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The pitfalls of professionalism

Professionalizing your family business is a good thing, right? Don't the experts all agree that formal structures, outside directors and management best practices can ensure the sustainability of your family firm?

Well, yes -- but professionalism alone won't guarantee a healthy family business. In the March/April issue of Family Business Magazine, Andreas Raharso of the Hay Group's Singapore-based Global R&D Center for Strategy Execution writes, "A strategy that overemphasizes professionalism and neglects the family will lead to a deteriorating family business."

As a case in point, consider the Bancroft family, who controlled Dow Jones & Co. (publisher of the Wall Street Journal) before selling that company to Rupert Murdoch's News Corp. in 2007. As family business adviser Jim Barrett noted in a 2011 Family Business column, Bancroft matriarch Jessie B. Cox, who died in 1982, decreed that the family would "leave the business to the professionals."

But Cox went too far in her insistence that the family not meddle in the day-to-day running of their investment. As the Bancrofts debated whether to sell the company, Cox's grandson Crawford Hill lamented in a letter to his relatives, "[T]here has absolutely never existed any kind of family-wide/cross-branch culture of teaching what it means to be an active, engaged owner and more crucially, a family director.... We are actually now paying the price for our passivity over the past 25 years."

Barrett observed in his 2011 FB column that as the years went on and the Bancroft family grew bigger, dissent began to fester among the various family branches. As Internet competition heated up and Dow Jones' stock price fell, family members grew less inclined to hold on to the company. We all know what happened next.

"The initial success attained through professionalizing family firms is often offset by problems, squabbles or even family feuds," Raharso cautions in our current issue. In addition to recruiting key non-family managers and outside directors, you must also focus on developing your next-generation family owners if you want your business to stay in the family.

Theories of relativity

In the just-published March/April issue of Family Business Magazine, attorney Joe Goodman explains that because of today's demographic and medical realities -- divorce and remarriage, increased longevity, unmarried and gay couples raising children, in vitro fertilization and gestational surrogacy -- estate planning is more complicated than it used to be.

In my March/April "From the Editor" column, I note that these new realities also complicate the question of who should be considered part of "the family," and thus who is permitted to own or inherit stock in the family business. A panel of family enterprise stakeholders will discuss this topic at our forthcoming Transitions East 2012 conference, which will be held in Orlando, Fla., April 25-27.

Each family must determine its own stock ownership policies by considering the family values and how family units might be formed in the future. It is instructive, however, to consider how others have answered those questions.

With the enactment of the Family Office Rule, which Congress inserted into the Investment Advisers Act of 1940 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Securities and Exchange Commission has considered this question, as well. The Family Office Rule determines whether a family office must register as an investment adviser with the SEC. Family offices that provide investment advice to people not considered as family clients must register.

On a "Frequently Asked Questions" page on the SEC's website, staff of the SEC's Division of Investment Management tell us who they consider to be "family members," for the purpose of determining compliance with the Family Office Rule:

• Same-sex domestic partners and unmarried opposite-sex partners are considered family members. (Presumably, so are lawfully married spouses.)
• However, "in-laws related through the spouse of the common ancestor, or through spouses or spousal equivalents" do not qualify as family members.
• Spouses or descendants of a stepchild whose parent later divorced the family member stepparent are not considered family members under the rule.

Whether or not you agree with the U.S. government on these matters (or if you find the SEC's wording to be so confusing that you don't know whether you agree!), these definitions are a way of opening a discussion on this topic with your family members.

The small-business advantage

Owners of small family businesses often tout their connection to their communities as one of their strengths. A new study by researchers at Baylor and Louisiana State universities offers some evidence to prove it.

In an article in the Cambridge Journal of Regions, Economy and Society, sociologists Troy Blanchard of LSU and Charles Tolbert and Carson Mencken of Baylor analyzed health statistics from more than 3,000 U.S. counties and parishes (what Louisiana calls its counties). They found that counties with a greater concentration of small, locally owned businesses had lower rates of mortality, obesity and diabetes, based on their review of national population, health, business and housing data.

At first blush, this conclusion seems counterintuitive, since small businesses are not known for providing their employees with lavish health insurance coverage. But the co-authors note that it's in the financial best interests of small, local companies to take actions such as supporting bond issues for health infrastructure, promote community health programs and support local farmers' markets. The researchers write:

"Small-business owners produce important noneconomic rewards for communities, such as enhanced stocks of social capital and collective efficacy. In this way, the small-business sector may produce salutary rather than unfavourable community health outcomes.... Entrepreneurial culture provides a local orientation that allows for greater levels of interaction and trust among community members. This, in turn, helps to create collective efficacy, which has positive effects on community health in a number of ways...."

The sociologists also note that the trend in large, multinational companies is to lay off workers, whereas small-business owners strive to retain their employees -- especially if those employees are their family members or neighbors.

"In addition to health, we expect that our entrepreneurial culture approach could be applied to a variety of indicators of well-being, such as crime, suicide, population growth and school performance."

Evidently, small-business owners' investment of their social capital is paying off.

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