Why family businesses should play by some rules

Most family businesses don't have a code of conduct … and they risk falling apart.

A code of conduct for a family business is an important part of the professionalisation of the business.

Essentially, it’s the document that deals with the overlap between family and business matters. This is the code that formalises the relationship between the family and the business and sets out guidelines for resolving inevitable issues.

It’s something that’s critical for any growing family business, where the complexity of handling multiple generations and agendas increases.

Sadly, a survey by accounting advisory group MGI found that 86 per cent of family businesses had no rules to strengthen interpersonal relationships and manage expectations of family members, and that 82 per cent had no policies to deal with predictable family-in-business issues before the need arises.

Alarmingly, most family businesses are nowhere near to developing a code of conduct -- 72 per cent did not hold regular family meetings to share information, build trust, avoid politics and create consensus. And that means one thing: many Australian family businesses are unlikely to last beyond the current generation.

Pamela Low, who runs family business forum meetings in Sydney, says many family businesses struggle with the concept. “Many family businesses do not have an established code of conduct, and if they do have a code of conduct it’s one of the last things that occurs in a process of developing their due diligence around their structure, governance and family councils,” Ms Low says.

She says each part of the business -- the family council, the board and the enterprise itself, along with the family -- should have a code of conduct. As she sees it, this makes the business more saleable or sustainable if the owner wants to hand it down to generations.

“If you want to always have your business saleable, you have to be able to have really good insight into all your general structures and systems and guidelines that make it clear to anyone buying the business that there is nothing unexpected. Then you really know that it’s sustainable, that this company not only has great succession planning at the individual level but at the team level, and the group level and the organisational level.

“And even if they don’t want to sell and hand it on to generations, they always should be healthy.”

She says codes of conduct are an integral part of the governance structure in the business. “They will have to get some compliance around the way they govern their business. They need to establish codes of conduct.”

In his book Developing Family Business Policies: Your Guide to the Future, family business commentator John Ward, along with co-authors Joseph Astrachan and Craig Aronoff, says codes of conduct come down to two issues: how family members treat each other and how they conduct themselves with the world outside the family.

The code of conduct has less to do with the business and more to with the dynamics of how the family manages itself in relation to the business.

Ward says family businesses need to tackle issues such as the rules governing what family members can say to each other’s spouses and parents, whether there can be an agreement not to badmouth each other to family members or employees, and how family members will resolve conflicts. This might, for example, involve creating some sort of agreement where issues are sorted out one-to-one without dragging in other family members.

Other issues include working out communication protocols and problem solving strategies that will ensure issues are sorted out behind closed doors and not in front of employees.

Another big potential flashpoint, Ward says, is confidentiality. How much and what kind of information, for example, can be shared. This, as he points out, is critical because it doesn’t just involve the business, it involves the entire family. It also goes to issues of handling the media. Should one family member handle it? And how does the rest of the family feel when that family member is hogging the limelight?

That raises another question: how open does the family actually want to be to the rest of the world? That’s not only in terms of publicity but also in relation to involvement in civic affairs and politics.

Tough questions. But, as Low says, they are critical for any family business looking for either a strong resale price or good succession planning.