Dynasties & Drama: Family Business In Focus

The philosopher Ibn Khaldun said "no dynasty lasts beyond the lifespan of three generations" and this vulnerability is all too familiar in the context of family business.

As generations pass, the number of interested family members invariably increase resulting in a greater risk of diverging views on the strategy of the business. Furthermore, subsequent generations may have different personal motivations and skillsets which may or may not render them suitable for working in the business.

This tension has been captured and dramatised by the HBO series “Succession”. For the reader who is unfamiliar, the series weaves a skilful and satirical narrative around a brilliant (but ruthless) media entrepreneur who is having to face the reality that he cannot run his company forever. The billion dollar question for his four children…. who will step into their father’s shoes?

In The Financial Times, Henry Mance considers that the series “does not imagine what could go wrong in family empires; it plasters together what has gone wrong in case after case in real life,” noting thematic overlaps and high profile family feuds reported in the media (1). But not all family dramas play out on the big screen or before the paparazzi. Many disputes are resolved confidentially between lawyers and advisors and never see the light of day.

So what lessons can be learnt with the benefit of hindsight? The following suggests some practical answers to the following questions:

What generational differences must be taken into account when passing on a family business 
Wherever the argument lands in terms of “nature versus nurture,” invariably our children are all different. In the context of a family business, personality has a significant bearing on approach to risk, the ability to lead and manage employees and the willingness to adhere to (or break away from) an existing business culture. Families must therefore take a flexible approach to how children are integrated into a family business.

There are clear societal differences between generations which also impact business. Generation “Y” (born from the early 1980s through to the Millennium) are sometimes coined as Generation “Why?”. With more access to information and technology than any generation before, Generation Y are arguably more likely to question the status quo. In a family business, this may mean interrogating traditional practice which has served the business well for many decades. Healthy, respectful debate should be encouraged, the absence of which could mean that a business might fail to adapt in line with its competitors.

The younger generation have entered adulthood during a period of significant change in relation to environmental, social and governance (ESG) issues and therefore are more likely to be engaged in this discussion. For the older generation to dismiss or fail to prioritise discussion of ESG in the context of their business may result in alienating the younger generation and potentially eroding business value in the longer term.

What types of disputes might arise between different family members and how can these be avoided?

Disputes often arise between family shareholders who are active participants in a family business (i.e. directors/employees) versus those who are passive family shareholders. This can lead to numerous complaints by the passive shareholders including, suppression of dividends, excessive remuneration, suppression of information or even diversion of business.

All of these complaints can be grounds for an “Unfair Prejudice” court action. If successful, the court can require a majority shareholder to purchase company shares from a minority shareholder at a price determined by the court and pay the claimant compensation. Where there is a likelihood of such risk occurring, business strategy must be considered in light of the potential for adverse shareholder action which, left unchecked, can cause both economic and reputational damage.

In certain circumstances family businesses are given over to trustees of dynastic discretionary trusts with a view to protecting against unpredictable future generations. However, frequently trustees of such trusts find themselves interposed between family branches with opposing views. Trustees may, effectively be “damned if they do and damned if they don’t” whereby any decision will be unpopular with one side.

In such circumstances trustees must tread extremely carefully to ensure that their decision-making is rational and defensible, and in certain circumstances they may be able to seek protection from the court. Equally, beneficiaries may find trustees being unreasonably sympathetic to the views of another family branch. In such circumstances it may be necessary to seek disclosure of information that might be being withheld and/or challenge the decisions being made. Ultimately it may be necessary to apply to court for a trustee to be removed.

Closing 
Frequently, family business feuds are fuelled by either actual inequality or perceived inequality amongst family members. These risks can be mitigated by having strong corporate and family governance structures which engender confidence in the way in which a business is run and promotes a healthy level of transparency. It may be prudent also to consider how a business could be structured so that either division or shareholder buyout could be achieved in the future, recognising that not all families are able to work together effectively in the longer term.

Whilst this article highlights the myriad risks faced by family businesses, it must be recognised that  many family businesses have not only survived in the longer term but have also given rise to some of the world’s most innovative and successful companies, all as iconic brands.

Whereas other companies strive tirelessly to build and maintain their culture and ethos, if managed with care, there is no culture and ethos stronger than family.

This article was first published in WealthBriefing on 26 November 2021.