Include your in-laws
You welcome your in-laws to your holiday table. But do you welcome them to join your family business governance structures?
In his wonderful book Family: The Compact Among Generations, retired family wealth consultant James E. Hughes Jr. writes:
Holding tight to the principle that only shared "blood" entitles a member to participate in family governance requires that many persons be excluded from it and thus from family decision making. Ironically, this out-group consists of people who consider themselves family members and whom the family considers in all other respects to be family members....
Given the difficulty of attempting to become a family that lasts five generations, it is highly doubtful that a system of family governance that excludes many of the members governed by it will lead to success. A family needs the human and intellectual assets of every member to enhance the group's well-being and to achieve its mission of greatness. Requiring any subset of family members to be governed by a system that bars their direct participation is unlikely to encourage the commitment and contribution of their human and intellectual assets. Rather, it will certainly discourage it.
For understandable reasons, some families prohibit in-laws from owning stock in the family business (though there are ways to prevent complications of stock ownership that would arise in the event of a divorce). Even if your in-laws can't be shareholders in your company, there are ways for them to participate in your family council or family meetings.
Your in-laws are the main sounding boards for their spouses (i.e., your blood relatives). If these husbands and wives are inundated with complaints about the family or the business and have no formalized way to help create unity, a host of problems can result. Hughes's wisdom bears heeding.
Conference emphasized learning and interaction
About 210 attendees, representing 60 families, came to the Coronado Island Marriott Resort & Spa in San Diego for Transitions West 2013, the seventh conference presented by Family Business Magazine and Stetson University's Family Enterprise Center. The theme of the conference, which took place November 13-15, was "Family Business Dynamics and the Dynamic Family Business."
Special sessions were added to the conference to facilitate discussion and sharing. Topic-based focus sessions allowed attendees to focus on areas of interest. In addition, special interest group meetings were scheduled for those wishing to discuss issues facing family councils, family offices, the next generation, senior family business members and non-family executives.
Before the conference officially opened, several families convened family meetings facilitated by family business advisers and coordinated by Transitions staff.
An optional pre-conference session, "Transitions 101," introduced first-time attendees to the conference format and offered tips on how to get the most out of the sessions. This introductory session also included an overview of basic family business concepts to new conference participants and others who wanted to brush up. Family Business staffers Barbara Spector and David Shaw, Stetson's Peter Begalla, Saybrook University Professor Dennis Jaffe and veteran Transitions attendee Dan Agnew, president of The Agnew Company, spoke at this session.
Transitions West 2013 officially opened on Wednesday evening, November 13, with a keynote address by Deborah Marriott Harrison, global officer, Marriott Culture and Business Councils, Marriott International Inc. The title of Harrison's talk was "The Marriott Family: History, Culture and Succession." Tim O'Hara, audit partner at PwC, delivered the keynote introduction and led the Q&A. A welcome reception followed.
A full day of conference sessions began on Thursday, November 14, with a panel conversation entitled "Know Which Hat You're Wearing." Howdy S. Holmes, president and CEO, Chelsea Milling; Anne Eiting Klamar, president and CEO, Midmark Corporation; and Joshua Nacht, a board member of Bird Technologies, discussed the importance of separating the roles of shareholder, family member and business employee. Bryant W. Seaman III, managing director and head of private asset advisory services at Bessemer Trust, was the conversation leader.
Family dynamics and sensitive issues
A panel conversation focusing on "Family Dynamics -- Building Trust, Respect and Communication" followed. Eric Allyn, board member of Welch Allyn; Harold L. Yoh III, chairman and CEO of Day & Zimmermann, and Julianne Lundberg Stafford of Lundberg Family Farms spoke about their families' strategies for building family cohesion and avoiding or resolving disputes. Arne Boudewyn, managing director -- family dynamics, education and governance at Abbot Downing, served as conversation leader.
