We the Family: The Benefits of Creating a Family Constitution

Setting up the next generation for success is an issue confronted by any family business that hopes to keep the company within the family. From navigating complex family dynamics to understanding how to manage a company at various stages of growth, next generation family business owners must learn how to be leaders both in the business and in the family. Brown Brothers Harriman recently sat down with Michael Preston, an adjunct professor at Columbia Business School and the co-director of its Family Business Program, to hear insights and advice gleaned from teaching the next generation of family business owners for more than two decades.

Brown Brothers Harriman: Tell us about your background. What drove your interest in working with family business owners?

Michael Preston: I never thought much about it, but I was born into a family business, which my father ran. It was only later that I realized I was self-taught about family businesses.

While I was attending New York University for my MBA, I was speaking to one of my professors – Peter Drucker, a well-known management expert – about the courses that I had enjoyed, and he recommended a career in management consulting. After graduation, I got a job at a large consulting firm and worked there for 28 years. I had a diverse set of clients during my career – I once tried to count, and it totaled over 100 – but many of the experiences were with growing family businesses. That’s where I learned to build on being born into a family business.

While I was working in consulting, I wrote a book with a couple of other partners called “The Road to Success: How to Manage Growth,” which focused on helping companies, particularly small and medium-sized businesses, navigate growth. In writing the book and summarizing my experiences, I started to see a pattern, where many of the owners, many of which were from family businesses, had strong personalities, with mixed results that could be both good and bad.

I was teaching continuing professional education courses to my staff at the consulting firm, and I had the idea to turn my book into a course and teach full time. My wife and I had dinner one evening with the vice dean of Columbia University, and she said she wanted me to teach the course at Columbia Business School. Things evolved from there, and I taught the course – Managing the Growing Company, which helped students navigate the complex personalities and attitudes in business – from 1998 to 2015.

During that time, I started to realize that the students in my classes were from family businesses, which I knew about through my consulting work and personal experience. That’s when the lightbulb went off. I created a course called Family Business Management and started teaching it in 2008. Fast-forward, and thanks to support from the administration, there are now six family business courses and a Family Business Club, which has between 150 and 200 students from family businesses each year. In 2015, we launched our Family Business Program to help prepare the next generation of family business owners for success.

BBH: You touched on the personalities in family businesses, and they usually tend to have complex dynamics. How do you prepare your family business students to manage that?

MP: Seventy percent of the world’s businesses are family businesses, and they have been dealing with many of the same issues over the course of time. I’ve tried to build my course and work with my partners, Patricia Angus1 and Daniel Wolfenzon, to develop our curriculum such that it positions students to learn to deal with those issues. For example, we have a course on conflict in family business.

There’s more to it than that, though. I also teach my students to create a three circles diagram plus a genogram, which are early steps in analyzing dynamics in the family and the business. In addition, we talk about the professionalization of both the business and the family. To address that, the students need to deal with questions related to the “family business” as well as the “business of the family.” For example, I work with them to conduct a SWOT analysis on the family business and then one on the family to identify the strengths, weaknesses, opportunities and threats for both. Through conducting analysis, listening to guest speakers and talking to one another about issues they are confronting, many students begin to see that they’re not alone in the challenges they are facing. To have my students have this realization in a classroom that is a safe space where they can compare notes with each other is significant.

Once they have their three circles diagram, genogram and SWOT analyses, we look at the increased professionalization of the business and the growth curve, which goes from small and medium-sized businesses up to very large businesses. We consider questions like: How do you evolve as the company grows? What are the complexities at different growth stages? We talk about how to structure and begin to build a proper organization with better systems, management and records.

Then, we look at the professionalization of the family, which has a similar growth curve, with the different generations plotted out. As time goes on, there’s a multiplier effect, and that is what leads to many of the issues inherent in family businesses. When you get to the third generation, not everyone may understand the business’s values or be interested in participating in it, or they may not all get along.

If they understand these dynamics on both sides of the equation – the family business and the business of the family – they can see through the common triggers that can cause the issues.

