This is an essay for professionals who advise families who control capital, whether that capital is invested in operating companies, investment vehicles, foundations or family offices. At the outset a few disclaimers are required. First, the term, "family business," is rarely to be found in this article. There are forty or more definitions of the term in the academic literature and few of these articles defining the beast offer enlightenment. In particular, the academic literature provides little guidance to the professional advisor to business owning families or enterprises controlled by families about (a) how to address the power of the family, (b) the emotional intensity of family business conflict, or (c) most importantly, how any well qualified legal or business advisor can or should deal with powerful emotions arising out of conflict in families about issues of power, control and money in the enterprise they control.
Secondly, this is not an article about all families in business together, because many families who operate what appear to the rest of the world to be "family businesses" do not find emotional sustenance in their relationships with the family members who share their business lives. Indeed many individuals find their lives in so-called family firms enervating. Others simple deny their enterprise is a family firm. Such enterprises and their advisory needs are outside the scope of this discussion because for them, the family half of the equation is marginal at best.
This article addresses only a segment of the family businesses generally comprehended by the common sense understanding of that term. The focus of this essay is members of families who share a commitment to continuing a legacy of shared values as much as prudently managing their capital together. As described more fully below, I denominate pools of capital controlled by these values driven families, "Family Controlled Enterprises," whether the capital is invested in an operating company, an investment vehicle or even a family foundation. In this context the central realities to be addressed by family members and advisors alike are (a) a pool of capital; (b) mechanisms of control, whether ownership, management or governance; and (c) the nature, culture, ethnicity and characteristics of the families that exercise control. Family business cases in which all decisions are grounded solely on financial criteria (and which are explicitly not addressed herein) differ fundamentally from cases presented by Family Controlled Enterprises. Some of these important differences and their impact on how technically competent professional advisors serve their clients are detailed below.
A third important disclaimer I must add is that this is also not an article on estate planning, because the most basic concerns shared by all high net worth individuals-minimizing estate taxes and maximizing liquidity for survivors-are often not the primary concerns of values driven families who control businesses. In his classic Family Business Review article, "Rough Family Justice: Equity in Family Business Succession Planning," Glenn Ayers described the process of advising such families on "How the Next Generation Can Succeed In Family Business" accurately as "continuity planning." He noted that their primary concerns are (a) continued family control of the enterprise and (b) peace and harmony in the family. Tax minimization and liquidity are important, but do not top their list of priorities. The concerns of these families do not arise out of a present or future succession event, such as a sale or other disposition, but rather out of a continuity planning process. This process should be understood as a family's endeavor to integrate its abiding values, its stewardship of an enterprise created by the family [but likely managed primarily by non-family managers] and its abiding and active concern for the enterprise's culture with financial and political decisions linked to the family's need to maintain long term financial strength of the enterprise[s] in which their capital is invested. While continuity planning encompasses a lot of estate planning, it is a broader, more comprehensive process, requiring attention to business strategy, corporate finance, and organizational development issues contemporaneous with personal estate planning by members of the controlling family. [And I must note parenthetically that writing an article about continuity planning consigns it to oblivion, since such a title evades all search engines and index purviews by readers who might actually be interested in the content it presents: hence the disclaimers and the title.]
Set forth below are five basic points I wish to emphasize which any professional advisor to a family controlled enterprise must understand viscerally as well as intellectually in order to succeed in this line of work. In addition, I set forth nine helpful practice points predicated on the analysis contained herein which should promote more optimal outcomes for advisors working with Family Controlled Enterprises.
The November 1999 issue of Trust & Estates is devoted to "Working Effectively with Wealthy Families." Articles offer tips such as " . . .[S]pending time, learning the big picture, listening and caring," which are characterized as "all part of the same process." That such fundamental human behaviors must be advocated in prestigious magazines serving the market for high net worth individuals, behaviors historically taken for granted as part of good professional service in earlier eras, says much about the current state of professional services to this market. The presence of such qualities is not desirable; they are absolutely necessary for any advisor who seeks to advise family controlled enterprises.
Some family businesses are built to last. Many are not. In my view there are two clear indicators of whether a family business is built to last: its balance sheet and its vision statement. My experience tells me that when the balance sheet of a family business is relatively unleveraged because the owners reinvest the bulk of their profits consistently each year, they are voting with their dollars to build a family business that will endure. I do not question the choice of business owning families who choose to maximize withdrawals of cash for personal consumption. I simply argue that their companies are built to serve the current generation of owner/managers--a legitimate choice, but one that is inconsistent with an enduring family controlled business enterprise.
