Family businesses have traditionally been reluctant to talk to advisers. What possible advice could an external specialist give me when my family knows the business inside out? So the argument goes.
But the flip side of this is family businesses need advice from external specialists more than ever. After all, family businesses face the same set of problems as non-family businesses do like the direction of their overall strategy and financial setup. On top of these factors, family businesses have their own set of issues – like succession and family governance. In fact, family businesses often require external advice more than many non-family businesses.
So here’s the dilemma – at one level there is an increased reluctance for family businesses to seek advice from outside advisers, but at the same time there is an increased need for such advice for family businesses.
Despite the dilemma, family businesses do hire advisers. But this can often lead to further misunderstandings and suspicions. Here’s how these can arise. Often an adviser is hired by just one member of the family, but this can create a conflict of interest. In fact, these “single family member advisers” can create havoc at a family business.
Such advisers are more likely to be extreme in their views – they will do anything to back the family member in any dispute. They are like a divorce lawyer, backing their client regardless of the rationale for doing so. Add money into the mix whereby the adviser is paid by the family member, rather than the family business, and the problems are, unsurprisingly, multiplied.
If family businesses are to avoid the potential conflict of interest of having advisers picked by a single family member, they need to employ advisers that are completely unbiased towards any member of the family. This will mean he or she can act as an adviser to the entire family. And at the same time, the adviser needs to see himself or herself as an adviser to the family and the family firm. They need to balance out information and loyalties across the family owners and the business.
Another difficulty can arise over the number of advisers used by a family business – because there are some many with different specialities – lawyers, accountants, psychologists, business advisers, and on it goes – more than one is usually hired. But problems can arise if family businesses have too many advisers, especially too many advisers effectively doing the same thing. There will always be too many opinions – and what happens in many cases is that family businesses listen most to those advisers whose opinions are closest to their own. So companies can end up paying a lot of money for advice that just confirms their own thoughts.
The message and the messenger
When family businesses take advice there are two things they take into consideration at the same time – one is the message and the other is the messenger. In general, family businesses tend to give too much credence to the messenger and not enough to the message – but this bias can create big problems.
An interesting example of this occurrence was recently illustrated in relation to the family who controls Aldi, the huge German supermarket chain. The family members of Berthold Albrecht, the son of the Aldi founder, sued Berthold’s former art consultant Helge Achenbach for allegedly fraudulent advice he gave to the deceased billionaire on art purchases. The case went through the German courts and ended with a prison sentence and a compensation payment of almost €20 million.
The dispute perfectly illustrates the problems of giving too much credence to the messenger rather and failing to carefully probe the message. If the family, or at least Berthold, scrutinised the message from his adviser they would have probably found out that it was wrong. But instead, they trusted the messenger too much. So for family businesses separating the messenger from the message is probably worthwhile advice. They need to trust the messenger, but they should also make sure if the message makes sense.
The longevity of advisers
If family businesses use an adviser at the beginning of their venture that adviser often sticks around even when the business in the meantime has grown massively. After all, loyalty is often rewarded with continuous employment. But using the same adviser at different stages of the business’s growth cycle can create problems. The old adviser may no longer have the capabilities to deal with a much bigger and complicated business, and/or a business that has expanded internationally. So relying on his or her advice when the business has grown can be costly.
There’s little doubt that if the relationship is to work, family businesses and advisers need to be very clear what their role will be in a business. And that needs to happen right from the beginning of the relationship. If this isn’t made clear at the start, an adviser might be brought in to solve a problem like succession, but end up being used in other roles as well, like triggering a change in the overall business culture, or helping to resolve family disputes.
Advisers should also know from the beginning the parameters around negative advice – will advisers be allowed to tell family members things that they don’t want to hear? Ideally, the answer should be yes to this if the relationship is to work for both parties.
But perhaps the biggest hurdle is for family businesses themselves to take a less suspicious approach to the adviser community – albeit by applying some of the parameters discussed above to safeguard their interests and ensure the relationship is fruitful.
Professor Nadine Kammerlander is chair of family business and academic director of the Institute of Family Business at WHU – Otto Beisheim School of Management. Nadine, a former consultant for McKinsey & Company, has advised many family businesses.