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Creating Accountability in the Family Business

By Edward Rosenfeld, ITAC Growth Services Practice Leader

Creating and maintaining accountability is one of the biggest challenges faced by family-owned businesses. When businesses mix family and business relationships without a structure for separating those very different areas, two results may occur:

  • Family members are not managed according to business standards, and the business suffers; or
  • Family members are subjected to more stringent expectations than outsiders or one family member feels at a disadvantage to another. The result may be a sense of unfairness that can lead to conflict.

Business owners may find it difficult or uncomfortable to balance the multiple roles they play in the family business. An owner can be simultaneously the CEO and the parent, sibling, spouse or cousin of an employee. Family businesses should look at the big picture. They should be aware of the difference between the ownership of the company and its management, and that the two can be separated. Family membership needs to be considered in its proper place in both. If family members are part of the management team, there should definitely be a system of evaluating:

  • Whether they are competent to be managing the organization. Often there is no process for deciding on qualification, or a formal program for developing the management skills of family members and assessing their progress. Is the evaluation fair or are they subject to excessive expectations that would not apply to non-family employees?
  • What is their accountability to the owners of the company? Ownership may include siblings or other relatives who are not active in the business.
  • What is their compensation based on? When family members are not paid for performance, their jobs can create the unintended consequence of either becoming an entitlement or “golden handcuffs”.

Best practices for managing a family business, which increase accountability, can be implemented and include:

  1. Having a performance review system that effectively evaluates family members as well as non-family employees. Consider having a non-family member take some responsibility for the review to increase objectivity.
  2. Setting compensation levels that relate to performance and job function. Develop profit-sharing mechanisms outside of performance that benefit all family members according to the ownership plan.
  3. Preparing a non-binding “Family Business Partnership Charter” that codifies the principles and relationships that will govern the business. Use this process to improve communication and prevent future misunderstandings. Use this as a basis to examine binding agreements such as Wills and Operating or Shareholders’ Agreements.
  4. Preparing a “Family Business Participation Plan”. This is especially useful if the children joining the business are younger. This plan defines rules around who gets to join the business, whether there must be an opening and with what qualifications, how skills will be developed and the rules around issues of accountability and compensation. The Plan also addresses whether a prenuptial agreement is part of the family business rules. This avoids future conflicts among the betrothed around feeling singled out for a prenuptial requirement.

Planning ahead even in the absence of current conflict can improve the prognosis for both the health of the business, and the health of family relationships. If you have any questions about these issues as they relate to your own business, please do not hesitate to contact us for a no-obligation consultation.