One of the best learning experiences for the students is the final paper in the class, where they are required to speak to their family about the family business. Often, they set up an hour to speak to their parents, who think they already know everything about the business, and two days later they’re finally done talking. The parents didn’t realize their children didn’t know the history and story of the business, and the children had no concept of the struggles and turmoil.

We the Family: The Benefits of Creating a Family Constitution

BBH: How can family business owners decide whether joining the family business is the right decision?

MP: The last class of the term is dedicated to that issue: Should you join the family business? And if not, why? It’s understandable if family members don’t want to.

We try to help the students recognize what is going on in their family business, based on the genogram, three circles diagram, relationships and growth curves, to then reach a conclusion. They’re also talking with each other, so they see each other’s stories, and it gives them a frame of reference. Often, they’ve only seen their own family business, and by the end, they have a dozen cases of family businesses and have heard guest speakers talk about family businesses. I think we help them mature in their thinking about their family business.

One of the principal takeaways from my courses is that there’s a difference between being involved in management and being an owner, and to understand the dynamics, the ownership factor is what you need to look at. If you’re one of nine cousins, and the family divides the ownership of the business by nine, you can pursue any career you want, but because you’re a member of the family, you get equity in the business.

BBH: What are some best practices you have seen family businesses establish that help to set up the next generation for success?

MP: One best practice is effective communication among family members, both as owners and as managers, and we recommend a variety of solutions. We encourage the students to think about communication in their family business and to set up different types of structures where the family, owners and managers can communicate. The most obvious one is the family council, and there are others.

Setting ground rules helps prevent many of the issues that can arise. There is a document often used to help sort this out and avoid problems, and it’s called the family constitution. This can include guidelines on everything from family employment to prenuptial agreements.

I have also seen family businesses have a rule that no family member can take over a job from a strong current employee. Imagine the deleterious effect of taking somebody successful out of the business to put in a family member. Seeing the next generation as a threat is not good. It’s important to put the next generation in an available position that they are qualified for and that aligns with their skill set.

Everybody, family members included, should be evaluated on an ongoing basis. Sometimes a family member is not qualified or is performing below average, and that can certainly raise issues. I think that when family members are hired in well-run, well-managed companies where they’ve managed the business of the family well, they are aware they need to perform and that no one is getting a free ride.

We also recommend to the students that they get a prenuptial agreement. If you marry into the family business, you become an owner over the long run. The worst thing would be to have four owners, where one married in, and have a situation in which one hates the other three due to a divorce.

We the Family: The Benefits of Creating a Family Constitution

BBH: You have been teaching family business owners for more than two decades. What is the most rewarding part of this role?

MP: I feel like I’ve helped the students navigate the challenges that life brings. As you might imagine, I hear from them, which is very gratifying.

I had a student who inherited her family’s lighting business. After she told her dad she wanted to work for the business, he said she could come work with him and eventually take over. He wanted her to share the office with him and see everything he did. She asked what I thought about that, and I said no way. Think about what the great professional organizations do – they have rotational training programs. We created a rotational program where she worked in six different areas for four months each, everywhere from the call center to the warehouse to the accounting department. I saw her a few years later, and she said what was important in going through that rotational training program was what the employees learned about her. They didn’t think her father just handed her the business, because they saw the work she put in. She felt she fully understood the business because of her experience.

Stories like that are the most rewarding part.

BBH: What advice do you have for the next generation of family business owners?

MP: Having an open mind and communicating are the most important attitudes to have. To assume that you know it all, no matter how many battles you have fought, is a mistake. I tell everybody that as you proceed in your career, doing it alone is a mistake. You need to have people to be your own personal advisory board. Just having communication about your personal situation with one or several people you trust can open your eyes to things. Try to join associations and meet people from different areas – even competitors who you respect.

What the next generation brings can be very valuable. Just look at what has happened with technology over the years; the next generation tends to be at the forefront of adoption. Looking for younger generation members who have the energy and insights combined with the competence, capabilities and experience can hopefully make for a better business and happier next generation.

BBH: Michael, thank you for sharing your thoughts with us.

Interview conducted and article written by Kaitlin Barbour.

 

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1 For Professor Angus’ insights on succession planning in family businesses, read our interview, “Successful Succession Planning for Family Businesses: Patricia Angus Leads the Way."