Shielding Family Businesses from an Investigation’s Impact
The impact of an investigation into a family business can be serious, both in terms of the business itself and the family relationships within it.
The effects will depend on the allegations that have prompted the investigation and the nature of the business. But a loss of reputation, damage to its standing in the market, financial difficulties, reduced productivity and negative effects on relationships with staff, investors and current and potential customers can all result from an investigation. This can even lead to disputes between family members and the future of the business being put at risk.
With so much being at stake, it is important that any family business that faces an investigation seeks appropriate legal advice at the earliest possible stage.
Those with the relevant legal expertise will be needed if the business is to maximise its chances of steering itself through the many challenges posed by an investigation while minimising the possible negative effects.
Managing Investigations
There are very few circumstances in which an investigation can be good for a family business. Being investigated may highlight problems for the business and give it clear indications of what it needs to do to ‘right the wrongs’. But this can often come at a high price.
The priority, therefore, has to be managing an investigation from the moment it is known that one is about to commence or has already begun.
Managing such a situation can require many actions. There has to be a degree of transparency in how the business deals with investigators and those who have a financial interest in it or dealings with it. Initially, this will involve identifying the mistakes that have been made, recognising the best way to prevent them happening again and communicating a willingness to do this to the investigators.
This may, in such businesses, require family members (or others involved in it) taking responsibility for actions that have caused – or at least, contributed to – the problems that have prompted the investigation. Although, if the business believes it has done nothing wrong it should seek legal representation so it can communicate this in the strongest way to the investigating authorities and devise a defence strategy that gives it the best chance of securing the most favourable possible outcome.
The Process
Managing the impact of an investigation can be seen as a two-stage process. There is managing the immediate effects (that we have already mentioned) and there is the need to take action to prevent the company finding itself in a similar situation in the future. To achieve this second objective, new workplace processes need to be devised and put into practice.
If the investigation does uncover problems, there will be a need for the business to respond. This could mean disciplining those involved in the wrongdoing (even though the investigating authority may also do this) and amending its workplace practices in order to “design out’ the possibility of the problems happening again. Introducing more formal staff working procedures, clearer policies and codes of conduct, tighter financial controls, and measures to make it easier for whistleblowers to report their concerns can all be of great value.
These measures will all reduce the chances of any repeat wrongdoing. But devising and introducing them during an investigation – or shortly after it is completed – may even lead to the business receiving a less severe penalty than it would otherwise have done.
Managing International Corporate Structures
No two family businesses are exactly the same. The nature of the business, the activities it is involved in, the personnel overseeing and / or carrying out those activities and the amount of direct or indirect family participation will all vary from one business to another.
Family businesses involved in cross-border activities face the most challenges. They are international corporate structures, which face particular responsibilities that other family businesses do not. They must manage the intricate details of international markets and the legal and regulatory requirements (and sometimes the relevant cultural matters) that come with operating in each country where it has an interest.
Such businesses must also ensure they employ staff that are capable of meeting the challenges of running such an operation effectively, efficiently and legally in more than one country. This requires planning, structuring and coordination to ensure that the business is meeting all the demands being placed on it by the legal, regulatory and cultural frameworks in place in all the countries where it is active. Only by taking such a comprehensive approach can a business be sure it is doing everything possible to reduce the possibility of an investigation into its activities.
Protecting the Reputation of a Family Business
Anything that could affect the reputation of a family business needs to be examined closely. Only by doing so can the business determine what needs to be done to minimise the potential harm or, in more fortunate situations, boost its standing.
If the situation is one that means the business has good news to announce that it can use to promote itself, it can be relatively straightforward to devise a press and publicity campaign to make the most of it. Trying to minimise the effect of bad news, however, can be more of a challenge.
Minimising Reputational Damage
Any hint of an investigation into the business and / or suggestion of a scandal involving the company or individuals within it is a danger. It can damage its reputation, its standing in the market in which it operates, and relationships with staff, investors and current or potential trading partners.
Such problems can, it could be argued, be particularly damaging to a family business as they involve a loss of trust. Many such businesses have built up such trust over generations. Any suggestion of wrongdoing can see the family name tainted or even destroyed. Unlike public companies, which can argue that wrongdoing was due to one or more rogue individuals, the status of a family business is bound to its history and the figures now running it. Anything that puts that status at risk is a problem that has to be addressed.
Action
Managing the immediate impact of any investigation or scandal requires taking action to address the issues that led to it.
