Thought Leadership

When Leading Family Businesses Across Generations, Clarity is Everything

Families are rarely surprised by the small family decisions that can turn into big arguments, such as where to go to dinner or whose turn it is to walk the dog. Yet business-owning families are often blindsided by the complexity these same family dynamics can create when family members are called upon to run businesses together — especially when decision-making requires alignment between parents and adult children or among adult siblings. One guiding principle can go a long way toward easing those tensions, according to Jennifer Pendergast, Kellogg’s John L. Ward Clinical Professor of Family Enterprise and Executive Director of the John L. Ward Center for Family Enterprises.

That magic ingredient? Clarity.

The first place where clarity is needed is in the definition of roles, noted Pendergast, who serves as Academic Director of Kellogg Executive Education’s Family Enterprise Boards, Governing Family Enterprises, and Forming Family Enterprise Governance programs. “As an example, you’ve got a father who started the business, but now the kids are coming into increased responsibility,” she said. “Maybe he says he’ll be chairman instead of CEO. What does that mean? How do you define that job, and how will you be clear with the organization? What if people who aren’t family members work there? Who do they listen to if the son or daughter says something the father wouldn’t say? What if Dad says he’s retired, but he keeps walking the manufacturing floor, telling people to change things? Roles need to be clear.”

Other areas where clarity is key are vision and business-strategy alignment. Without a concrete plan agreed to by all, the older generation may be more likely to return to the fore after relinquishing authority, thinking their judgment is needed. “If you have a founder who says they’re going to step back but receives a financial statement and sees it’s not going well, the tendency is to jump back in,” Pendergast said. “But if everyone’s agreed on a plan that, for example, invests in something that won’t show returns right away, people are less worried because that’s the agreement that was made. If there’s alignment on the business strategy, people don’t feel the need to be in the details all the time. And when new things come up, you have a litmus test to decide whether or not to do them without having to revisit the discussion. If there’s alignment on strategy, then tactically, people have more space to do their job.”

Another way in which it’s critical to be clear is to differentiate between different types of discussions, according to Pendergast. Conversations about management decisions need to be distinguished from ownership discussions about topics such as where to invest or whether or not a founder moving from CEO to chairman is ready to transfer ownership to his children. “These are discussions best held by the family, without non-family management present,” she said. “Early on, people are so caught up on the operational side of things that they’re not thinking about longer-term issues. So it’s a combination of reserving time to make those decisions, being clear on rules, and communicating as a group so you can find a way to navigate challenging situations and a way to comfortably disagree.”

As if all that weren’t enough, family-business leaders also need to be aware that once a sibling generation is in charge of a company, they tend to work less like a hierarchy and more as a team. “Someone may be named CEO, while someone else may be head of marketing, and a third person is head of finance, but they tend to coordinate on decisions,” Pendergast noted. “In families, there’s deference given to including everyone’s input because they all grew up together. And even though one person’s title may be higher, everyone’s an owner and they all could be equal owners, so they often defer to each other or avoid making decisions if they don’t all agree. The result is that it takes too long to make a decision.” That can be a big disadvantage in a fast-moving business world when the competition is more agile and has already moved on, she added. “You have to learn to give family and non-family executives breathing room to make their own decisions, letting go of the need for consensus in all instances. Family businesses need to keep up with the pace of the competition.” So, definition of management roles and what decisions managers, both family and non-family, are allowed to make, is another area where clarity is required.

Lack of clarity can lead to the kind of tension that severely affected one family business Pendergast cited. The older generation of siblings running things decided to have the next generation attend meetings, which were so contentious that they frequently ended amid much bickering and little to no consensus. “Finally, the kids stood up and said it was too painful to sit and watch the older generation fight, so if nobody could figure out how to get along, they weren’t coming anymore,” she said. The older generation went to counseling to learn how to communicate better, but that wouldn’t have happened had the younger generation not forced the issue.

“When you develop a dynamic that’s normal to you because you’ve always lived that way, it can be toxic to others,” Pendergast said. “Even though you’ve learned to live with this dysfunctional dynamic, it can still have an impact across the organization and the ownership group.”

In other words, adopt the sensible guidelines for clarity outlined above — defining management roles, clarifying and separating ownership and management decisions, and agreement on strategy and vision — and the company should run smoothly enough that nobody has to threaten revolution in order to save it.

Jennifer Pendergast, PhD, is the inaugural John L. Ward Clinical Professor of Family Enterprise and Faculty Director of the John L. Ward Center for Family Enterprises at Kellogg School of Management, Northwestern University. In this capacity, Jennifer guides the market-leading Executive Education and MBA programs and the research agenda for the John L. Ward Center for Family Enterprises. Previously, she served as the US leader of Egon Zehnder’s Family Business Advisory.

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