Resolving Family Conflicts In Firms

Family businesses must sort out their differences to survive, writes Amin Nasser, partner of Private Company Services Leader at PwC Middle East.

Family businesses have been the very foundation of the GCC economies; in fact more than 80 per cent of the region’s businesses are either family run or family-controlled. A large percentage of the commercial activity in the GCC is controlled by family business groups, who are involved in several sectors and constitute the majority of the non-oil gross domestic product (GDP).

Although strong cultural traditions including respect for the elder generation have to a certain extent protected the families from conflicts, we are beginning to see a number of families in the GCC going through some family feuds. However most of these families have managed to keep their family feuds private.

Why do conflicts occur?

The two greatest threats to the successful continuity of family businesses are conflict and succession. Conflicts in family businesses are rarely caused by poor business performance; most conflicts arise because the family owners perceive that their needs are not met. Conflicts also surface when situations are unclear or not properly understood. The management of these conflicts becomes the key to survival of both the business and the family.

The core issues likely to cause tensions or make tempers fly in a family business include:

1. Decisions about the future strategy of the business.
2. Performance of family members actively involved in the business.
3. The setting of remuneration levels for those family members.
4. Decisions around who can and who cannot work in the business.
5. Family members involved in the business not consulting the family on key issues.
6. Deciding between the reinvestment of profits and the payment of dividends.
7. The role ‘in-laws’ should or should not play in the business.
8. How family shareholders can exit.
9. Agreeing on the basis valuation of shares in the business for those exiting the business.
10. Choosing the future leaders of the family and business.

Impact of family conflicts

1. Destroys a successful family business

Sadly, unresolved conflicts between family members usually leads to the destruction of the family business in terms of reputation and structure as it disintegrates into smaller less effective units.

2. Negative impact on family harmony and relationships

As family members start fighting with each other, the family cohesion and harmony is negatively affected. These conflicts end up in family members not only leaving their family business, but also leaving the family and destroying their relationships.

3. Freezing of assets and family wealth

In the Middle East, a number of family disputes have ended in courts, which implement strict rules on the management of the assets under dispute.

How do you minimise conflicts?

According to the PriceWaterhouseCooper (PwC) Family Business Survey carried out in 2010/11, over 70 per cent of the family businesses surveyed did not have any procedures for dealing with disputes between family members. If implemented, the following measures will help reduce the feuds.

1. Establish rules

Through the family council or the shareholders’ assembly, the family usually builds and agrees upon a set of rules that address key ownership issues. These values are often referred to as family protocols or family constitution. Successful family businesses have adopted these rules and understood the need to establish strong intra-generational business relationships. Being brothers, sisters or cousins may not be enough at times.

2. Decouple family issues from business issues

Very few family businesses in the Middle East have clear lines between family and business activities and this lack of clear separation increases the potential for conflict between family members.

3. Establish a family forum (family council)

Families create family councils and shareholders’ assemblies for the family owners, which is a separate forum from the board of directors and management of the company. The family council allows family owners to be actively engaged in the debate surrounding ownership and family issues – the emphasis here being on the fact that all family members can participate, regardless of whether they are actively involved in the management of the business or not.

4. Concept of fairness in the family

The whole family should have a real commitment to fairness. This in turn calls for the family constitution to be created with the fairness concept as the key ingredient.

5. Conflict resolution mechanism

Family businesses are increasingly creating formal conflict resolution mechanisms that provide a forum where the family members in dispute can air their differences and hopefully resolve the issues in an amicable way. However, in family businesses, emotions are sometimes quite high which makes it difficult to resolve issues in an effective way. Therefore, families set up conflict resolution committees that include the involvement of an outsider, a person who is trusted and well respected by the family, who offers that independent voice.