Harnessing Conflict: How Family Businesses Can Survive and Thrive

Dec 1, 2019

Abstract

This paper seeks to help bridge the theory-practice spectrum of family business conflict with a model for analyzing family firm conflict entitled the Family Business Conflict Code.  Following a detailed review of family business, conflict and psychological theory and research, conflict prevention, conflict analysis and conflict management processes are set out for use by families and practitioners to address the inevitable conflicts business families will experience.
Key Words
Family business theory, conflict theory, psychological theory, conflict prevention, conflict management

 

 
Table of Contents

  1. Harnessing Conflict: How Family Businesses Can Survive and Thrive.
  2. Abstract
  3. Key Words
  4. Table of Contents
  5. List of Figures
  6. Introduction
    1. The Nature of Family Business
      1. (a)        Prevalence of Family Business
      2. (b)        Definition of Family Business
      3. (c)        Definition of Family Enterprise
      4. (d)        Complexity of Family Business
      5. (e)        Performance of Family Businesses
      6. (f)         Social Responsibility, Philanthropy and the Family Business
      7. (g)        Current State of Family Business Research
      8. (h)        Systems Theory
        1. The Three Circle Model
      9. (i)         Family Business: Defining Success.
        1. Importance of Business Succession
        2. Concept of Transgenerational Wealth
        3. Concept of Complete Wealth
        4. Family Business Success as an Infinite Game
    2. The Nature of Conflict
      1. (a)        Definition of Conflict
      2. (b)        Approaches to Conflict
      3. (c)        Forms of Conflict
      4. (d)        Views of Conflict
      5. (e)        Types of Conflict
      6. (f)        Development of Conflict
        1. Spiral or Escalation Ladder of Conflict
        2. The Conflict Process
      7. (g)        Sources of Conflict
        1. Wheel of Conflict
      8. (h)        Conflict in Family Businesses
        1. Common Forms of Relationship Conflict in Family Business
    3. Psychology and Family Business
      1. (a)        Developmental Models
        1. The Three Dimensional Developmental Model
        2. The Interfacing Life Cycles Model
      2. (b)        Circumplex Model.
      3. (c)        Personality Traits.
        1. Big-5 Model
        2. Personality Traits of Entrepreneurs
        3. Downside to Entrepreneur Personality?.
    4. Conflict Prevention in Family Business
      1. (a)        Governance Best Practices for Family Business.
        1. Regular Family Meetings
        2. Family Charter
      2. (b)        Governance Structures for Family Business.
        1. Family Circle Governance
        2. Ownership Circle Governance
        3. Business Circle Governance
      3. (c)        Legal Planning for Family Business.
        1. Shareholders Agreements
        2. Trusts
        3. Marriage Agreements
        4. Other Tools, Including Wills
        5. Incapacity Planning: Power of Attorney
      4. (d)        Family Office for Integrated Wealth
        1. What is a family office?
        2. Family Office Services
        3. Family Office Structures
    5. Conflict Management in Family Business
      1. (a)        Conflict Management Strategies Families Use6
      2. (b)        Third Party Interventions
        1. Managing the Conflict Process
    6. Conclusion
  7. Bibliography

 

 List of Figures

Figure 1:           The Family Business Conflict Code

Figure 2:           The Family Enterprise Model

Figure 3:           The Three Circle Model

Figure 4:           The Conflict Spiral

Figure 5:           The Conflict Process

Figure 6:           The Conflict-Intensity Continuum

Figure 7:           The Wheel of Conflict

Figure 8:           Human Needs in Conflict

Figure 9:           The Three-Dimensional Developmental Model

Figure 10:        The Interfacing Life Cycles Model

Figure 11:        The Basic Governance Structures of the Family Business System Model

Figure 12:        The Approaches to Managing Organizational Conflict Model

Figure 13:        The Family Business Multi-Disciplinary Team Model

 

Introduction

Many of the wealthiest and most successful families are those who have built family-owned businesses.  Ironically, their very success frequently brings to these families conflicts of an intensity and complexity rarely encountered by independently-owned businesses.  These conflicts can make family businesses possibly the most difficult to operate and sustain over time.  A heady alchemy of power, politics, identity, money and family create endless possibilities for both success and strife.

Conflict, of course, is not unique to family business.  Conflict flows from life and is continuously present in all human interactions.  While conflict can produce long-standing cycles of hurt and destruction, effectively engaging with or harnessing conflict can also make it a powerful source of constructive change.[1]  Conflict can be an opportunity to grow and increase our understanding of people and their roles within complex structures such as family businesses.  A family business is a system that is simultaneously dynamic, adaptive, and changing.  The energy of conflict can be harnessed to engage in constructive change processes at the individual, family, ownership, and business levels of a family business, as visualized by the Family Business Conflict Code:

Figure 1: The Family Business Conflict Code.

 

Since family business conflicts are often quite complex, working with a model reveals the larger picture beyond the immediate presenting problem.  By understanding what is happening in the individual, family, ownership, and business arenas, family members and their advisors can more effectively analyze, diagnose, and hopefully resolve the family business conflict.  In the process of constructively working through conflict, families can improve communication, relationships, conflict management skills, and the family business system as a whole.  The opportunities are endless.

1.     The Nature of Family Business

(a) Prevalence of Family Business

Family businesses are the predominant form of business enterprise in the world.[2]  In Canada, about half of the workforce is employed by a family business.  Canadian family businesses are estimated to contribute to 45 to 60 percent of Canadian GDP, and family businesses create an estimated 70 to 90 percent of global GDP annually.[3]  Recent research suggests that the actual number of family-controlled businesses in the world may constitute 80 percent of all businesses.  That said, there are discrepancies between sources, largely because there is a lack of consensus on what is meant by family, let alone what is meant by the term family business.[4]

(b) Definition of Family Business

Although there is no common definition of what constitutes a family business, family businesses generally have the following characteristics:

  1. Multiple members of the same family are involved as major owners or managers, either contemporaneously or over time;[5]
  2. The family controls the business through involvement in ownership and management positions;[6]
  3. The family has intergenerational intent;[7] and
  4. The business contributes significantly to the family’s wealth, income, and/or identity.[8]

(c)  Definition of Family Enterprise

Whereas the term family business often implies a singular business unit such as a store, office, or factory, a family enterprise often refers to a portfolio of businesses or initiatives that a family may be involved in. These initiatives include not only one or more operating business units, but also can include portfolios of other assets to be managed and shared including financial, real estate, philanthropic, heirloom, and deferred assets.  Deferred assets are assets that do not come into play until after death, like insurance and annuities. [9]

Figure 2: The Family Enterprise Model.  Source: Family Enterprise Exchange (2018).

 

In fact, family enterprises are the norm as 89.4 percent of families control more than a single firm, with the mean number of firms controlled by a family at 3.4.[10]

(d) Complexity of Family Business

The complexity of family business arises from trying to balance family demands and the needs of the business, while addressing the complex interaction between the two. As well as dealing with commonplace business issues, such as changes in markets, evolving technology and challenges from competitors, family businesses must deal with the unique psychological dimensions of having family members work together.

Each of the family members in the business will have their own characteristics, perspectives, and goals. Working together intensifies family interactions and can exacerbate family problems such as sibling rivalry or competition between generations. Unresolved conflicts and diminishing communication and trust can undermine the operation of the business and ultimately result in a detrimental effect on the business.

Key issues to be tackled include coordinated decision-making across the family, business, and ownership arenas; facilitating long term family ownership and succession of the business and/or wealth; issues of nepotism and entitlement; balancing the involvement and performance of family members with their skill set and those required by the business, while above all operating in the best interests of the business and family as a whole.

(e) Performance of Family Businesses

Research indicates that family firms are often strong financial performers.  While family businesses certainly confront many challenges, they also possess advantages born out of a unique and dynamic owner-manager-family interaction.  Whether measured by the bottom line value creation for shareholders or their capacity to create jobs, family companies can outperform their non-family counterparts.[11]  A review of 59 empirical studies of the effects of family involvement on the financial performance of a firm found that family involvement generally has a positive effect for public family firms and an insignificant or negative effect for private family firms.[12]  Another meta-analysis of financial performance found a small positive effect of family involvement on firm performance.[13]

The concept of “familiness” has been developed to describe the unique bundle of resources available for establishing a strategic advantage, held by and particular to family firms as a result of the unique interaction between the family and the business.  It may be that “familiness qualities,” including, but not limited to, a long-term strategic focus, a legacy orientation, family relationships, and operational efficiency, contribute to the strong performance of family firms.[14]

(f)   Social Responsibility, Philanthropy, and the Family Business

Research has shown that family firms are often more socially responsible than non-family firms along several dimensions.  In fact, the majority of research on this subject suggests that family enterprises tend to exhibit higher levels of corporate social responsibility and greater citizenship in the community than non-family firms.[15] Researchers theorize that this is likely due to family concern about image and reputation, and a desire to protect family assets.[16]

(g) Current State of Family Business Research

Family business research is the study of family-owned and managed businesses and the subsystems that affect the way they operate.  Interest in family firm research has grown significantly in over the last twenty years, leading to an emerging field of study within business research.  The underlying assumption of this research field is that family firms have particular characteristics that distinguish them from non-family firms.  Agency theory, resource theory, stewardship theory, socio-emotional wealth and institutional theory are some of the central theories appearing in scholarly family business literature.[17]

An emerging theory is that, despite the heterogeneity of family firms, a unifying characteristic is a focus on socioeconomical wealth (“SEW”), defined as a non-financial/non-economic value from owning and controlling a firm including “identity, the ability to exercise family influence and the perpetuation of the family dynasty.”[18]  Further, the interdisciplinary research field of family science has been suggested to help explain how differences among families shape differences among family firms and how family firms, in turn, shape business families.  Family science is the study of how various elements of familial relationships, family member roles, and family transitions influence outcomes for families.[19]

Family business research remains a new and evolving field which is still building legitimacy within management studies.[20]  Researchers note that the academic field of family business research still lacks sufficient theoretical integration and faces highly diverse results.[21]

(h) Systems Theory

Systems theory is a foundational concept in family business thinking.  A system is a network of interdependent components that work together to try to accomplish the aim of the system.[22]   Five principles of systems thinking that impact on family businesses are as follows:

  1. The whole is greater than the sum of its parts;
  2. Organizations seek homeostasis: trying to keep things stable or the same;
  3. Patterns of behaviour are predictable over generations;
  4. Every action creates a non-linear reaction, like a ripple in a pond; and
  5. Interfacing life cycles imply constant changes.[23]

i.     The Three Circle Model
In the systems theory approach, the family firm is modeled as comprising three overlapping, interacting, and interdependent subsystems of family, ownership, and management.[24]  Each subsystem maintains boundaries that separate it from the other subsystems and the general external environment, within which the family business operates.  This model suggests that a family firm is best understood and studied as a complex and dynamic system in which each of the subsystems has a strong impact on the other subsystems and accordingly the larger system as a whole.

Figure 3: The Three Circle Model.  Source: Tagiuri and Davis (1982)

If a person has one role, they will be in just one subsystem or circle. However, if they have multiple roles, they will be in an overlapping sector, sitting within two or three circles at one time. Within the three circle model, there are seven distinct groups with a connection to the family business:

  1. Family members not involved in the business, but who are descendants or spouses/partners of owners;
  2. Family owners not employed in the business;
  3. Non-family owners who do not work in the business;
  4. Non-family owners who work in the business;
  5. Non-family employees;
  6. Family members who work in the business but are not owners; and
  7. Family owners who work in the business.

Each of the seven interest groups identified by the model has its own viewpoints, goals, concerns, and dynamics. The long-term success of a family business system depends on the functioning and mutual support of each of these groups.

(i)   Family Business: Defining Success

 i.     Importance of Business Succession
Family businesses are unique in the extent to which succession planning assumes a key role in the firm’s life.  Because business competitive success, family harmony, and ownership returns are all at stake at the same time in the firm, carefully orchestrating a multi-year succession process across generations of owner-managers is a priority.

