One of the problems with being an accountant is that we tend to think that the world, or at least the business world, acts according to logic and rationality. In our world the debits equal the credits; you act either within the law or outside of it – it is quite a black and white place. Therefore if a strategy would result in increased profitability we would expect a business to follow it.
Of course what this view of the world fails to take into account is that businesses are full of people and people are rarely rationale. They can be fearful, jealous, lazy, angry, stupid, vengeful and even psychopathic. They can also be affected by a wide variety of mind-altering substances – some more legal than others. I’ve met more than one business owner who started the work day with a liquid breakfast which wasn’t coffee.
Health also plays a big part in how well people make decisions – people tend to be more bold when they feel well and defensive when they feel ill. A business owner recently told me that she was afraid her chronic insomnia was affecting her ability to make rational decisions.
Nowhere is the human element more obvious than in family businesses, where emotions connected with deep-seated family issues become entangled in the business; for example:-
• A younger sibling is rarely supported for a position of authority over their older siblings, especially by the older siblings; the wider the age gap, the more resentful they are likely to be of the younger one’s promotion. While the younger sibling may be the best person to run the business it is often impossible for an older sibling to deal with the fact that the person who used to look up to them in childhood will now be making the rules.
I have met siblings in business who could never agree because the older one could not admit that the younger one might be right. The same situation often applies to parents and children in the same business – it can be a very difficult thing for a father to admit that the child may be right and he may be wrong. Poor decisions are often made because of stubbornness and pride.
• A sibling working in the business will often resent the fact that a non-working sibling receives the same dividend and is building up the same value in their investment in the business. It does not even seem to matter if the working sibling receives a market or above – market salary for their work; in their view they are suffering the stress and the risks involved in running the business while their non-working siblings are reaping the benefits on ‘easy-street’. This is one reason why buy-outs of non-working siblings and cousins is almost inevitable, even if it puts a strain on the business or, at least, constrains the growth of the business.
• Boards are often chaired by semi-retired business owners in order to maintain their pride and visible standing in the business community – not because they are the best person for the job or even know how to properly chair a meeting. Which leads to the whole issue of the composition of family business boards; being a family member is not a rational criterion for being a director.
• I have seen family businesses expand too quickly just to ensure there is a place in the business for all of the children of the current owner. The resulting level of debt vastly increased the annual interest bill while the expansion (too hastily conceived and implemented) did not produce the expected income. The ironic result of trying to find room for all the children was that there was less profit for everyone.
• The concept of equity between family members, which families hold sacrosanct, does not translate well to a business environment where not all family members are equal in terms of energy, ability and aspiration. It can result in family members being employed just to give them a job; it can hold back the talented and promote the untalented very rapidly to the level of their incompetence. And, I’m afraid I have to say it, mothers are often the instigators of the family business dealing equally with the unequal.
The reason we have family business constitutions is to try to set rules and procedures that operate on the principles of rationality. That assumes, of course, that the family owners of the business decide that the business is to operate on the basis of ‘the business comes first’. But you can’t assume that this is the overriding principle – many family businesses aim to accommodate a combination of the best interests of the family and the business. I’m sure there are many which are managed predominantly in the best interests of the family, even where this conflicts with the interests of the business. Drawing all the profits from the business is a fair indication that this is the case.
As accountants we can give sound, rationale advice to SME owners but we should not be surprised that it is not always taken - rationality is often no contest against powerful emotions such as pride, jealously and love.
Sue Prestney FCA is spokesperson on SMEs for the Institute of Chartered Accountants in Australia.