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Dominik v. Eynern comes from a business family which is now in its 5th generation. He holds a BSc in Economics and a MSc in Finance, worked in the international investment banking industry. He’s a founding member and director of Family Hippocampus ltd. His research on family dynamics is inspired by insights from behavioural economics, cognitive neuroscience, dynamic complex system, and chaos theory.

Introduction

Family businesses often navigate a delicate balance between transparency and confidentiality. This dynamic becomes especially complex when Non- Disclosure Agreements (NDAs) are involved. Much like the omerta code of silence in organized crime, family NDAs aim to protect sensitive information but can inadvertently lead to isolation and mistrust. In this article, we explore the implications of family NDAs, drawing parallels to fictional business families to understand their impact on individual members, the broader family, and the business itself.

The Paradox of Secrecy

In a fictional dynastic family with 50 members, including 20 shareholders, the patriarch, who also serves as the CEO, mandates a strict code of silence. This secrecy is intended to protect the family’s interests but often stifles critical discussion and accountability. Shareholders, spanning from the 3rd to the 5th generation, find themselves in a dilemma. They must balance their roles as custodians of family wealth with the need to support the business’s strategic direction without full transparency.

While NDAs are crucial for maintaining competitive advantages and protecting sensitive information, they can create an environment of suspicion and fear. The lack of open communication may lead to misinformation and assumptions that can harm the business and the family relationships. The tension between the need for secrecy and the desire for ventilation creates a paradox that many family businesses struggle to resolve.

The Stewardship vs. Principal-Agent Model

Traditional family businesses often operate under the Stewardship model, where the patriarch’s decisions go unquestioned. However, as newer generations become more financially literate and experienced in fields like M&A advisory and investment banking, they demand greater involvement in corporate governance. This shift creates a clash of belief systems, leading to tensions that can threaten the family’s cohesion and the business’s stability.

The Stewardship model assumes that the CEO, often a family patriarch, acts in the best interests of the family and the business. This model worked well in earlier generations where deference to authority was common, and the business environment was less complex. However, modern family members, especially those with professional experience and education, may lean towards the Principal-Agent model. They view the CEO as an agent who needs  to be monitored and held accountable, leading to a fundamental clash in governance philosophy.

Tensions and Their Release

The buildup of tension between responsible shareholders and an authoritative patriarch can lead to significant conflicts. These conflicts often arise from three main factors:

The Stewardship vs. Principal-Agent Model

Traditional family businesses often operate under the Stewardship model, where the patriarch’s decisions go unquestioned. However, as newer generations become more financially literate and experienced in fields like M&A advisory and investment banking, they demand greater involvement in corporate governance. This shift creates a clash of belief systems, leading to tensions that can threaten the family’s cohesion and the business’s stability.

The Stewardship model assumes that the CEO, often a family patriarch, acts in the best interests of the family and the business. This model worked well in earlier generations where deference to authority was common, and the business environment was less complex. However, modern family members, especially those with professional experience and education, may lean towards the Principal-Agent model. They view the CEO as an agent who needs to be monitored and held accountable, leading to a fundamental clash in governance philosophy.

Tensions and Their Release

The buildup of tension between responsible shareholders and an authoritative patriarch can lead to significant conflicts. These conflicts often arise from three main factors:

1. Shareholder's Responsibility: Shareholders have a duty to oversee how their capital is deployed, regardless of how it was acquired.
2. Custodians of Wealth: In a multigenerational family business, shareholders act as custodians of the family wealth, responsible for its preservation and growth for future generations.
3. Patriarch's Reluctance: The patriarch, perceiving himself as a steward, often resists sharing control and transparency, viewing it as a challenge to his authority.

When these tensions reach a critical point, the resulting conflicts can cause emotional distress and jeopardize the business’s performance because of dysfunctional family dynamics that impact on the business. Effective conflict resolution mechanisms are essential to release these tensions constructively.

This can involve facilitated discussions, mediation, and the development of governance structures that include checks and balances.

Communication and Complex Thinking

Effective family governance requires embracing complex thinking, which acknowledges the multifaceted nature of family dynamics and business operations. Unlike linear or hierarchical thinking, complex thinking allows for multiple perspectives and adaptive decision-making. This approach fosters a shared reality and shared intentionality among family members, crucial for navigating the intricacies of family dynamics and business governance.

Complex thinking involves understanding that family and business issues are interconnected and cannot be solved in isolation. It requires looking at problems from different angles and considering the impact of decisions on various stakeholders. Encouraging family members to adopt a mindset that values diverse perspectives can lead to more innovative and resilient solutions.

The Role of Emotional Intelligence

Emotional intelligence plays a pivotal role in managing family dynamics under the constraints of NDAs. By cultivating empathy, active listening, and emotional regulation, family members can better navigate conflicts and build a supportive environment. This process involves:

Intrapersonal Communication: Understanding one’s emotions and motivations. Family members must reflect on their feelings about the business and their roles within it. This self-awareness helps in articulating concerns and aspirations more clearly.

Interpersonal Communication: Engaging with others’ perspectives and emotions. This involves not only listening to what is being said but also understanding the underlying emotions and motivations. Techniques such as active listening, where the listener fully concentrates, understands, and responds thoughtfully, are vital.

Training sessions focused on building emotional intelligence can be beneficial. These sessions can include role-playing exercises, group discussions, and individual coaching to enhance emotional awareness and interpersonal skills.

A Path Forward

To stimulate evolution of the self and the family system, consider the following strategies:

1. Reaching out to others: From my own experience I know, it is paramount to meet other family members from other families than your own to converse with them and normalize the experiences in a safe and secretive environment, even if it violates the family NDA! This is most powerful to create psychological freedom degrees that are necessary to process the matters and deal with them constructively. Such a safe space for peer-development is provided by the Family Hippocampus Club.
2. Facilitated Discussions: Engage a neutral facilitator to guide discussions, ensuring all voices are heard and respected. Facilitated discussions create a safe space for family members to express their views without fear of retribution. The facilitator can help manage conflicts and keep the discussions productive.
3. Education and Training: Provide training in emotional intelligence and complex thinking to all family members. Regular workshops and seminars can help family members develop the skills needed to navigate complex family and business dynamics.
4. Periodic Reviews: Regularly review and update the NDA terms and governance structures to reflect changing dynamics and ensure alignment with the family’s values and goals. This could involve setting up a governance committee that meets periodically to assess the effectiveness of current structures and make necessary adjustments.

Additionally, creating a family constitution that outlines the roles, responsibilities, and rights of each family member can provide clarity and prevent conflicts. This constitution should be a living document, regularly updated to reflect the evolving family dynamics.

Conclusion

While NDAs are essential for protecting sensitive information, their implementation must be carefully managed to avoid unintended consequences. By fostering open communication, emotional intelligence, and complex thinking, family businesses can navigate the challenges they face with family dynamics and strengthen their governance structures. Ultimately, the goal is to ensure the family’s long-term success and harmony.

This article provides a comprehensive approach to enhancing family dynamics in the face of a pluralistic world. As family businesses continue to evolve, embracing these strategies will help them thrive amidst the complexities of modern business environments.