Ask A FEA – Ken Lancaster on Managing Risk in the Family Enterprise

Question: What communication processes can help families discuss risk in the family enterprise so that this sensitive topic is addressed in a calm, respectful, inclusive manner?

KEN: Addressing risk in a family enterprise is extremely important for the ongoing success of both the family business as well as the family. The following communication process will greatly assist in the discussion and proper management of risk:

• Clarify the issue
• Define success
• Identify barriers
• Brainstorm options
• Identify key actions
• Build accountability

Family members should be reminded of the importance of non-verbal communication and how it can impact the communication process in both a positive and negative way. Generating trust within the family will enhance the communication process. Engaging in trust-building activities are helpful. An example is the creation of a family vision, mission and values.

Question: When helping your clients to identify and manage risk, what risk factors do you consider that are unique to family businesses?

KEN: Family relationship risk is unique to a family business as family relationships and family legacy will inevitably play a factor in the day-to-day decisions required for the family business. Lack of succession planning is a common risk factor I have seen within family businesses. All too often, the family is focused on the short term business decisions and do not take the time to address succession plans. The pressure to hire family members is often present. There is a tendency to hire family members but they may lack the skills and experience required for their position. Culture and structure is often informal within a family business. The result can be a lack of defined strategy and goals as well as polices and documentation.

Question: How can business families effectively manage different risk profiles within their family?

KEN: Effective management of risk in the family enterprise can be challenging. Successful management of risk can be accomplished through ongoing communication. Here are a few examples that can assist with this:

Managing Information — It is important to ensure that relevant information is available to all key stakeholders. Greater trust can be developed when there is open and transparent information provided for the required decisions.

Training — Implement a plan to invest in the training and development of family, owners and management. This will increase the knowledge base and skills that will assist in improved decision making.

Decision-Making Criteria — Prepare a set of criteria that will form the basis upon which decisions will be based. This will help reduce the emotional element in the decision making process.