The 10 most common employment mistakes in family business

by Brad Simmons Partner Brad's vision is for every successful Australian family and entrepreneur to have a clear sense of purpose for their wealth. Brad helps to connect families with the expertise they need to simplify, protect and grow, enabling them to live their purpose and build and perpetuate their legacies. He works with passion, insight, independence, discretion and unwavering dedication to help families transition wealth across generations. Contact Brad

There are few issues in family business that create more conflict and tension than the employment of family members. The complexities involved – and the breakdowns in communication and trust that can result – contribute significantly to the alarmingly high rate of failed intergenerational transitions in family business.

In our experience, the employment practices of most family businesses fall well short of the standards required to attract and retain the best industry talent. Here, we explore some of the most common mistakes family members make when it comes to hiring (and firing) for their business.

1. Poor family and business governance

Research from Family Business Australia has found that while 80% of family businesses experienced conflict or tension within a 12-month period, those who had a Family Council in place were much less likely to have encountered conflict or tension. Why? Because a well-structured governing body provides a forum to air and resolve family issues outside of the day-to-day business environment. Despite this, only 50% of family businesses have a formal business board in place. Implementing some form of external governance, be it a Family Council or Advisory Board, is a critical step in setting the tone of the culture inside the business.

2. Lack of a family employment policy

It is difficult to fathom, but only half of all family businesses have a formal policy in place for the selection, remuneration and promotion of employees, including family employees. In the early stages of a family business, it is often expected that all (or at least most) family members will enter the business. However, as the business matures and transitions across generations, not all family members will be interested in or capable of working in the business.

For the betterment of both the business and the employee, it is critical that clear rules exist to govern when and how a family member enters the business and what is expected of them once they’re in. Common hurdles for entry might include minimum age level, qualifications or years’ experience outside of the business. Aside from enabling individuals to explore the world and find their own sense of identity and achievement outside of the business, families who implement these minimum hurdles are often amazed at the valuable skills and insights family members bring with them when they eventually enter the business.

3. Tolerance of underperforming family members

Once family members have entered employment within the family business, often they are left with little clarity over what is expected of them. They may have felt a sense of obligation to join the business but suddenly find themselves in an ill-fitting job that they neither enjoy nor perform well in. As a result, both the individual and the business suffer.

We have worked with numerous family businesses to provide a pathway for employees in this position to exit the business and pursue their passion instead, often in an unrelated field. In these situations, it can be quite moving to see the energy that is unlocked as individuals are liberated from their ill-fitting roles; the rekindling of family relationships that can occur; and the clear air that is enjoyed by those remaining in the business to get on with running the operations.

4. Ill-defined position descriptions and organisational structures

We recently worked with a fourth-generation family business that, aside from having no board in place (see above), also had no position descriptions, meaningful job titles, reporting lines, annual performance reviews or remuneration policies – despite employing 500 people nationally! The business has muddled along and a natural hierarchy had formed, with certain individuals assuming leadership roles. However, there was an incredible amount of duplicated effort and overlap, and a serious lack of accountability,which resulted in not only a high rate of turnover, but also a culture of bullying and harassment.

Over the course of several years, we worked with an organisational development coach to unpack the roles of all employees in this business, document them in clear position descriptions, realign reporting lines and implement a culture of accountability and performance management. The results have been game changing – both culturally and financially.

5. Failure to define the purpose of the business

Research indicates that 70% of family wealth transfers fail within three generations. One of the major causes of this is a failure on the part of the family to clearly define the purpose of the family balance sheet – including the operating business. As renowned leadership author Simon Sinek explores in his book, Start with Why, most businesses can tell you what they do and how they do it, but cannot tell you why. As Sinek says, “People don’t buy what you do, they buy why you do it.” Businesses that fail to define their purpose leave their employees uninspired and directionless.

Having a powerful vision and mission statement is a great start to combatting this pitfall, but it is only part of the equation – business leaders must live their purpose in a proactive and visible way and inspire their teams to do the same.

6. Inability to attract and retain great people

Many family businesses don’t have the in-house expertise required to search and select the best talent for a given role. Additionally, we often see family businesses underestimate what they have to offer in the employment market.

We recently helped a family business hire a non-family CEO for the first time in their 50-year history. They were completely overwhelmed when a large number of well-credentialed senior business leaders applied for the role. They had no idea that they could attract such high-calibre applicants and, critically, until that point had not known how to go about it. Their only regret now is that they didn’t start decades earlier.

7. Poor transition from siblings to cousins

In our experience, issues associated with employment become magnified and more acute as family organisations move from the first and second generations to third and fourth generations and beyond. Why? First, with increased size (i.e. more family members) comes increased complexity. Second, the dynamic between cousins is very different to the dynamic between siblings. Siblings often share a common set of values and have shared common experiences, having usually grown up in the same household. Cousins, on the other hand, are likely to have fewer shared experiences, be more geographically dispersed and have a lesser sense of responsibility towards each other. Family businesses that fail to adequately prepare for this shift in dynamic are setting themselves up for failure.

8. Inequitable remuneration and company perks

When two siblings work together in a family business, it is only natural that they insist on everything being equal – the same pay rate, the same entitlements and often even the same job titles. While this arrangement might work well for a partnership of siblings, neutralising the sibling rivalry that would otherwise exist, it invariably causes conflict and tension when other family members become involved.

Naturally, if someone is being paid below or above market rates for the job that they are performing, a sense of injustice will result. Consequently, family members can be tempted to self-compensate by remunerating themselves in other ways. We have seen everything from school fees to fuel cards, groceries, food, beverage, frequent flyer points and personal travel funded out of the business coffers. Aside from the significant tax risks this creates, a poorly governed remuneration approach breeds a toxic culture of self-interest and fuels a race to the bottom.

In our view, the only foolproof solution is to move to market-based remuneration. Will this mean that one family member gets paid more than another? Of course it will. Families need to understand that equal does not necessarily mean equitable.

9. No succession planning

As the saying goes, graveyards are full of people who thought they were irreplaceable. It is little wonder then, that less than 10% of family businesses report having a succession plan in place for their current CEO or Managing Director. However, while self-preservation is an inherent part of human nature, overstaying one’s welcome can be hugely undignified.

Too often we have seen family patriarchs and matriarchs pushing their executive careers well beyond what’s commonly considered to be retirement age. As we explore in a recent article, ‘An open letter to the family patriarch’, these senior members of the family business may be afraid of letting go, or indeed, not know how to. There are a variety of critical roles that senior members of the family can and should play in a family business. Providing meaningful, rather than tokenistic, roles for them through proper succession planning is the key.

10. Mixing personal assets and expenditure with the business

Too often, we see families mixing their private affairs (school fees, investment portfolios, private expenditure etc.) with the books and accounts of the family business. Basic accounting principles dictate that they should be separated, and for good reason. As we explore in a recent article, ‘The perils of mixing family office with family business‘, managing the family’s personal assets inside the family business not only exposes the family and the business to a raft of operational and legal risks, it can create conflict and tension between family employees and those working outside the business.

The good news is, there is an easier way. As we explore in the Family Roadmap, families who take a strategic approach by building out their values, vision and mission, implementing basic governance structures, and carefully crafting roles and responsibilities across their operating businesses, together with their private affairs, position themselves to overcome the challenges that so many families succumb to.

Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.
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