In family-owned companies, business failure is often related to a failure in succession planning.  Regularly quoted succession statistics of family businesses are grim.  John Ward’s seminal study in 1987 found that only 30 percent of family businesses are successfully transferred to the next generation from the founding family owners.  And the odds get worse in the transitions between the second and third generations and the third and fourth generations, when only 13 percent and 3 percent of such businesses remain in the founding family.[25]

These often-repeated succession statistics seem to prove true the old adage “from shirtsleeves to shirtsleeves in three generations.”  The phrase encapsulates the theory that the first generation of an enterprising family spends its lifetime working hard and living frugally, the second generation enjoys a comfortable lifestyle, eventually entering elite society and the third generation grows up in luxury, doing little or no work while squandering the family fortune.

John Ward’s 30/13/3 statistic has been largely unchallenged in mainstream literature and media coverage of family-owned businesses.  It seems to suggest that there is something fundamentally “wrong” with family firms, and that they inevitably fall into the three-generation survival trap.  Even though the survival rates of non-family firms are by no means larger, family business research has contributed to a rather negative outlook of family business succession in particular.  Existing family firm survival studies often neglect the portfolio of entrepreneurial activities of business families beyond a core company.  Further, most traditional longevity studies fail to acknowledge other forms of succession beyond passing on the business within the family, such as the sale of the firm as way to harvest value and create new opportunities for the family.[26]

ii.     Concept of Transgenerational Wealth

The concept of family-influenced, transgenerational wealth creation re-frames succession by focussing on developing a family’s entrepreneurial tendencies.  With transgenerational wealth creation as a goal, the survival of one family firm – a single operating business – is not the only way to pursue and achieve long-term success, and low succession rates do not mean that family firms are inept or incapable.[27]

Transgenerational wealth creation allows the next generation to use the family resources to take risks and build an entrepreneurial orientation.  Proactive, entrepreneurial strategies such as diversifying assets through a sale or strategic alliances should not mean that a family business is considered to have failed.  To grow a family’s wealth and pass it on to subsequent generations for their stewardship, the next generation should be given the opportunity to take risks and pursue new directions that are essential for multi-generational growth.

Succession should only be considered to have failed if the next generation involuntarily loses control of the transitioned assets.  Specifically, if a family business is sold and the financial assets are voluntarily redeployed into the financial markets, this is considered a restructuring of those assets, not a failed succession plan.  Similarly, if the transitioned financial assets are used for philanthropic purposes, that is considered a voluntary redistribution of those assets.  Involuntary losses or succession failure occurs only when beneficiaries lose control of their wealth through factors such as “foolish expenditures, bad investments, mismanagement, inattention, incompetence, family feuding or other causes within their control.”[28]

iii.     Concept of Complete Wealth

Adding to the understanding that successful intergenerational wealth transfer may or may not involve the transfer of an operating business to the next generation, wealth itself can be understood as more than purely financial assets.  A conception of a family’s “complete wealth” is that, in addition to quantitative, financial capital, wealth also includes qualitative components, including human, intellectual, social, and spiritual capital.[29]  The family’s financial capital is a tool to support the growth of its human, intellectual, social and spiritual capitals.  The key concept of complete wealth is that the most important assets of a family are in fact its individual members.[30]

The human capital of a family consists of the individuals who make up the family.  Their human capital includes their physical and emotional well-being as well as each member’s ability to find meaningful work and establish a positive sense of identity.[31]  When speaking about human capital, it includes effective parenting and grandparenting, communication, consensus building, team building, conflict resolution, leadership training, values, morals and ethics, and goal setting.[32]

The intellectual capital of a family is composed of the knowledge gained through the life experiences of each family member and what each family member knows.  Intellectual capital includes family members’ academic successes, career growth, artistic achievements, financial literacy, and the ability to learn and teach what they know.[33]

Social capital refers to family members’ relationships with each other and the larger community.  It also refers to the family’s ability to share and sustain an intention that transcends each member’s individual interests, often in the form of volunteer and philanthropic activities.[34]

Financial capital of a family is the property it owns.  It comprises all branches of the family enterprise, including operating business assets, financial assets (cash, public securities, privately held company stock, interests in private partnerships), real estate assets, philanthropic assets, heirloom assets, and deferred assets.  Financial capital is the tool that facilitates the cultivation of all other forms of capital.[35]

iv.     Family Business Success as an Infinite Game

Game theory is a branch of mathematics concerned with the analysis of strategies for dealing with competitive situations where the outcome of a participant’s choice of action depends critically on the actions of other participants.  Winning conflicts is the goal of game theory, or at least minimizing losses where winning is impossible.  In game theory, there are two types of games: finite and infinite.[36]  Finite games are played to win, which is when they end.  For example, baseball is a finite game: a game with known players, fixed rules and an agreed-upon objective – to win the game.[37] In contrast, the object of infinite games is not to win, but to ensure the continuation of play.  The rules may change, the boundaries may change, even the participants may change – as long as the game is never allowed to come to an end.[38]  Family businesses and the goal of transgenerational wealth are inherently infinite games.

Finite games, such as winning a weekly bingo game, are often played inside infinite games, such as maintaining the lifetime friendship of the bingo players.  Play is a metaphor for complex human engagements whenever they take on both a competitive and cooperative character, for example in a family business.  Family businesses compete with other firms externally, and internally are pools of competition for finite resources such as income, status, and power.  The family members who compete inside the finite game of the business are also playing an infinite game of perpetuating the business and/or family wealth to the next generation.  Specifically, if the goal is intergenerational succession of a family business or transgenerational wealth, one must play with the overarching mindset of an infinite game.  Success is achieved by leading the family business so the business and/or transgenerational wealth continues on after the individual players are gone.

2.     The Nature of Conflict

(a)           Definition of Conflict

Conflict, an inevitable part of human interaction, is an apparent or latent opposition between two or more parties that results from differences that are either real or imagined.[39]  Conflict begins where one party perceives that another party has negatively affected, or is about to negatively affect, something that the first party cares about.[40] More broadly, conflict is an interactive process manifested in incompatibility, disagreement, or dissonance within or between social entities (i.e., individual, group, organization, etc.).[41]

(b)           Approaches to Conflict

There are two general approaches to the concept of conflict: the competitive approach and the procedural approach.  Traditionally, conflict is thought to arise from opposing interests involving scarce resources and goal divergence and frustration.  The term conflict as popularly used typically reflects the assumption that conflict involves not only differences but incompatible goals and is win-lose.[42] A second approach is that conflict can be more readily understood if it is considered as a dynamic process.  A conflict relationship between two or more individuals can be analyzed as a sequence of conflict episodes.  A potential conflict may or may not progress to a competitive stage because alternative, more cooperative courses of development are also possible through the process.[43]

(c)            Forms of Conflict

Four main forms of conflict are intrapersonal, interpersonal, intragroup, and intergroup.  Intrapersonal conflict is conflict experienced by a single individual, when his or her own goals, values, or roles diverge internally, often in the form of cognitive dissonance. Interpersonal conflict is conflict due to differences between two or more people who are required to interact.  Intragroup conflict is conflict within a group or team.  Intergroup conflict is when multiple groups disagree on various issues.  Conflict can arise between two groups within the same organization, and that also would be considered intergroup conflict. Within the various forms of conflict, one can experience horizontal conflict, which is conflict with others that are at the same peer level as you, or vertical conflict, which is conflict with someone senior or subordinate to you.[44]

(d)           Views of Conflict

Conflict has been traditionally viewed as dysfunctional and often the result of poor communication or a lack of trust between parties.  Conflict in the traditional view is associated with words like violence and destruction, and people are encouraged to avoid it at all costs.  Around the 1940s, a human relations view of conflict emerged, suggesting that, because conflict is inevitable and normal, we should learn to embrace it.  Conflicts should be understood and addressed because they can be constructive and beneficial for individuals and organizations.  A newer interactionist view encourages conflict on the assumption that a group that is completely harmonious and cooperative is prone to becoming static and non-responsive to needs for change and innovation.  The interactionist view encourages a minimal level of conflict, as just enough conflict is thought to keep a group creative and moving forward.[45]  The interactionist view does not state that all conflict is positive and separates conflicts into functional and dysfunctional types.

(e)           Types of Conflict

               In terms of functional and dysfunctional conflict, a distinction is often made between substantive conflict (often referred to as task and process conflict) and relationship conflict.[46]  Substantive and relationship conflict can occur independently of each other, one type of conflict can turn into another, or they can occur simultaneously[47].  Task conflicts deal with tensions and disagreements on the nature of tasks individuals work on, manifesting as contradicting opinions and views about goals and technical issues concerning those tasks.  Moderate levels of task conflicts are thought to improve decision making, thereby improving the performance of a family firm.  Process conflict is a disagreement about how work should be accomplished.  It also deals with disagreements about the organization of work, and plans and timetables.  Similar to task conflict, moderate levels of process conflict are thought to help in sharing and transferring knowledge that helps family firms innovate and improve efficiency and performance.[48]

Relationship conflict deals with interpersonal tensions between individuals caused by their relationship and not by the tasks or jobs they perform.  Relationship conflict can result in negative emotions such as anger, distrust, animosity, and rivalry between family members and is thought to adversely impact firm performance.[49]  Relationship conflict interferes with task-related efforts and decreases the goodwill and mutual understanding of group members.  Chronic relationship conflict can have serious detrimental effects on a family firm’s functioning.  To date, there has been little evidence of any positive effects of relationship conflict on either firm performance or family member satisfaction.[50]

(f)             Development of Conflict

i.                 Spiral or Escalation Ladder of Conflict
               Conflicts sometimes develop in a sequential manner, often referred to as a spiral or escalation ladder of conflict.[51]  A typical spiral ladder of conflict is shown here: [52]

 

Figure 4: The Conflict Spiral.  Source: Eunson (2012)

Not all conflicts develop in exactly this sequence.  Certain phases of the spiral may be skipped or may occur in different orders or entirely different phases may occur.  The spiral is designed to be similar to a tornado.  The more a conflict progresses up the spiral, the stronger the effect and the more difficult it is to get out of.  The spiral has two main zones: the covert and the overt.  The covert zone is where the conflict has not yet emerged or erupted into public view, and the overt zone is where the conflict becomes public and direct.  There are multiple strategies available for getting off the spiral at each stage, including avoidance and various problem solving and conflict management techniques.

ii.               The Conflict Process

In addition to a spiral, conflict can be interpreted as a process having five stages: potential opposition or incompatibility, cognition and personalization, intentions, behaviour and outcomes:[53]

 

Figure 5: The Conflict Process.  Source: Robbins and Judge (2007)

 

The first stage in the conflict process is potential opposition or incompatibility, described as the conditions that create opportunities for conflict to arise.  These conditions do not necessarily always lead to conflict, but one or more of them need to be present if conflict is to occur. Three general categories, referred to as antecedent conditions, are part of this stage: communication, structure, and personal variables.  Miscommunication and ambiguity are known to be a source of conflict, as is too much or too little communication.  Too much communication can be overwhelming and confusing and too little communication can create frustration from lack of information or connection.  The structure of the group is a second cause for conflict.  Structure includes size (the larger the group, the greater probability of conflict), degree of specialization (the more specialized the activity of the group, the greater probability of conflict), jurisdictional clarity (the more ambiguous the allocation of responsibility and roles, the greater the probability of conflict), goal incompatibility (difference of goals among group members increases the probability of conflict), leadership style differences, dependence (interdependence triggers conflict) and remuneration systems (conflict is caused whenever resources are thought to be distributed unfairly).[54]  Personal variables are the third major antecedent condition for conflict to occur. These variables can be as simple as the sound of another person’s voice, their facial expressions, their personality, or their values. If one party doesn’t like the personal traits and characteristics of another party, that is a potential cause of conflict.