In their classic text, Built to Last: Successful Habits of Visionary Companies, two Stanford Business School professors, James Collins and Jerry Porras, compare and contrast 18 of America's large corporations who dominate their industries with their largest (and less successful) competitors. In the process of a six year long empirical study which compared truly great companies who became industry leaders and their less successful competitors, such as Marriott with Howard Johnson, Motorola with Zenith, Hewlett-Packard with Texas Instruments, the authors concluded that the primary distinguishing characteristic of the truly great companies (which their competitors lack) is that these truly successful firms "...[P]reserve a cherished core ideology. Put another way, they distinguish their timeless core values and enduring core purpose (which should never change) from their operating practices and business strategies (which should be changing constantly in response to a changing world)."
The book reaffirms the competitive validity of being a values driven enterprise and offers abundant research based, practical recommendations for owners who wish to create a business that is "built to last." Rather than give a more comprehensive review of the book, I want to point out something that intrigued me about the list of 18 companies selected by the authors as paradigms of visionary companies: that is the extent to which family control is a characteristic of these now huge and hugely successful visionary companies. Of the 18 companies, four founding families (whose patriarchs were the architects of their vision) continue to control the companies through ownership: Ford, Marriott, Nordstrom and Wal-Mart. Of these, Nordstrom and Marriott retain family CEO's, and Ford has recently elected a fourth generation family as non-executive chairman. Of the remaining 14 companies, four others enjoyed at least two generations (and many decades) of family leadership in the CEO position: IBM, Johnson & Johnson, Merck, and Motorola (where a third generation Galvin is now CEO).
My purpose in highlighting this observation is that at Genus Resources we find that most of our clients are truly values driven organizations, although often the enterprise's core values are assumed rather than articulated. Moreover, these core values are often rooted in the multigenerational history of the founding family. We believe that these family businesses have, therefore, a running head start on the journey of becoming visionary companies that are "built to last." We believe that the core values of family controlled enterprises can only be truly valued by advisors whose technical skill in quantitative areas are matched by their qualities as listeners and communicators and their profound respect for these values.
In an article several years ago, Professor Peter Drucker suggested four golden rules for family businesses to follow if they wish to prosper. Family members must work as hard as non-family members; family businesses need to add non-family managers; at least one top job in each family business must be filled by a non-family manager; and "before the situation becomes acute, the issue of succession should be entrusted to someone neither part of the family nor part of the business." [emphasis supplied]. Professor Drucker's nostrums may be necessary, but they do not constitute sufficient counsel to the professional advisor who would advise family controlled enterprises effectively.
Drucker's fourth golden rule, that family businesses can best manage the succession process, a process often fraught with intergenerational conflict, by hiring an outside professional to make the hard decisions is like suggesting that Babe Ruth could have prolonged his baseball career by moderating his diet. It misses the point. One cannot, nor should one seek, remove the emotional power of family relationships from enterprises controlled by family. Rather, to manage an intergenerational transition successfully, owners, managers and advisors to the enterprise must recognize the power of those relationships. Regardless of size, a family business will at one time or another become a stage on which the emotional and interpersonal dramas of the controlling family are enacted. This reality must be understood for intergenerational conflicts to be managed in a manner that allows the family controlled enterprise to prosper before, during and after the transfer process from senior to junior family members.
There are more than 200,000 private companies in America with revenues over $5,000,000, the vast majority of which are family owned or controlled. While it is frequently estimated that seventy percent of all family firms do not succeed into the second generation and ninety percent do not continue into a third generation of family ownership or management, tens of thousands of these larger family businesses do continue from generation to generation. Instead of assuming that only managerial corrections can save family business, observers of this powerful engine of our economy could glean much from studying the family side of family businesses that complete successful transitions.
To begin, observers of family businesses must surrender the medical model of analysis. Family controlled enterprises are not sickly counterparts to professionally managed firms to be guided back to health by accounting or legal counterparts to Marcus Welby, M.D. Their often raucous, tumultuous style, their patriarchal and matriarchal cultures, and their organizational structures are usually deeply rooted in the generations-old cultures of their founding families. It is here one finds the sources of the family business' competitive strengths and weaknesses. Ownership, governance and management systems of family businesses are interwoven with family and, therefore, are themselves as particular and individual as the families that founded and control them. These family systems are often part and parcel of the functional solutions, not simply part of the problem, at such firms. As Tolstoy wrote in Anna Karenina: "All happy families resemble one another; every unhappy family is unhappy in its own way."