After lunch on Thursday, participants broke into focus sessions based on their company's generational stage. Jeff Ladouceur, director at SEI Private Wealth Management, and Nancy Drozdow, principal at CFAR, facilitated sessions for family companies in the founder and second generation. Justin Zamparelli, a partner at Withers Bergman LLP, and Anna Nichols, director of communications at Altair Advisers LLC, facilitated sessions for third-generation family companies. Dirk Jungé, chairman of Pitcairn, and Saybrook University's Dennis Jaffe were the facilitators for sessions geared toward families whose enterprises were in the fourth generation and beyond.
"Dealing with Sensitive Family Issues" was addressed in a panel conversation led by Dana Telford, a consultant with the Family Business Consulting Group. Panelists were Preston Root, president of the Root Family Board of Directors; Dale Marquis, founder and chairman, and Matt Marquis, president of Invest West Financial Corporation and Pacifica Hotel Company; and Frederic J. Marx, a partner with Hemenway & Barnes LLP. They discussed strategies for addressing issues of addiction, illness, unsuitability for leadership and other problems potentially threatening to the future of the family and the family business.
A second set of focus sessions addressed tax and estate planning (facilitated by Jeff Saccacio, a partner with PwC), trusts and ownership (facilitated by Laura Ziegler, principal and fiduciary counsel, Bessemer Trust), wealth management (facilitated by Anna Nichols of Altair Advisers), family dynamics (facilitated by Abbot Downing's Arne Boudewyn), the next generation (facilitated by Greg McCann, director of Stetson's Family Enterprise Center), married-ins (facilitated by Michael Farrell, managing director of SEI Private Wealth Management) and family councils (facilitated by Justin Zamparelli of Withers Bergman and Debbie Bing, a principal of CFAR).
Special interest group meetings followed the focus sessions. Some attendees gathered with their peers to discuss family councils, family offices, and issues facing next-generation members or non-family executives. Other attendees paired up for one-on-one meetings with fellow participants with similar interests.
Group dinners on Thursday night were held at two family-owned restaurants: Boathouse 1887 on the Bay and Brigantine Seafood Restaurant.
Next generation and entrepreneurial innovations
Friday, November 15 opened with a panel conversation entitled "From Child to Owner: The Engaged Next Generation." Phil Clemens, CEO of The Clemens Family Corporation; Kareem Afzal, vice president and business development manager of PDC Machines; and Tim Hussey, president and CEO of Hussey Seating Company, shared their views on what it takes for the next generation to be good owners, and what the family can do to foster a sense of stewardship. The conversation was lead by Rhona Vogel, CEO and founder of Vogel Consulting.
A panel conversation on "Entrepreneurship, Investment and the Dynamic Family Business" followed. The session focused on deploying family wealth in new ways within and outside the family business, investing family capital and encouraging new ways of thinking. Pitcairn's Dirk Jungé led a conversation featuring panelists Jason Pritzker, president and co-founder of Yapmo LLC, and Warner King Babcock, chairman and CEO of AM Private Enterprises Inc.
The conference closed with a keynote address by The Clemens Family Corporation's Phil Clemens, who spoke about how his family made the transition from a "family business" to a "business family."
Transitions West 2013's Platinum Sponsor was PwC. Gold Sponsors were Bessemer Trust, Abbot Downing and Vogel Consulting. Silver Sponsors were the Family Business Consulting Group, SEI Private Wealth Management and The World Residences at Sea. Bronze Sponsors were Pitcairn, Withers Bergman, CFAR, University of Pittsburgh's Institute for Entrepreneurial Excellence, Altair Advisers and Kellogg School of Management's Center for Family Enterprise.
Transitions East 2014 will be held March 26-28, 2014, at the Grand Hyatt Tampa Bay in Tampa, Fla. For information, see www.familybusinessmagazine.com/transitions
Be discreet when complimenting kids’ work
Lucy Kellaway, who writes a Financial Times column called "On Work," recently advised her readers not to praise their subordinates in public.
