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A couple of weeks ago, we outlined 3 of the most common and useful models that have been developed to describe family business. Because of all the constituents at play in a family business, there are so many dimensions at play in any matter that dissecting what is occurring can be incredibly challenging.  Models like the Three Circles, Four Rooms and Five Capitals arm us with a set of lenses by which one can interpret the circumstances presented and develop an appropriate response.

With all models, it is helpful to keep in mind George Box’s quote “all models are wrong, but some are useful.”   So, while we have already covered how models are useful, today I would like to consider where such models may struggle to be applicable.  These are places in which the model does not cover a particular dynamic, where something important is buried within the model and may not get the attention it needs, or where there are externalities at work that may make applying the model challenging. 

I became curious in looking at family systems this way because I commonly saw areas in family systems which were universally acknowledged to be important by individual family members but remained challenging in getting the family system to put into practice.  

After much study and research, I have concluded the root for these airgaps in family business models has to do with the way the most models look at the family. Often, our thinking looks at family as simple, linear system, when instead families are best described as ‘complex adaptive systems.’ While this sounds like semantics, the study of complex adaptive systems is a burgeoning field of research that has largely only been applied to computing and stock markets. That said, there are lessons we can apply to families.

Before describing complex systems, let’s review simple systems. Simple systems function linearly – the movement of one piece directly affects another piece down the line.  A manufacturing line or car engine would be an example. Most importantly, linear systems can be explained and predicted by describing each component and how it interacts with others.

Complex adaptive systems (CAS) are different as they are systems in which the whole is greater than the sum of the parts.  In a CAS, the action of each individual actor is insufficient to explain the actions of the entire system. A CAS is fluid and adaptive to changing circumstances and dynamics. We all interact with one of the largest complex adaptive system regularly – the stock market.  The marvel of the stock market is that over long periods of time, by aggregating the views of individual investors, the market can price risk accordingly. 

As well, even things like market meltdowns, speak to how the system can have a mind of its own.  In families though we see examples of this complexity at work. For example, a small disagreement between two family members can have far reaching effects on other family members and the business who are not directly involved in the conflict.    

This is a vast under-simplification of CAS and I would point you to the work of the Sante Fe Institute and author Michael Maubossin in explaining in much greater detail.  

As such, as we consider modeling a family system, linear models like we discussed previously are helpful. But because of the complexity of the system, we also must consider the system in its entirety in more of a top down fashion.

When doing so, we find that there are certain classes of activities that seem to struggle in family enterprises. These activities are common to the whole system – and are endemic to each of the prior models. Because they are everyone’s responsibility, they become no one’s responsibility. Even more so, because they may have multiple constituencies that have a view on the activity – coordinating the activity across the family system becomes exceptionally challenging.

These activities are ‘system regulation,’ communication, and education.

System regulation sounds somewhat nebulous because in most families this function is subsumed within the role of the patriarch or matriarch. But in a large family enterprise, the number of relationships at work, the aggregate amount of activity across various entities, in addition to the on-going efforts of managing the family’s financial capital outstrip the capacity of any one person to serve as the central node. 

When this happens, it is easy for the system to enter a period of operation without regulation. Regulation is ultimately about how the family system coordinates is activities to make sure there is alignment towards the broader goals of the family. As well, regulation includes a feed-back loop so that the “central nervous system” of the family is aware of threats – both internal and external – that threaten the family’s stability.  For internal threats, while all families have their dysfunctions and conflicts (what gathering of humans does not?), the system must be aware of where the normal ‘colds’ of the family, begin to threaten becoming ‘systemic cancer.’

One recommendation is that families consider some sort of executive committee of key leadership that meets regularly to coordinate the activities of the family, business, ownership, foundation, etc. 

The second area that falls through the cracks of family systems is communication.  In my experience, nearly everyone agrees that communication is important in a family system. The challenge is that each part of the family system needs to communicate with the others. As well, often the communication is inter-dependent on the actions of other family members. 

Because of this interconnectedness, communication is simultaneously both everyone and no one’s responsibility. As well, communication programs are technically challenging to implement given that most families are exceptionally private in nature so there is a cultural barrier. As well, unless the family has owned a public company or been in a business which required significant efforts around marketing and PR, it is likely a skill set that is not readily available within the family system.

A final challenge with communication is the fact that it often feels highly one-sided. Like the famed quip, that 50% of advertising dollars spent are effective, but you do not know which 50%, so it is with family communication.  Closing the loop on communication to measure impact, retention, and effectiveness is challenging.

Remedying challenges of communication include a change in culture to embrace communication.  Training and developing a resource with skills in PR, investor relations, and marketing also makes a lot of sense. How this resource is engaged will be important to define and should be coordinated with the executive committee so ensure alignment around messaging.

The final activity that family’s systems struggle with is similar to communication – education.  The development of the family’s members is universally important and clearly would a key action in using any of our Big 3 family business models. But education is likely a focus of the family council, business, family office, private trust company, and foundation. 

Each of those entities has educational goals for the family, with the challenge of coordinating where each family member is on a continuum of education, developing content, and delivering in a multi-modal way aligned with each family member’s primary learning style. This is highly complicated, and the sizable number of constituents makes it even more difficult. As such, education is probably the most important, most discussed topic for families currently, but one that is among the most challenging in being able to move the needle on.

Education is among the most challenging questions families are trying to answer today.  If we can reason by analogy, when corporations have areas the spread across a broad range of departments, they often will create a steering committee with representatives for each constituent. This seems like a reasonable starting place. Beyond the steering level is implementation, and finding the right professional partner there is a challenge – either internally or externally.  That role is a unicorn like mixture of both educational background, expertise in human development, content knowledge across various verticals, assessment methodology, etc. The only place that comes to mind where you may begin hunting for such a person would be in a high-functioning career services department of a top-tier college or university. 

Families are complicated no doubt. For family members and those who work with family businesses and family offices, this complexity can sometimes feel impenetrable. Even when using tools like models of family enterprises, there are activities like regulation, communication, and education that even if they are included within an existing model, somehow remain out of reach for the family to address.

This struggle is because families are complex adaptive systems. And as such, the system behaves independently from each of the constituent members.  By viewing certain struggles in the family enterprise with such a lens on, we can more readily identify these struggle points and outline solutions that account for the complexity and dispersed levels of authority.

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About the Author

David Wells is the Founder and CEO of Family Capital Strategy, a strategy consultancy based in Nashville, TN. We help families stay invested together by collaborating with them to build world-class family offices. We provide objective, conflict free advice in a strategic, customized and multi-generational manner.