Consultancy: Dividends or divorce: keeping it in the family: Efficient management meets its match in dynastic drama

RUNNING a family business can present difficulties that do not occur in other companies. When your fellow directors are your father and your sister, there may be more trust, but the chances are there will also be more tensions, taboo areas and long-standing grievances.

Such issues can seriously undermine the effectiveness of a business, according to Shaun Leslie, director of the Stoy Centre for Family Business, which advises family firms. 'Getting people to separate family issues from business issues is one of the key things,' Mr Leslie said. 'It sounds obvious, but when people are deeply involved in a situation, it can be difficult.'

Mr Leslie pointed out that some large companies were family businesses, 'though most people think of the family firm as the corner shop'. The centre, which is sponsored by Stoy Hayward, the accountants and business advisers, has members with turnover as high as pounds 300m, and others with as many as 30,000 employees.

Succession is an issue that typically causes problems. 'The father is often reluctant to relinquish control of something he has spent his life building up. It's very understandable. At the same time the business needs new thinking, or it will become stultified.' There are no figures available for Britain, but data for the US indicates that only 30 per cent of family businesses are successfully passed on to the second generation and only 13 per cent to the third.

Mr Leslie commended the 'family constitution' as a 'fundamental set of rules laying down the way the family operates within the business'. The constitution should ideally be drawn up on a family retreat, say a weekend at a hotel, when decisions are made about such issues as how shares will be owned and passed on through the family; whether wives or husbands of family members will be allowed into the business; and whether shares may be owned by family members who are not involved in the business.

'These are the fundamental aspects of running a family business which, if set out in writing and agreed by the family, can reduce a lot of the potential conflict.

'People often say they haven't got the time to do this, but if they don't make time they will run into a crisis or the business will suffer because issues are not sorted out and resentments continue.'

The conflict between the welfare of the family and the health of the business may be detrimental to both. 'Fairness is important within families. A typical situation is one where a father has three sons, who all want to come into the business. Two have a lot of potential, but one has no business sense; to be fair to each, however, he decides to give each a third of the business. But though he's being fair to the family he's not being fair to the business, and maybe not being fair ultimately to the non-business son, because the arrangement will cause a lot of resentment.

'The recommendation is to think what is good for the business and what is good for the family - and that it might be better to do something different for the third son.

'When acting as a consultant, I would say 'Think about it: does the business exist for the family or does the family exist for the business?' Sometimes the business is paramount and family interests are secondary, so they take a ruthless approach; alternatively, people may have a deliberate policy of forgoing potential for developing the business because it's not good for the family. Sorting out a philosophy could be part of the constitution.

'You sometimes also find that a son has ambitions for the business which his father doesn't share. One way around this would be for the son to have access to his shares, so that he would be risking his capital in the business as collateral on a venture. If all went well, he would make some money; if it didn't, he would lose his money and have learnt something.'

Another issue that comes up frequently is a conflict of interest between shareholders and management. Mr Leslie said: 'One of our largest members has 200 family shareholders, but only a handful are involved in the management. With so many shareholders it can be very difficult to keep them alongside because they may simply want their 10 per cent dividend each year and cause ructions if they don't get it, even if it prevents investment in the business.

'In such a case you usually need better understanding and communication, so that all parties are clear what the objectives are. People tend not to think enough about the need to communicate; if they did, they would take more time to put themselves in the other person's shoes and see that there is a need to explain. With such a dilute ownership, however, it might be advisable to offer to buy back the shares, if the capital situation allows.'

Training for the next generation is another key issue. 'Sometimes you'll find that Dad keeps control of the business and fails to recognise the need to develop the next generation. In any business, it's important to develop your staff and not make the whole operation rely on one person. It's especially important in a family business. We often find that people lack awareness of this issue. People don't like to think about not being around for ever, but we would ask them to recognise that if the business is to succeed, their knowledge and expertise have to be passed on to the next generation of management; that they have a choice of either planning ahead or letting all they've built up be thrown away.

'Psychology is the important thing in most of these matters, understanding how people think about issues, because some issues go for years without being addressed and become taboo subjects - issues such as when is Dad going to retire. This is where an outsider coming in can play a role, can talk to each member of the family separately and find out what's bothering them. An outsider can make a judgment that there isn't really a problem, except the fundamental problem of an inability to talk through issues which people have put aside.'

The Stoy Centre for Family Business is planning a series of seminars; details from 8 Baker Street, London W1N 1DA, telephone 071-486 5888.

(Photograph omitted)