Kellaway cited a study by researchers Elaine Chan and Jaideep Sengupta that was published in the Journal of Consumer Research. Chan and Sengupta found that bystanders who overhear someone who is being praised envy the person who receives the compliment and resent the person who gives it.
"This means that most managers are getting it badly wrong," Kellaway wrote. "They have been taught that a vital part of their job is to stroll around the office dispensing praise here and there .... What they are actually doing is creating resentment and making themselves deeply unpopular."
Family business owners who are trying to bring next-generation members along would be wise to pay particular attention to this research tidbit. The risk of staff resentment is already considerable when a next-generation member comes aboard. Chan and Sengupta's findings indicate that senior family members who loudly tout a young relative's accomplishments might exacerbate the problem.
The best way to fight accusations that family members owe their jobs to nepotism is for family hires to demonstrate competence and humility. Their elders can help by maintaining high standards for next-generation members -- and by being discreet and judicious with the plaudits.
Candid comments on the sale of a business
When a family decides to sell their company, they usually issue a press release with a terse statement attributed to a family representative. Such statements tend to highlight a synergy between the family business and the acquiring company; for example, they often note that both entities have similar values or goals.
Statements attributed to family members seldom describe how they feel about selling the business founded by their ancestor. And while some of these comments cite the economy, industry shifts or a tough competitive environment as reasons the family opted to sell, rarely do they mention family dynamics (other than the lack of a family successor).
But last month, upon announcing the sale of his family's United Supermarkets LLC to Albertson's LLC, United co-president Matt Bumstead made some revealing remarks -- not in a written statement, but in person.
United Supermarkets, based in West Lubbock, Texas, had been family-owned since 1916. Four generations of the Bumstead family had owned and operated the company. Lubbock news/talk radio station KFYO reported that Matt Bumstead was "impassioned" as he made the following comments at a press conference:
"Fourth-generation family businesses don't come along very often; there's a reason for that. And there's a reason that very few make it that far, and there's a reason that there are very, very, very few fifth-generation family businesses. The main reason for that, honestly, is the family, and that's it's hard for a family to keep their arms around an enterprise, a mission, as something grows over that many years.
"We've seen other family supermarket businesses who had been great and proud reach a point where they were dying on the vine. In many cases it was because, though no real fault of their own, the family lost control, lost their ability to support. They lost their ability to be good stewards. To make the right decisions or to lead in the right way.
"We were not going to let that happen to our business. Not to this company, not to this mission, not to our people, not to our guests. And there certainly are thousands of people who are second-guessing this decision tonight and they have a right to, and quite frankly it's an honor that they care enough to do that. I assure you, no one cares more about these people than our family. And no one cares more about this mission and the legacy than we do."
A broken philanthropic promise
If you're going to make a promise, you'd better be sure you can keep it. And the bigger the promise, the higher the stakes if it's broken. A recent situation involving a business family's bequest to a Kentucky college bears this out.
As the Wall Street Journal reported last month, the A. Eugene Brockman Charitable Trust withdrew a donation of stock worth $250 million to Centre College in Danville, Ky., less than two months after the gift had been announced. The donation would have essentially doubled the 1,400-student college's endowment, the Journal article said. Robert Brockman, son of the late A. Eugene Brockman, is a Centre College alumnus and a former member of the school's board.
According to the Journal report, the gift of stock in Universal Computer Systems Holding Inc., which does business as Reynolds & Reynolds Inc. of Dayton, Ohio, and makes software for auto dealerships, depended on a recapitalization of the company. Over the summer, the company -- whose owners include Robert Brockman, who is its CEO, and Texas buyout firm Vista Equity Partners -- tried to raise about $4.3 billion in loans and bonds through a recapitalization after an unsuccessful attempt to sell the business. The recapitalization would have valued the company at about $5.36 billion, the article said.
But then the company halted the deal before the credit was funded. A spokesman for the company told the Journal, "We have a lot of confidence in our financial strength and the flexibility it affords us in the future."