We have talked elsewhere about the need to take steps to identify problems, tackle them and prevent any repeat of them. Such steps can mean that a more favourable outcome is achieved than may otherwise have been the case. Investigating authorities may not prosecute or may be lenient when it comes to the penalties they impose, and the business may be able to continue functioning having suffered less damage than may have been possible.
But much may still need to be done to restore the business’ standing in the eyes of others. It must be determined what is required to repair or boost its reputation. This will require an assessment of what harm has been caused and how it can best be overcome.
Practices such as press and public relations campaigns and even rebranding can go some way to convincing the outside world that the business is now trouble-free.
Changes
There may be some benefit in making changes at board or senior management level after the original problems have been resolved.
These changes may not necessarily be the most effective or comprehensive ways of addressing the issues that had been identified – those steps should already have been taken by this stage. But changes that alter the public perception of who is now ‘in charge’ may help promote the idea that the business has put its problems behind it.
The appointment of new figures to high-ranking positions, especially if they come from outside of the business, can distance it from the scandal as far as observers and those who deal with it directly are concerned. These appointments can be of value in conveying the idea that the business is ushering in a new era of credibility, integrity and professionalism.
A family business may have built up its standing over many years. This standing will be based largely on the family’s reputation. But even the most traditional business sometimes needs to make changes to disassociate itself from the problems it has encountered.
Any damage to the reputation of a family business can be harmful in a variety of ways. But that does not mean that it cannot be tackled and measures put in place to ensure that the business protects everything it looked at risk of losing.
Succession Planning During Investigations
A family business that has to face an investigation needs to act promptly and intelligently to deal with the issues that arise. An investigation can bring with it the threat of scandal. It may also make it necessary to make notable changes regarding those who hold significant positions within the business.
Such changes can go some way to reducing the potential damage that a scandal can cause, as they enable the company to argue that it has new people in place who are righting any wrongs and looking to ensure they do not happen again. On an internal level, these changes can be an opportunity for the business to promote emerging talent (either from within or outside the company) and devise new ways of functioning.
It may, depending on the nature and seriousness of the investigation, be necessary to remove family members from senior positions within the business. This can have the aforementioned benefits. But it can also present a challenge. The resulting shortage of people in senior positions can, if not addressed quickly, lead to a lack of expertise where it is arguably most needed. There is a need to make sure that recruitment to those positions is carried out in the right way so that the business can recover from the problems that have been identified as quickly as possible.
Such a challenge requires a family business to identify the right people for the right positions. Any problems that have arisen may not have just led to an investigation – they may have identified much wider-ranging issues that require not only the replacement of certain people within the business but also the creation of new positions and new procedures. It can be more involved than a one in – one out approach.
The issue of succession planning is an important one for businesses. It may not need to be done because of an investigation - a person’s death, retirement or moving to another company can all make it necessary. Family businesses must, therefore, have procedures in place to ensure they are able to identify the positions that need filling and the best internal or external candidates for them. These procedures should have been devised well before they need to be used. Only by doing this can a business minimise the disruption that can be caused by replacing those who have had positions of influence within it.
Board Management in Crisis Situations
An investigation into a business can be a crisis. Regardless of whether an investigation is justified, if one is opened it can affect a business’ value, reputation, standing in the markets in which it operates and relationships with trading partners and current and potential staff and investors.
This is why it is important that the board of the business (or those who hold the equivalent positions) take steps to ensure all aspects of the investigation are managed in a way that protects the company’s interests. The circumstances will differ from investigation to investigation and from business to business. But, in each such situation, there has to be an emphasis on determining what the best possible outcome would be, and how this could be achieved.
But those who hold the senior positions in a company should be doing more than overseeing a reaction to a crisis. They need to be continually looking at the way the company is functioning in order to assess the risks and the best way to manage them should any potential problems become a reality. This is the responsibility facing the board and / or senior figures at any type of company; not just family businesses. Such people have a duty to put measures in place that identify and minimise risks. They need to ensure the business is in a position to make the most appropriate response if and when an investigation (or any other type of crisis) arises. That response has to involve ensuring that all necessary individuals and organisations are notified as swiftly as possible once it becomes apparent that a crisis situation is likely.
This approach can only be truly effective if such measures are regularly reviewed and, if necessary, revised. Crisis management works best if it is proactive rather than reactive. Plans need to have been drawn up in advance and have been subject to regular assessment to ensure they take into account all possible situations and any changes that have arisen since they were devised. Doing this when a crisis is about to begin (or in the middle of one) will achieve little.
A family business may never face the prospect of a crisis; especially if it is always well run. But it has to have plans in place should one arise.
