Nine Ways For Family Businesses To Ward Off Conflict Of Interest

Conflict of interest can erode an organization’s credibility. But for family businesses, these kinds of scenarios can be particularly difficult to avoid.

Conflict of interest is defined as a situation in which an individual has competing interests or loyalties, as when a person’s self-interests interfere with his or her professional interests, and so it becomes difficult for the person to make fair decisions about either set of interests. Yet just the term “family business” includes two competing interests: family and business.

Family infighting can spill over into the workplace, and workplace infighting can tear apart a family. Or non-family employees can end up feeling like outsiders whose opinions don’t carry as much weight.

Family business expert Don Schwerzler of Lawrenceville, Ga., told Inc. magazine that these conflicts can be difficult to resolve because there are three levels of interests involved: family issues, business issues and leadership issues. “A dispute that occurs in one can quickly cascade into other areas,” he says.

Thought leaders like Schwerzler suggest that these kinds of disputes are normal when parents, siblings and other relatives are working side by side. But this fighting can stunt the growth of a business if it isn’t kept in check. Family businesses can head off conflicts of interest by changing their operation’s mindset and incorporating some best practices for management. Here are nine ways:

  1. Be honest and transparent with all employees. That includes being open with both family and non-family members. And be transparent about having family members work for you. As KPMG cautions, “If you don’t, your secret will be discovered soon enough, and you will appear deceitful.”
  2. Keep family separate from business. Like church and state, the two should be separate. Set boundaries, and keep family decisions separate from business decisions. SCORE counselors advise against letting family members borrow company vehicles or asking the company’s IT person to set up their home offices. The same goes for passing off personal expenses such as family vacations as business expenses. “You have to professionalize the business,” said Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of “Consulting to Family Businesses,” in the same Inc. article. “Ask yourself what you would do if this person was not a family member.”
  3. Consider outside counsel. A mediator or consultant, such as a family business therapist, can help resolve conflicts over strategy, succession and general family feuds, Schwerzler says. A neutral third party who gains an understanding of the family dynamics can act as a negotiator and help the business reach solutions.
  4. Create structure. The fact that most businesses have an informal management style can actually limit growth and interfere with conflict resolution, Schwerzler says. Implementing standard policies and procedures can help organizations avoid these problems.
  5. Draft a family constitution. Businesses can take structure one step further by writing a family constitution to outline the values, principles and procedures that they agree to follow, suggests Marleen Dieleman, associate professor of strategy and policy at the National University of Singapore Business School. This document can help an organization set rules not only about conflicts of interest, but also about issues such as ownership, succession, decision-making and dividends.
  6. Award contracts based on merit, not because the individual is part of the family. Modern business analysts agree, an operation can open itself up to problems for both family and non-family members and face accusations of nepotism.
  7. Never show family members special treatment. SCORE small business counselors told Inc. that businesses should avoid creating two classes of employees, which would pit family employees against non-family employees. Don’t make employees feel as though they’ll never get that raise or promotion because they are not part of the family. Showing favoritism to family members will discourage non-family employees. As KPMG asserts, “Non-family employees should feel that they have the same opportunities of advancing their careers as members of the family bloodline.”
  8. Set boundaries in the boardroom: Family business boards can carry a greater potential for conflicts of interest because of their overlapping roles and responsibilities, according to panelists at the 2016 Private Company Governance Summit. In a discussion moderated by Stephanie Brun de Pontet, senior consultant with the Family Business Consulting Group, panelists said, “It’s a tricky issue for directors to provide insight and oversight to management in the boardroom, then report to the same upper management in their day jobs.” Writing job descriptions can help these board members be more explicit about their roles in and out of the boardroom. Bringing in an independent director can also help provide objectivity and fresh eyes to the decision-making process in the boardroom.
  9. Don’t let family history dictate rewards or punishments. Offer both praise and discipline where it is due, regardless of the person’s family status. “Make sure everything is democratic when dealing with both family members and non-family employees,” according to KPMG.

Did you enjoy this content?

If so, sign up below to be the first to receive new articles, updates and news from Ethical Legacies.