The gift would have created 40 full scholarships each year starting in 2014 for science and economic majors. According to the Journal report, the college has halted its marketing campaign for the program. Evatt Tamine, a trustee for the trust, told the Journal it still plans to support the school. "There were all sorts of things we didn't anticipate and couldn't address in time," Tamine said.
Halting the recapitalization may have been the best move for the company, but the withdrawal of the bequest harms the reputation of the Brockman family, and that of the college. It's best to hold your grand announcements until your plans are fully hatched.
Renovation and renewal
I have just embarked on a major renovation of my home. Demolition has begun, and soon the contractors will start the rebuilding process.
To make room for the contractors to do their work, I had to pack up my possessions. This forced me to do something I had long put off -- examine everything I had been saving and consider what I could discard.
Right now there is dust everywhere and most of what I own is in boxes, so I am feeling very disoriented. The renovation project requires me to spend money and temporarily sacrifice my personal space. But after the work is done, I will be living in a sparkling new home, unencumbered by things I no longer need. The moribund appliances and shabby fixtures will be replaced. It will be unpleasant to live through the work, but I'll be so happy at the end of the process.
I'm sure you can figure out where I'm going with this. In business and in life, we often avoid the challenge of discarding what is no longer helpful and changing what we've grown accustomed to. We know things would be a lot better if we invested in renewal, but inertia wins out.
For family business members, resistance to change can be dangerous. Consider the shareholders who would rather take dividends than pursue new opportunities, the ne'er-do-well son who knows he won't ever be fired and the relatives who dismiss ideas offered by "the rebel" or "the baby." If these behavior patterns persist, the future of the family business will be in jeopardy.
Maybe it's time to knock down walls, build a new foundation and raise the ceiling.
Not the retiring type
A study by consulting and market research firm Spectrem Group found that wealthy people are less likely to retire. When asked, "At what age do you expect to retire?," nearly one-third of respondents with annual incomes of $750,000 or more said, "over 70," and 15% said they never planned to retire.
A Los Angeles Times report on the study said:
That stems partially from the way wealthy people view themselves and their success -- as a result of hard work and risk-taking, which they're not inclined to give up just because they can financially. And high-net-worth people also are frequently tied to companies they own or have founded, making it harder to detach logistically and emotionally.
Indeed. Robert Wegman didn't name his son Danny as CEO of grocery chain Wegmans until 2005, when the elder Wegman was 86. Curt Carlson, founder of Carlson Companies, named his son-in-law Skip Gage as CEO in 1989 but returned in 1992 and remained at the helm until 1998, when he named his daughter Marilyn Carlson Nelson as his successor. Curt was 83 and Marilyn 60 at the time.
A strong work ethic is admirable. But there is a time to let go. A younger person -- either a member of your family or a non-family executive -- will bring new energy and fresh knowledge to your company. He or she is likely to be more inclined to take risks, which can pay off in ways you can't even imagine.
I'm not suggesting that senior leaders retire to a lifetime of golf and early-bird specials, if that's not their thing. There are many ways to make valuable contributions and engage your mind. One way is to serve as a director on the board of a family business that's trying to achieve the level of success your company enjoys. Another is to become active as a mentor via your region's family business center.
Of course, you need to plan your retirement before you walk away. Family Business Magazine's Directory of Advisers includes many consultants who are able to help. If you're getting on in years, maybe it's time to give one of them a call.
The directors who would not leave
A recent Wall Street Journal article noted that 34% of the independent directors of companies in the Russell 3000 stock index have served on those boards for a decade or longer, compared with about 18% in 2008. And among that cohort of outside directors, there are 28 who have remained on a board for a whopping 40 years or more.
Some investors and corporate governance experts consider long-tenured directors to be as helpful as gum that's permanently stuck to the bottom of a shoe. As the Journal report pointed out, these board fixtures occupy seats that could be taken by younger people with fresh ideas, and their continued presence thwarts efforts to bring diversity to the board. (All of the directors with 40+ years of service, for example, are men; their ages range from 67 to 87.)
