Family therapist on family businesses: Policies and preparation are musts

The family that does business together needs to have policies together.

That's the opinion of Dennis Jaffe, a senior research fellow at BanyanGlobal Family Business Advisors in San Francisco. Jaffe recently spoke at the third annual Resnick-Wynn Family Business Conference, held Feb. 29 at Florida Gulf Coast University in Fort Myers. 

It's easy to understand why he is sought. Jaffe has an alphabet behind his name: A Yale University bachelor's degree in philosophy, a master's in business from Yale, a sociology doctorate from Yale. 

He worked for 35 years as a professor of organizational systems and psychology at Saybrook University in San Francisco. He is a licensed California clinical psychologist, specializing in family therapy.

Jaffe recently spoke with the Business Observer on a host of family business topics, including how many family businesses exist in the United States. "It's impossible to say, but it's the majority of wealth in every nation," says Jaffe. (He's likely right, as McKinsey recently found more than 70% of global GDP is generated by family businesses.)

Edited excerpts of the interview:

What is the biggest challenge right now with family businesses?

The big question for a family is do we want to stay together? They are asking: "We're investors, we have a number of different assets that we share. Do we just want to be investors that have a shared investment?"

Courtesy image

So families are saying, "What does it mean to be a family business, not just a bunch of investors?" (The businesses) go to the next generations.

They have different interests. Their families grow up separately, even though the original family grew up together ... By the third generation, they're all over the place.

They begin to say, "Do we want to do philanthropy? Do we have some shared values?" And a lot of questions come up for the family that go beyond being a business. They kind of look ahead and say, "What do we want for the next generation?" Some families say "It was a nice investment, I want to be cashed out. I want to do things with my immediate family."

Most families say, "We want to do something." The family is more than just a business. It's a community with shared values, shared culture.

What is the second challenge after identifying the desire to stay together?

How to actively prepare that next generation to take control and to manage and use this wonderful asset that they share wisely. It's about much more than how much money do we make from it? It's about what do we do with the money we create?

If you (just) hand it to the kids, though, you have failed.

Families that are successfully transitioning are highly engaged with each other. They teach the young people. They bring them around the businesses. They have internships. They make sure they get a good education. If you wait and say "I'm going to pass this on," you're passing it to people who are not prepared.

So they teach not just working there but how to be involved.

What if a family business brings on highly educated top executives from the corporate world? There seems to be friction often in that scenario. 

(Chuckles.) Right. Exactly. But the family has to have a policy to manage friction. There's always going to be differences. If you're a family who owns a huge asset like a business, you're going to have disagreements.

And it isn't that there are disagreements. It's that the family business doesn't have a reasonable way to deal with the disagreements. They push them under the table. Or they avoid them, or they plot against each other. They don't have a way to have discussions.

Family businesses that have been successful have governance. They have a clear way on how decisions are made. This is when we disagree, this is what we do.

Every family has to have outside people who work for the business. Sometimes if they have two generations of employees, they are family too. Quasi-family members.

When there is friction in a family business, do you sit them down and tell them they have to be more corporate?

No, because that doesn't do anything. I help them sit down and have a conversation, which feels fair and so they can listen to each other. You slow things down.

I tell them each of them has a reality. How are you going to work it out that each of you feels respected? Basically, the family has to make a decision together. (My consulting firm) is not hired to be judges. We are hired to help the family create a resolution. The corporate solution doesn't work. The fact is, these decisions are emotional and not rational.

And to say you need to be rational? Try that in your family.

What is an example of a family business success story?

A patriarch and matriarch create a business. Most of the kids are in the business. Three kids are in the business and two are not, but they will inherit some of the business. The father is old and wants to pull back. The children ask, "How do we work together?" The father doesn't have any idea how to do that, other than to declare it.

We got together the five kids and the parents and asked what they wanted. We looked at what decisions are made by people who work there and what decisions are made by the family.

We began to work on what we call a family agreement. What do the family owners want? We created a board of directors. The family began to create a set of policies. We created what we call an "owner's council." (There were seven owners, the two parents and the five kids.)

The board has to work with the managers and ask "is this business creating the profits we want?" We created a 15-page agreement that created rules when there is a disagreement. How does that get solved? And we also created in the owner's council a policy on when there is a disagreement.

They were all able to work together.