Martin Salas

Family Business and the Cassandra effect

Family Business Advisory

Published in Semana Económica magazine on 06/17/2017

When the Greek god Apollo, disheartened by the indifference of Cassandra, granted her the gift of clairvoyance, he did it with a detail that only an unrequited lover could make: that no one believed in his futuristic, and accurate, visions. Adjusted to the cosmopolitan reality of business, today the Casandra effect translates into a concrete scenario: in its growth, companies know that they must implement management processes that while do not guarantee sustainability their absence lead to failure. A principle that is applied with precision in the universe of family businesses.

It is general knowledge that certain management approaches or practices such as strategic planning, innovation or meritocracy avoid, or at least slow down over time, the stagnation or decline of organizations. Despite knowing it, many family businesses do not incorporate them into their DNA or when they do, it is already too late. Cassandra present and as always, unheard. There will always be family businesses and this article it is not about exalting or emphasizing their advantages or difficulties. The critical point is to recognize what must be done to be successful and to last over the years.

Modern management tools are a benefit for all types of companies. But in the case of family-owned ones, the delay in their implementation, often compensated by an overwhelming entrepreneurial spirit, is due to the fact that they did not settle family issues so that the business could benefit. When family, ownership and business, whose limits are not fixed and rigid, are integrated to each other and therefore interdependent and influenced, the conclusion is that family relations have a direct impact on management, its results and sustainability over time.

There are usually two aspects that mark the healthy direction of a family organization. The ability to manage the succession in the reins of the business; and the definition of the rules of government within the family, so that they can be a clear reference to the advent of discrepancies and / or conflicts in the collective perspective or its relationship with the business. The first topic is usually framed in the second, but it is relevant to detail its impact separately, before asking the question: What would Cassandra say about the cases presented?

The succession planning, well designed and subsequently agreed, can make a difference, guarantee continuity and strengthen the survival of the family as owner. The main reason, which actually applies to all types of companies, but is more powerful in the family-owned ones, is that in its initial phase (first three generations, 85% in Colombia) the candidates for leadership are the closest relatives arriving with ease to the dangerous emotional dilemma of the preferred child if a plan based on merit, development opportunities and preparation to perform the role has not been developed.

This last aspect is critical because it grants the successor validation, both organizational and emotional, at managerial and family level. Without the validation that reinforces the trust of the family and employees, a culture of “waiting for failure”, loss of talent and inevitable conflicts within the family can be created. Evidence that reinforces this approach: if the transition from first to second generation has a high emotional component, the transition from the second generation to the third is considered to be the most critical of all.

Statistics confirm that in the third generation is when family businesses are sold or disappear. A fact that becomes more evident if there is not qualified family members to take the post. At that time, the possibility must be raised that the CEO may come from outside the family. And if it is decided that it is external to the company, the change can lead to professionalized management based on the new scenario. In addition, it allows the family, by choice or lack of options, to move towards the creation of systemic trust in the organization.

If a company fails to achieve this systemic confidence, it takes the risk of entering into a spiral of errors. Organizational trust plays a key role in the evolution of family businesses because initially it is based on interpersonal relationships supported by close kinship (first and second generation), it passes to a trust based on competence and merit (third generation) and ends in the creation of trust in the family and business governance model (systemic trust, third generation and later).

The systemic trust in the organization is based on the definition and application of rules, formal communication forums and family protocols, with consistent application, whenever circumstances warrant. An essential support based on another determining factor: the creation of a family governance that generates trust in everyone, generation after generation, even though a series of branches have arisen from the main trunk whose link is no longer based solely on close blood relationship or proximity of a single family.

The creation of family governance is the second dilemma of the Casandra effect. As new generations take the post, either in the management of the company or in its ownership, the complexity in the relationships gets more complicated, different branches get distant. Therefore, the sustainability of the business is built through the creation of mechanisms that know how to anticipate conflicts and uncomfortable situations, which sooner or later usually appear in every family business.

An additional point, no less important, is the definition of the values and principles that accompany the growth of the family business and constitute the same ones of the organization. With this cornerstone, a framework can be designed to regulate the participation of all members, from the role of the in-laws (sons-in-law, daughters-in-law or brothers-in-law) to the conditions of who and how a new member should work and how their performance should be evaluated as well as promotion rules vis a vis competent executives who are not part of the family.

A government framework that includes aspects such as the transfer of shares, the reinvestment rules, the creation of intrafamilial communication forums or the rules to leave the family ownership. With an additional condition: the commitment and active participation of the whole family in the creation of these principles. This implies that no consultant should do it for them, but accompany and facilitate that process. Finally, the success lies in the fact that each of the members has been able to convey clearly their points of view and understand those of others in order to reach consensus.

In other words, a process that cannot be imposed or outsourced because, just as the family owns its business, it must also own its rules. A process that requires permanent communication. This factor is critical to keep the family together, whether its members are involved or not in the management in order to create a culture of transparency and avoid misunderstandings.

This practice should be extended even to family members who are not shareholders, because they could become shareholders or influence those who are, and there is no greater risk than having shareholders who do not know the business or have felt isolated in the past. This way, family assemblies are key forums to align visions and points of view, so that they can convey a single voice in their interaction with the business. To achieve this, practice and commitment are required, and that is where family protocols offer the adequate conceptual framework for discussion and analysis.

In summary, for families in business, the idea is to challenge Apollo and his spell and recognize that, in terms of business or family management, there are proven practices that benefit both. In contrast, the Casandra effect provides examples of family businesses that disappeared due to inaction by their members, by omitting the enormous impact of family relationships in the company (and vice versa), or because they gave up creating an awareness of responsibility in the generational transition, particularly when there was no need to do it because when there is a need it could be too late.