20/08/2015

By Ken McCracken, consultant and co-founder at Withers Consulting Group

The term ‘best practice’ is used to describe recommended or successful strategies which can be used by businesses, families or individuals as they prepare for the future.

But with family business in particular, the term ‘best’ is highly subjective, as what’s considered right for one family won’t work for all.

An overreliance on best practice and the assumption that it will solve every problem or dilemma within a family, family-owned or family-run business, can result in increased financial risk.

For example, some families will consider the natural or ‘best’ succession-planning option to be the appointment of the next generation — part of the family and trusted implicitly — to the board, instead of relatively unknown ‘outsiders’. But what if ‘outsiders’ could deliver better financial results? Is it right to call their appointment a ‘worst practice’, which must be the case if appointment of family is to be called “the best”?

The proponents of any best practice are unlikely to be deterred by examples of families who achieve success by alternative means. Indeed, these families may be described as “alternative” to suggest that they are taking risks, or “a bit out there”. This, of course, protects best practice from being revealed as nothing more than one way of achieving success.

Other strategies commonly regarded as best practice include the requirement for a family member to have a degree in a relevant field and three to five years of work experience before joining the business. But in some families the goal is to provide employment for family members at multiple levels of the company, and encourage family members to come join the business, and for them the best practice of “first work outside the business” is counterproductive.

Similarly, often it is said that it is best practice to bring independent directors onto the board, to give the company the advantage of new perspectives and experience. However, if the family chooses a board with a majority of outside directors there could be a risk that the board substitutes its own assumptions for what the family wants and takes the business in an entirely different direction.

Ultimately, what is best practice comes down to the goals of the family, or the goals of different elements of their business. For example, we recently spoke with four family businesses which had all created family councils. While each family considered the establishment of a family council as best practice, neither could decide on the role the council should play in regards to succession planning.

Economist John Kenneth Galbraith argues in his book, The Affluent Society, that conventional wisdom is revered by those who agree with it: “It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that emphasises this predictability. I shall refer to these ideas henceforth as the conventional wisdom.

Naturally, families who agree that their relatives should spend time working outside the business will agree that this is best practice. However, referring to this as best practice damns the families who take different routes. As long as each of them is successful on their own terms, what does it matter?

Maybe best practice is influenced too often by the understandable self-interests of its promoters. No doubt the recommendations of best practice are well intentioned and can be helpful as ideas for a family to consider, but is it too cynical to suggest research into a correlation between best practice and the services offered by its proponents?

There is one final reason to be wary of best practice. It is generally accepted as misleading to deduce a normative statement of what ought to be from a description of what is. In other words, it is misleading to recommend what one family ought to do based on what worked for another family enterprise.

In reality, we know that every family is different. While it is very helpful to give families examples of what others have done to cope with the challenges of owning and running a family enterprise, each of them still needs to work out what they mean by success and then plan how to achieve it in a way that is consistent with their values. Families must come to terms with this challenge and resist the temptation to take a short cut by grabbing a so-called ‘best practice’ off the shelf. While the decisions made by a family might sometimes look idiosyncratic to an outsider, who cares? If it works for that family, then it works.