What's more, older directors may not be up to speed on today's business practices or technology. The Journal report quoted Richard E. McDowell, 69, a director of Northwest Bancshares Inc. since 1972 and the son and grandson of previous Northwest presidents, who confessed to having some difficulty accessing board briefing materials via the iPad; McDowell plans to retire from the board at 72. And -- perhaps most significantly -- directors who have served on a board for decades may have developed close relationships with managers that could potentially compromise their presumed independence.
But there is another point of view on the matter. Some corporate directors consider their long-standing directors to be like a fine wine that improves with age or a vintage watch that still keeps perfect time. "Board colleagues say long-serving members often provide useful context about a company, its industry and its past...," the Journal article said. "Some highly experienced board members believe their long-term ties with a company make them tougher monitors of management -- partly because they understand its prior missteps better than newer directors do."
This appears to be the majority viewpoint. The Journal article cited a study by recruiter Spencer Stuart of companies in Standard & Poor's 500 index; only 17 of those companies have term limits for their directors.
The Journal article didn't discuss family companies, but a recent Deloitte study (discussed in the July/August 2013 issue of Family Business Magazine) reveals that family firms also tend to keep their directors on board for indefinite periods. The study found that 82% of the respondents' boards had no term limits for directors, and 89% had no age limits.
As the Journal pointed out, one possible alternative to using term or age limits to force directors off a board is instituting evaluations of individual directors. Under this system, board members -- of any age -- who are determined to be poor performers are asked to leave the board. This practice, however, apparently has not yet caught on in family businesses: Two-thirds of the respondents to the Deloitte study said they don't conduct formal director evaluations.
The Graham enterprise post-Post
News that the Washington Post Co. had agreed to sell the Washington Post to Amazon founder Jeff Bezos took the staff of the legendary newspaper by surprise, according to an account in the New Yorker by David Remnick, who worked at the Post for a decade.
Remnick wrote that when Post staff were called to a meeting on the afternoon of August 5, they thought they were going to hear an announcement that the company had sold its headquarters building, which has been on the market since February.
A letter to readers from Post publisher Katharine Weymouth that was posted on the newspaper's website started, "This is a day that my family and I never expected to come." The Graham family has led the paper for four generations.
The accompanying graphic featured images from pivotal moments in the paper's storied history, including the resignation of President Richard Nixon, brought about by the coverage of the Watergate scandal by Post reporters Bob Woodward and Carl Bernstein.
Weymouth told the Post staffers that she thought her late grandmother and namesake Katharine Graham, who led the paper in the Watergate era, would have approved of the sale, Remnick wrote. But her uncle, company chairman Donald Graham -- Katharine Graham's son -- told Remnick, "Well, she doesn't know that. And I don't know that."
According to Remnick's report, Donald Graham consulted with the company's board and "quietly began looking for a potential buyer" in late 2012, after seven years of declining revenues and forecasts of continued decline for two more years. Newsroom staff had been cut from more than 1,000 to about 640. Remnick wrote that Graham
sacrificed his family's ownership in the hope of saving the thing itself. From another owner, you wouldn't believe it, you would think he was bailing....
Former Post executive editor Leonard Downie told Remnick, "Don hated all the cutting and he just didn't want to cut anymore."
Media pundit Michael Wolff, writing in The Guardian a few weeks before the sale was announced, listed several missteps by the Post management and flatly stated that Weymouth "has been a disaster in a job for which she had, other than her lineage, no qualifications." A profile of Weymouth in the New York Times shortly thereafter pointed out that she was "carving a path in a capital, and an industry, vastly changed from the one her grandmother inhabited when big-city newspapers were flush with advertising."
The Times report said Weymouth and her grandmother were "extremely close" and noted that the publisher's office is lined with pictures of Kay Graham; Weymouth wore her grandmother's pearls on her first day in the publisher's job, the Times article said.
