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Spring 2013

September Current Thinking Column

Tuesday, September 30, 2014

Keeping Commitment Alive on the Road

by Burak Kocer, PhD

Having explained the expectations of developing a family constitution to all three members of a second generation, I asked them to introduce me to their family leader, who was also the Chairman of the company, as I wanted to understand his perspective, expectations and concerns. On our first meeting, the Chairman explained that his first priority was making the right decision in terms of nominating the person who will succeed him. He was concerned with merely relying on a document that outlined a set of rules, which would be archived in a drawer without any practical value. Therefore, drafting a family constitution was not on his agenda. His mind was busy with people rather than rules. Although his priority for nominating the right successor was a rational concern, I felt I had to explain that the absence of his personality could never be replaced by another personality. None of his potential successors could establish a similar leader-follower relationship in the way he did among the second generation, who were essentially the same age and level of experience. 

The strongest successor he could leave behind would be the principles inspired and developed from his personality.

In order to do this, he had to work in cooperation with his family in drafting the rules to guide them in his absence. When he challenged me by asking if I can guarantee that his children would care about these principles and treat them as a living document, I reflected on the factors that are necessary to keep commitment alive. I mulled over which factors influence the implementation of a family constitution once it is signed off, especially at the early stages, and which supporting instruments are useful to maintain members’ commitment throughout the years. This is how I decided on the topic for this month’s newsletter. Here is a summary of some key points from my perspective to help enhance a family’s ability to cope with formal rules during the time of transition:

Division of Responsibilities for a Shared Purpose

One of the main indicators of a well-governed company is its differentiated components, each of which contributes to a shared purpose by undertaking specific responsibilities. This involves establishing and maintaining a vertical and horizontal division of roles among the members of an organization. However, this is where many families have trouble: switching to a new governance style of delegation and accountability from the former “everyone involved in everything” management style.  

When adopting this new structure, one of the most challenging aspects for families is the inconvenience of switching to a more formalized work environment. Formalization involves a predetermined set of rules concerning two essential business functions, information flow and decision-making (e.g., a family constitution), which are normally handled through occasional social interactions in the family. While many factors cause inconvenience during this period, the most common ones include discontent with losing the warmth in human relationship, reluctance to commit to a standard reporting procedure and a more precisely defined span of control.

Reminding yourself of the outcomes you want to achieve and shortcomings you want to avoid will help keep your commitment alive during the early stages of formalization.

Keep the Ball Rolling

A family member’s commitment to work together under a predefined set of rules ultimately pays off by increasing their ability to work with other members of the family. Fortunately, the most critical factor here is not determining where to start, but how to keep the ball rolling. The study of attitude–behavior consistency (A-B Consistency) sheds light on this situation. A-B consistency concerns the degree to which people's attitudes (opinions) predict their behaviors (actions). A–B consistency exists when there is a strong relationship between opinions and actions. For example, a person with a positive attitude toward protecting the environment and who also chooses to recycle shows high A-B consistency.[1] On the other hand, you do not need to wait until others develop a high degree of environmental awareness (opinion) to motivate them to recycle. Merely encouraging the act of recycling (behavior) by placing corresponding recycling receptacles by homes would also create awareness on protecting the environment and eventually cultivate the same opinion.  In this case, the behavior fostered the opinion.

Governance of a business is not much different in terms of A-B consistency. Family members with negative attitudes towards a formalized work environment will be the least cooperative, however, you do not have enough time to wait until each person is on board. By keeping the ball rolling through board/committee meetings with promptly announced agendas or periodic reports on KPIs, you may have the chance to develop a more positive attitude towards a new governance style.

As Much As Needed

While keeping the ball rolling has the potential to foster positive attitude, too much sophistication is counterproductive. Depending on the needs of the family, your governance framework may involve an independent board, sub-committees within the board, a family investment committee, additional family committees dedicated to various needs such as training/development/recruitment, a family office—the list goes on. Yet, A-B consistency from B to A will not work if these sophisticated governance bodies do not satisfy a strongly felt need, as recognized by the family as a whole.  