The second stage in the conflict process is cognition and personalization.  Conflict doesn’t exist unless a party perceives it to exist, through an awareness of the presence of preceding conditions.  At this stage, conflict issues are defined and parties perceive what the conflict is about.  Whether the conflict is perceived negatively or positively reflects how it is dealt with and its outcome.  Moreover, emotions have a major role in perceiving a conflict.[55]  If negative emotions are present, trust erodes and there are more negative interpretations of another parties’ behaviour.  If positive emotions are present, more creative and innovative conflict resolution options are considered to be possible.[56]

The third stage in the conflict process is the intentions or decisions by a party to act in a given way.  A party must infer another party’s intent to know how to respond to his or her behavior.  Many conflicts escalate simply because one party attributes the wrong intentions to the other.  There is also often incongruity between intentions and behavior, so behavior does not always accurately reflect a party’s intentions.  There are five primary conflict-handling intentions:

  • Competing (assertive and uncooperative),
  • Collaborating (assertive and cooperative),
  • Avoiding (unassertive and uncooperative),
  • Accommodating (unassertive and cooperative), and
  • Compromising (midrange on both assertiveness and cooperativeness).

Conflict handling intentions will be reviewed in detail in the Conflict Management in Family Business section and in Figure 12 below.

The fourth stage in the conflict process is behaviour. Similar to the conflict spiral discussed above, it’s at the overt, behaviour stage when conflict becomes visible to others. Behaviours can include statements, actions, and reactions made by the parties involved in the conflict. In this stage, the parties act out their intentions through a dynamic process of interaction between parties.  Behaviour sometimes varies from a party’s original intentions, due to miscalculations, confusion, or errors.  The Conflict-Intensity Continuum provides a way of visualizing conflict behaviour:[57]

 

Figure 6: The Conflict Intensity Continuum.  Source Robbins (1974)

 

All conflicts exist somewhere along this continuum, ranging from no conflict to annihilatory conflict. In the lower part, controlled forms of functional conflict take place, while on the upper part, increasingly dysfunctional conflict with actions of increasing aggression and destruction appear.

The last stage in the conflict process is the outcome or the consequence of a conflict.  There can be functional outcomes of conflict for a family business, such as improving the quality of decision making, stimulating creativity and innovation, encouraging interest and curiosity among parties, providing the mechanism through which problems can be aired and tensions released, and fostering an environment of self-evaluation and change.  On the other hand, dysfunctional conflicts clearly reduce firm effectiveness.  Among the undesirable consequences of conflict on a family business are poor communication, reduced trust between parties, reductions in firm cohesiveness and the subordination of business goals to the primacy of infighting between parties. Researchers have found that all forms of conflict, even the functional varieties, appear to reduce group member satisfaction and trust.[58]  At the extreme, conflict can bring firm functioning to a halt and threaten its very survival.  Many researchers theorize that conflict is likely a major contributor to the often-quoted family business succession failure statistics.

(g)           Sources of Conflict

Whereas conflict has multiple sources, human needs are at the core of all conflicts.  People engage in conflict either because they have needs that are met by the conflict process itself or because they have needs that they believe they can only attain by engaging in conflict.[59]  These human needs are expressed through other proximate causes: history, structure or context, emotions, values, and communication. Human needs and the proximate causes of conflict are illustrated in Bernard Mayer’s Wheel of Conflict:

i.                 Wheel of Conflict

 


Figure 7: The Wheel of Conflict.  Source: Mayer (2012)

 

Attempts to understand a conflict should start by examining the proximate causes.  A better understanding of the conflict’s history and its context, and of the parties’ feelings, values and patterns of communication, will reveal their deeper human needs.  Human needs range from survival; to substantive, procedural, and psychological concerns; to identity-based needs for community, meaning, intimacy, and autonomy.[60]

The structure or context within which a conflict takes place can contribute to conflict, including available resources, decision-making procedures, time constraints, legal requirements, communication mechanisms, and physical setting.  For example, the litigation process is a context that can exacerbate conflict by making compromise more difficult and casting issues into right versus wrong and win versus lose struggles.

Emotion is the energy the fuels conflict.  Emotions can be generated by the interactions of the conflict, the circumstances surrounding the conflict, or by previous experiences.  Emotions can fuel conflict, but they can also be part of deescalating it, as on some level all people share the desire to seek connection, affirmation, and acceptance.[61]

The history of participants in a conflict or in the system in which the conflict is occurring has a powerful influence on the course of that conflict.  The relationships and past experiences between parties involved in a conflict can lead them to make both positive and negative assumptions about the other, sometimes forming a bias even prior to engaging with the other party.[62]

Clear communication is a constant challenge, particularly under emotionally charged circumstances.  Conflict frequently escalates because parties act on the assumption that they have communicated, or understood another party’s communication, accurately when they have not.  Culture, gender, age, class, cognitive capacity, and environment all impact communication.  Parties often rely on inaccurate or incomplete perceptions, form stereotypes, and carry into communications conclusions drawn from previous interactions or experiences.  It is possible to improve communication between parties through the process of meta-communication (communicating about communicating), through a reciprocal process of sending and receiving messages about how to communicate, what is working in an interaction and how to adjust communication to make it work better. [63]

Values are beliefs about what is important, what distinguishes right from wrong, and what principles should govern how we lead our lives.  When a conflict is defined or experienced as a struggle about values, it becomes more charged and intractable.  As people define themselves in part through core beliefs, a values conflict can make them feel attacked or that they are compromising their sense of self or integrity in some way.  Although some conflicts are clearly about fundamental value differences, often parties have a choice about whether a conflict will be defined in this way.  If a party develops righteous certainty that they hold the moral high ground, it rigidifies the conflict and narrows options for resolution.  If a true value difference exists, which is less common than often thought, parties may arrive at an understanding about how to move forward despite the value differences but the core conflict will likely remain unless circumstances change, more perceived important values intervene, or the parties modify their core values in some way.[64]

Mayer sets out four contextual factors that cut across all sources of conflict: culture, power, personality, and data.  Culture affects conflict as it is embedded in parties’ communication styles, their history, their ways of dealing with emotions, their values, and the structure within which conflict occurs.  Power is the ability to have one’s needs met and to further one’s goals.  Power dynamics can obscure the roots of conflict but can also help us understand the nature of an interaction.  Power is embedded in the structure within which the conflict is occurring and is also a product of the personal styles and interpersonal interactions of the parties.  How data is handled and communicated can exacerbate conflict.  Parties can battle for access to data or dispute what data is correct, and data is embedded in both communication and structure.[65]

As already mentioned, human needs are the ultimate causes of conflict and appear at the hub of Mayer’s Wheel of Conflict:

 

Figure 8: Human Needs in Conflict.  Source: Mayer 2012

Mayer conceives of needs as three overlapping types that operate in conflict and can assist in understanding the core of what motivates parties in conflict: survival needs, interest needs, and identity needs.  Interests can be short term, long term, individual, group, outcome-based, process-based, conscious, and unconscious.  Christopher Moore suggests that interest needs can be substantive (concerned with tangible benefits), procedural (concerned with the process for interacting, communicating, or decision making), and psychological (concerned with how one is treated, respected, or acknowledged).[66]

Mayer suggests that identity needs are fundamental to our sense of selves and our place in the world, and have four elements: meaning, community, intimacy, and autonomy.  The need for meaning has to do with establishing a purpose for one’s life and existence.  Sometimes pursuing a conflict is a great source of meaning for people and may cause them to hold onto a conflict to avoid the loss of meaning.  Community refers to that aspect of people’s identity that derives from feeling connected to groups with which they can identify and in which they feel recognized. Mayer points out that when people pursue a conflict to solidify a sense of community or to protect their community against the forces of disintegration, they are in part struggling to preserve their identity.[67]

Intimacy involves the need to be special, unique, and important to other people, and such needs are mostly met in family and friendship structures.  Intimacy implies some reciprocity.  In family disputes, it is often the loss of intimacy or the fact that a façade of intimacy has been shattered that causes pain and challenges people’s sense of identity.  A loss of intimacy may interfere with a party’s acceptance of the outcome of a conflict as they may not be ready to move on from the loss.

The need for autonomy is the flip side of the needs for community and intimacy.  Autonomy is the need for independence, freedom, and individuality.  Within families, it is common for tensions to exist between the needs for intimacy and connection versus autonomy and for these tensions to manifest in internal and interpersonal conflicts.  When conflicts are identity based, improving relationships and communication is required to achieve resolution and any possible resolution will be incremental rather than an immediate fix.[68]

Mayer points out that survival needs are concerns for fundamental safety and security, in addition to food, shelter, and clothing.  Sometimes parties feel that their survival is at stake in a conflict, even if it may not appear that way from an external perspective.  When a party feels their survival needs are at risk, immediate assistance or attention to the perceived or actual threats are required before any other conflict management strategy is able to be employed.[69]

(h)           Conflict in Family Businesses

Family business disputes are usually multifaceted, with numerous causes that interact in complex ways.  Relationship conflict in particular is prevalent in family firms and can often have very adverse consequences for the business.[70]  Relationship conflicts decrease goodwill, mutual understanding, and camaraderie[71] and lead to reduced satisfaction and a lack of regard for other group members[72], all of which hinder family firm performance and undermine its “familiness” advantage.

i.                 Common Forms of Relationship Conflict in Family Business

Family business conflicts can be categorized four ways: justice conflict, role conflict, identity conflict, and succession conflict.  Justice conflict concerns problems of compensation and quality of treatment, along with a perceived fair allocation of resources between parties.  Role conflict centers on confusion among roles when family members work together, on the inside/outside phenomenon when the family business employs non-family members, and on which parties are permitted to be owners.  Identity conflicts involve family members’ need to differentiate themselves from family expectations and act as independent, autonomous people.  Identity conflicts often surface through gender conflicts, sibling rivalry, and parent/child inter-relationships.  Succession conflicts are related to ownership issues, which party in the next generation will obtain control over the family firm (power) and the success (or not) of the wealth transfer from one generation to the next.[73]

3.     Psychology and Family Business

Conceptual frameworks rooted in psychology have much to offer us in terms of understanding business families and their members.  There are two major approaches to the theory of personality: idiographic, the belief that human behaviour cannot be broken down into its constituent parts; and nomothetic, the view that some general dimension of behaviour can be used to describe most people of a general age group.[74]  Generally speaking, the nomothetic approach involves making generalizations and understanding large-scale patterns. The idiographic approach involves uncovering detailed information. One of the most influential models of personality, psychodynamic, relies on the idiographic use of case history studies to reach larger conclusions about human nature.[75]

When assessing psychology and how it may interface with family firm conflict, one strategy is to start with the nomothetic perspective and look for various general themes and how they may be impacting on a business family.  When you believe you have a personality issue that may be impacting on a conflict, switch to the idiographic perspective to focus on the specific individual(s) and their unique traits.[76]

One central nomothetic psychodynamic concept applied to family businesses is the family lifecycle. [77]

 

(a) Developmental Models

Whereas the three circle model (business, ownership, and family) helps to assess a family business at a certain point of time, a developmental approach helps to identify dilemmas and problems that arise due to changes within the business, the family, and the distribution of ownership over time.[78]

i.                 The Three Dimensional Developmental Model

In each of the three subsystems – ownership, family, and business – there is a separate developmental dimension.  The ownership subsystem goes through its sequence of stages, the family subsystem has its own sequence and the business also progresses through a sequence of stages.  These developmental progressions influence each other, but they are also independent.  Each part changes at its own pace and according to its own sequence. As the family business moves to a new stage in any of the dimensions, it takes on a new shape, with new characteristics.[79]

 

Figure 9: The Three-Dimensional Developmental Model.  Source: Gersick, Davis, Hampton, and Lansberg (1997)

The family axis of the developmental model was influenced by the psychologists Erik Erikson and Daniel Levinson and their stages of life theories.[80]  The ownership axis is derived from the work John Ward on how successive stages of family ownership result in fundamental differences in every aspect of the family business.[81]  The business axis is a merger of numerous business life-cycle models.  The overall model provides a framework for understanding family businesses over time in each dimension, and suggests how a recognition of the current stage, and the interaction of the various stages across the ownership, family, and business subsystems, could help with the analysis of the dynamics of the family business conflict.

