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The Three Pitfalls of "Chain of Command" Violation

This case study is based on a real family business. However, the name and major details are disguised to protect their privacy.

The Sanchez family owns a 75-year-old multinational company in South America. However, they recently struggled with three interlocking issues involving chain of command. Unfortunately, these problems led to the loss of three company CEOs in the space of three years.

The lessons are extremely significant when a family business transitions into a business family, diversifying from core/legacy business into new ventures.
The third generation family members play the role of ownership in the business, while the entire management is overseen by a non-Family CEO.

Pitfall 1: Giving Direct Instructions to the Staff (Circumventing the CEO)

As a third-generation family member who did not work in the business, Alberto Sanchez, would give direct instructions to the staff, which would be contradictory to the CEO’s directions. This would leave the staff confused, anxious and nervous. Due to this situation, multiple CEOs quit, leading constant instability in the system as well as unnecessary problems. When this was analyzed by the family advisor, it came to light that Alberto was upset that the company was investing in two new lines of business while no longer reinvesting in the original business, the one his family was famous for. He bitterly resented that the core business was being treated as a cash cow to support the new ventures.

To address this issue, Alberto could have been made to understand why the board and management made the decision to focus on the two new lines of business rather than on the company’s core offering. In this case, the core business was in a dwindling market, and growth opportunities in the two new product offerings were far more attractive. It emphasizes the importance of keeping all family members informed about the decisions being taken, the reasons and the benefits.

Important Takeaway - Board members and management should communicate effectively with family members around key strategic decisions

Pitfall 2: Using Staff as a “Listening Post”

Marisol Sanchez, the daughter of the company’s founder, did not work in the family business. As a shareholder whose income depended on the company, she took an acute interest in how the business was doing. Marisol used to invite members of the staff to tea. At these meetings, she’d ask pointed questions about what was going on in the company. This was awkward for some staff members because they knew she was trying to get information about the different issues. The CEO knew she was trying to influence things through the back door. This was an irritant for him, especially when few staff members liked the influence that his special relationship with Marisol gave him. It became a partial cause for why the most recent CEO quit.

To address this issue, the Chair of the Board could have established a protocol of meeting regularly with Marisol – perhaps once a quarter or every two months. One or two of these visits each year could include the CEO, who would walk Marisol through what’s going on in the business.

Key Takeaway: Some of the most effective board chairs spend significant amount of time interfacing with family owners to keep them fully informed about the developments in the business.

Pitfall 3: Multiple Family Members Speaking Publicly about the Company

In a family-owned company, there’s enormous value for the brand to have a family member as spokesperson — a role often played by the Board Chair if he or she is a family member. A company needs a spokesperson so there’s a unified message, and when a family member’s name is the same as the brand, it can be a powerful combination. Unfortunately, when family members disagree with each other, it can be tempting to be a back channel to the press. Even when they’re on board with the company’s direction, having more than one spokesperson can dilute the company’s core message.

In the case of the Sanchez family, another problem emerged – this one involving family members speaking with the media. Inez Sanchez, Alberto’s cousin, talked about her political views in a public forum, with the result that a YouTube of her comments went viral. Her views were her own, but because her last name was Sanchez, people assumed that her views matched those of the company. While some people loved Inez’s political opinions, other detested them and organized boycotts. The cost of this episode in terms of brand goodwill, family harmony, and staff time trying to clean up after it was close to catastrophic.

To address this issue, family members need to be sensitized on the topic of media interfacing. Someone from top management or the board should explain the appropriate procedures for dealing with the press. They should also discuss with family members the pitfalls that can result from failing to adhere to the guidelines. A point person within the company should be identified for family members to contact if they have any questions about making public statements or if they receive media calls.

Key Takeaway: Appointing a single spokesperson for the company, who is represented by the family is most effective strategy for the company’s brand image and family’s reputation.

In conclusion, it is in the best economic and social interest of the family to appreciate and follow the corporate chain of command.

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