In its simplest form, your new governance structure will involve a separation between decision-management and decision-control.  This is achieved by building a Board of Directors, which has a judgmental ability independent from those who run the company. However, in regards to the Board of Directors, there is also no limit to the level of sophistication you can implement through increasing the size, adding independent directors, establishing sub-committees or work groups, and meeting more frequently.

Building and Activating Your First Board

In order to define an appropriate composition for your board, it is worth reviewing what you want to achieve with a functional board. The Board of Directors is a “common mind” formed by a group of people representing different interests. For example, starting from the second generation onward, there will be multiple elementary family branches with different levels of involvement in day-to-day management.  This multi-generational perspective could eventually lead to discrepancies in information concerning company matters. Therefore, one of the most critical duties of a functional board is to ensure adequate representation of all branches on the board.  

Additionally, the presence of outsiders with no ownership, employment, family or commercial ties with the company is essential in bringing the independent judgment of managerial decisions to the board level. Some argue a qualified board member who is connected to the family, but acts independently could also precipitate the expected contributions of such a position. Although this might be true to a certain extent, independent judgment is not the sole expectation from independent board members—confidence in that director from the stakeholders (different family branches) he/she represents is equally important. In the case of a Board of Directors, the term independence also involves impartiality, and this can only be provided by an outsider.  Thus, by giving confidence to all stakeholders with different interests, the board fulfills the keystone role of governance. Without the keystone, you will not be able to keep the commitment of the family as a whole alive. If your family members are not convinced of the value in having a strong and functional board, their future commitment to a cohesive governance style could deteriorate. 

A Committed Leader

A fundamental part of a predefined set of rules of governance involves the organization of meetings. The ability to extract the most from each member of a team is a different sort of art, and essentially a trait of a strong leader. In the transition from one governance style to another, the role of family leaders must evolve, too. In most cases, the leaders of the family assume the roles of Board of Directors and/or CEO to navigate the company through its strategic priorities by making the critical decisions with or without consulting others. On the other hand, the role of the Chairman, the person who leads the board, is to extract the common sense of members who collectively lead the company.  Switching a leader’s mindset from managing the company to managing the board is a challenging task, which requires preparation in advance. Without a prepared Chairman, the change in a company’s governance style will not resonate, further risking the future commitment of the family.

Family or the Business?

Once you have the governing bodies up and running, you expect them to generate good decisions. In the case of a family business, a “good “ decision is not only economically accurate for the company, but also satisfactory for the family. At the end of the day, this is a family company and will remain so as long as the family maintains control of ownership.

In that sense, rational decisions that overlook the needs of the family will undermine commitment and eventually hinder the functionality of governing bodies. For example, while being a well-governed company necessitates hiring qualified managers, being a well-governed family necessitates guiding and supporting its members to develop the required qualifications. Thus, a family recruitment policy should not only define job specifications, but also a development plan for enthusiastic family members. Similarly, a dividend policy should seek a balance between cash flow needs of the company and liquidity expectations of different family members. This can be achieved by offering alternative solutions through additional policies to annex the dividend policy, such as a share purchase or family loan programs.

Take-Aways

  • One’s attitude towards a new governance style will evolve as she/he observes its components functioning. Do not postpone establishing the key governing bodies and main reporting functions until the family develops a mutual understanding on each and every detail.
  • Do not complicate your governance structure with dysfunctional components such as additional committees or meetings. Just because other families govern in this style does not mean it is right for you.
  • Keep in mind that you will not end up where you want to be unless you have a real Board of Directors.
  • Make sure that the leader is prepared to acquire additional skills separately, while shaping the overall governance framework.
  • Do not sacrifice the requirements of your company at the expense of the needs of your family. Likewise, do not sacrifice the requirements of your family at the expense of the needs of your company. If not anything else, governing a family business is a continuous effort to seek a balance between the two.


[1] Roy F. Baummeister and Kathleen D. Vohs (2007), Encyclopedia of Social Psychology, SAGE Publications, Inc.

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