 

ii.               The Interfacing Life Cycles Model

The interfacing life cycles model builds on the developmental model by adding two more axes: industry and individual.[82]

 

Figure 10: The Interfacing Life Cycles Model.  Source Kets de Vries, Carlock and Florent-Treacy (2007)

The model is based on the assumption that the most intractable family business issues are not the business problems the organisation faces, but the psychological and emotional issues that compound them. Applying the model is intended to help to explain behaviour and enable the family to prepare for life cycle transitions and other issues that may arise in the family business.

 

(b) Circumplex Model

               Another central nomothetic psychodynamic concept is family systems theory, particularly the circumplex model.  Family systems theory describes the family as system whereby members interact through circular communication processes within a hierarchy of established rules and rituals.[83]  The major model depicting the family system is the circumplex model which focuses on the three central dimensions of marital and family systems: cohesion, flexibility, and communication. The major hypothesis of the circumplex model is that balanced couple and family systems tend to be more functional compared to unbalanced systems.[84]

The circumplex model explains family outcomes based on a typology of 16 family types based on different levels of cohesion (disengaged versus enmeshed) and flexibility (rigidity versus chaos), which are moderated by communication quality.  By providing a framework for embracing the complexity among families, the circumplex model (and systems theory, more generally) can assist practitioners to better assess family relationships and the dynamics underlying conflict.[85]

Family cohesion is defined as the emotional bonding that family members have towards one another. Cohesion is how family systems balance the separateness versus togetherness of their members. There are four levels of cohesion ranging from disengaged (very low), to separated (low to moderate), to connected (moderate to high), to enmeshed (very high).  Central or balanced levels of cohesion (separated and connected) make for optimal family functioning.  When cohesion levels are very high (enmeshed systems), there is too much consensus within the family and too little independence.  At the other extreme (disengaged systems), family members go their separate ways, with limited attachment or commitment to their family.[86]

Family flexibility is the amount of change in its leadership, role relationships, and relationship rules.  The specific measures include leadership (control, discipline), negotiation styles, role relationships, and relationship rules.  The focus of flexibility is on how systems balance stability versus change. The four levels of flexibility range from rigid (very low), to structured (low to moderate), to flexible (moderate to high), to chaotic (very high).  As with cohesion, it is theorized that central or balanced levels of flexibility (structured and flexible) are more conducive to family functioning, with the extremes (rigid and chaotic) being the most problematic for families as they move through their life-cycle.[87]

Communication is considered critical for facilitating optimal functioning on the cohesion and flexibility dimensions.  Family communication patterns theory provides a framework of four communication patterns along two dimensions – conversation and conformity: protective (high conformity, low conversation), pluralistic (low conformity, high conversation), consensual (high conformity, high conversation), and laissez-faire (low conformity, low conversation).  Research of family firms has found that conversation patterns reduce four types of conflict (task, relational, process, and status), while conformity patterns increase relational, process, and status conflict.[88]

 

(c)  Personality Traits

i.                 Big-5 Model

In contrast to the nomothetic models set out above, a idiographic model focusses on trait research and its application to behavior.  A fundamental model of adult personality is the Five-Factor Model (also known as the “FFM” or “Big-5” model).  The Big-5 model represents individual differences in personality through measuring extraversion, agreeableness, conscientiousness, neuroticism, and openness.[89]  The five “macro traits” cover a distinct set of characteristics:

  • Openness to experience: describes the breadth, depth, originality, and complexity of an individual’s mental and experimental life;
  • Conscientiousness: describes socially prescribed impulse control that facilitates task- and goal-orientated behavior;
  • Extraversion: implies an energetic approach toward the social and material world and includes traits such as sociability, activity, assertiveness, and positive emotionality;
  • Agreeableness: contrasts a prosocial and communal orientation toward others with antagonism and includes traits such as altruism, tender-mindedness, trust, and modesty; and
  • Neuroticism: contrasts emotional stability and even-temperedness with negative emotionality, such as feeling anxious, nervous, sad, and tense.[90]

The effect of these traits on conflict can be complex and context-dependent, particularly when we appreciate the prospect of individual personality differences interacting across the family, business, and ownership subsystems.  Certain personality types might be more prone to conflict than others, and different personality types might clash to create conflict.  For example, parties who are low on conscientiousness may interact with those who are high on conscientiousness. Personality can also affect conflict by affecting a party’s attributions such that different personality types tend to see a conflict as either task or relationship-based, and the influence of personality on this tendency is stronger when one accounts for the personality of both people involved.  For example, differences in levels of extraversion lead to more task-based conflict, whereas differences in conscientiousness is associated with more relationship-based conflict.[91]

Researchers have found associations between collaborative conflict resolution strategies and higher scores on agreeableness (trust, altruism, compliance) and lower scores on neuroticism (angry hostility, depression, self-consciousness, and vulnerability).  Similarly, contending conflict resolution strategies have been associated with low scores on conscientiousness (competence, duty, self-discipline, and deliberation), low agreeableness (straightforwardness, trust, altruism, compliance, and modesty), low openness (ideas and values) and low extraversion (warmth).[92]  Higher scores on all the facets of neuroticism are related to the choice of contending as a conflict resolution strategy.  Similarly, neurotic individuals have been found to be more likely to employ attacking strategies or avoid conflict completely.[93]

ii.               Personality Traits of Entrepreneurs

Family businesses are all originally created by founders/entrepreneurs.  Are there common personality characteristics of entrepreneurs that can inform practitioners assisting with family business conflict?  Although there have been many studies to assess if there are common personality characteristics of entrepreneurs, recent evidence suggests that the typical personality traits of individuals will vary across the entrepreneurial activity, for example, a technology start up versus a mom and pop type small business.[94]  Certainly, not every founder of a family business will compare to a Steve Jobs or Elon Musk.  Within the family business realm, there are thousands of founders seeking growth-oriented family businesses and many more seeking to build a business for their families as self-employed proprietors.  That said, a recent meta-analysis of 23 studies conducted from 1970 to 2002 in a variety of countries did find entrepreneurs to be more open to experience, more conscientious, similar for extraversion, less agreeable, and less neurotic than managers.[95]

Other studies have assessed whether entrepreneurs differ from the general population in qualities such as self-efficacy, innovativeness, internal versus external locus of control, risk attitudes, and need for achievement.  Recent studies indicate that an internal LOC (a belief that one controls one’s life) and need for achievement are important predictors of entry into entrepreneurship.  Risk-taking is also found to correlate with business founding but not necessarily with performance or exit.  Finally, there also seems to be a link between entrepreneurial self-sufficiency and business founding, as well as with specific related functions such as business planning skills.[96]

iii.            Downside to Entrepreneur Personality?

Entrepreneurs, the founders of family firms, are creators of enormous wealth for their family members, employees, and society as a whole.  Entire industries and innovations have been driven by entrepreneurs, which have had lasting economic and lifestyle impacts on society.  To start a business from scratch and/or disrupt an industry requires a high appetite for risk and enormous initiative, drive, and fortitude in the face of many and daunting obstacles.  The positive personality qualities of family firm founder/entrepreneurs can also have a dark side.  Specifically, positive attributes, such as energy, self-confidence, need for achievement and self-sufficiency, can sometimes devolve over time into over-confidence, aggressiveness, narcissism, ruthlessness, and irresponsibility.[97]  A common theme encountered by practitioners working with business families is an aggressive, impatient, demanding, authoritarian, neglectful parent, often the business founder-patriarch.[98]  The personal qualities that drove initial success are also the personal qualities that most contribute to conflict.

4.     Conflict Prevention in Family Business

Having set out the theoretical landscape and potential challenges practitioners will face, what follows is an outline of how best to assist business families to prevent or at least minimize destructive conflict before it starts.

(a) Governance Best Practices for Family Business

Good governance is the best defence to prevent destructive family business conflict before it starts.  At its most basic level, governance is an organizational structure which helps groups make decisions.  A governance system is a combination of governance structures, processes, plans, statements, policies, rules, and agreements used to pursue the governance objectives of an organization.[99]  The governance of a family business is more complicated than that of non-family owned companies because of the central role of the family that owns and typically leads the business.  The essentials of family business governance are regular family meetings and a family charter/constitution.

i.                 Regular Family Meetings

               Every business family can benefit from regularly scheduled family meetings.  By implementing regular meetings where family members are able to communicate with each other in a structured environment, a family creates a system for dealing with miscommunication as well as addressing more serious conflict before it spirals up the conflict ladder.

One size does not fit all, and the form of meeting will be adjusted to a family’s communication style.  Formalized meetings will include facilitated family councils and family retreats, discussed below.  Fun events can also be scheduled such as family dinners, vacations, and family reunions.  A regular newsletter is an effective way to keep geographically dispersed family members connected through regular personal updates, photos, and business or financial information.  If conflict is particularly high, family meetings should be carefully planned in advance and facilitated by a trained third party.[100]

ii.               Family Charter

Also called the family constitution, family creed, family protocol, or family agreement, the family charter is the document where the family sets out their values, vision, and commitment in relation to the family business.  It is also used to record the agreement the family have reached on key issues such as who can own shares in or work for the family business.  Family charters are rarely binding legal documents and instead record agreements in principle and the aspirations of the business owning family.

Families who are able to define and articulate their shared goals and the guiding values and principles that will help achieve them, give their businesses a strong foundation for sustainability and successful conflict prevention.  A family business can be seen as the external manifestation of a family’s value system.  Values, or rules for living, underpin a code of behaviour that builds and supports a family vision and business mission, and informs the family’s decision making.  During periods of challenge and transition, a family business is supported by a belief in shared values, but where there is no clear vision to unify a family, opportunities for conflict can increase.[101]

Codifying values increases in importance with the passage of time.  As families expand and scatter geographically and culturally, a sense of shared values, updated and revitalized with each generation, becomes increasingly important in binding families together and to the business.  The family communicates its vision and values to the board, which sets strategies and implements actions accordingly.  With shared vision and common values inspiring business performance, a virtuous circle can be created.  When family members see their values strengthening the business, their pride in those values and the family is reinforced.[102]  Research has shown that implementation of a family constitution, defined as formal protocol aimed at improving coexistence and cohesion in the family, was significantly and positively related to business performance.[103]

(b) Governance Structures for Family Business

Governance in a family enterprise can refer to the overall governance of the family business system, or it can refer to any of the specific types of governance found in each of the three subsystems in a family business system: [104]

 

Figure 11: The Basic Governance Structures of the Family Business System Model. Source: Davis (2001)

As a family moves from unilateral decision making in the owner-founder stage towards more complex decision making in the sibling partnership and then cousin consortium stages, increased and more formalized governance is important to ensure that the right people are given the right information to make the right decisions.  The three systems of governance do not necessarily need to be in place all at once, nor do they necessarily need to operate simultaneously in one family enterprise.  The type of governance structure that a family firm needs at any one point will depend on the developmental life stage of the business: inception, growth, harvest; and the stage of family ownership: owner-founder, sibling partnership, cousin consortium.[105] One type of governance structure does not fit all family enterprise systems, but most family enterprise systems can be governed by a few structures set out below.

i.                 Family Circle Governance

               The governance needs of family businesses will depend on various factors, some quantitative such as family size, business complexity, and the balance between insiders and outsiders.  Other factors will be qualitative, including the degree of cohesion and quality of communication between family members.  Smaller and/or more cohesive families may start with frequent family meetings.  Families facing greater tensions or complexity many need a more formalized approach at the outset, including the negotiation of family charters and shareholder’s agreements.

A.    Family Assembly

Also called family meetings, family forums, family briefings, family gatherings, family retreats, or family conventions, a family assembly is a meeting of the wider business family.  Attendance is usually open to all adult family members, irrespective of whether they work in or hold shares in the business.

As noted above, family meetings are essential in any family enterprise and are the most effective forum for averting the primary causes of conflict.  As family members participate in creating the family’s shared future through family meetings, these meetings become a place to strengthen trust and communication, to prepare the upcoming generation for their future roles and responsibilities, and to reinforce shared values and develop a shared vision.