The curmudgeonly, irascible, powerful and committed individuals who dominate family controlled enterprises come in all ages, from all ethnic groups and races, and in both genders. But their ethnic, cultural and gender differences are less important than their common desire to have both healthy families and profitable family businesses. Their commitments are to legacies, progeny, heritage and community. They do not fit nicely into the American myth of the entrepreneur as lone wolf and successor to the pioneering frontiersman. But they dominate many markets and industries, and with tenacity manage to pass on to the next generation, more often than one would believe possible, not just their assets, but their heritage and their legacy of values.
I do not intend these words to constitute a panegyric to extended families that scream and yell at each other, emulating the richly entertaining cinematic closing of Moonstruck. Rather, I mean only to rebut the simplistic idea that family businesses can be cured by the application of scientific management methods intended to fix the business side of the family business system. After working closely with more than 200 family controlled enterprises over the past fourteen years, the professionals in my firm and I have concluded that it is in fact the articulation and management of family issues in family business systems that will determine whether change in the business can occur. Family issues in family controlled enterprises are much like the molten magma flowing beneath the surface of the Earth. Family issues--both interpersonal and intrapsychic-erupt like volcanos when left unarticulated and unaddressed.
Family controlled enterprises therefore require accountants, lawyers, bankers, life underwriters and other advisors who are trained to identify such issues to deal with them ethically and competently. Many family firms require more specialized intervenors such as interdisciplinary consulting teams in which at least one advisor has advanced clinical training and experience in family therapy and at least one advisor is trained in one of the primary business advisory disciplines in order to reduce the risk of family issues which exist concurrently with other management, ownership and tax issues. Each member of such a team must become bi-lingual in the languages of business and psychology and learn to communicate their insights in plain English to the families and non-family business managers who comprise family business systems. In this way the powerful and obdurate sources of resistance to change in the family system can be overcome by the clinical team member so that the counsel of the business
These next two points rely heavily on the analysis of my partner Thomas D. Davidow, Ed. D., a clinical psychologist. When two family generations begin to talk to each other, they are speaking from different frames of reference. We are all molded by our individual experiences, which color the lenses through which we see the world. In a family controlled enterprise, the senior generation has usually survived more different experiences of all kinds than its progeny, simply by virtue of age. However, the variety of experience is less important than the sharp intergenerational difference in those experiences. The son, for example, thinks differently, not just because he is less experienced with business or life than his father or mother, but because his generation looks at the world through a different prism.
One family business we worked with illustrates this difference in frames of reference. The senior generation had built a successful business from ground zero. For example, the founder told us how he actually kept count of the paper clips in the early years because he had to be very cost conscious. He cared deeply about his adult children, but he was also an extremely tough man. Described by others we talked to as being difficult to deal with, he never listened to others because he assumed he already had the right answer. Indeed, he was not very flexible, and certainly unburdened by self-doubt.
The younger of two sons worked with him in the business. (The older son had gone on to medical school). The younger son was bright and capable for his age, but he was also hot-tempered and impatient. When this son and his father would disagree about significant issues, the son would become angry and quit his job. The father would become upset by his son's departure, give in to him on whatever issue had triggered the outburst, and beg the son to return to the business.
When we started to work with this family, we talked about the communication gap between father and son and how the dramatic differences in their experiences growing up might be seen to relate to this gap. The father was the son of a poor man. His two sons, including the one in the business, had grown up as the offspring of a rich man. One day the father turned to us and said, "I get it. My son never grew up understanding the advantage of disadvantage." Their worlds could not have been more different. The next time the son walked out of the business, the father wished him well, but did not capitulate or seek to cajole him into returning to work. Three weeks later the son asked the father to take him back! The illustration is designed to point out that the communication between the father and the son always broke down because there were no common points of reference for discussing business issues. They would look at each situation from such different perspectives that they could neither communicate effectively, nor agree.
There were obviously many other issues. The father had attempted to give his son the life he never had when he was growing up. Consequently, the father had indulged his son in a variety of ways and never held him accountable for his actions. Consequently, the son had been taught by the father that the best way to get what you wanted was to throw a "tantrum" (leave the business). Given the father's history of not understanding that the word "No" was just as important in establishing a loving relationship as "Yes", he would always let his son out of the predicament in which he had placed himself.
The father often endured the word "No" and this experience was a primary reason he developed his determination and his success. When the father let the son go and put his son in the position of having to call to re-enter the business, he shifted the relationship to one in which the father, as boss, could ask the son to take responsibility for his behavior.
The son's frequent departures when he did not get his way were a continuation of their different backgrounds and experiences. The father knew how tough the world can be. By allowing his son to leave and not calling him back, he gave his son the opportunity to discover what life can be like without a job or with a job, but without the same future and compensation that his present employment afforded him. That experience, however minor, created common ground for the father and the son on the realities of life and a level of appreciation for the fortunes of their current life. For once the son was able to put himself in his father's shoes.
