What to Do If a Feud Threatens Your Family Business (hbr.org)
Author: Josh Baron and Rob Lachenauer
Reading the banner headlines about family businesses gone sour — Market Basket, Rollins, L’Oreal, among others — people often conclude that conflicts in family businesses spiral out of control like mighty tornadoes that destroy everything in their paths. Actually, strong disagreements are inevitable in all human relationships, but families that own businesses are more at risk for serious conflict than ordinary families because the power, status, and money at stake are greater, and so the decisions that these families face are also of greater consequence.
Our firm’s partners have worked with more than 200 family business clients in 20 countries, and over time we have seen seven predictable stages of conflict. The tragedy is that these stages are largely avoidable, but the owners of family businesses have to be aware of them — and of the ways to extricate themselves when they get caught up in a spiral.
The seven stages:
1) Interests diverge. In their book in Getting to Yes, Harvard negotiators Roger Fisher and William Ury define an interest as a broad desire that a person or group of people have for something. Some interests are shared; others are individual. Most business families are united first and foremost in their wanting to protect the Golden Goose; i.e., to keep the business healthy. However, given that family members have different roles and responsibilities as the family business grows, interests naturally diverge. Some family members work in the business, and some are owners (some are both; others are neither). Those employed in the business will be more inclined to channel profits to re-investment and bonuses, while owners will be disposed to pay higher dividends. Where anyone stands on a particular issue will be influenced by where they sit in the family business system.
2) Positions harden. Once interests diverge, individuals or groups typically adopt different positions on issues. A position is the specific way that people try to get what they want, and positions become clear as soon as decisions must be made. Again, all families have to make important decisions — e.g., where to live and where to send the kids to school — but business families are called upon to make significant decisions more frequently. Because these decisions often involve the allocation of resources, positions can degenerate into zero sum games: He wants more; therefore, I get less. Positions harden, and suddenly everyone feels that the matter can be resolved in only one way – his way. Positional bargaining begins, and even if a solution is reached, one party often comes away feeling that the solution is unfair. Consequently, positional bargaining typically leads to outcomes that are neither successful nor sustainable.
3) Communication breaks down. When there is a failure to recognize common interests, and when positions harden, then communication gets badly muddled. Family members start shunning one another or sending flaming emails — or even conversing through memos that are vetted by their personal lawyers. Typically it’s not silence or all out war, but rather a tense dynamic where people break away and don’t talk for a while, and then the tension bubbles up to the surface again, and things explode. We worked with one client family where three brothers would get into huge screaming matches, yelling verbal abuse, before lapsing into silences that threatened the business. Although the brothers were effectively the CEO, COO, and CFO, they wouldn’t talk to one another for months after a fight, not even on business matters. They each squandered opportunities to reconcile their differences.
4) Alliances form. When people stop talking directly to each other, alliances inevitably begin to take shape. Everyone feels forced to take sides, and partisan camps spring up, often starting with the spouses of the “wronged” family member. Alliances harden as confirmation biases set in: All actions of the other side; are interpreted through a lens that confirms the righteousness of the alliance’s view. In this stage, things get very personal, and each side labels the other as crazy, stupid, lazy, or worse, and this polarization makes compromise even more difficult. In business families, five kinds of alliances are common: alliances that form around family branches (e.g., brother’s side versus sister’s), owner groups (e.g., voting versus non-voting shareholders), participation levels (owner-operators versus passive owners), gender, and generations (senior versus next). We are familiar with one business family, for example, where the senior generation has aligned itself against the next generation of operators and managers in such a way that, if not resolved, threatens the very survival of the business.
5) Proxy wars are unleashed. As alliances get entrenched, those on opposing sides look for ways to bolster their positions, and inevitably they entangle other people in the conflict. Family members call in insiders; non-family managers and employees, for example; to serve as pawns in a game that nobody will win. Proxy wars take multiple forms: In a very large firm, businesses aligned with, or led by, the other side are sold; aligned senior managers are fired; dividends are withheld to hurt some passive owners, at the expense of the many. At one client family, a board member actually threatened to unleash an out-of-the-ordinary audit of the work of a CFO aligned with the other branch, not too subtly accusing him of fraud.
