November 30, 2021

What Does the Evolution of Families Mean for the Businesses They Run?

Holland & Knight Shareholder Rights Blog
Michael J. Zdeb
Shareholder Rights Blog

I recently saw this article in KelloggInsights based on working paper research of Krishnan Nair, postdoctoral fellow with John L. Ward Center for Family Enterprises at Kellogg, and Edward J. Zajac, professor of Management and Organizations at Kellogg.

The question of whether family businesses have advantages over other forms of ownership has been debated for years. What is it that distinguishes the family business – is it a long-term investment horizon? A common sense of purpose, values and motivations? Less emphasis on the bottom line?

In the 45 years that I have been involved with family businesses, I have seen the advantages that exist financially, as well as the nonfinancial benefits to the family and, frequently, the community. I also have seen the disadvantages, conflicts and legal disputes, in particular following generational shifts within the family ownership.

The research discussed in the KelloggInsights article considered the evolutionary factors that might explain the challenges faced intergenerationally by family businesses.

The researchers considered broad predications from evolutionary work on family businesses to gather some observations. From that literature and work, propositions were developed concerning "relational dynamics within family businesses." They found that case studies focused on family businesses and observed dynamics "tended to align with insight from the evolutionary literature."

Two central premises were observed: "… that humans tend to behave more altruistically toward the relative with whom they share the greatest genetic overlap, and that we behave more altruistically with our maternal relatives than those on the paternal side."

The premises were then considered in different generations. They suggest that the founder and his or her children have significant "genetic resemblance" that can contribute to family harmony, especially if a matriarch with influence over the patriarch exists.

At the second generation, the so-called "sibling-partnership stage," the prediction is that the physical resemblance of the children "is likely to accompany greater family harmony." The prediction also was that material half-siblings would have more harmonious business relationships than paternal half-siblings.

At the more remote level of third-generation cousins, the prediction is that the greater the proportion of maternal-tied family members compared to paternal family connectedness, the greater the likelihood for more harmony.

These predictions were described as general tendencies and not as fixed or deterministic. From a planning perspective with generational shifts in ownership, these predictions may have a suggestive effect on the shifts among male and female family members. Is there an advantage to more involvement of female heirs? Will cousins with the greatest maternal family line connectedness have the greater chance of a harmonious relationship and long-term success of the family business?

My practice has been more focused on dispute resolution. Father vs. female child, brother vs. brother and cousin disputes have been common. Also, it has not been unusual for disputes to arise between siblings on the death of their mother after the loss of their father.

As the research continues to consider the evolutionary effect, it will be interesting to see the results and how to incorporate the research into planning generational shifts, as well as the potential impact on the resolution of disputes that develop.

Frequently, the family business of consulting and psychological work of consultants are considered "soft" by the legal community. However, after 45 years of involvement as an attorney, I have come to appreciate the impact of the "soft" topics on the success of long-term family businesses.

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