The Washington Post's report on the sale to Bezos said it includes the Post and its website, the Express newspaper, the Gazette Newspapers and Southern Maryland Newspapers, the Fairfax County Times, El Tiempo Latino, a production plant and a Maryland facility that prints military publications.
What's next for the Graham family enterprise? The Post's report said that after the deal closes, the publicly traded Washington Post Co. will be renamed and the Graham family will control it through its supervoting shares.
The company will continue to own the Post's headquarters, Slate.com, Foreign Policy magazine, the WaPoLabs digital development operation and land in Alexandria, Va. It also owns the Kaplan education division, which recently acquired Grockit, a social media-based test-preparation business. Kaplan, which been a profitable division that supported the newspaper, now is facing declining revenues. The business, and the for-profit education industry in general, has been criticized for students' low graduation rates and defaults on student loans.
Last month, the Post Co. announced that it had acquired Forney Corp., which supplies products and systems that control and monitor combustion processes in electric utility and industrial applications. In 2012, the company acquired a majority stake in Celtic Healthcare. Pundit Wolff noted in The Guardian that these moves turn the Post Co. "into a holding company, in essence an investment vehicle."
Katharine Weymouth will stay on as publisher of the Post under Bezos's ownership, at least for a while. She told Remnick, "I don't feel like it's the end and that I have to summarize my legacy in terms of this news. I hope I'll be here for the long term and I will stay as long as Jeff will have me.... History will have to judge."
Whatever you think about the third- and fourth-generation Grahams' stewardship of the company, it's hard not to wince at the pain they must be feeling. Like all inheritors of great legacies, they were always afraid of being the ones to screw it up, as the Times noted in its profile of Weymouth.
In a letter to employees made public on Jim Romenesko's media blog, Donald Graham wrote:
"All the Grahams in this room have been proud to know since we were very little that we were part of the family that owned The Washington Post. We have loved the paper, what it stood for, and those who produced it.
"But the point of our ownership had always been that it was supposed to be good for the Post. As the newspaper business continued to bring up questions to which we have no answers, Katharine and I began to ask ourselves if our small public company was still the best home for the newspaper.... We were certain the paper would survive under our ownership, but we wanted it to do more than that. We wanted it to succeed."
One unnamed Post reporter told Remnick: "This was the family acknowledging that we can't do it anymore and we have to give it to someone else. And we love the Graham family, we are proud of the family."
The perils of primogeniture
A recent Financial Times article about revenue growth for British mid-market companies raised an interesting family business issue.
The article compared the U.K. companies' revenue growth from January to April 2013, which averaged 2.3%, with revenue growth for the German Mittelstand companies -- mid-cap businesses, mostly family-owned, that are known for their strong performance and their significant contribution to Germany's economy. During the same period, the Mittelstand's average growth was 2.4%, the FT article said.
In discussing why the Mittelstand's success has been hard for British businesses to replicate until now, the FT cited a McKinsey study that found only 10% of German family businesses were run by the eldest son, compared with 50% in the U.K. The FT article said:
Where the default choice was to appoint the eldest son to run the company, [the McKinsey study] said companies were drastically restricting their ability to find the right talent.
Of course, there are plenty of firstborn sons who are succeeding at running the family business. One example -- Hal Yoh, CEO of Day & Zimmermann -- is on the front cover of the May/June issue of Family Business Magazine.
But many other successful family business leaders are younger sons (like third-oldest child Paul Jacobs, chairman and CEO of Qualcomm), daughters (such as Craigie Zildjian, CEO of the Avedis Zildjian Co.) and non-family members (take, for example, Alan Mulally of Ford Motor Co.).
The best person to take over the family business is the most qualified person for the job, regardless of birth order, gender or family membership. That isn't an earth-shattering revelation. In fact, it might not even seem worth noting. But what may be obvious in theory may be hard to put into practice when tradition and expectations stand in the way.
