Every head of a family firm intuitively knows that the greatest business risk is not currency fluctuations, access to capital, nor even an economic crisis. It is family conflict.

If a family feud arises and spills over to the business, it can easily destroy decades of careful reputation-building, split the firm into separate pieces, or spell its end altogether.

Recent years have seen a series of high profile bust-ups splashed across the business headlines – from investment firm Hiap Hoe in Singapore to restaurant business Yung Kee in Hong Kong and the bitter conflict between the Ambani brothers over India’s Reliance Group.

How can families – and family firms – avoid such damaging conflict?

Managing risk

In much of the corporate world, firms have built governance frameworks designed to manage business risks effectively.

In most Asian family firms the boundaries between private and business issues are blurred

However, very few business families have created family governance frameworks to manage family risks, despite the fact that family conflict is one of the key reasons why family firms fail. This is especially the case in Asia, where family firms are a dominant feature of the business landscape.

Feuds often arise within families because expectations of wealth or leadership positions remain implicit and contradict the distribution of actual competencies or voting rights.

The larger the number of family members involved, the more policies one needs. This is because family members have different interests and abilities, and the more diverse the interests the more likely painful trade-offs will have to be made.

For example, if someone holds shares but is not active in the business, he or she might be primarily interested in dividends. Those actually running the business however could be more focused on longer term growth and not inclined to pay out.

What then are the issues that require clarification for family businesses?

Here are eight points for firms to consider, all of which can be laid down in a family constitution or charter:

  • The family’s values that underpin the success of the business
  • who can and cannot be owners of the firm and how ownership is transferred (including whether shares can be sold to outsiders; and how shares are inherited)
  • the process for choosing family leaders and business leaders
  • who can work in the business and under what conditions
  • how the family interacts with the business
  • what is the dividend policy
  • and how family members should and should not behave (including how to deal with conflicts of interest).

Of course discussing these issues in the open may not be easy. It involves thinking about inheritance, who deserves what level of compensation, whether family members can get fired, how much to pay out to whom, or how to deal with divorce, conflict and other emotive topics.

Blurred boundaries

ThinkAloud4Other than aligning the family, the structure of the firm’s constitution should also carefully spell out how the family interacts with the business. In other words, there should be a link between family governance and corporate governance. Ideally, these are separate issues but connected in order to channel the family’s commitment to and benefits from the business in a transparent manner.

In most Asian family firms the boundaries between private and business issues are blurred. While this in itself may not hamper the business, it opens the field to misunderstandings and grievances – for instance if family members borrow from the firm or use firm property privately.

Typically such misunderstandings do not erupt into conflict when the founder is still around. But left unaddressed they are much more likely to become an obstacle when the leadership transfers to the next generation.

By being more transparent about some basic principles family business leaders can proactively shape expectations through more clarity upfront and instilling a “fair process”.

Although this may not preempt all conflicts, a culture of transparency and rule-based decision-making can dramatically reduce any disruptive impact on the firm.

This way everyone knows that trade-offs need to be made and the message to all family members is that any difficult decision involves a fair weighing of multiple interests based on jointly created principles, rather than individual preferences.

This can help mitigate any perception of personal bias, so that even if a family member does not agree with the decision, it is much easier to accept.

Corporate culture

There is of course no one-size-fits-all recipe to avoid family conflicts and rules alone are insufficient. Families should also cultivate the right values and a corporate culture of constructive discussion, especially when the firm moves beyond the founder phase.

Ideally, disagreements should give rise to constructive discussion which benefits the family and the business, with the rules of a family governance charter assisting in their resolution.

Fundamentally, effective governance is about the rules by which leaders lead.

Small and simple firms need simple corporate governance, and small families can have simple family governance structures.

But when the business is mature and diversified, and the family complex with multiple generations involved, it is time to put rules in place.

Prevention is always better than cure and the best time to start is when there is no serious conflict. Even so, the process of developing family governance can take many months.

Family conflicts remain a key business risk, but families are can manage it constructively through family governance, complementing corporate governance frameworks to provide a more secure business future.