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Making or breaking trust in a family enterprise

Adrian Batty begins client webinars with a few sobering statistics on what happens when trust is broken in a family enterprise. “A business problem causes family issues 19 months later on average,” says Batty, Deloitte Private’s national leader of Family Enterprise. “But family friction takes just 14 months to cause business problems. Only 30 per cent of family enterprises successfully transition to the second generation, 13 per cent to the third and three per cent to the fourth.”

Based on 30 years of advising family enterprises, he says trust issues arise from five key risks:

The danger signs, according to Batty, are the lack of proper discussion forums and a “black book” where the founder keeps a private record of who has been given what. 

“Without the right facts, children make incorrect assumptions about what family support is being provided, which is often amplified by many informal and piecemeal discussions,” he says. 

The solution is a family board, holding properly convened meetings with an agenda and minutes. “It’s a place to be heard, make decisions, educate the next generation and make transparent the family salaries, distributions, gifts and loans.”

Batty has heard every excuse from founders struggling to let go: “The next generation is not ready, there’s a big deal coming up.

“It often takes a health issue to force a handover,” he says, “but this doesn’t  make for a seamless transition.” 

Batty advises founders to establish clear roles, pathways, accountability and support structures for family members to be successful. “They need to create some independence for their children, including financial independence,” he says. “Too many founders handcuff family members to the business by keeping all the wealth together under their control.”

Batty often works with family enterprises that have grown significantly in size and complexity, making the education of the next generation crucial. He recommends starting early, including rotating family members through various departments, encouraging them to gain experience with an outside company, ghosting senior executives and mentoring. 

The key to establishing family governance is to deal with unfairness issues. “Little things can cause big cracks,” says Batty, listing a string of grievances he’s unearthed – such as Frequent Flyer points, salaries and spouses working in the business. The answer is a transparent system that includes market salaries for those in the business, and more clarity on the

A big part of Batty’s role is to educate family members about the importance of governance in the enterprise and the family. “When they understand the big picture, everyone settles down.”

Some families opt to sign a formal agreement stipulating their values, investment parameters, decision-making protocols and the like. “This is helpful, but the process of building it jointly with all family members is the most valuable part,” says Batty. “Family governance is the foundation for business governance.”

Article published in Company Director magazine, November 2020