6) Advocates are called in. After involving innocent insiders, the next move down the conflict spiral is to bring in expert outsiders as advocates for a particular point of view or position. Warring Co-CEOs, who were cousins, called in a compensation consultant, whom one cousin accused of being biased. The cousins dismissed the consultant, but the tension between them mounted. Even worse, family members lawyer up. Since lawyers are obligated to advocate for their clients, they make the strongest possible, uncompromising case for why their side is in the right, and the other side in the wrong. The nature of the dialogue changes, too, as the search for unlawful behavior takes center stage over reconciliation. For this reason, even the best-intentioned lawyers almost always ratchet up the conflict. We remember one painful board meeting with seven family board members, each with their personal counsel sitting behind them. The meeting degenerated into one legal objection after another that smothered all attempts at making important decisions.
7) Lawsuits are filed. Turning a family difference into a lawsuit is an act of all out war. Families can and do get to this stage, and it’s almost always counterproductive, and expensive, both financially and psychologically. Our colleague, Steve Salley, himself an attorney, summed up the situation: “Family litigation is the ugliest form of warfare: civil war. Hostages and casualties vastly outnumber apparent winners, and the scars are permanent. Any victories end up being tragically unsatisfying.” When families think of lawsuits as the remedy, they are not taking into account the likely regret they will feel for the next five or 10 years, or longer, as well as the impact on their employees and the community.
We see the tragic unfolding of these seven stages of conflict all the time in the business families with which we work. We have observed great anguish and frustration. Families fractured. Careers and businesses ruined.
The good news is that we have also witnessed a difficult, but replicable, path out of the conflict spiral — a few important steps that can get the business family on the right path again.
See the opportunity in the pain. If family members feel enough pain, then they become willing to see their interests in a new light. Pain brings fresh opportunities. Indeed, intense pain is a sign that interests have actually shifted, and this shift allows warring factions to come to the table and find compromises that didn’t exist before. Interests can change so much as business families go down the conflict spiral that the client with the seven lawyers in the boardroom actually told us later: “All we want now is peace and prosperity.”
Re-tap the ties that bind. After interests are redefined, business families who successfully break the conflict spiral do so by acknowledging the ties that bind them together. These families tap into a visceral, almost biological, realization that family matters deeply, and that protection of the family is an almost evolutionary imperative. As one family member put it: “Let’s work out our differences so that we don’t poison the next generation.”
Go back to common interests. After rediscovering the emotional ties that link them, successful business families are then ready to create another deal together based on the new interests that they share. To do this, however, they need to return to ground zero. Even when relations have improved, family members can’t just reverse direction and go from stage seven back to stage three — from filing a lawsuit to just plain communicating poorly. They have to go right back to the beginning again to try to find some points of commonality in their redefined interests.
Re-set expectations. Finally, once families have completed all the previous steps, there comes the inevitable resetting of expectations. Families that have sued one another may never end up as friends again, but they can revise what they want from one another. Once-warring family members may never forget the past, but unless they can forgive one another, they will never be able to look together towards the future.
Tragically, there are times when families just can’t turn their pain to their advantage. They can’t go back and find a commonality of interests, a new grand bargain; they can’t forgive the mistakes of the past. Then it’s time to sell the business and to separate socially, if possible.
Even better than knowing how to get out of a conflict that is spiraling downwards, however, is knowing how to avoid the seven stages of conflict. Really understanding the cost of litigation — for example, appreciating how ugly is it, and how much families will regret it later — can go a long way toward keeping them from waging all out war.
If family members want to avoid the disastrous spiral of conflict, they should keep an eye open for the seven escalation points. When people disagree, they often think that the best way to address their interests is to leap into action. And the tricky thing is that this reaction is often rational. If someone in the family is not honoring a written deal, the logical step is to turn to a lawyer. It’s also reasonable that the other party will hire his own lawyer. Taken individually, all these steps make sense. Ironically, it’s rational actions provoking rational reactions that send business families down the devastation spiral.
We advise family members, therefore, to take a deep breath before allowing to themselves to escalate to the next stage. Recognize that whenever they say, “I think this is the only way to do it,” they’ve taken a step towards escalating conflict in the family business system. Whenever they give up truly trying to communicate, they’ve taken a step toward all-out war. Each of the seven stages of conflict is a step that a family member or family branch can take or not — there is a choice. And that’s the really hard part because each family member has many chances to keep the family and the business from self-destructing. That’s a huge opportunity, and a big responsibility.
Some of the identifying details in this article have been changed to protect client confidentiality.