Family businesses often face unique challenges in governance and decision-making. One particularly complex issue is structural conflict, which arises from governance structures and legal agreements rather than individual behavior or relationships. Understanding and addressing these conflicts is crucial for the long-term success and harmony of the family business.
The Shipp Family Case Study
Introduction to the Shipp Family
The Shipp family, owners of a third-generation heavy-equipment business, encountered significant structural conflict after the unexpected death of their father. The brothers inherited equal ownership and a legal arrangement requiring 76% approval for major decisions, effectively necessitating unanimous agreement. This governance structure, while appearing equitable on paper, set the stage for potential conflict due to the high threshold needed for any significant business decisions.
Deterioration of Relationships
Initially, the Shipp brothers maintained a close relationship, functioning effectively as co-owners of their family business. However, tensions began to rise following a contentious acquisition that underperformed, creating financial strain and fueling mistrust among them. The absence of their father’s unifying influence further exacerbated misunderstandings and led to the formation of opposing factions within the family. As these factions solidified, the brothers found themselves increasingly unable to agree on any substantial business changes, leading to stagnation and paralyzing their decision-making process.
Common Causes of Structural Conflict
Issues of Control
Structural conflicts often stem from issues of control created by governance structures. For example, the Shipp family’s requirement for near-total agreement among the brothers resulted in decision-making deadlock, highlighting the problems of imbalanced authority. When control is not clearly defined or shared among family members, it can lead to significant power struggles that disrupt the family business’s operations and strategic direction. Furthermore, these conflicts can be intensified by the personal dynamics and emotional ties inherent in family relationships, creating a complex web of issues that are challenging to untangle.
Economic Interests
Misaligned economic interests can also lead to structural conflict. In one case, a family business split into three entities saw each daughter owning a larger stake in one company and smaller stakes in the others, incentivizing competition rather than collaboration. Such structures can create a competitive environment where family members prioritize their individual financial gains over the collective interests of the business. This competition can erode trust and collaboration, essential components for the success of any family enterprise. Misaligned economic interests can also manifest in disagreements over investment priorities, profit distribution, and reinvestment strategies, further compounding the challenges faced by family businesses.
Organizational Design and Legal Provisions
Organizational Design
The design of the organizational structure itself can embed conflicts among family members. Structures that distribute ownership too widely or unevenly can lead to competing interests, undermining collaborative efforts. For instance, when ownership is spread thinly among many family members, it can dilute the decision-making power and create a sense of disenfranchisement among individuals. Conversely, concentrating ownership in the hands of a few can create imbalances that lead to power struggles and resentment. Effective organizational design needs to consider both the historical context of the family business and the current dynamics to foster a more inclusive and collaborative environment.
Legal Provisions and Agreements
Specific legal agreements can spur structural conflict, as seen in a French confectionery business where a “one cuts, the other chooses” rule led to mutual paranoia and mistrust between the sisters involved. While such agreements are intended to create fairness, they can often lead to unintended consequences when misinterpreted or exploited. Legal provisions that lack flexibility or fail to evolve with the changing dynamics of the family business can become sources of contention, creating barriers to effective governance and decision-making. To mitigate these risks, it is essential to regularly review and amend legal agreements to ensure they reflect the current reality and aspirations of the family business.
Strategies for Mitigating Structural Conflict
Depersonalization of Issues
A critical step in resolving structural conflicts is to depersonalize the issue, recognizing that the conflict arises from governance structures rather than individual behavior. This perspective allows families to objectively confront and change the sources of conflict. By shifting the focus from personal grievances to structural issues, families can engage in more productive discussions aimed at finding solutions that benefit the business as a whole. Depersonalizing conflict also helps to preserve relationships, ensuring that business disagreements do not spill over into personal animosities that can further complicate the governance of the family enterprise.
Changing Governance Structures
Amending legal documents and governance structures to better align with current dynamics can provide long-term relief from conflict. Although challenging and potentially expensive, this approach can be essential for the business’s health. Changes might include adjusting decision-making thresholds, redefining roles and responsibilities, or creating new policies that promote transparency and accountability. It is often helpful to involve third-party experts, such as family business consultants or legal advisors, to guide the process and ensure that the changes made are both fair and effective. These external perspectives can provide valuable insights and help navigate the delicate balance between honoring family traditions and embracing necessary reforms.
Enacted Governance and Alternative Approaches
Enacted Governance
Creating non-legally binding forums and handshake agreements can promote healthier decision-making processes. Owner councils without legal authority can build consensus among family members before formal decisions are made, offering a practical alternative to changing legal structures. These forums provide a space for open dialogue, allowing family members to express their views and concerns without the pressure of formal mandates. Enacted governance encourages a collaborative approach to decision-making, fostering a sense of collective ownership and shared responsibility. This approach can also serve as a testing ground for new ideas and policies before they are formally adopted, reducing the risk of unintended consequences.
Waiting Out the Conflict
In some cases, structural conflicts may dissipate over time as ownership becomes more distributed across family branches. However, this approach risks prolonged stagnation and further damage to the business, with unresolved conflict potentially being inherited by the next generation. While waiting out the conflict might seem like a less disruptive option in the short term, it can lead to prolonged periods of indecision and strategic drift that hinder the business’s growth and performance. It is crucial for family businesses to balance the need for patience with the urgency of addressing underlying issues before they become deeply entrenched, ensuring a healthier and more sustainable governance structure.
Selling or Splitting the Business
Selling the Business
When conflicts are too entrenched, selling the family business may be the most productive option. This decision, often seen as a last resort, can offer a fresh start free from historical conflicts and entrenched narratives. Selling the business allows family members to pursue their interests independently and removes the emotional baggage and relational complexities inherent in family-owned enterprises. It can also provide a financial windfall that each family member can reinvest in new ventures or use to achieve personal goals. However, selling the family business is a significant decision that requires careful consideration of its long-term implications, both financially and emotionally, for all involved parties.
Splitting the Business
In cases where conflicts are irreconcilable, splitting the family business into separate entities may create a viable path forward. This solution allows family members to manage their divisions independently, reducing conflict and fostering a sense of ownership and accountability. While splitting the business can be complex and costly, it can provide clarity and enable family members to pursue their vision without the constraints of a unified but conflicted governance structure. It’s critical to seek professional guidance to navigate the logistical and legal challenges involved in such a transition to ensure a smooth and equitable division.
