Beware of Creating Silos Inside Your Family Business

When the word “silos” is mentioned in a business context, one thinks about very large corporations that have become so bureaucratic that they are unable to remain nimble.  However, all too often silos are created inside even very small family businesses.  The genesis of this phenomenon is often grounded in good intentions; after all, it is easier to maintain good relationships if every member of the family is treated equally – or so it may seem.  It is often out of this notion of equality that silos are born within a family business.  What you end up with is a business model built around family dynamics and personalities, rather than what the business requires in order to compete in the marketplace.

Many times, parents who have adult children entering the business will create silos by creating new roles or new divisions, or even start entirely new affiliated companies, in the interest of making sure that each sibling has an equally important role.  While the intentions are often good, there are some realities that should also be considered.  For example, it is rare that every member of the family is a “born leader” or even wants to lead others – every person typically has strengths and weaknesses that are better suited for one role or another.

So what should we do to prevent silos from forming?  The best practices, which have been widely adopted by family enterprises around the world, involve insuring that all positions within the organizational chart are there because they are in the best interest of the overall business – not just the best interest of a family member.  In addition, it is also highly encouraged that compensation levels for each position be paid at a fair market rate, and that overall compensation throughout the company is more focused on being fair than being equal.  Equal compensation generally tends to promote sub-par performance, as top performers are not rewarded adequately for their significant contributions and poor performers are unjustly rewarded for a job poorly done.

Business First, not Family First.  All owners should be treated equallywhen it comes to distributing profits at the end of the year, as this is the time when it is appropriate for everyone to receive equal benefit, per share, for their ownership interest in the company. This reward, however, should be driven by the overall performance of the business, as opposed to the financial needs of family members.  This type of focus on business performance tends to promote positive behaviors, because everyone has a shared interest throughout the course of the year to increase the profitability of the company for the benefit of all stakeholders.  This may include developing new customer relationships, growing revenues, reducing or eliminate unnecessary expenses, and you will find that different family members may show a preference or talent in one or more of these areas.  And, for parents who have not begun to transition ownership to the next generation, profit-sharing can be done equally among adult children, as this will also help prepare them for the roles of being equal owners in the future.

Cross Train Family Employees. Rather than having a parent train a son or daughter to “replace them,” make sure that up and coming family leaders are exposed to all areas of the business and trained by non-family members and key staff.  Assess their performance objectively to determine which area of the business they are ultimately best suited for.  Many family businesses avoid having a son or daughter report directly to a parent, if it can be avoided. 

Dan Caudill of Caudill Seed Co., a 63 year old regional seed and supply distributor based in Louisville, recently hired his son Corey (representing the third generation) into the business.  He quickly realized that the having a non-family member as his son’s direct report would be advantageous.  Says Caudill , “I try to keep the family dynamics out of the business exchange.  Corey reports directly to the Chief of Operations, Sam Fell, and both can be more objective without the family dynamics that often accompany parent and child interactions.  In my opinion a business still must run like a business, which is very different than a family.”

As family employees experience all aspects of the business, check in with them periodically as well as with those training them to determine where their interest and aptitude is showing up.  Confirm this assessment with objective assessment tools and 360 reviews.   

Avoid the “Mini-Me” Complex.  Don’t assume that your son or daughter has to run the business exactly the same way you did.  In fact, assume (and hope) that they will not.  The skills set required to start up a business is not the same skills set required to take that business to the next level of growth.  Many times the entrepreneur who started the business needs someone who is willing and skilled at building the necessary infrastructure required to grow and professionalize the business.  Value creation by the time a family businesses reaches the second generation often involves the systemization and formalization of the business, which creates more efficiencies but also ensures that all the value of the company doesn’t walk out the front door when you do.   Open up your mind to the fact that the business needs a different type of leader at this stage of its growth and evolution; someone very different from you.  That person may or may not turn out to be your child.

Create Individual Development Plans that Coincide with your Growth Plan. What is your growth plan for the business?  How will you build value over time?  What are the key value drivers of your business?  Once you determine what the business needs to grow and how you will grow it, create an individual development plan for each member of the family, comparing their unique skills, behavioral and motivational profile to the overall growth plan for the business.  Have an open discussion about what the business needs, and compare that to what each member of the family is most interested and best suited to contribute.  Then go about the process of getting everyone in the right seat, and for the right reasons.

But what if silos have already been formed?  One approach to dealing with this issue is to bring in a third party, with experience in helping families work through this issue, but it is also possible to work through this as a family.  First having a clear organizational chart that all stakeholders (owners, family members, and key employees) agree really serves the best interest of the company and its customers is key.  Once this is established an HR director, HR outsourcing firm, or often even trade organizations can provide information on what a competitive compensation package looks like for each role within the company.  While this may seem like it is a daunting task, it can and has been done.  Koetter Woodworking, which has been in business in southern Indiana for over 50 years, had developed silos as each of five brothers entered the business after graduation from high school, but they worked together to change this as they saw that it did not promote the overall health and growth of the company.   Jerrry Koetter, President, said “We came to believe that opportunities that were birthrights instead of earned, actually served to reduce our drive to improve ourselves.  However, when compensation was aligned with contributions to the success of the company, we had the incentive to improve ourselves professionally.”  Brother and CEO, Randy Koetter, added, “Once we started making decisions based on the best interest of the corporation, instead of the family or each family member, it became a much easier conversation to have around making compensation fair as opposed to equal”

As the old adage goes, “An ounce of prevention is worth a pound of cure”, and this holds true where silos form within the family businesses.   But even if that ship has already sailed, it is possible to chart a new and improved course based in fairness. Remember, when it comes to family business, fair is not always equal.  A “business first” vs. a “family first” approach is always the safest bet.

This article was written by and provided courtesy of Kathleen Hoye, Executive in Residence, Director, University of Louisville Family Business Center, and Vaughan Scott, MBA, CPWA ®, Managing Director – Investment Officer with Axiom Financial Strategies Group in New Albany, IN.  University of Louisville is not affiliated with Axiom Financial Strategies. The opinions expressed in this communication are those of the author(s) and are not necessarily those of Axiom Financial Strategies or its affiliates. Visit our website at www.AxiomFSG.com.

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