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Family businesses – What’s the best way to address conflicts of interest?

July 16, 2013

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It’s normal for a family business to deal not only with company issues, but also personal matters. When those issues conflict, trouble can’t be far behind. But there are ways to handle such problems and keep them from cropping up again down the road.

Bad for business, bad for morale

Conflicts of interest — whether due to a family member feeling “entitled” to disobey company policies or to take more liberties with bonuses and salaries — can damage your company’s external image and credibility. If word gets out that your company is biased in its business connections and transactions, customers and vendors outside the family may be hesitant to deal with your company.

Such matters can also be bad from a family perspective. Not only do such dealings often end up costing the company and its shareholders money and lost opportunities, but they also may generate resentment from other family members in the business.

Suppose your company provides startup capital for your grandchild’s new business but, without a sound business plan, the venture fails. In such a circumstance, your company wouldn’t just lose its investment — it would also suffer from resentment that you’d supported your grandchild’s endeavor over other family members’ endeavors.

Conflicts of interest affect nonfamily employees, as well. They may become disheartened if they believe they’re receiving inequitable treatment. As you can imagine, this can lead to decreased morale and productivity.

Where trouble may arise

The potential for conflicts naturally increases as a family business grows to include more family members. Consequently, it’s important to anticipate and identify the different types of situations that may crop up. You should also consider whether a current situation may develop into a future concern.

Some of the more common sources of conflict may involve influence — such as encouraging your business to hire individuals or use vendors because of familial or personal ties. In addition, misusing privileged business information or mishandling company property, resources or services can lead to conflict. Last, accepting personal gifts, favors or services from your company’s vendors or clients can often lead to conflicts.

And for family businesses in particular, compensation that favors family employees by giving pay raises, bonuses or other perks over and above what nonfamily employees receive is a definite no-no.

When in doubt, listen to your conscience. Telltale signs that a situation poses a conflict of interest include deriving personal or monetary gain at the expense of the business and feeling a need to conceal details of a situation from others in the company, family or public.

A policy that favors all

While it might be tempting to favor family members over nonfamily employees by offering higher salaries or greater benefits, don’t do it. You’ll be setting up a battleground between the “haves” and “have-nots” which can sour relationships for years to come. The best policy is to treat all employees the same.

Remedying the situation

Having a written, well defined set of guiding principles for your organization can help identify and remedy potential issues. It also demonstrates your family business’s commitment to integrity and fairness, and serves as a guide for potential conflicts.

If you haven’t already done so, update your employee policy manual by defining your guiding principles and provide several illustrative examples. In addition, outline the process for resolving conflicts, such as bringing them to your board’s attention or consulting a business advisor.

Moreover, require employees to disclose any personal relationships or interests that relate to the business, such as with vendors or investments. And establish procedures for a team to objectively evaluate and select vendors. Finally, specify rules and fees for using company resources and equipment.

To ensure your staff follows these guiding principles, incorporate it into your bylaws and employee handbook. Also, have your board and employees review the principles and sign a copy of it annually.

For more information on this topic, please contact Tony Schweier at [email protected]

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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