Governance & Family Businesses

Anticipating Conflict in Family Businesses

By Kryssia Madrigal

The family has been and continues to be one of the fundamental structures of economic production. From this structure, a large number of businesses have been developed, some of which have become important companies and corporations of renown worldwide even in our times.

In addition to facing changes in the global environment at a philosophical, social, economic, and technological level, family businesses have the challenge of surviving in the long term and overcoming other additional problems such as overcoming the transition between generations, conflicts that arise in the family-business relationship, and lack of trust.

These conflicts, very natural from the point of view of human relationships, can increase rivalry and generational competition problems within a family business, which, if there is no clear anticipation of them, can even hinder its development and even generate its extinction or division. For these reasons, it is necessary to develop agreements in the relationship between the family and the business and maintain harmony in the family.

The dilemma of the family business

As mentioned, in a family business, one must deal not only with the problems inherent in a business but also with the needs, concerns, and desires of a family. A family business involves emotions and feelings, so a balance that is not easy to manage is required.

One of the main challenges in most family businesses is to find a true family-business balance; unfortunately, in most cases, this is not achieved, and there is generally a bias towards one of the extremes, either the family or the business. A system biased towards the family puts the needs, concerns, and family stability before business planning, affecting managerial communication channels, performance measurement, decision-making, and the exploitation of business strategic opportunities. A system biased towards the business neglects family issues and needs, affecting family communication, identity, loyalty, time with the family, and emotions. Both extremes are not desirable. To ensure the long-term survival of a family business, an appropriate balance between family and business must be found, achieving good business performance with trust, commitment, and family harmony.

The importance of the Family Protocol

The continuity of the family business depends not only on its success in the environment in which it operates but also on the transparency and planning of the family’s rules regarding it. The establishment of these rules aims to support the development of family agreements to clarify the family’s expectations around difficult topics such as money, careers, control, and succession, among others, thus anticipating many of the most common conflicts in the family business.

In the family continuity plan, it is assumed that the family plays an important role in the success of the business and, therefore, should focus on the family in creating new strategies to revitalize the company and promote future growth over time and across generations.

The process of defining the Family Protocol is complex and, in practice, requires an iterative process to reach final agreements. To do this, it is necessary to have the commitment of all family members participating in the process and the discipline of work meetings where the different rules to be established around the family business are defined and discussed. Furthermore, it is fundamental to define whether the family is willing to work together to perpetuate the family business, accepting the responsibilities that this implies and if, in addition, they wish to continue working together to grow their heritage beyond the current company.

For this reason, each process is unique and different, depending on the needs and expectations of each family. At the end of the day, it is expected to obtain a document that represents their “family constitution,” with which all parties agree and are committed to fulfilling it. Our experience with over 150 families advised in Latin America helps us provide solutions to anticipate the conflicts that are usually part of a family business.

Esteban R Brenes and Krysia Madrigal, based on the article “The Challenge of Family Businesses,” published in: INCAE REVIEW Vol XIII. No.3, October 2003.