Family Business

James Lea is a professor at the University of North Carolina at Chapel Hill and a nationally known family business speaker, author, and advisor. You can send comments or questions to him at james.lea@ yourfamilybusiness.net.

Ground rules lay foundation for thriving family company

"OK," the moderator announced, "before we begin, I'm going to lay down some ground rules."

There were a dozen or so people gathered in a town hall conference room to draft a resolution on the installation of curbs and sidewalks in a long-neglected neighborhood, a costly and controversial project.

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"First," the group leader intoned, "no interrupting another speaker. Second, no shouting. Third, try to base your statements on solid information or evidence. And fourth, anyone who throws, kicks or intentionally damages a piece of furniture in any other way will be excluded from further participation."

Ground rules are also good for family businesses. They define the extent and limits of business operating flexibility and of family members' behavior.

Along with written business policies and procedures, ground rules give some solid shape to family members' relationships with the business and with one another as owners, executives and employees. They promote sensible discussion, reduce arguments and increase predictability. Here are a few ground rules that many families in business have found useful.

• Rule 1: The business must be acknowledged and respected as the source of the family's financial security. This one might seem like a no-brainer, but sometimes, family members who don't work in the business but who eat at its table shrug away the business's importance to the family's overall welfare. Even family employees can develop habits such as taking skiing trips on inventory days. While there's no reason for the business to occupy the family's every thought, it shouldn't lose its place in everyone's awareness.
• Rule 2: Any qualified family member may apply for a specific job in the business. The key words here are "qualified" and "specific." From the moment that a startup grows enough to make employing additional family members feasible, it should be well-understood that just walking in the door and expecting a place to sit and get a check every month won't cut it. Unless the business is chartered as a charity, family members should expect to apply for jobs and present their qualifications for those jobs like everyone else.
• Rule 3: Family members who are designated to assume senior executive responsibilities must complete a systematic program of preparation that includes technical training, apprenticeship and mentoring. Family companies large and small too often neglect to systematically prepare the people whom they will make responsible for preserving and enhancing the business. It should be a ground rule for planning family ownership continuity and succession that everyone who's tagged to take on a top job must be well prepared for it.
• Rule 4: Salaries, bonuses and perquisites will be awarded according to the individual's performance and the performance of the business. "My brother makes 50 grand, so I should make 50 grand." What's missing from that common whine? The word "earns." In no other type of business enterprise would anyone expect to be rewarded at a certain level just because someone else in the organization is rewarded at that level. Ground rules that set performance criteria for salaries, raises and perks are one of the hallmarks of family businesses that succeed without excessive family friction over compensation.
• Rule 5: Decisions concerning hiring, firing and compensating family and non-family employees, and concerning overall operations of the business, will be made according to written policies and procedures. It takes time, thought and money to develop clear company policies and a procedures manual. But that investment yields big returns in businesslike operations, sound resources management, and peace and quiet in the family.
• Rule 6: The long-term interests of the business will always take precedence over the short-term interests of any family executive or employee or any family member. Sure, you or someone in your family has worked long and hard, and the result is a strong, stable business that generates money like a Guernsey generates butterfat. So why not channel that unused corporate cash into a bigger house, a place on the coast, a new car every year and other amenities? Take another look at Ground Rule 1. The family should never forget that in business the marketplace, the economy, customers' whims and a thousand other things are constantly in motion. A company must stay alert and flexible in order to keep up with those shifts, and that requires leadership that's paying attention and generous cash reserves.

Repeatedly taking too much money out of the business to satisfy lifestyle urges is just bad business. And it doesn't do much for the character of the family, either.