantly threatens social institutions, including religions, governments, and most of all—businesses—because the business’ needs compete with the natural and instinctive bonds of family.

And this matter has scale. According to Family Enterprise USA, there are 5.5 million family businesses in the U.S. comprising 80% of all business enterprises (2013). They contribute 57% of the U.S. GDP (that’s $8.3 trillion), employ 63% of the workforce, and are responsible for 78% of new jobs. The average life span of a family-owned business is 24 years. About 40% of U.S. family-owned businesses turn into second-generation businesses, approximately 13% are passed down successfully to a third generation, and 3% to a fourth or beyond. I find myself continually surprised by the deep incuriosity among trained business specialists and experts—just how few people are thinking deeply about the problems of tumultuous change in family-owned businesses.
Surely the greatest part of America’s wealth by far lies in the ownership of enterprise value in private and family-owned businesses. Private family businesses are the largest single category of businesses in our economy—and just possibly one of the most interesting domains in the positive psychology lab, as well. Over the past twenty five-plus years, about half of my work has been with private family businesses (as opposed to private founder-owned EOMs). In working with these families, I have been filled with appreciation for some of the most capable and caring, extraordinarily generous and demanding, kind and difficult people I have ever encountered. The mix of genetic kin and business mission can be inspirational beyond belief, or toxic in the extreme, to the business, and tragically—to the family.

In businesses that are owned by kin, there can be no possibility of the perfect overlap of genetic interest and what is in the business’ best interest.  I find that the most sustainably successful businesses owned by families take on a unique mindset. Specifically, instead of thinking of themselves as “family businesses” and all that means (like having to hire the loser son-in-law—hey, it’s a family business) they redefine and clarify their mindset. They tend to view the business as just one of the resources that the family stewards together. In that case, not only do you never hire the loser son-in-law (you’d never run that risk); instead the businesses are cared for very carefully by families, just like they care for other resources they’ve inherited—their name, reputation, a multi-generation vacation home, traditions, stories and lore, a family foundation, a grandfather’s wooden boat.

Let’s take that example of Gramp’s boat a little further, and note that instead of it being a beat up old skiff, let’s say it’s a sixty-five foot traditional wooden schooner. No responsible family member would suggest that one of the family offspring with little or no training, experience, or passion for cruising be the skipper of that complex vessel and lead its challenging crew would they? In fact, adopting the new mindset, the family cares so much about properly stewarding Gramp’s boat that they don’t have to personally skipper the boat, they simply want to make sure the boat has the best possible care and a world class skipper to take care of it for the family and to ensure its long life. If that’s how they think about the business, then they also want to make sure the business has the right governance, the right capital structure, the right leadership, the right strategy, and a sustainable business model resulting in enough profit and cash flow to assure its future mission. They don’t have to personally have their hands on the sheets and halyards or do the navigating. Look, I suppose there is some non-zero probability that the perfect CEO for the business the family owns could just happen to have the same last name as the owners (and they occasionally do), but the probability is so small as to be challenging to calculate.

In a Bigelow-produced video titled The Case of the Uncertain Entrepreneur, Shannon Reeder thoughtfully explains to Bigelow partner David Linton, “David, I earned a Master of Fine Art degree, and my passion is as a painter. I only came into our family Reeder Pump business to help my father while he had a crisis, and now… now the business is doing great. I have other things I have to get on with in my life; I want to be an artist, and someday a mom. Where is it written that I am the best person to deal with my endlessly adolescent brother in the business, or to take the business to the next step of success or longevity? And host family Thanksgiving?” And then she delivered the knockout zinger question:  “David, who said a family business has to be a life sentence?”

Families can never be absolute havens from conflict because, among other things, there is competition over parental investment. Parents largely apportion their tangible and emotional investment across all their children, born and unborn, with every offspring equally valuable—all else being equal. But while an offspring has some interest in its siblings’ welfare (since it shares half its genes with each sibling) it naturally has a disproportionate interest in its own welfare (since it shares all of its genes with itself!). Genes replicate, mutate, compete, select, and accumulate. In family businesses this results in struggles over employment, leadership, recognition, ownership, and control. This sibling rivalry conflict plays itself out through their entire life span, and ultimately results in struggles over inheritance.
So the theory of natural selection is simple, but the results of the theory are exceedingly complex. They are challenging for human minds to fully comprehend, or from which to predict outcomes. We are not robots controlled by our genes where complex behaviors are decided in advance. But a large number of recurring forms of human conflict in family business are a result of a small number of features of the very process that made life possible.
We are the brainiest species on the planet, with the ability to examine future scenarios, assign probabilities to them, and then act boldly to achieve future goals. William James once wrote, “My first act of free will shall be to believe in free will.” Will we let genes trump free will? How about some fresh energy—some new ways of thinking about businesses that families own? Can we adopt a new mindset about the bond between family members as a steward of the enterprise and escape the bondage created by the deterministic old-form family business (where you are obligated by your genetic fate to employ the loser brother-in-law)? Can we commit to missions and achievements that are larger than the mere self-interest of ourselves… or of our kin? Can mission dance with kinship?

Behind most great family businesses are great families. The best family businesses transcend the old insular thinking. They free individual family members to structure their participation as owners, their contribution to the governance dialogue, to the business strategy, and ultimately to unlock the power of their own personal alpha, distinctive competence, or even unique ability. What richer and healthier (and kinder, too), transformative positive outcomes can be achieved for individual EOMs, their families, and their long lasting enterprises as a result of adopting and acting on this fresh new mindset? Where the fresh new mindset thrives—family creativity and compassion flourish.

References & Further Reading:

The Case of the Uncertain Entrepreneur. Bigelow LLC, 16 Mar. 2011. Web. 11 Dec. 2015. http://www.bigelowllc.com/resources/intellectual-property/.
Kinkade, Ann. “The Family Enterprise USA Annual Survey 2013.” The Family Enterprise USA Annual Survey 2013. Network of Family Businesses, 1 Dec. 2012. Web. 11 Dec. 2015. http://www.netfamilybusiness.com/information-center/articles/4827-the-family-enterprise-usa-annual-survey-2013.
Harari, Yuval N. Sapiens: A Brief History of Humankind. New York: HarperCollins, 2014. Print.

Nomura, Catherine. Unique Ability: Creating the Life You Want. Toronto: Strategic Coach, 2003. Print.

Perry, Ralph Barton. The Thought and Character of William James: As Revealed in Unpublished Correspondence and Notes, Together with His Published Writings. Boston: Little, Brown, 1935. Print.

Pinker, Steven. “Evolutionary Genetics and the Conflicts of Human Social Life.” This Explains Everything: Deep, Beautiful, and Elegant Theories of How the World Works. Comp. John Brockman. New York: Harper Perennial, 2013. N. pag. Print.
Ridley, Matt. The Rational Optimist: How Prosperity Evolves. New York: Harper, 2010. Print.

Worrell, Peter R. Enterprise Value: How the Best Owner-managers Build Their Fortune, Capture Their Company’s Gains, and Create Their Legacy. New York: McGraw Hill, 2014. Print.