B.    Family Council

A family council is an advisory and consultative body which represents the business owning family.  The key role of the family council is to facilitate communication between the family members and the board of directors.  The family council will also usually organize family assembly meetings.

ii.               Ownership Circle Governance

The ownership subsystem comprises the actual equity owners of the family enterprise.  Business ownership can be seen as a package of rights and responsibilities attached to share or asset ownership.  Arguably, the chief responsibility of business owners is to provide capital to the firm.  In most jurisdictions, in exchange for capital, shareholders are given rights, such as to attend and vote at shareholder meetings, to receive dividends, and to elect the board of directors, which has the primary responsibility of managing the business.

Ownership in family businesses tends to progress through a sequence of continuity:

  1. Owner-managed businesses in which ownership of the company is in the hands of just one person;
  2. Sibling partnerships where ownership has been divided more or less equally among a group of siblings, some or all of whom work in the business; and
  3. Cousin companies (third generation firms and older) in which ownership has been spread across a group of shareholders, a significant proportion of whom take no part in the day-to-day management of the business[106].

Added to the incremental stages of ownership of a family enterprise, are six types of owners:

  1. An operating owner with direct responsibility for running the business;
  2. A governing owner who is a full-time overseer but not involved in the family business, such as a chairman of the board of directors;
  3. An involved owner who is not employed in the business but takes a genuine interest in the company, offering support to management as appropriate;
  4. A passive owner who collects dividends but abdicates responsibility for the business to others and makes no conscious decision to stay an owner;
  5. An investor owner who is similar to a passive owner except if they are dissatisfied with their returns, they may make a deliberate decision to keep or sell their ownership; and
  6. A proud owner who is not engaged in the business or especially knowledgeable about it, but nonetheless is proud to be an owner.[107]

In addition to the type of owners noted above, owners can be differentiated along a growth versus harvest continuum of motivation.  A harvest strategy is associated with optimizing returns today in terms of resisting investment in the business, eschewing risk and market development, and extracting maximum dividends.[108]  In contrast, a growth strategy is associated with optimizing revenue and share appreciation in the future in terms of maximizing investment in products, capabilities, and markets of the business, albeit with greater risk[109].  Research has found that owner-founders pursue a growth orientation while subsequent generations of owners trend towards greater harvest orientation as ownership disburses.[110]

A.    Shareholders Assembly/Owner’s Council

The governance structure for the ownership subsystem is an owner’s council or shareholders assembly, which consists of representatives elected by the group of owners. This council is the foundation of the governance system for the business. The ownership council has the ultimate authority to choose members of a board of directors or a board of advisors, as well as the chairperson of a board.  If the business is still in the inception or owner-founder stage, an ownership council could even include family members who are not technically “owners,” which allows decision-making to be disbursed beyond the single owner-founder.

The ownership council addresses anything related to ownership of the company: decisions on behalf of all shareholders, liquidity issues, generational, continuity and transition issues, and how to execute the family’s long-term vision.  Shareholders meetings including all shareholders are held as a method of communication between the shareholders council and the larger ownership group.

iii.            Business Circle Governance

There is a clear link between best practices business governance and conflict prevention.  Business governance often starts with an informal board of advisors before it transitions into a formal board of directors.

A.    Board of Advisors

The board of directors, a legal requirement of incorporated companies in most jurisdictions, is the primary governance structure for any business, family-owned or not.  During a family business’ early stages, the board is foremost a statutorily required legal entity and often a “rubber stamp” board for the owner-operator.  It often transitions over time into an advisory board, comprised of trusted employees; professional advisors, such as the company lawyer and accountant; and friends.  The function of an advisory board is to provide a sounding board for the founder’s ideas and concerns over the direction of the business.  Usually an advisory board is an interim solution between a fully family run board of directors and a board with one or more formally appointed non-executive outside directors.  An advisory board allows for a transition in the formality of the way a family business operates and the degree of accountability and challenge an owner-founder faces as leader.

B.    Board of Directors

As the business grows and ownership and management roles are separated, the board often becomes more formal and professional in its role: providing feedback, confirming management’s actions, planning continuity, and assessing performance.  An effective board facilitates conflict prevention in two fundamental ways: the board holds management accountable to early planning, and demonstrates to the next generation that the family is committed to increasing professionalism in ownership and management, as well as to new ideas.

(c)  Legal Planning for Family Business

In addition to good governance, preventative legal planning prevents a world of potential costly and drawn out legal, familial, and financial disputes from happening in the first place.  Fundamental planning tools include tools to provide for retirement and death: shareholders’ (or partnership or other co-ownership) agreements, trusts, outright gifts, marriage agreements and wills; as well as tools to plan for incapacity: trusts, powers of attorney, and delegation of corporation authority.  What follows is a concise summary of the main planning tools in the context of family business.

i.                 Shareholders Agreements

A comprehensive shareholders agreement is a key tool in ensuring conflict is either prevented or managed, particularly around succession issues.  The agreement may also serve as a tool to reinforce family governance strategies put in place to facilitate intergenerational participation in the business.  By providing safeguards to the potential risks inherent in permitting the next generation to acquire ownership in a business, the agreement can facilitate broader ownership of the family business.

At its essence, a shareholders agreement sets out the rules for co-ownership of any family enterprise.  The shareholders agreement that governs a family business that aspires to extend to multiple generations must address the various events that typically occur in the life of a family: marriage, illness, disability or incapacity, divorce, difficulty with creditors, retirement from the family business, and family disputes. Key to such an agreement is the flexibility to adapt to changes in both the family’s and the business’ circumstances.

Many family-owned businesses have no shareholders agreement in place, particularly in the early years when owners rarely believe that such an agreement will be necessary, either because succession is not yet a priority or because of a belief that family members will reach agreement when necessary.  The best time to implement a shareholders’ agreement is while the founder-owner is still alive, capable, and in control of the business. Unfortunately, too many business owners appreciate the need for a shareholders agreement only when it truly is needed because a dispute has arisen which the agreement could have resolved or avoided.  At that stage, it’s too late.

ii.               Trusts

There are many benefits afforded by the use of a trust, including:

  1. centralized asset ownership and management of assets;
  2. flexibility in determining the method of future wealth distributions;
  3. enhanced asset protection for beneficiaries from third-party claims, including potential creditor and other actions;
  4. increased confidentiality; and
  5. potential avoidance of probate procedure and consequent probate fees.

A key feature of a trust is the separation of ownership and control of an asset from the benefit of that asset.  This separation of ownership and control of an asset from the benefit of it makes the trust a very useful tool in the preservation of wealth and the succession of the family business.  The founder of the family business is able to direct which elements of the business are to be transitioned to the next generation or other parties, transfer those elements into a trust, retain control of them by acting as trustee and, as and when she considers appropriate, make distributions out of the trust.  In this manner, she can affect the transition of ownership gradually, with the flexibility to respond to changing circumstances.

There are many complexities inherent in trust drafting and the applicable tax rules.  Trusts are often entered into in the context of a tax driven corporate estate freeze.  A comprehensive discussion of taxation considerations in the context of business succession is beyond the scope of this paper.

iii.            Marriage Agreements

When a marriage or marriage-like relationship breaks down, a division of property of the spouses occurs.  The impact of that division of property on a family business can be significant and can disrupt and even end its viability.  Family members often wish to keep the business in the family, which often means not in the hands of an estranged spouse.  A well-drafted marriage agreement can reduce the risk of an estranged spouse acquiring an interest in the business, and thus is an important part of conflict prevention for family enterprise.

The main objective of a marriage agreement in the context of the family enterprise is to ensure that the business interests or other assets, whether held directly or indirectly through a trust of which the family member spouse is a beneficiary, remain the property of the family member spouse on marriage breakdown.  If a marriage agreement is to achieve the desired result, it is critical that each spouse fully discloses his or her respective assets and their value to the other as a pre-condition of signing the agreement.  Transparent and full disclosure will face impediments if a founder doesn’t wish to disclose valuations to her child or grandchild, if the interest is in a discretionary trust is difficult to quantify, and/or if the expense of formally valuing the business interest will be prohibitive.

Even in the instance of full and accurate financial disclosure, a well-drafted agreement, and with both parties obtaining independent legal advice, there can be no guarantee that the agreement will escape judicial intervention upon marital breakdown.  That said, an agreement is certainly better than none and can serve as a valuable communication tool for family members and their spouses on the nature of family enterprise assets, their value, and family expectations in terms of succession planning.

iv.             Other Tools, Including Wills

Some other preventative legal planning strategies can include:

  • rearranging property ownership;
  • use of joint tenancy ownership;
  • life insurance, and specific beneficiary designations, or life insurance trusts;
  • annuities;
  • RRSP’s and RIF’s; and
  • last, but not least, the will.

A will is an essential part of a plan to distribute an estate on death, but it is only one part. Arranging property interests in different ways during one’s lifetime can accomplish some or all of the intended distribution.  A will must be drafted to accommodate the overall estate plan.

Even if there has been a complex estate plan put into place with trusts and other structures, there are almost always some assets that have not been dealt with and which must be taken care of by the will. In addition, a will appoints an executor, who has legal authority to administer an estate, including defending or pursuing any legal claims against the estate.  Common planning for families who own private businesses is to enter into multiple wills, where often the corporate assets will be governed by a second, non-probated will.  It’s essential that such planning is carefully considered in terms of drafting and income tax considerations to prevent unforeseen conflicts later.  In summary, no matter how simple or complex an estate plan is, a will is essential for all family business planning.

v.               Incapacity Planning: Power of Attorney

A lack of adequate planning for incapacity can result in significant damage to the assets and operational health of a business if a significant conflict occurs between family members.  If there is a dispute about which party can sign for a founder or president of a company, in the absence of the required documents, it could be necessary to appoint a committee or adult guardian for that family member, which is time consuming, onerous, and could be damaging to the viability and goodwill of the business.

Execution of an enduring power of attorney in advance of any incapacity will confer authority on another person or corporate entity to carry on the family member’s legal and financial affairs, including managing a business and other assets.  Consideration should be given to the preparation and execution of multiple powers of attorney, including one that provides limited powers to carry on the business.  In this manner, a separate attorney can be appointed to manage each of the business and personal assets.  An attorney with the correct skills and knowledge can be put in place to ensure a smooth continuity of a business in the event of the unexpected incapacity of a key person or a family conflict.

(d) Family Office for Integrated Wealth

               A family office is a fast-growing solution which allows a higher net worth family to manage and transfer wealth in a cohesive and planned manner.  Consolidating asset management, governance, family communication, education, and philanthropy in one entity is a sophisticated strategy for conflict prevention and transgenerational wealth continuity.

i.                 What is a Family Office?

A family office is a means by which a family coordinates its financial affairs.  The need or wish for a family office is usually driven either by a requirement for coordination of the liquid portion of wealth or by a significant increase in family liquidity and the desire to retain some degree of control over the management of the proceeds of that occurrence.  A family office is a means for a family to maintain control over the way they preserve and grow their wealth while at the same time being a focal point of contact for the family and their numerous advisors.

A.    Definition of a Family Office

At its essence, a family office exists to meet the unique needs of the family that it serves, and as such every office is different. Generally, a family office is a separate entity committed to sustaining and building the long-term wealth of an individual family[111]. It does this in several ways, by drawing upon a collection of advisors and a professional team to manage, sustain, and grow family assets while preparing future generations to be thoughtful and productive stewards of those assets. Family offices can provide a wide range of services based on a family’s needs, including but not limited to wealth management, estate and legacy planning, family communication, education and governance, and tax compliance and filing.

B.    Roles of a Family Office

A family office acts as a single conglomerate for the many systems required to manage family wealth, however; it can serve a number of roles on behalf of the family that go beyond the basics of wealth management. These roles can be categorized into three components: “the keeper and executor”, “the guardian and confidant” and the “brain trust”[112].  These categories broadly define the most common functions that a family office will take when serving a family in its many capacities.