Family and private company leaders convene at PCGS 2013
Family business owners and directors joined with other owners of closely held and private equity-owned businesses for the inaugural Private Company Governance Summit, sponsored by Directors & Boards and Family Business magazines. The summit took place May 15-17 at the Fairfax at Embassy Row in Washington, D.C.
Attendees packed the hotel's Fairfax Ballroom to hear the panel presentations and keynote addresses.
Jim Ethier, third-generation chairman of Bush Brothers & Co., was among the panelists who offered insights on board composition, the relationship between management and the board, succession planning and board governance practices in a session entitled "Private Company Boards -- One Size Doesn't Fit All."
Directors & Boards' Jim Kristie moderated a panel focusing on "Private Board Roles, Committees and Independence." Panelists included Dave Phillips, chairman of Midmark Corporation (a family company in the fourth generation of leadership) and a director on multiple other private and public company boards.
A panel presentation addressing "Private Company Director Service: Risks and Responsibility" included David Meachin, who has served on the boards of public, private and family-controlled companies, and management consultant George Isaac, who has served on numerous public and private boards, including several Isaac family business boards.
Panelists at a session entitled "The Effective Private Board" included Jill Kanin-Lovers, a member of the boards of Dot Foods, a family company. Dan Hatzenbuehler, chairman of E. Ritter & Company, a fifth-generation family business, was among the panelists who spoke about "Identifying, Securing and Paying the Best Private Company Board Members."
The conference also featured breakout sessions, including one geared toward family company boards. Norman Augustine, retired chairman and CEO of Lockheed Martin Corp. and a former undersecretary of the Army, delivered the conference's closing keynote address, entitled "Lessons for Private Boards from the Public Company World."
The Private Company Governance Summit 2013's premiere conference partner was Deloitte. Conference partners were Heidrick & Struggles, Diligent and Chubb.
Will industry consolidation affect family funeral homes?
Last week, Service Corporation International (SCI), North America's largest operator of funeral homes and cemeteries, agreed to buy Stewart Enterprises Inc., the second-largest funeral-care provider. If approved by federal authorities, the merged company would own 1,653 funeral homes and 515 cemeteries in 48 states, eight Canadian provinces and Puerto Rico, with revenues of nearly $3 billion, Reuters reported.
How will further growth of the corporate burial behemoth affect family funeral homes? According to National Funeral Directors Association spokeswoman Jessica Koth, about 86% of the funeral homes in the U.S. are family-owned. These business owners "are watching the news with great interest," Koth tells Family Business. "Family-owned funeral homes are taking a wait-and-see approach."
Regulatory authorities may require SCI and Stewart to make divestitures before combining in order to avoid antitrust concerns, Koth notes. This means some funeral homes that had been sold to the conglomerates by their founding families may once again be family-owned.
SCI has made big acquisitions before. In 2006, it bought out the Alderwoods Group, which at the time was the industry's No. 2 funeral home operator, for $856 million, the Houston Chronicle noted.
Stewart Enterprises itself is a family-controlled company. Founded in 1910 by Albert Stewart, it expanded in the 1980s from its base in Louisiana and Texas into Florida, Maryland, Washington, D.C. and West Virginia. The company went public in 1991. Chairman Frank B. Stewart Jr., 76, the founder's grandson, has a 30% stake in the company.
Daniel Isard, president of funeral industry consulting firm Foresight Companies, speculates that a potential estate tax liability for Frank Stewart's heirs drove the decision to merge. SCI had tried unsuccessfully to take over Stewart Enterprises in 2008. "It was just a matter of egos being put aside and logic taking over," Isard tells Family Business.
As for potential ramifications for family-owned competitors, "I don't think [the merger] is going to have any marked effect on family-owned or privately owned funeral homes," Isard comments. He says family funeral home operators should not be concerned about price competition from the combined company. "Neither [SCI nor Stewart] was price-focused," Isard says.