The gap in years, and the corresponding differences in life experiences between the two generations, can become a chasm dividing fathers and sons, parents and children, as each generation tries to communicate from its own reality. When we give speeches to family business groups, we often do a communications exercise in which we ask for two volunteers from the audience. We separate the volunteers and tell one of them to pretend that he/she is at a bus stop and not to waver from that instruction. We tell the other volunteer to pretend that he/she is at home in an apartment. Each is also told to attempt a conversation with the other. Both are then momentarily escorted outside the room. Before the two volunteers return to the room to enact the drama, we tell the audience to listen carefully to the conversation about to occur between the two volunteers. Out of earshot of the two volunteers, we explain to the audience that one of the volunteers is playing the role of a crazy person. The audience's assignment is to discern which of the two it is.
The volunteers reenter the room and begin a conversation in the following manner. Either one may begin the conversation. For example, one may say: "Hi ! My name is Sam. Who are you? What are you doing here?"
As soon as one volunteer says, "I am waiting for a bus," or, "I am relaxing in my apartment," the two participants generally get a little nervous and confused.
"Excuse me? " is generally the next line.
The conversation can continue in the following manner. "I am sorry but this is my apartment and buses do not come through my apartment. There is a bus stop outside and you can wait out there if you want."
"I am not leaving. This is a public place and I have every right to be here."
The two volunteers begin to struggle with their realities and continue to insist on their positions. This exchange can sometimes get a little heated. We interrupt the exercise before it becomes too antagonistic and then turn to the audience.
When we ask the audience which volunteer is the crazy one, some audience members select one volunteer and some select the other. Usually the audience then proceeds to argue about who is crazy and who is not.
The exercise is designed to demonstrate how each volunteer in the dialogue is behaving normally from his or her own experience. The problem is that the realities cannot exist simultaneously. One cannot both be at a bus stop and in one's apartment at the same time. This is very similar to the problem between the generations in a family business. One cannot live the life of the founder and also of the successor generation. They are different realities. Each of these realities has merit and credibility. The challenge is to build common ground between them.
Sophisticated learning, up-to-date skills, and an eagerness to improve on the old ways obviously differ from seasoned experience and wisdom. The younger generation frequently possesses the former and the senior generation frequently has the latter. When the two sets of traits come together in the family firm, a formidable team can be created.
Intergenerational conflicts arise in every family business in which more than one generation is active in management. Conflict can occur on many fronts. In this context, conflict means that seniors have views about money, authority, intimacy and other aspects of relations that differ from their children's views. The two generations may have similar values regarding these issues. But they frequently argue over them because those two topics are areas when there are major conflicts over control. The issue of authority and money are generally very clear in non-family business situations.
Money and control are two historical family issues that the father and son have probably been struggling with since the child was born. It becomes impossible to separate out this very powerful family issue in a family business setting. There may be many or few differences, each varying from mild to intense. The challenge in every family business situation is to articulate the differences and to be honest about them in order to manage them effectively rather than trying to sweep them under the rug. Left unarticulated, these differences between parents and their now grown children in the business play out in struggles for control that mirror the earlier control struggle between parent and child, when the offspring was still "a child."
The result of replaying the earlier parent-child conflict in the family business setting is that both parents become involved in the issue and they in turn revisit their own set of experiences raising their children, now grown and working in the business. Parents remain parents regardless of the age of their children. Both parents continue to remain involved in the welfare of their children. If there is a struggle in the business between a child and one of the parents, both parents quickly become involved in the situation. If the mother has always believed that the father acts in an unreasonable manner when it comes to the management of his children, she will take that attitude into the discussion of the business problems that her spouse is having with her child. Her presence and her lobbying will undermine the control/authority that the father has in the business setting. This difference of opinion may be explicit or it may be very subtle. But in either case it can have the same effect. One might think that the locus of the problem would help define who's in charge of the solution, but it usually does not. The issues and dynamics of who is in control also take on a variety of forms. These struggles may be complicated and extremely confusing.
Let us, for the purpose of discussion, take a walk down the path of authority. Authority is usually defined as: "Who is in charge? Who outranks whom?" But authority may also be defined as: "Who knows best?" Relationships between parents and children in family owned business occur on many different levels. There is the business relationship and the family relationship. In business, one does not challenge the authority of the boss too many times before one is on the street out of a job. In the family such challenges to parental authority are the stuff of everyday life.
