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Why Develop a Sibling Code of Conduct Document?

Posted on April 29, 2016 by Chris Reichert

Countless studies have shown that only 30% of family businesses successfully transition to the second generation. Of those that do successfully transition to G2, less than 13% of those will successfully transition to G3. As daunting as the statistics may be, the big question is why. When you explore the most common reasons behind failed G1-G2 or G2-G3 family business transitions, the factors are predominantly family-based rather than business-based.

Recognizing the stark difference between G1 and G2 family businesses

Unlike first generation businesses that are usually led by one founder with complete autonomy and control, second generation businesses are often led by a group of siblings that must make decisions about the direction of the business and how to deploy resources together as partners. There may also be non-active family shareholders who bring their own unique perspective and priorities.

Building high-functioning teams always takes work, but adding “family baggage” into the mix complicates things further. Unspoken power structures are often present between siblings. These may have started with birth order or gender, and have likely been reinforced over the course of a lifetime through things like hand-me-downs or battles for the top bunk! These power dynamics between siblings are carried into adulthood.

To continue building a thriving business in the second generation, family members must be able to communicate effectively with each other, even when stressed. This is particularly important when non-family management and staff are involved in the business since poor dynamics and family outbursts can cause great harm to the business.

One tool that can be used to help families while transitioning their business to the second generation is a sibling code of conduct document.

What is a sibling code of conduct, and what do these document typically include?

A sibling code of conduct is a written document that sibling partners actively develop together. This document is typically prepared after discussing values and the commitments sibling partners want to make to each other in a wide range of “soft side” areas. Example areas include: the values by which they will operate the business, how decisions will be made, how conflicts will be resolved, how they wish to treat and interact with each other.

Why is a code of conduct document helpful?

Parents often feel the need to intervene when they observe their children fighting, but what happens when the conflict is between adult sibling shareholders? It isn’t hard to see how sibling partnerships can begin to fracture when things become tense, which can place great strain on the entire family. For these reasons it is critical to address conflict before relationships and trust becomes irreparably eroded. An agreed-upon code of conduct document gives business families a written document to refer back to so everyone can revisit the commitments made to each other, and hold each other accountable in a way that is “safe” and minimizes conflict.

An ounce of prevention is worth a pound of cure

If you are contemplating transitioning your business to the next generation, or if you have already done so, one of the greatest gifts you can give your family is to take the time to develop a code of conduct document together, outlining the guiding principles that all family members agree to. Whether you engage in these types of discussions around a boardroom table or at a cabin over a nice bottle of wine, the key is to develop the document in a way that is “real”, and provides an opportunity for all voices in the family to be heard. When properly developed, code of conduct documents give families the comfort of knowing there is a process in place to help overcome obstacles as they emerge, which gives everyone confidence that the family will always remain strong, even when tempers flare. Tools like this will help your family to be among the 30% that successfully transition their business to the second generation (or 13% to the third generation), while also keeping your family strong.