Fairness in family firms

When faced with decisions regarding ownership or leadership in a family firm, one is inevitably confronted with issues of justice and fairness. These questions arise in any human context, but are particularly acute in the context of family firms: Why was cousin Harriet appointed Managing Director rather than brother Paul? Why did uncle George receive more than aunt Louisa?

Family firms are both places where fairness is greatly needed and yet where it can be difficult to assess. Is it fair to manage the business because one was the first born and ready to take responsibilities earlier? Are equal shares among shareholders fairer than giving the person who manages the firm the majority of shares?

These questions are of significance to almost all family firms. And there is rarely an obvious single answer. This is why, with my colleagues at INSEAD we recommend focussing on the fairness of the process through which such decisions take place. 

Let’s take the case of Anne. Upon her husband’s death, she took over control of the business and the majority of shares. After a few years, she became tired of managing the business and of the conflicts with her step-son (her husband had two children from a previous marriage). She announced that she was about to sell the business, after receiving two unsolicited offers. Her two children and the two step-children, aged between 30 and 40 and minority owners, were shocked and demanded a family meeting to discuss the matter. They met together for two days with a moderator and envisioned a series of options for the future. Everyone was given a voice, and they used a decision-making matrix to provide more objectivity about the decision. They still took the decision to sell, but in a more pro-active way, taking the time to find the best offer – indeed, they finally sold the business for more than twice the proposed price.

Some readers may feel disappointed that the business was sold; nevertheless the involvement of the children in the decision led to a much better sale and acceptance; and it also preserved, as far as possible, the family relationships.

The above example illustrates the importance of the decision-making process. The mother could have sold the majority of the business without consulting the next generation, but she would have risked a major family conflict. By opening the conversation, she led the way to a collective decision, one that was better accepted and in fact more profitable.

Fair Process in family firms encompasses the “5 Cs”:

  • Communication and voice: those involved with the outcome of the decision are given a voice and their views heard. This generates more options, increases participation and motivation.
  • all the individual, family and management expectations are made clear.
  • the same principles and rules are applied to all.
  • altered business conditions, new information or family life-cycle transitions may lead to revised decisions or rules.
  • Commitment to fairness: there is a willingness to continuously improve processes, to listen and to communicate sincerely.

Best practices observed in successful family firms increase Fair Process. Family meetings increase communication and clarity. The “outside world”, represented by external board members, non-family managers or advisors, forces consistency and may also induce change. Finally, family policies ensure clarity and consistency, and provide a necessary framework for reference.

A Fair Process attitude will seek to ask: “How was the appointment decided upon? Using which criteria? By whom?” and “How do my children prefer to work together?” (instead of “Why cousin Harriet?” or “Should I give more to my daughter or to my son?”).

Families will live with such choices for years, sometimes generations. The additional time required to engage in Fair Process should be seen as an investment in the future, in the performance of the business and in peace within the family. 

Christine Blondel