As one goes through the developmental stages of autonomy and independence (adolescence), the primary emotional task is to challenge authority. Working in the family business makes it difficult to experience a total separation from the family. The younger family business member does not work through all the necessary emotional and developmental states and can become stuck in some step of the adolescent stage in his or her relationship with the parent. When this happens, there is constant undercurrent of struggle between the younger generation and the senior generation over who is in charge and who knows best. This undercurrent is fueled when the younger generation lobbies the other parent for the legitimacy of its position.
This dynamic, which is common in all families, now surfaces within the business context. The ambiguity of this situation is very difficult to work through and creates tremendous stress and frustrations for all parties.
Resolution can be achieved by striving to clarify the roles of each family business member and to improve communication. Each family member is certainly in charge of his/her life outside the business. But at work the boss is the boss. Yet in a family business some middle ground is necessary. This middle ground can take shape as a structured time and place for the discussion of those areas that overlap. If it is assumed that the next generation may assume control of the business some day, there ought to be an opportunity for that generation to ask questions about the rationale for certain decisions or the direction of the company. This time and space for discussion comprises a crucial component of succession training and education and should not be seen as an opportunity for second-guessing or Monday morning quarterbacking. This structure is only one solution. It should not be seen as sufficient to overcome all the issues that may exist between the generations.
So who is in charge? The reality is that the person who owns and controls the voting stock of the family business is in charge. Any message or hint to the contrary is a fantasy for everyone. This reality may be offensive and discomforting to many family members, but it must be acknowledged and discussed. Voting control gives the person in charge the option of listening to the opinions of others, but he or she can still choose to act unilaterally, disregarding others' views. Other family members, and even non-family employees, who are uncomfortable with so little control over their lives, are faced with a series of choices. These choices may be experienced as uncomfortable because they may include not continuing in the family business. Nevertheless, they must be confronted. It starts with one basic choice -- to stay in the business or leave. Most people wait too long before they are ready to confront this choice and frequently it is so far down the road that the alternatives available are very onerous for all family members.
In our practice, we take the position that before divisive issues are discussed, the family must acknowledge the possibility that these differences may not be resolved. This is a very important stance. Two generations of a family often begin a dialogue with the expectation that the other generation should understand and will be sympathetic to its position. The expectation is that the other generation, the parents (if the kids initiate) or the kids (if the parents initiate), should be willing to meet them half way at the very least -- since they've come half way to meeting the other generation's position. But the conversation frequently deteriorates because members of each generation expect the other to come not just half way across the chasm but all of the way, adopting either the juniors' or the seniors' position completely. Neither is able to deliver because they could not compromise. When this happens, each side may feel very disappointed with the other. Disappointment gives rise to anger and communication becomes even more difficult.
When more than one member of the next generation is active in the management of the family firm, the senior members may feel they're being forced to choose one child, for instance, over another. Most parents spend their lives trying to convince their kids that they are all loved equally, but in this situation, the founder and his or her spouse must make a decision that directly contradicts this message. Let's face facts: The prospect of the next generation running the business when there is just "one seat at the head of the table" can put tremendous strain on family relationships. This is particularly true when a sibling rivalry is fueled by a competition to get to the top of the company ladder.
The symbolic and real power of a family business cannot be overestimated. Family members' connections with the business can profoundly affect their individual self-esteem, as well as the quality of their relationships within the family.
But in addition to giving the family an identity in the community, the FOB can become the playing field on which many family issues get acted out. For instance, when families start tackling the problem of succession, many of the unresolved family and business issues begin surfacing. And because people generally tend to avoid dealing with difficult issues, these matters build up over time and may take on an almost mythical power. This powerful tension only serves to discourage a family from facing up to the underlying problems.
It is critical to the health of both family and business to deal with succession as soon as possible. This effort requires patience and delicate handling, but it definitely can be accomplished. The key is simply to face reality. We find that fantasy is usually more frightening than reality. That is to say, the consequences of dealing with succession are generally more frightening in one's imagination than they are in reality.
Succession is not a decision. It is an organized process that involves discussion, information gathering, evaluation, research, asking necessary questions and much more. If you address the issue of succession as a process that includes all family members, the power and the tension associated with the decision will be significantly reduced.
To encourage families to discuss the issue of succession, we have devised a few ground rules for approaching the problem.
The steps described above will require a commitment of time--in some cases as little as two hours every month. It has been our experience that families who own and participate in managing Family Controlled Enterprises are highly skilled at making dreams become a reality. The succession problem is merely another intellectual problem to be solved. It can be an extremely difficult and complicated process that may at times seem to be an endless and unsolvable dilemma. However, if one approaches the process in an organized manner, acknowledging the power of family and discovering an understanding of family systems issues, it is possible both to protect the business and preserve the family.