Victoria Pigott
Partner, Mishcon de Reya
Well uh, dealing with family and friends can be incredibly rewarding. Err, families are rightly proud of the businesses that they’ve set up and that they can pass down a generation. It’s usually satisfying for those working in those businesses to know that they’re providing not only for their families but also for the generations to come. However, whilst working with your family members can be a blessing, it can also be incredibly difficult to work with those you’ve known for so long and it can on occasion become a curse.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
Are you talking about issues in terms of how the business is run?
Victoria Pigott
Partner, Mishcon de Reya
Yes. So we often hear the phrase the first generation makes it, the second generation spends it and the third generation blows it. People have a very different work ethic if they’ve been brought up in a wealthy, privileged background and it, it’s difficult for wealthy families to motivate their children and ensure that they have real ambition and a drive to study. It’s a real issue when you bring up children in a privileged background, you hope that they’re going to go on to work in the family business but you want to ensure that they don’t have a sense of entitlement um, that prevents them from working for it and importantly not taking it for granted or assuming that their role is guaranteed.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
So it’s clearly a very difficult balancing act. What can families do?
Victoria Pigott
Partner, Mishcon de Reya
The first thing to do and I think the most important objective is to set clear roles and expectations. So are the children or the cousins all expected to go into the family business? Is there an obvious successor? Are there clear expectations of what you’ve got to achieve in order to be allowed to work in the family business? There is always hierarchy in every family, both generations, sides of families and if divisions start to appear you’ve got to confront them. Don’t let them fester. You need to make it very clear to each family member what is expected of them. You need to communicate. Talk to them about division of the future, what it might look like but also listen to their queries. Engage with the next generation, make them feel heard. It may be that they are going to be overruled but giving them a voice, letting them speak, that they are heard and they have value given to their opinions and contributions. And it, it might sound obvious, but a lot of families really struggle with favouritism; is there a golden child, the favoured one and if possible, try to avoid unequal treatment. Or if there is one clear choice for the next CEO, the leader of the business, speak to the other family members and talk to them about why their characteristics might be better. Manage everyone’s expectations.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
You’ve talked about expectations and communication. Is it best that those things are written down somewhere?
Victoria Pigott
Partner, Mishcon de Reya
Yes. So family businesses by definition are often much less formal but it is much better in the long run to have legally binding documents whether they’re shareholder agreements, partnership agreements, employment contracts. The process of setting something out in writing is really helpful and it forces people to go through those kind of um, discussions. What they are expected to sign up to, what the vision of the future is going to be. So as the documentation is drafted and finalised, issues and concerns can be raised, discussed and decided upon as a family. You need to make sure that the documentation sets out decision making processes in the future um so, clarify how major decisions are going to be made. Is it a vote, majority vote? Is it seniority? Set out how disagreements are going to be managed. Are they going to be dealt with through arbitration, in private, avoid the media. It’s the drafting of and agreeing to these documents that is most likely to avoid the disagreements in the first place.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
And in addition to documentation, what else might be helpful?
Victoria Pigott
Partner, Mishcon de Reya
I think communication protocol are crucial. So you will have members of the family who are involved in the day-to-day running and those who aren’t. You need to make sure you have regular board meetings with proper agendas and minutes. It all needs to be properly documented. Do it formally. Don’t do it at a family dinner. But then obviously in terms of practicalities, the time you may all be together might only be at a family dinner, so carve out time before the dinner and announce, ‘we are now having a board meeting’ and then once it’s finished you can go on and have the family dinner. It goes back to managing expectations and succession. Not knowing what a business is going to look like in the future is unsettling and demotivating. You need to be transparent about who is going to take it over, how transitions will happen. Don’t make it a competition. Don’t pit people against each other. You need to avoid assumptions. Put it in writing, have the discussions with all the stakeholders.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
And you are talking here about um, family members. What about bringing in outside expertise?
Victoria Pigott
Partner, Mishcon de Reya
It’s obviously viewed with some scepticism people would like to keep it in the family, people think that you don’t want to air your secrets in public but if you have an exceptional individual the strategic use of exceptional advisors is incredibly valuable to a family and many family businesses have long, longstanding De Facto family members who have been there for a very long time, they are loyal and trusted by all parts of the family and their role assists with bringing this objectivity into the decision making that is so difficult in family businesses and often introduces specialist skills that the current family members may not have. But obviously the caveat is, chose your advisors wisely and invest in them for long term commitment.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
And things invariably sometimes go wrong. What’s your advice when that happens?
Victoria Pigott
Partner, Mishcon de Reya
Absolutely and even the most cohesive family structures can have issues. Families are constantly evolving so children are becoming adults with opinions, people are dying, people are marrying others and bringing them into the fold and when these things happen, especially with the death of a senior member, there’s a real sense of loss and grief and with that comes the rebalancing of family dynamics.
Peter Steen
Partner, Head of Private Wealth Disputes, Mishcon de Reya
Do you have any specific pointers for when things go wrong?
Victoria Pigott
Partner, Mishcon de Reya
I think the most important thing is to address issues early. Don’t let them fester. Don’t let resentment build up and talk about any concerns as quickly as possible. You need to use facts not emotion and keep the conversation focussed on the business. Think about perhaps bringing in a mediator, a neutral third party who can facilitate difficult discussions, keep it on track and that’s often the best way to avoid full blown legal disputes. I think that some families also have to accept that there are times when they will no longer be able to work together and you need to look at the viable options, the alternatives. Many family business disputes end up destroying both the family business and most importantly, family relationships. Don’t let that happen. Be realistic about restructuring, being bought out. Think about practicality rather than emotion. And legal action should be your last resort. I mean I’m a litigator who spends most of my time persuading families not to litigate, look at the alternatives. But if it is unavoidable, chose lawyers who have experience in family business disputes. They need emotional intelligence, they need obviously to be a commercial litigator but they need an understanding of family dynamics and empathy. And families should learn from experiences. Use them to create better systems and safeguards for the future to protect the most precious things which are your family business and your family.