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June 21, 2022

Never Miss A Memo: Why Effective Communication is the Currency to Family Business Continuity

communication

The following is a cautionary tale about communication within a family business:

During a family shareholder meeting, the third generation (G3) owners of a business were informed by the Chairman of their auto-parts manufacturing company that they were facing severe financial hardships due to industry disruptions. Without significant financial investment and a turnaround strategy, their business was not likely to survive. After the meeting, Sara, one of the G3 owners, approached her cousin, Mark. Mark was a close childhood friend and the family CEO of this business unit. Sara trusted Mark and wanted to understand what was going on. She asked Mark why he and company executives had waited until now to inform the family owners of the business’ challenges. Mark’s reply was telling. He informed Sara that his father (the head of the business for nearly twenty years), taught him to “keep your cards close to the vest.” In sharing business information with family members, Mark’s father believed that he risked the shareholders becoming “armchair quarterbacks.” It had been best to share only positive developments and avoid talk of problems at all costs in his mind. In passing this belief onto his son, Mark’s father had ensured a lack of communication with shareholders became the legacy of communication within the business.

The Imperative for Shifting Communication Dynamics from G2 to G3

Mark’s father’s beliefs are not uncommon. After all, a controlling owner’s word is essentially gospel. As founders, these individuals rarely feel a compelling need to be fully transparent with family regarding details associated with the family business’ performance, including divulging the business’ potential problems. It is often easier to have a quiet life and to remain to withhold in such matters.This can be attractive because it creates a quiet, hassle-free life for owner-founder or highly trusted sibling leaders.

Sharing information about the businesses may raise unhelpful questions, causing trouble for management. Information security is also a significant concern. Should confidential business information make its way into the community and market, it could adversely impact the business’s competitive position.

This tends to be maintained when sibling partners succeed a controlling owner. Though the family shareholder group is growing, involved members often use the same communication style as the controlling owner. Even when communications and expectations with the broader family are expressed more openly, this process tends to be informal. Updates and inputs are commonly sought from family members over the breakfast or dinner table.

In either case, there are serious risks involved with these practices.

  • Poor communication regarding critical developments in the business erodes trust between management and existing and potential shareholders.
  • More specifically, when shareholders are informed at the last minute of problems potentially posing a threat to their livelihood and financial security, they lose trust in business leaders.
  • Running afoul of these players, at best, creates discontent and serious conflict, often resulting in shareholders electing to replace leaders and board members.
  • At worst, this approach may inspire a desire to be bought out amongst shareholders. The failure of such policies is, in general, the rule rather than the exception. The solution, thankfully, is simple.

At the cousin consortium stage, business leaders should understand the risks of adopting the “play it close to the vest” communication style used by controlling owners or sibling partners. At this stage, the needs of the family will be evolving and the percentage ownership held by family members will also have decreased. As a result, interests, and priorities for what family members expect of the businesses will have diversified. In addition, because the size of the family has grown substantially, family members are more distant from leadership and decisions being made.

Communication strategies and practices should continuously be improved upon, increasing their effectiveness. Our suggestion is that involved family members think about communication with the family shareholders and the next generation as a marketer. Through our global work with multi-generational family businesses, we have identified several strategies to support families in their approach to communication and information sharing within a family enterprise:

1. Curate a segmented communication plan
Effective communication is important to any organization. The challenges described above highlight why it is particularly challenging for family businesses. One way to strengthen communication in your family business is to develop a clear communication plan, which defines what information will be shared with different stakeholders in your family business system. The table below illustrates how to outline your communication plan:

QuestionsRecommendations
What segments of people within the family enterprise should be considered for the communication plan?Typically, the following constituencies should be informed in some capacity about the family enterprise activities:
· Family shareholders
· Non-family shareholders
· Next generation family members
· Spouses
· Employees
What information should be shared with these different segments?
You should consider the following types of information and whether there should be full transparency in sharing that information or whether some information should be presented at a high level (redacted format)
· Assets owned by the family
· Financial information on the businesses
· Updates on the businesses (non-financial)
· Shareholder policies
· Family policies
How frequently should you communicate with the identified segments?
Define when you will target to communicate formal updates with the different segments throughout the year. For example, one family holds quarterly updates for the shareholders and updates two times per year for the next generation. Another family organizes town-hall style meetings once per year in different parts of the country where family members live for the family and non-family leaders to provide business updates and to listen to the interests and priorities of family shareholders and the next generation family members.

2. Leverage information technology to enhance your communication plan
In our experience, most family-owned businesses are not sophisticated in how they use technology to support communication and decision-making. Communication technology has come a long way over the past decade. Messaging apps, online cloud storage and document sharing if used well can help business owning families stay connected and informed about their family business.

There are now innovative platforms like Trusted Family, which have integrated these technologies with the sole objective to address the communication challenges faced by family businesses and family offices. Tools like Trusted Family can ensure information sharing is segmented by the different stakeholder groups and provide spaces for family members to connect and contribute to decision-making when they should have a voice.