Divorce and the unintended consequences of family governance

Divorce and the unintended consequences of family...

Exploring how divorce can affect a family business through two very different case studies.

People in conference

There is a common narrative in relation to marital divorce in a family business being mainly about protecting the family enterprise from spouses. The statistical prevalence of divorces in different societies is often cited as a threat to encourage this type of protective strategy, such as using pre-nuptial or post-nuptial agreements, especially if it is assumed that any divorce is bound to be rancorous. However, here are 2 similar stories from practice that pose a different type of issue.

Like many families, the Smiths had decided that employment in their third generation business should be based on talent and not bloodline. The family and their board, the majority of whom were non-family, agreed about the importance of segmenting the business and family domains. The talented spouse of one of the next generation was hired on the basis of this policy and provided several years valued service, but then the marriage foundered.

A similar challenge arose with the Browns where a family member married one of the non-family senior managers. Unlike the Smiths, the Browns liked to mix family and business and often it was said that people in the business were “treated like family”. The meaning of this sentiment was put to the test when this marriage foundered.

What happened in each case?

The Smith’s board argued that the previously agreed boundary had been established to help avoid a family crisis from becoming a business crisis. The family understandably felt that the circumstances justified the boundary being treated as flexible and would have preferred their now former in-law to leave the business, but the board remained resolute.

They cited their duties as directors to do what was in the best interests of the company and all its stakeholders and more than hinted that if one of their member was “forced” to leave, then she might not leave alone. Faced with the risk of creating a larger problem with their board, the Smith family relented and agreed that the former spouse should stay, albeit at a cost to the relationship between the board and some family shareholders.

The Browns found it difficult even to imagine the outcome that the Smiths got to and in their case a deal was done and the former spouse left. However, after a short break he reappeared at a competitor and then members of his former team who thought that he had been badly treated, and definitely not “treated like family”, left the Brown’s business to join their old boss.

If you find one or other outcome more palatable, or think another course could have been followed, that just goes to prove the eternal verity that that there is no best practice in family businesses. The Smiths and the Browns ended up with different outcomes because they are different families. If we are capable of learning anything from these experiences it is the old lesson of it being wise for a family to plan before something, like a divorce, happens.

That is a lot easier said than done because it is never straightforward to discuss the closest relationships of family members. If you would like a copy of an agenda that we have devised to help a family to work through this delicate matter please contact us.

Connect with us

Stay up to date with what matters to you

Gain access to personalized content based on your interests by signing up today