As the keeper and executor, the family office serves the family by executing and archiving various transactions and legal documents related to family wealth. One of the benefits of a family office, is that it allows families to manage their wealth as a unique business. As such, the family office, rather than an individual family member, may manage tasks and transactions relating to family wealth.

The family office also provides a single, secure location to collect, amass, and archive all relevant family documents. This may include any tax, compliance, legal, business planning, investment planning, and estate planning documentation for the family office as an entity and for individual family members as members of the family office.

As the guardian and confidant, the family office serves to protect the family from risk and to work in the best interests of the family as a whole.  As a family accrues wealth, they also accrue risk as systems become increasingly complex.  A family office allows wealth and family management systems to be integrated, allowing for increased communication between systems and more complex risk assessment and conflict prevention and management.

The family office is first and foremost a protector and steward of family wealth, and part of that protection involves proper identification and mitigation of risks.  A very simple way that family office mitigates risk is by creating an environment where advisors to various fields in family wealth management are given the ability and environment to share knowledge in service of the family.  Research in the field of family business advising positively confirms that communication and knowledge sharing among advisors across multiple disciplines leads to more effective advising in all disciplines and a reduction in conflicts.[113]  Many issues that arise in family business relate to more than one component system – family, business, and ownership, and so needed to be addressed by multiple advisors to be correctly identified and resolved.  Communication among advisors was found to be key to the identification, analysis, and solution of given problems and conflicts arising in the family business.

As the brain trust the family office serves as a repository of family knowledge and development.  As noted earlier, family wealth is not only measured in liquid assets, but also by the experience and knowledge that each family member possesses. The family office provides a structured organization to compile this knowledge and use it to further family and individual successes.  This knowledge can be exchanged through family meetings, fostered through family education, and passed on by knowledgeable family members and trusted advisors.  Having access to the wide network of family knowledge benefits each individual member of the family in achieving their personal goals and strengthens family bonds and communication by giving voice and value to the knowledge and experience of each family member.

ii.               Family Office Services

A family office provides a wide breadth of services at the election of the family. These services are designed to address the many needs of transgenerational wealth.  There is a need to preserve and build family wealth, and an equal need to prepare the family to receive and become responsible stewards of this wealth.

Family office services most commonly include:

  • Family meeting coordination;
  • Development and maintenance of governance structures;
  • Family education;
  • Conflict prevention and conflict management;
  • Tax, estate and financial planning;
  • Wealth transfer planning;
  • Asset protection and other risk management;
  • Investment consulting, monitoring and performance measurement;
  • Philanthropic planning and foundation management; and
  • Financial recordkeeping, compliance, and consolidated reporting.

 

iii.            Family Office Structures

Depending on a family’s needs and preferences, different family office models offer different advantages. The most common family office models are the single-family office, the multi-family office, the private asset manager, and the customized family office. Each of these models offers different strengths and weaknesses and each appeal to different family needs and desires for their family office.  A commonality is family office operate at a conflict prevention tool available for business families who wish to consolidate their business affairs and/or wealth in a centralized and formal manner.

5.  Conflict Management in Family Business

The inevitable happens: conflict in the family business.  The business family either didn’t plan proactively to prevent conflict or conflict has arisen despite the best preventative efforts.

(a) Conflict Management Strategies Families Use
Based on conflict, intensity, and care for other parties, family members can adopt five styles of conflict management: collaborating, competing, avoiding, accommodating, and compromising.[114]  Managing conflict is function of how assertive a party is in satisfying their own group or self-concern, and how cooperative they are in satisfying those of the other party.[115]  Figure 12 shows where each style of conflict management is placed according to how much assertive and cooperative it is.

 

Figure 12: Approaches to Managing Organizational Conflict Model.  Source: Thomas (1992)

The avoiding style of conflict management has both the lowest cooperation with other parties and lowest assertiveness of a party’s own interests. This style is often used to hide from a situation or to avoid immediate stress.  Moreover, it usually does not address the underlying conflict sources.  Its main advantage is a cooling down of conflict whenever there are no clear solutions.  Avoidance is based on distancing from problems and is effective for small problems and for difficult and escalating problems with no clear or immediate solution.

The accommodating style takes place whenever there is total cooperation with the other party while not asserting one’s own concerns. Accommodation is not necessarily a sign of weakness.  It may be the best and most suitable style of conflict management in certain situations, especially when the party accommodating is aware that he is wrong or when he wants improve goodwill with other parties to the conflict.

The compromising style fits in the center, with intermediate levels of cooperation and assertiveness.  It is a compromise between pure competition and pure accommodation and is based on accomplishing a balance between personal and common interests.  This approach is labeled as “distributed conflict management” because no one gets exactly what they want but rather a portion of everyone’s goals is accomplished.[116]  This conflict management strategy doesn’t generally resolve the underlying sources of disputes but rather finds a way around them.  Particularly with respect to relational disputes, the underlying causes often remain despite the overt compromise.

The competing style, also known as the dominating or contending style, is when parties try to force their will, wishes, and perspectives on others, creating competition between family members.  Contending blocks other people from achieving their goals and can elicit feelings of anger, stress, and distrust which lead to misunderstandings and potentially damaged relationships.  It has the characteristics of maximum assertiveness for one’s own concerns and a minimum cooperativeness with another’s concerns. This is a zero sum, win-lose conflict management strategy which can have adverse long-term outcomes for a family firm.  Contending works best when a party has all the power and doesn’t care about long-term relationships or wants to take the risk of damage to long-term goodwill in order to take control of a dangerous or difficult situation.

In the collaborative conflict management style, both the assertiveness to satisfy one’s own concerns and the cooperativeness to satisfy the other party’s concerns are maximized.  Also known as an integrating conflict management style, this strategy results in a mutually acceptable situation that accommodates all concerned parties and is considered win-win.  When it’s possible, the collaborative conflict management style increases team effectiveness, leads to solutions that satisfy all parties, and reduces the chance that conflicts will re-emerge.  The result of such style is the satisfaction of the interests of both parties involved in the conflict.

As referenced earlier, scores of big five factors are shown to correlate with specific conflict management styles.  In a recent study, extroversion, conscientiousness, openness, and agreeableness have a positive relationship with an integrating style.  Extroversion has a positive relationship with dominating, while agreeableness and neuroticism have negative relationships with dominating.  Extroversion, openness, and conscientiousness have a negative relationship with avoiding, while agreeableness and neuroticism have a positive relationship with avoiding.  [117]  In a recent study of the impact of a family-firm leader’s conflict management strategy on the business, it was found that the collaborative style results in less conflict in the family and perceptions of stronger firm performance.  The competition and avoidance conflict management styles were associated with higher levels of conflict and lower perceptions of family firm performance.[118]

(b) Third Party Interventions

Effectively resolving a dispute requires three steps.  First, the parties must recognize that conflict has multiple, varied sources.  Second, they must accurately diagnose the sources of different conflicts. Third, dispute resolution methods must be tailored to address the underlying sources.[119]  A failure to diagnose and resolve the underlying sources of a conflict can cause it to persist and become more complicated.  It’s important to acknowledge that there is no one best way to resolve a dispute, especially a complex one such as family business disputes, and there may be multiple aspects of a conflict that require multipronged dispute resolution strategies.  A suggested conflict management process and dispute analysis model in the form of the Family Business Conflict Code follows below.

i.                 Managing the Conflict Process

A.    Defining the Client

Many times, a practitioner thinks of the individual who created the business as his or her client.  However, in the context of a family business, the client can be thought of as the whole family relationship.  Serving multiple clients may complicate matters for the family advisor, but it can prove to be much more effective for the larger family enterprise system when critical information is not kept in one subsystem or professional silo.  Accordingly, practitioners must learn to expand their definition of client both in a longitudinal and latitudinal fashion.  Advisors must expand their understanding of the family relationships over multiple generations (longitudinal). They must also look at the growth of families to include in-laws or, as many clients like to call them, out-laws (latitudinal).

For lawyers who practice within the confines of conflicts rules and the codes of professional conduct, a broader conception of the client presents a unique retainer challenge.  One way to address potential conflicts issues is to enter into a written agreement with the initial client, often the owner-founder, which permits communication and information sharing with other family members and professionals working together as a multi-disciplinary team.  The more specific the information sharing agreement, the better, to avoid misunderstandings or difficulties which may arise, particularly in the event of family conflict.

B.    Building and Leading a Multi-Disciplinary Team

Advising family owned businesses often brings together professionals from diverse disciplines, including lawyers, mediators, facilitators, accountants, family therapists, and management consultants.  Advisors may work in one or more of the three systems: [120]

 

Figure 13: The Family Business Multi-Disciplinary Team Model.  Source: Strike (2012)

Professionals have traditionally worked with families independently of one another and didn’t have a chance to compare their lone perspectives and form a more complete and holistic picture of the family enterprise system to better serve families.  Independent advising has often led to the family business client receiving different or even conflicting advice from different advisors.  To improve the quality and consistency of advice, researchers have suggested that advisors from different disciplines work collaboratively and take all three subsystems – that is, family, business, and ownership – into account in addressing the issues facing the family enterprise.[121]

While working in multidisciplinary teams using a systems perspective provides a more comprehensive and coordinated approach to assisting a business family, particularly through the conflict management process, this approach is not without its challenges. Consulting with multiple professionals is time consuming and requires a strong commitment to managing the process of the team.  Whether it is codified into a formal multi-disciplinary charter or informally coordinated, effective teams require a leader who is recognized and respected as the team’s organizer and facilitator.  Practitioners who have developed the most enduring relationships with business families were often able to do so by “quarterbacking” a larger advisory team. The benefit to the family of integrating advice is more effective and enduring conflict management assistance.

C.     Information Gathering

               Once the advisory team is put together and the retainer agreement is entered into, information gathering and an analysis of the family business conflict proceeds.  This process provides the information and a roadmap for appropriate conflict management strategy selection, including any possible discrepancy between the presenting or initially perceived conflict and the real or underlying conflict in the family firm system.[122]

1)    Genogram

A key information gathering tool is the family genogram, which is a visual representation of the membership of a family, exits and entries into this system, and relationships within.  A genogram is a graphic way of organizing the mass of information gathered during a family assessment and finding patterns in the family system for more targeted analysis and assistance.[123]  When analyzing family businesses, preparing a genogram of the family starting from the founding generation, can be a powerful tool to capture the family system’s key players and relationships effectively. Each row depicts a generation of a family, and lists siblings from oldest to youngest, from left to right. Gender, marital status, age, nature of relationships, and other details such as role in the business and ownership can be included using legends. Developing a genogram is often an interesting exercise for the business family and is an invaluable tool for the advisor to understand the players and dynamics of the family.

2)    Personal Interviews and Document Review

Personal interviews are invaluable tool for gathering information and understanding relationships and dynamics in the family business system.  Parties who should be interviewed include:

  1. Non-family owners/investors: owners who are not family or involved in the business;
  2. Family: members of the family who do not own or work in the business;
  3. Non-family managers and employees: non-family members who work in the business;
  4. Inactive family owners: family members who have ownership but who do no work in the business;
  5. Owner managers: non-family members who have ownership and are active in the business;
  6. Family employees: family members who do not have ownership but who are active in the business;
  7. Family owner/managers: family owners who also work in the business;
  8. External stakeholders: customers and suppliers or other non-family owner stakeholders, other advisors, lawyers, accountants, and other professionals involved.[124]

Information to obtain can be organized by system circle.  In terms of the family circle, information includes family history, family roles and relationships, patterns and values, decision making, communication and conflict management styles.  In the business circle, information includes organizational chart(s), any strategic or business plan, mission statements, systems, processes, leadership structure, finances etc.  In the ownership circle, information includes legal documentation, the nature and distribution of ownership, the nature and organization of the board of directors etc.[125]  On a related note, documents to be collected for review include financial statements, company constating documents, shareholders agreements, organizational charts, vision statements, mission statements, strategic plans, trust documents, and all related estate planning documentation, compensation policies etc.

