Managing conflict in the family business

A familiar aphorism—industrialist to beggar in three generations—describes the likelihood of family-owned businesses failing even before the founder’s grandchildren take over.

Around 90% of Indian businesses are family-owned, yet less than 30% of them successfully hand over the baton to the second generation, and less than 10% make the transition to the third generation. Whether it is the grocery shop next door or India’s richest family, there is a high probability that the family business will split after the founder’s death.

Managing succession, next-generation induction and sibling rivalry in a family-run business is a complex, emotional and difficult task that many families are unable to navigate. To compound the problem, Indian families don’t talk openly about succession and leadership transition—it is considered disrespectful to senior generations.

The first casualty of internal family conflict is the organization culture. The freewheeling entrepreneurial start-up culture which took the company to great heights abruptly changes to opaque silos, territorial mindsets, politics, inter-personal friction and bureaucracy. Staff functions which have proximity to the family become powerful at the expense of line functions and the organization loses its ability to respond to a fast-changing environment. In some cases, if the staff sees that a split is imminent, they start aligning themselves with either of the feuding factions. Loyalty begins to take precedence over performance.

Undeniably, the biggest challenge in succession planning is the founder himself. A founder who has worked a 12-hour day over the first 15-20 years of his/her journey finds it hard to walk away from a business he/she has built brick by brick. Founders of family-managed businesses in India typically work till they are at least 75 years old. When the second generation joins the business, sharing power and authority becomes a point of disagreement.

During this period, the second generation seeks increased authority and responsibility commensurate with their growing maturity and experience but can be frustrated by the founder’s repeated intrusions into their assigned “territory". The founder, on the other hand, tends to believe the easy-going next generation doesn’t really measure up, and lacks the grit and determination to succeed.

Before describing the three-step plan for managing family conflicts, it is important to get the context right by starting at the very beginning. For, if a succession plan is to work, it is the founder who must initiate the changes.

Take time out

The first thing to do is take two steps back from day-to-day operations and go off-site with family members to agree on the basics. What are the core values and what is the vision? Where does each family member see himself in five years? If the long-term vision as a family is not aligned, members will keep clashing on operational matters. Sometimes an experienced and trusted external facilitator can help structure discussions and play mediator. Once the vision and values are aligned, there is much less likelihood of conflict in day-to-day operations.

In the unlikely event that there is an unbridgeable gap in vision, it is best to split amicably in a fair and transparent way. Agree to disagree and move on.

Document a succession plan

Succession planning and induction of the next generation cannot translate to a one-day handover of charge that lets the founder walk off into the sunset. It is a 5- to 10-year journey, with increasing levels of responsibility. There should be time allocated for grooming and training the incoming generation. At every level, there should be a process for assessment and feedback by an independent team that should include professionals from outside.

A succession plan takes six-eight weeks to prepare and must factor in the needs of all stakeholders—founders, all members of the family, professionals who report to the founder and share an uneasy relationship with the next generation, but will eventually have to report to them. This plan must also factor in the core capability and potential of every member of the next generation and provide options for those family members who want to exit to pursue other opportunities.

This step has to be implemented by the founder.

Create a family charter

As a last step in the three-point plan, a family charter that lists mutually acceptable rules and responsibilities should be put in place to ensure harmonious conduct of business. A family charter helps preserve the legacy of parents and grandparents whose contributions have made the business successful.

Family conflicts usually start with comparisons of visible status symbols—homes, cars, cheque-signing authority, job title and, of course, compensation. So these issues must be covered in the family charter.

A family charter needn’t be a complex legal instrument. It can be a simple, easy-to-implement 5- to 10-page document, depending on the size and complexity of the business. It’s a document that should be reviewed every year and modified to meet the changing needs of the business.

A formal family charter must be put in place within two years of the second generation joining the family business—by this time, areas of concern would have become visible.

While there is no guarantee of success, these three steps will maintain family harmony and help preserve the legacy of the founding generation.

Harsh Chopra is the founder of Partners4Growth, a management consulting company that works with family-managed companies, helping them to professionalize and scale up.