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Family Firms Need Policy for Conflicts of Interest

THE GLOBE AND MAIL – MANAGING – Thursday, March 11, 1999, B13

There are few business confrontations that can generate the emotional heat of a conflict-of-interest dispute in a family enterprise.

Just listen to the rhetoric. When family members describe a relative usurping a company car for personal use, or scoring a job for a shiftless spouse or friend, they talk in terms of a personal violation, like a domestic break-in. It's taken as a blow against the family itself.

A conflict of interest happens when there is a discrepancy between an individual's personal interests and the official responsibilities of that person in a position of trust.

It's not surprising that a conflict of interest is practically endemic to the family firm. It's a fight between what's best for the business and what some family members believe they are entitled to as business owners.

It therefore brings out all the stifled emotions of the family and the buried history of its business: accusations of incompetence, unfair practices and preferential treatment compete with anger, resentment and pride.

But a forthright discussion about what's right and what it means to undermine the freedom and profitability of the company cannot be swept aside. The reality is that run-of-the-mill events in another company can strain partnerships in a family firm and perhaps place it in jeopardy.

Here are some common examples:

What are the benefits of saying no? You can save yourself a lot of trouble by setting a policy that all family members will deal with the company at arm's length.

The policy states an important message about the family's attitude to fairness and builds instant credibility for its leaders' decisions. Moreover, you never have an excuse to endure poor performance and there's no family fallout if a supplier gets cut. Finally, it punctuates that this is a business, not a family-owned social agency.

Owners and other members of the family business should be motivated to do things on their own and not milk the family firm for inappropriate favours.

In the end, owners and other members of the family business should be motivated to do things on their own and not milk the family firm for inappropriate favours. It saves everyone from tangled emotional dialogues about what's allowed, what's taboo, who gets more and who gets less. It also minimizes the opportunity for mis-communication, selective understanding, manipulation and jealousy.

But what does it mean to deal at arm's length? At a minimum, the family should discuss a policy that prevents relatives from undertaking transactions with the family firm. However, more detailed rules, which follow, will help prevent most conflict.

No secrets. One client put it very succinctly: "It's better to ask permission than to always seek forgiveness."

Universality. Any special deals are available to all staff, offering the same opportunities of membership in the family firm to everyone – family and non-family.

Fee for service. Anyone using company resources pays for them according to an arranged schedule.

Preparation. Develop criteria and a selection process for controversial projects ahead of time and seek competitive bids.

Supplier review. A committee evaluates and chooses suppliers, reviewing performance annually. This committee is stacked with non-family members.

No promises. When friends or spouses make requests, family members may assist in setting appointments, but clearly state they have no influence in the decision.

Everyone should see the benefit of the company operating objectively. This will allow leaders to concentrate on profits rather than personal issues. However, many business families have also found that starting from this basic no conflict position makes it easier to deal with the exception, when everyone agrees that the rules need to be bent, if not broken.

It's interesting that conflict of interest disputes seldom arise at the founder stage. As partnerships become more complex – once sons, daughters, nieces and nephews inherit power – the line between rightful benefits and wrongful entitlement becomes hazy.

Meeting to discuss a conflict policy and documenting the agreements in a manual can sidetrack a fight. When differences occur – and they will – a business family that has already discussed these situations will, in theory, at least have some background with which to begin a discussion with minimal discomfort and distraction.

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