Leadership and Governance for Managing Conflict in Family Businesses

Family businesses have shaped global economic history in every era, representing, almost exclusively until the Industrial Revolution, the dominant form of entrepreneurial organization. We owe to them ambitions for prosperity, growth projects, development, and decisive innovations. Only with the need for large investment capital, far exceeding what single families had available in past centuries, did the path open to corporations, public enterprises, and financial holdings.

It is widely believed that family businesses pay greater attention to the experience of employees and individual customers, to whom they are often connected by a long-standing relationship of gratitude, not only for the revenues generated and the work provided, but also for having believed in the company from the beginning or for having remained loyal during more or less difficult periods in its history. Customers and employees are often considered an irreplaceable personal treasure.

The relationship with customers, suppliers, and employees, visible in day-to-day life and enacted by the entrepreneur rather than written and declared in codes of conduct, is often the first set of values to be decoded in order to understand the organizational culture and the expectations for anyone revolving around it. Familial like many others, yet specific like the personality of the person who founded it.

Family businesses have often become large, and continue to do so even today, through the founder’s name, which may be more recognizable than the holding company later created and listed, and which continues to represent a guarantee for the funds established for extraordinary transactions.

The success of the entrepreneur and the founding shareholders, through the adversities overcome together, their recognizable and self-consistent style, by definition represents the leadership model that kept the organization on course, managed conflicts, negotiated conditions with internal and external stakeholders, attracted and retained employees, often sacrificed profits to avoid excessive reliance on debt capital, and avoided loss of ownership control in pursuit of the dream of ensuring continuity for future generations.

The entrepreneur’s flexibility and ability to respond to the market, by adopting lean and often self-financed decisions, often prove successful and appropriately calibrated in the short and medium term; however, they may not be sufficient to overcome long-term complexities and the risks linked to generational transition. At this critical stage in the company’s journey, the founder’s values and personality give way to less defined contexts where personal leadership becomes mixed with family dynamics, different management approaches, and different economic objectives. The “Buddenbrooks syndrome,” referring to Thomas Mann’s famous novel, is often regarded as a natural law capable of explaining the rise and decline of a family dynasty over the course of 3 generations, regardless of organizational size. In fact, research by J.P. Morgan found that only 15% of the companies on the Forbes 400 list managed to remain there after 25 years. The entrepreneur’s leadership, however strong and visionary, is often not enough on its own to interpret the challenges ahead, and managerial support becomes necessary in order to provide a structured point of view on Human Resources, strategies, and markets.

May’s model helps us, regardless of company size, to understand the challenges and complexities that, with the support of external governance, the company will have to face based on its positioning along three axes that consider: 1. Entrepreneurial Commitment (Business Structure); 2. Type of Family Ownership (Ownership Structure); 3. Influence on the Business (Governance Structure).

Business Structure

The early years of a family business are marked by the founders’ pursuit of market success and financial stability. Consolidation, once achieved, continues together with organizational progression through the search for process efficiency. The first complexity to be addressed, also driven by company size and available resources, leads founders to reflect on the strategic convenience of positioning themselves with a focused approach on a single product/service or market, or with a diversified approach across multiple activities, up to the most advanced cases of establishing a “Family Investment Office”.

Ownership Structure

Typically, as the company grows, it evolves together with the family: the entrepreneurial ecosystem is enriched by children, spouses, and cousins. Over time, new family shareholders may join or replace the founder, arriving over time or generated by succession and/or extended family ties. The first distinction is between shareholders active and inactive in management. With this come relational and potentially conflictual complexities that should not be underestimated by the entrepreneur.

If the leadership of the founder or the original core of shareholders was initially clearly associated with decisions, guidelines, and solutions to problems encountered, over time it ends up becoming diluted. A structure that moves from sole shareholder, to siblings’ company, to cousins’ consortium, and family dynasty leads to negotiations with personalities, acquired rights, interests, and strategic visions that differ not only on the business, but on life plans and values as well, often very far apart. Once siblings have overcome the hurdle of succession and set aside rivalries, they face complexities driven by their more or less marked interest in active management and the possible lack of the necessary skills. However, when management passes to cousins (often extended to their respective partners) and the original project becomes more distant in time, the effect may be to multiply rivalries that were only superficially resolved among siblings.

At this stage of development, without a clear and impartial Governance framework defined by a far-sighted leader from the earliest stages, the company becomes exposed to divergences over the strategic project, with the stakes available to new shareholders being questioned through demonstrations of superior skills and managerial capabilities that may become instruments of retaliation against other branches of the family.

Governance Structure

Management may move from the entrepreneur’s centralized leadership to management by the family with different roles, to family economic control with varying degrees of active presence in management, up to total delegation to external agents while preserving economic control and at the same time allowing the presence of shareholdings external to the family. This last dimension of May’s model, Governance, is the one that, through its combinations, offers the greatest support for the challenges that the business and ownership structures must face and that, in the case of family businesses, they will often need to survive. Governance based on support from a manager external to family dynamics can make a difference in determining the most appropriate strategic business choices regarding people, performance evaluation, and the allocation of financial resources. In particular, in the case of a sole owner, the external manager can provide support with a high level of managerial and specialist expertise, and can be a good mediator capable of resolving accusations of “individual abuse of power,” very often generated unconsciously or arising from family misunderstandings. Above all, such a person can prepare an emergency plan (“contingency plan”), often underestimated until sudden health, financial, or operational events prove too late that the company was not equipped for major adverse situations. The external manager can be a neutral and influential negotiator who prepares the entrepreneur’s succession and therefore a competent accomplice to the entrepreneurial dream of the company’s survival and intergenerational continuity. In the case of companies passed on to siblings and cousins, an external manager can bring the managerial and professional content that is lacking in order to protect strategic survival, ensuring fair processes and decisions while overcoming family conflicts. At the same time, the authority that comes from generating value growth while defusing potential conflicts would make it easier to reach agreements between shareholders interested in management and inactive ones, preserving the emotional dimension that accompanies every separation and the consequent division of family assets.

Support to Governance in the various phases of growth and strategic positioning would have several implications and benefits: in the case of a young family business, it would mitigate excessive confidence in the face of scarce resources or lack of professionalism needed to operationally translate brilliant entrepreneurial intuitions.

In the case of consolidated businesses, whether focused or diversified, it would support an objective assessment of risk diversification, accompanying it with the necessary skills and considering, without any prejudice, the possibility of acquiring them externally, strengthening the management team, or developing them internally. At the same time, it would ensure that strategic thinking capable of overcoming beliefs dictated by the current life cycle of the market and the business (whether positive or negative) can point toward compelling investments able to preserve family capital and maintain control over the long term.

Ultimately, the presence of a founder-leader who thinks well in advance about the need to equip the company with Governance rules and plans through the support of a manager able to provide expertise and objectivity at key moments such as the appointment of successors, supporting their development