D.    Analysis: The Family Business Conflict Code Model

A conflict analysis model can help clarify complex systems and provide useful guidance to conflict resolution practitioners.[126]

As stated by Bernard Mayer:

A framework for understanding conflict is an organizing lens that brings conflict into better focus.  There are many different lenses we can use to look at conflict, and each of us will find some more amenable to our way of thinking than others … We need frameworks that expand our thinking, that challenge our assumptions, and that are practical and readily usable.[127]

The Family Business Conflict Code is a model of family business conflict that practitioners can use to diagnose family firm conflict as well as obtain guidance about what interventions may help and why:

 

 

Upon completion of the information gathering phase, information can be mapped out and organized in each of the individual, family, ownership, business and conflict sections.  In the individual section, a party can be mapped along the individual developmental cycle of young adult, settling down, mid-life transition, and late adulthood.  In terms of individual personality traits impacting on conflict, parties can assessed with one of the various big five personality tests to assess their potential propensity for conflict and projected conflict management styles.  Noting that only a licensed mental health professional can diagnose an individual, these results can form a “working theory” for a conflict resolution practitioner to select a potential intervention.

In the family section, a family can be allocated along the family life cycle of young family with children, launching young adults, grandparenting, and retirement.  Self-report instruments including FACES II and FACES III can be employed to assess a family along the continuums of cohesion and flexibility.[128]  Family communication patterns can be assessed with tools such as the Family Communication Pattern (RFCP) instrument to assess constructive and destructive intrafamilial patterns of communication in the family.[129]

               In the ownership section, the life cycle of owner-managed, family partnership, sibling partnership, cousin collaboration, and family syndicate can be assessed.  Ownership types and orientations towards either harvest or growth can be assessed as potential sources of conflict between parties.  In the business section, the business and industry life cycles can be assessed along the start-up, growth, expansion/formalization, maturity, and decline-regeneration continuum.  Assessments of the health of the business itself can be performed, such as a SWOT analysis: strengths, weaknesses, opportunities and threats.  Tools to assist with understanding the strengths and weaknesses of the family firm’s capabilities, and any opportunities and threats to it, will help to highlight potential pressures and sources of conflict in that part of the family business system.[130]

In the conflict section, the presenting conflict can be mapped by type (substantive or relationship).  If the conflict appears to be relational, as it often is, the “usual suspects” of family conflict can be investigated: justice, role, identity, or succession conflicts.  In terms of these conflicts, they can be assessed along a continuum of where they are in terms of process, intensity, and conflict management styles of the involved parties.

Based on the integrated analysis of the Family Business Conflict Code, the underlying sources of conflict can be determined, and strategies employed to address them.  It may be that individual or family therapy could assist individuals or the family as a whole.  Governance structures such as a family charter or structured family meetings could assist with family miscommunication and ambiguity.  Documentation of ownership relationships in terms of a shareholders agreement may be indicated.  The business may require governance structures such as a formalized and independent board of directors or a business plan to address business challenges.

E.     Conflict Resolution Processes

In terms of the conflict itself, conflicts are usually dynamic rather than static, with the potential for the source of conflict to change during attempts to resolve the initial source of the dispute.  Conflict resolution professionals need to remain attuned to the range of possible sources of conflict, so that changes in the nature or sources of a particular dispute can be identified and appropriately addressed.  The dynamic nature of disputes means that conflict management needs to be flexible to allow the dispute resolution method to match the changing nature and/or differing perceptions of the conflict sources.

F.     Conflict Resolution Options

One or more of the following conflict resolution processes could be part of a family business conflict management strategy.  Negotiation is any form of communication in which opposing parties discuss steps they could take to resolve a dispute between them. Negotiation can occur directly between the parties or indirectly through agents acting on behalf of the parties, such as lawyers.  Negotiation can be managed by a third party such as a professional facilitator.

Mediation is a non-binding process in which a neutral, impartial third party with no decision-making authority attempts to facilitate an agreement between disputing parties. Mediation is generally a private dispute resolution process.  Conciliation can range from an approach that is essentially mediation with a more interventionist third party or shuttle negotiations where the third-party neutral shuttles between the disputants who are unwilling to meet in person.  Joint fact finding involves parties choosing a neutral fact finder who investigates, reviews documents, and interviews witnesses to determine the facts in a dispute.  Neutral evaluation is a process in which parties obtain from an experienced (and possibly expert) neutral third party a non-binding reasoned evaluation of their case on its merits.  The opinion or assessment is expected to have persuasive value, especially because the neutral third party is jointly selected.  Med-Arb, short for mediation-arbitration, is a process in which one person acts first as a mediator and then as an arbitrator.  If the initial mediation is unsuccessful, the mediator becomes an arbitrator and makes a binding decision.

Arbitration is a dispute resolution process in which disputes are submitted to a neutral adjudicator through presentation of evidence and arguments.  The arbitrator is empowered to render a binding decision.  Arbitration is generally a private, voluntary method of adjudication.  Also, a contract such as a shareholders agreement may provide that disputes must be resolved by arbitration rather than litigation. Adjudication refers to a dispute resolution process in which a neutral third party hears each party’s evidence and arguments and renders a decision that is binding on them.  This includes arbitration and traditional litigation (for example a trial).

Which dispute resolution process is right for that particular business family at that particular point in time with that particular conflict is, of course, contextual and dependent on many factors.  Before choosing a conflict management process, it’s important for practitioners and family members to assess in a systematic way the source of the conflict, the type of the conflict, the severity of the conflict, how the conflict could be resolved, and the possible benefits and risks of each potential conflict management process.  A preferred method of conflict resolution for a family firm lies in collaboration or cooperative forms of third-party intervention.  If conflict can be resolved constructively, it will minimize negative impacts and possibly even enhance the family firm and its performance.

6.     Conclusion

A review of family, conflict and psychology theories and research, conflict prevention practices, and conflict management processes, anchored by the Family Business Conflict Code model, offers insights and tools to assist families and practitioners to prevent and manage family firm conflict.  When we can better understand how a business family experiences and manages conflict, we will be better equipped to prevent or resolve it when it occurs.

 

 
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Footnote
[1] John Lederach, Little Book of Conflict Transformation: Clear Articulation Of The Guiding Principles By A Pioneer In The Field, original edition ed (Intercourse, PA: Good Books, 2003).

[2] Pramodita Sharma, James Chrisman & Kelin Gersick, “25 Years of Family Business Review” (2012) 25 Family Business Review – FAM BUS REV 5.

[3] Jennifer Halyk, Research Matters in the Family Enterprise Field:  Where Theory and Practise Meet (Sauder School of Business Business Families Centre, 2012).

[4] Joseph H Astrachan, Sabine B Klein & Kosmas X Smyrnios, “The F-PEC Scale of Family Influence: A Proposal for Solving the Family Business Definition Problem1” (2002) 15:1 Family Business Review 45.

[5] Danny Miller et al, “Are family firms really superior performers?” (2007) 13:5 Journal of Corporate Finance 829 at 836.

[6] The Family Firm Institute Inc., Family Enterprise: Understanding Families in Business and Families of Wealth, + Online Assessment Tool, har/psc edition ed (Hoboken, New Jersey: Wiley, 2013) at 2.

[7] Jon C Carr & Jennifer M Sequeira, “Prior family business exposure as intergenerational influence and entrepreneurial intent: A Theory of Planned Behavior approach” (2007) 60:10 Journal of Business Research 1090.

[8] Amy M Schuman, Wendy Sage-Hayward & David Ransburg, Human Resources in the Family Business: Maximizing the Power of Your People, 1st ed. 2016 edition ed (Basingstoke, Hampshire: New York, NY: Palgrave Macmillan, 2015).

[9] Family Enterprise Model (Family Enterprise Xchange, 2018).

[10] Mattias Nordqvist & Thomas Zellweger, “Transgenerational Entrepreneurship: Exploring Growth and Performance in Family Firms Across Generations” (2010) http://www.alexandria.unisg.ch/Publikationen/54561.

[11] Ernesto J Poza, Family Business, 3 edition ed (Mason, Ohio: South-Western College Pub, 2009) at vii.

[12] Alex Stewart & Michael A Hitt, “Why Can’t a Family Business Be More Like a Nonfamily Business? Modes of Professionalization in Family Firms” (2012) 25:1 Family Business Review 55.

[13] MICHAEL CARNEY et al, “BUSINESS GROUP AFFILIATION, PERFORMANCE, CONTEXT, AND STRATEGY: A META-ANALYSIS” (2011) 54:3 The Academy of Management Journal 437.

[14] Timothy G Habbershon & Mary L Williams, “A Resource-Based Framework for Assessing the Strategic Advantages of Family Firms” (1999) 12:1 Family Business Review 1.

[15] Pascual Berrone et al, “Socioemotional Wealth and Corporate Responses to Institutional Pressures: Do Family-Controlled Firms Pollute Less?” 32.

[16] W Gibb Dyer & David A Whetten, “Family Firms and Social Responsibility: Preliminary Evidence from the S&P 500” (2006) 30:6 Entrepreneurship Theory and Practice 785.

[17] DL Odom et al, “The most influential family business articles from 2006 to 2013 using five theoretical perspectives” in The Palgrave Handbook of Heterogeneity among Family Firms (2018) 41.

[18] Luis R Gómez-Mejía et al, “Socioemotional Wealth and Business Risks in Family-controlled Firms: Evidence from Spanish Olive Oil Mills” (2007) 52:1 Administrative Science Quarterly 106.

[19] Peter Jaskiewicz & W Gibb Dyer, “Addressing the Elephant in the Room: Disentangling Family Heterogeneity to Advance Family Business Research” (2017) 30:2 Family Business Review 111.

[20] Sascha Kraus, Rainer Harms & Matthias Fink, “Family Firm Research: Sketching a Research Field” (2011) 13 Int J of Entrepreneurship and Innovation Management 32.

[21] Helge Mensching, Sascha Kraus & Ricarda Bouncken, “Socioemotional Wealth in Family Firm Research – A Literature Review” (2014) 14 Journal of International Business and Economics 165.

[22] William Edwards Deming, The New Economics: For Industry, Government, Education (MIT Press, 2000) at 50.

[23] Family Enterprise Exchange, Business Family Dynamics (2018) at 14.

[24] Renato Tagiuri & John Davis, “Bivalent Attributes of the Family Firm” (1996) 9:2 Family Business Review 199.

[25] John L Ward, “The Special Role of Strategic Planning for Family Businesses”: (2016) Family Business Review, online: <https://journals.sagepub.com/doi/pdf/10.1111/j.1741-6248.1988.00105.x>.

[26] Thomas Markus Zellweger, Robert S Nason & Mattias Nordqvist, “From Longevity of Firms to Transgenerational Entrepreneurship of Families: Introducing Family Entrepreneurial Orientation” (2012) 25:2 Family Business Review 136 at 2.

[27] Zellweger, Nason & Nordqvist, supra note 26.

[28] Roy Williams & Vic Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, 1 edition ed (San Francisco, California: Robert Reed Publishers, 2010) at 16.

[29] James E Hughes Jr, Susan E Massenzio & Keith Whitaker, Complete Family Wealth, 1 edition ed (Hoboken, New Jersey: Bloomberg Press, 2017) at 9.

[30] Ibid at 36.

[31] Ibid at 11.

[32] Lee Hausner & Douglas K K Freeman, The Legacy Family: The Definitive Guide to Creating a Successful Multigenerational Family, 2010 edition ed (New York: Palgrave Macmillan, 2009) at 7.

[33] Jr, Massenzio & Whitaker, supra note 29 at 11.

[34] Hausner & Freeman, supra note 32 at 7.

[35] Jr, Massenzio & Whitaker, supra note 29 at 12.

[36] James Carse, Finite and Infinite Games (New York: Free Press, 2013).

[37] Simon Sinek, The Infinite Game (Portfolio, 2019).

[38] Carse, supra note 36.

[39] John W Budd, Alexander J S Colvin & Dionne Pohler, “Advancing Dispute Resolution by Understanding the Sources of Conflict: Toward an Integrated Framework” (2019) ILR Review 0019793919866817.

