- A Family Business Perspective
The question of what is fair has perplexed many family business owners, and their search for fairness has resulted in conflict. The term ‘fairness’ can have different meanings.
In business, fairness is based on merit—the more you produce, the more you should earn. When it comes to ownership, fairness is proportional—the more you own, the more benefit of control and distributions of profit one gains. Many times, in family businesses, fair is not equal and equal is not fair.
Let’s consider the following scenario:
- In a successful family business that grew exponentially, the parents followed the principle of equality in transfer of wealth to their children.
- Psychologically, the transfer of wealth is usually perceived as a symbol of love. By dividing their assets equally among their children, the parents felt they expressed their equal love all children.
- Despite the well-intended efforts of equality in treatment, it led to differences and strained relationships among their children.
- The children who contributed actively to the business felt that they ended up with the same, equal value/benefits than those who did not contribute anything. They felt their time commitment and extra efforts went unnoticed.
- On the other hand, the non-participating members felt that they did not receive a good return on their shareholding, as they felt that their dividends were compromised due to high compensation and special company perks given to the working family members.
- All children felt that though there was equal distribution of wealth, they were being treated unfairly.
A family’s goal should not be to pursue equality in isolation but to find solutions where people feel fairly treated and accept the outcomes as reasonable. If people believe that the process in determining an outcome was fair and transparent, they are more likely to believe that the outcome is fair — or, at least they will be able to accept the outcome.
Based on the unique context of the family, the principle of equality needs to be complemented with principle of equity. Equity principle considers the unique context and varied needs of the individuals.
The term “equity” refers to fairness and justice and is distinguished from equality. Equality means providing the same opportunities to all, while equity recognizes that all do not start from the same place and acknowledges differences and variations as every individual is different. It is possible that “equal” treatment does not always produce “equity” when conditions and circumstances are very different.
Let’s explore one solution that combines the principles of equity and equality in the context of the above scenario. The ownership in business is inherited by all the children equally as the family’s legacy. But if family members want to work in the business, they have to be competent, and they are compensated based on their contribution in the business. The other children are given equal value in other assets as part of wealth distribution. Therefore, most often the solution lies in ability to carefully combine both equity and equality principles in achieving a fair outcome for all.
It is important that the family fully discusses, clarifies and agrees upon standards of fairness and equitable principles. It needs to be codified into family statements of principle and into the legal documents. The family that sticks by a set of consistent standards can avoid much of the confusion and agony of conflicts / disputes of perceived unfairness.