A Q & A; With the Founders of CSUF’s Family Business Council
The husband-and-wife team of Judy and Dave Harman co-founded the Family Business Council at California State University, Fullerton, in 1994. Since then, they have been helping OC firms address the issues unique to family ownership, with an emphasis on keeping the businesses family owned. In January, they turned over the program to current director Mike Trueblood, but they continue to work with the council in advisory roles and Dave Harman runs “affinity groups” for families to get together and share expertise.
Because of their busy schedules, they were interviewed separately and their answers were edited together for this report, with initials identifying which of them made each statement.
How do you help family-owned businesses?
DH: Many testimonials reported that a lot of family businesses could never have made it without the Family Business Council. We give these businesses a forum where they can go and find solutions to the problems and, more than anything else, find out that there are other family businesses that have the same problems and that they have solved them. They are happy and successful, and continue to grow.
What sort of programs do you offer?
DH: Many of our programs teach industrial psychology and interpersonal communication skills, including anger and stress management. Our programs also deal with family constitutions, family meetings, family boards of directors and questions like how they function, how they fit in and what they should do. We’re always dealing with the family dynamic.
What are some examples of how the “family dynamic” affects a business?
JH: Well, here’s one good example: The second generation has three brothers. They all have different numbers of children. When you get down to the third generation, you’re dealing with cousins. Choosing a successor becomes very difficult.
There’s infighting?
JH: Oh, yes. One of the things that helps is having an external board of directors that contains non-family members who don’t hold stock options. They have to be totally independent and have to be objective, otherwise it won’t work.
We see things like, “My kid is brighter than your kid. My kid has a higher level of education than your kid does. My kid was in the business first,” and so on. The overlay of family issues blurs all the normal selection criteria for the successor, and the dynamics of the family go back for generations.
We’re also seeing gender issues.
How so?
JH: You pick the daughter as the successor who’s been in the business since she was in high school. She has no college education. However, she has the respect of everybody in the business, especially if it’s a “blue-collar” type of business. Nevertheless, the reins generally will be passed along to the son who has a bachelor’s degree from a prestigious university.
But that example involves more than just a gender issue.
JH: Well, yes and no. It’s still usually accepted that the son will take over regardless. Things are changing, though. Family business is a relatively new area of study in this country. It’s about where entrepreneurship was 10 years ago.
Really good bodies of knowledge are being developed, especially in the U.S., more so than in Europe and other countries where family businesses are much older generationally. Family business consultants are actually in much more demand in Europe where family businesses there are dealing with sixth and seventh generation issues.
We’ve learned from our research that family businesses are different from other businesses, but they are uniquely alike compared with each other in the problems they confront and the solutions that are necessary. The problems are predictable.
There are solutions, and that’s one of the things family business research is bringing to the forefront. So, there are more and more and more resources available to family businesses all the time.
Our office has an extensive library of case studies that provide details on how families resolved their various problems. We also have books on compensation issues, sibling issues, how to choose an effective group of advisors, how to set up a board of directors, how to deal with communication problems, strategic planning and estate planning.
Keeping ownership in the family while bringing in non-family members sounds like a delicate balancing act. How do they go about doing that?
DH: Because they want to keep ownership in the family, they won’t offer stock options to non-family members, which can hurt their ability to attract and keep the non-family labor they want. They get around this by offering a “phantom” stock option, where the company in a sense “pretends” to give them a stock option, based on annual appraisals of the company. The employee receives appropriate returns on their investment, without actually owning any real share of the company. This enables a family business to be competitive in attracting the employees it needs to develop to its fullest potential.
We believe the family should have a constitution or charter that mandates that the core beliefs come from the family. We think the family should ensure that its board of directors,or board of advisors, to avoid legal implications,should have a reasonable percent age of non-family members.
What are other issues are you seeing?
JH: Rites of entry into the family business, plus compensation issues can all pose huge problems.
Most small businesses don’t know how to access information on market rates for labor, and they often are not paying family members market rates. They very often pay family members too much.
We spend a great deal of time identifying what issues the business should be dealing and what issues the family should be dealing with.
We also help these businesses tackle “buy-and-sell” issues and agreements, making sure there’s a clear understanding and methodology for compensation in the event one of the primary owners passes away.
What do you mean by “rites of entry”?
JH: If you own a second or third generation company, do you let every member of the family have a job because they share the surname of the founder? Or, do you set up some guidelines for entry into the business such as: minimum level of education, a minimum three to five years of “outside” work experience and an opening in the company for which they meet the job requirements?
Is the person in question a viable candidate? Is the job being created specifically for them? Are they going to be working in a position where they can’t meet the job’s requirements? They need a sound employment policy manual that deals with family business issues.
Do you perform a mediation role?
DH: We don’t do mediation for them. Mainly, we offer a database, plus eight programs per year and three social events. The eight programs per year are on issues that deal with the family dynamic. In other words, we put on a program of strategic planning specifically for family business. Family businesses have all the problems of any other business, but they also have the added dimension of trying to keep the families together and harmonious,they are, after all, the shareholders.
How else do you help them along?
DH: We have a library of books that we can offer to people who have specific problems. We also have a list of consultants that we know have done a good job in certain areas, and we’ll refer them to the family.
Because California State University, Fullerton grads tend to work locally, primarily for family-owned businesses, the school is also working on developing a management course for people who work for family-owned businesses. We believe that successful family businesses need non-family members in management eventually, and they need to work at making them feel comfortable and reward them in keeping with the company’s market value.
We also found that 60% of graduates from CSUF end up staying within 70 miles of the campus, and a lot those will end up at the thousands of privately held and family-owned businesses in OC.
What sort of trends do you see in terms of their success rates?
DH: About 30% make it to the second generation, and 10% of the initial group make it to the third generation. We’re working to improve that.
How active are they in developing and applying problem-solving and strategic management to their businesses?
DH: We help them determine appropriate compensation so that they can keep wages in line with current labor market conditions.