[40] Stephen P Robbins & Timothy A Judge, Organizational Behavior, 12 edition ed (Upper Saddle River, N.J: Pearson, 2006).

[41] M Afzalur Rahim, “TOWARD A THEORY OF MANAGING ORGANIZATIONAL CONFLICT” (2002) International Journal of Conflict Management, online: <https://www.emerald.com/insight/content/doi/10.1108/eb022874/full/html>.

[42] Dean Tjosvold, “Defining Conflict and Making Choices About Its Management: Lighting the Dark Side of Organizational Life” (2006) 17 International Journal of Conflict Management 87.

[43] Louis R Pondy, “Organizational Conflict: Concepts and Models” (1967) 12:2 Administrative Science Quarterly 296.

[44] M Afzalur Rahim, Managing conflict in organizations, 4th ed. ed (New Brunswick [N.J.]: Transaction Publishers, 2011).

[45] Carsten K W de Dreu, Ben J M Emans & Evert van de Vliert, “THE INFLUENCE OF OWN COGNITIVE AND OTHER’S COMMUNICATED GAIN OR LOSS FRAME ON NEGOTIATION BEHAVIOR” (1992) International Journal of Conflict Management, online: <https://www.emerald.com/insight/content/doi/10.1108/eb022708/full/html>.

[46] Karen Jehn et al, “The Effects of Conflict Types, Dimensions, and Emergent States on Group Outcomes” (2008) 17 Group Decision and Negotiation 465.

[47] D’Lisa McKee et al, “Conflicts in Family Firms: The Good and the Bad” in The SAGE Handbook of Family Business (London: SAGE Publications Ltd, 2014) 514.

[48] Franz W Kellermanns & Kimberly A Eddleston, “Feuding Families: When Conflict Does a Family Firm Good” (2004) 28:3 Ent Theory & Pract 209.

[49] McKee et al, supra note 47.

[50] Jehn et al, supra note 46.

[51] Dean G Pruitt, “Conflict, Escalation and De-escalation of” in The Encyclopedia of Peace Psychology (American Cancer Society, 2011).

[52] Baden Eunson, Conflict Management, 1 edition ed (Australia: Wiley, 2011).

[53] Stephen P Robbins & Tim Judge, Organizational behavior, 15th ed ed (Boston: Pearson, 2013) at 449.

[54] Jehn et al, supra note 46.

[55] Peter J D Carnevale & Alice M Isen, “The influence of positive affect and visual access on the discovery of integrative solutions in bilateral negotiation” (1986) 37:1 Organizational Behavior and Human Decision Processes 1.

[56] Ibid.

[57] Robbins & Judge, supra note 40.

[58] Jehn et al, supra note 46.

[59] Bernard Mayer, The Dynamics of Conflict Resolution: A Practitioner’s Guide, 1 edition ed (San Francisco: Jossey-Bass, 2000).

[60] Ibid.

[61] Ibid.

[62] Ibid.

[63] Ibid.

[64] Ibid.

[65] Ibid.

[66] Christopher W Moore, The Mediation Process: Practical Strategies for Resolving Conflict, 4 edition ed (San Francisco: Jossey-Bass, 2014).

[67] Mayer, supra note 59.

[68] Ibid.

[69] Ibid.

[70] Kimberly A Eddleston & Franz W Kellermanns, “Destructive and productive family relationships: A stewardship theory perspective” (2007) 22:4 Journal of Business Venturing 545.

[71] Morton Deutsch, “Conflicts: Productive and Destructive*” (1969) 25:1 Journal of Social Issues 7.

[72] Karen A Jehn, “A Multimethod Examination of the Benefits and Detriments of Intragroup Conflict” (1995) 40:2 Administrative Science Quarterly 256.

[73] Sharon M Danes et al, “Predictors of Family Business Tensions and Goal Achievement” (1999) 12:3 Family Business Review 241.

[74] Peter T Coleman, Morton Deutsch & Eric C Marcus, eds, The Handbook of Conflict Resolution: Theory and Practice, 3 edition ed (San Francisco, CA: Jossey-Bass, 2014) at 401.

[75] Coleman, Deutsch, & Marcus, supra note 74.

[76] Theodore Millon, Disorders of Personality: DSM-IV and Beyond, 2 edition ed (New York: Wiley, 1995).

[77] Arist von Schlippe & Klaus A Schneewind, “Theories from Family Psychology and Family Therapy” in The SAGE Handbook of Family Business (London: SAGE Publications Ltd, 2014) 47.

[78] John A Davis et al, Generation to Generation: Life Cycles of the Family Business, Kelin E. Gersick, ed. (Harvard Business Review Press, 1997) at 15.

[79] Ibid at 18.

[80] Martin Gerstein & Michele Papen-Daniel, Understanding Adulthood. A Review and Analysis of the Works of Three Leading Authorities on the Stages and Crises in Adult Development. California Personnel and Guidance Association Monograph Number 15 (California Personnel and Guidance Association, 654 East Commonwealth Ave, 1981).

[81] Keeping the Family Business Healthy – How to Plan for Continuing Growth, Profitability, and Family Leadership | J. Ward | Palgrave Macmillan.

[82] Kets de Vries et al, Family business on the couch. A psychological perspective. (Chichester: John Wiley & Sons, 2007).

[83] Carlfred B Broderick, Understanding Family Process: Basics of Family Systems Theory (SAGE, 1993).

[84] David H Olson, “Circumplex Model of Marital and Family Systems” (2000) 22:2 Journal of Family Therapy 144.

[85] James G Combs et al, “What Do We Know About Business Families? Setting the Stage for Leveraging Family Science Theories” (2019) Family Business Review 0894486519863508.

[86] Olson, supra note 84.

[87] Ibid.

[88] Emily A Paskewitz & Stephenson J Beck, “When Work and Family Merge: Understanding Intragroup Conflict Experiences in Family Farm Businesses” (2017) 17:4 Journal of Family Communication 386.

[89] Paul T Costa, Robert R McCrae & Gary G Kay, “Persons, Places, and Personality: Career Assessment Using the Revised NEO Personality Inventory” (1995) 3:2 Journal of Career Assessment 123.

[90] Oliver P John, Richard W Robins & Lawrence A Pervin, eds, Handbook of Personality, Third Edition: Theory and Research, third edition ed (New York: The Guilford Press, 2010).

[91] Joyce E Bono et al, “The Role of Personality in Task and Relationship Conflict” (2002) 70:3 Journal of Personality 311.

[92] Peter T Coleman, Morton Deutsch & Eric C Marcus, eds, The Handbook of Conflict Resolution: Theory and Practice, 3 edition ed (San Francisco, CA: Jossey-Bass, 2014) at 422.

[93] Coleman, Deutsch, & Marcus, supra note 92.

[94] Sari Pekkala Kerr, William R Kerr & Tina Xu, “Personality Traits of Entrepreneurs: A Review of Recent Literature” 50.

[95] Hao Zhao & Scott Seibert, “The Big Five Personality Dimensions and Entrepreneurial Status: A Meta-Analytical Review” (2006) 91 The Journal of applied psychology 259.

[96] Kerr, Kerr & Xu, supra note 94.

[97] Danny Miller, “A Downside to the Entrepreneurial Personality?” (2015) 39:1 Entrepreneurship Theory and Practice 1.

[98] Ibid.

[99] Drew S Medoza & John L Ward, Family Business Governance: Maximizing Family and Business Potential, 2011 edition ed (New York: Palgrave Macmillan, 2010).

[100] Joseph H Astrachan & Kristi S McMillan, Conflict and Communication in the Family Business (Marietta, Ga: Family Enterprise Publishers, 2003).

[101] Peter Leach & Victoria B Mars, Family Enterprises: The Essentials, main edition ed (Profile Books, 2016) at 5.

[102] Ibid.

[103] Rocio Arteaga & Susana Menéndez-Requejo, “Family Constitution and Business Performance: Moderating Factors” (2017) 30:4 Family Business Review 320.

[104] “Governing the Family-Run Business”, (4 September 2001), online: HBS Working Knowledge <http://hbswk.hbs.edu/item/governing-the-family-run-business>.

[105] Fred Neubauer & Alden G Lank, The Family Business: Its Governance for Sustainability (New York: Routledge, 1998).

[106] Davis et al, supra note 78.

[107] C Aronoff & J Ward, Family Business Ownership: How to Be an Effective Shareholder, 2nd ed. 2011 edition ed (New York: Palgrave Macmillan, 2011).

[108] Michael E Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1 edition ed (New York: Free Press, 1998).

[109] “Creativity and/or Alertness: a reconsideration of the Schumpeterian entrepreneur” in The Driving Force of the Market (Routledge, 2000).

[110] Albert Cannella, “To Reap or to Sow? Governance, Strategy and Performance in Family Versus Founder Businesses”, online: <https://www.academia.edu/21487077/To_Reap_or_to_Sow_Governance_Strategy_and_Performance_in_Family_Versus_Founder_Businesses>.

[111] Dirk Jungé, Handbook of family business & family business consultation: A global perspective (Binghamton: International Business Press, 2006) at 367.

[112] Kirby Rosplock, The complete family office handbook (Hoboken: John Wiley and Sons, Inc., 2014) at 14-18

[113] Emma Su and Junsheng Dou, “How Does Knowledge Sharing Among Advisors from Different Disciplines Affect the Quality of the Services Provided to the Family Business Client? An Investigation from the Family Business Advisor’s Perspective.” (2013) 26:3 Family Business Review at 256.

 

[114] Deanna F Womack, “Assessing the Thomas-Kilmann Conflict Mode Survey” (1988) 1:3 Management Communication Quarterly 321.

[115] Robbins & Judge, supra note 53.

[116] Ritch L Sorenson, “Conflict Management Strategies Used in Successful Family Businesses” (1999) 12:2 Family Business Review 133.

[117] David Antonioni, “RELATIONSHIP BETWEEN THE BIG FIVE PERSONALITY FACTORS AND CONFLICT MANAGEMENT STYLES” (1998) International Journal of Conflict Management, online: <https://www.emerald.com/insight/content/doi/10.1108/eb022814/full/html>.

[118] Sorenson, supra note 116.

[119] Budd, Colvin & Pohler, supra note 39.

[120] Vanessa M Strike, “Advising the Family Firm: Reviewing the Past to Build the Future” (2012) 25:2 Family Business Review 156.

[121] W Gibb Dyer, “Potential Contributions of Organizational Behavior to the Study of Family-Owned Businesses” (1994) 7:2 Family Business Review 109.

[122] Jane Hilburt-Davis & William G Dyer, Consulting to Family Businesses: Contracting, Assessment, and Implementation, 1 edition ed (San Francisco, CA: Pfeiffer, 2002).

[123] Monica McGoldrick, Randy Gerson & Sueli Petry, Genograms: Assessment And Intervention Third Edition, 3rd ed. edition ed (New York: WW Norton, 2008).

[124] Hilburt-Davis & Dyer, supra note 122 at 49.

[125] Hilburt-Davis & Dyer, supra note 122.

[126] Gary T Furlong, The Conflict Resolution Toolbox: Models and Maps for Analyzing, Diagnosing, and Resolving Conflict, 1 edition ed (Mississauga, Ont: Wiley, 2010) at 10.

[127] Bernard S Mayer, The Dynamics of Conflict: A Guide to Engagement and Intervention, 2 edition ed (San Francisco: Jossey-Bass, 2012) at 4.

[128] Edward F Kouneski, “FAMILY ASSESSMENT AND THE CIRCUMPLEX MODEL: NEW RESEARCH DEVELOPMENTS AND APPLICATIONS” 141.

[129] L Ritchie & Mary Fitzpatrick, “Family Communication Patterns: Measuring Intra-Personal Perceptions of Inter-Personal Relationships” (1990) 17 Communication Research.

[130] Migrator, “SWOT, PESTLE and other models for strategic analysis”, (24 November 2011), online: nibusinessinfo.co.uk <https://www.nibusinessinfo.co.uk/content/swot-pestle-and-other-models-strategic-analysis>.