The Dangers of an In-Law Becoming a Shareholder – Part 2

By Prof. Enrique Soriano

Hiring in-laws in your family business is very tempting but dangerous. No doubt, as a business owner, inviting an extended member of the family to help in the business gets you the best of both worlds. The assurance that in-laws care about your business and the odds that you can trust them when it comes to sensitive information makes it so tempting to invite and sometimes cajole them into joining the company. It is typically seen as gaining a trusted employee willing to not only work long hours and accept less pay but also buy into your dream and help you achieve it.

But be careful here – the opposite can also happen, and you may end up with a dangerous and cunning special employee with a “birthright” mentality by reason of marriage.

Every difficult situation requires careful collaboration, setting expectations, and decisive action. By its very nature, mixing family with business is already replete with emotions, and adding another potential conflict (lazy, entitled in-law) can spark another volatile brew. The case of an ill-advised in-law joining a family business can be quite daunting as it poses a dilemma for the entire family and the business. I am referring to the story I shared where the matriarch made an urgent appeal to my office, W+B Advisory, to intervene due to her weak, henpecked CEO son kowtowing to a manipulative wife who was all over the place practically making all the decisions related to their family business.

Her actions created a toxic organizational culture and ultimately hurt the business. Many longtime employees started to wonder if the family members/shareholders really valued them. What shocked many was when senior executives began to hand in their resignations one after the other. As the wife’s negative influence spread across the business and beyond (customers, suppliers, creditors), the pressures started to mount to arrest the dramatic sales decline and address a demotivated senior management team. The immediate action was for the family members (especially those working in the business) to take the necessary steps to mitigate the bleeding and manage the damage brought about by the son and an emboldened and defiant daughter-in-law.

I’ve highlighted our immediate recommendations below.

Reevaluate Roles: If the in-law has the necessary skills, the family must ensure clear guidelines and expectations for the in-law’s role in the business, which can include clearly-defined responsibilities, decision-making authority, and compensation. It should also establish a process for addressing conflicts or disagreements that may arise during the term of the in-law.

Reactivate the Family Council: Our first initiative was to set up a family council or an ad hoc group comprising family members mandated to meet and evaluate the in-law’s behavior, skills, expertise, and whether these align with the core family values. Personally, it was important to communicate openly and honestly with the in-law to ferret out concerns and expectations and provide her with feedback on her performance. No matter how sensitive the circumstances were, the council must move forward and confront the issues.

Reestablish Rules with Accountability. It was also essential to determine whether the in-law had the necessary knowledge and experience to manage her people and exemplify leadership to run the business effectively. If the collective decision does not favor the in-law retaining her position, the family members may need to consider the following options.

1. She should be given sufficient bandwidth to improve her performance. If this option will not work;
2. Proceed to hire a professional manager to replace her;
3. To manage the fallout due to the wife’s removal, the council must explain in very clear terms the reason for the removal to the immediate family. Communicating openly and threshing out the issues that led to the removal is a good step in mitigating the impact;
4. The Shareholders, at their option and through its Board, may also initiate the replacement of the CEO son.

Repurchase Shares: In the unlikely event that the in-law continues to refuse and heed the advice of the council and the Board, the family members may need to pursue other options like initiating a buyback of whatever shares were given to the henpecked husband. Buyback agreements can be pre-agreed using the shareholders’ agreement to institutionalize rules related to ownership.