But John Bachman, 56, the eighth-generation operator of Bachman Funeral Home in Strasburg, Pa., says has been experiencing price competition from corporate consolidators for years. "They can buy in bulk and keep salaries low," he notes.
In the past, says Bachman, whose business was founded in 1769, his family could avoid the expense of advertising. "Word of mouth has been very effective for us," he says. "But now, we have a lot of people shopping for price." Today's price-sensitive clients, for example, are opting for inexpensive veneer caskets to save on funeral costs, he notes. "I haven't sold a cherry casket in three years."
Societal factors, such as increased mobility, have had an effect as well, Bachman says. "People are not loyal to a particular funeral home just because it's in their town." And many municipalities have more funeral homes than can be sustained, given the death rate of their populations, Bachman observes.
Bachman, who once ran three funeral homes, now operates only one. "There isn't a lot of money in this business if you're small," he says.
Keynote speakers among Transitions East ‘13 highlights
Attendees at the Transitions East 2013 conference gave high marks to the event's three keynote speakers. The conference, presented by Family Business Magazine and Stetson University's Family Enterprise Center, took place at the Grand Hyatt Tampa Bay on April 17-19. More than 230 people, representing 77 family companies, participated in the conference.
Thomas J. Pritzker, executive chairman of Hyatt Hotels Corporation, set the tone for the conference with his opening keynote address, in which he shared the lessons he learned about business and life.
In a keynote address entitled "Reclaiming Our Heritage," Bernadette Castro, CEO of Castro Convertibles, reminisced about starring as a young girl in the furniture company's early television ads. The business, founded by her father, was sold in 1993 to a company that eliminated the Castro name and later went out of business. Today, Castro and her children have revived the Castro Convertibles brand.
Dini Pickering, vice chairman of the board of directors at The Biltmore Company, presented the closing keynote speech, entitled "Governance, Bringing in Outside Talent and the Successful Transition." Pickering, a fourth-generation descendant of George Vanderbilt whose family operates the Inn on Biltmore Estate and related businesses, presented the history of the family enterprise, her family's succession journey and the policies and procedures they have established.
Transitions East 2013 also featured panel discussions centered on several main topic areas: "Family and Business Challenges by Generational Stage," "Getting Succession Right," "Developing the Next Generation for Leadership and Ownership" and Harnessing the Expertise of Non-Family Executives." Other conference offerings included breakout sessions, a workshop and a group dinner at the family-owned Columbia Restaurant in historic Ybor City.
A full report of Transitions East 2013 will be published in the July/August 2013 issue of Family Business Magazine.
Transitions West 2013 will be held Nov. 13-15 at the Marriott Coronado Island Resort in San Diego. For information, see www.familybusinessmagazine.com/transitions.
I can quit you—but please don’t quit
As the song says, breaking up is hard to do ... especially when spouses work together.
Last month, Cablevision Systems Corp. announced that Kristin Dolan, wife of CEO James Dolan, had been promoted -- a few weeks after the company said the Dolans had separated on a trial basis, the Wall Street Journal reported.
Kristin Dolan has worked at Cablevision for 23 years; she and her husband met at the company, the Journal report said. Her role at the company has been increasing since 2011. Her new duties will include sales oversight of cable TV, Internet and voice products, plus product management and marketing, according to the Journal. Prior to her promotion, she had participated in company earnings calls alongside her husband, the article noted.
What happens when you don't want your ex in your life, but you need that person in your business? Family Business Magazine pondered that question back in 2008. Our article cited a study by family business researchers Patricia Cole and Kit Johnson of nine former couples who despite their breakup continued working as business partners.
Cole and Johnson told Family Business that the couples trusted each other in business matters -- even if trust in their personal relationship had been violated through infidelity! "They were able to compartmentalize business trust as separate from their personal relationship," Johnson said.
In other words: Even if someone turns out not to be your soulmate, he or she may be the best person for the job at your company.
Of course, trust goes only so far. As our 2008 article pointed out, family business advisers say carefully negotiated documents such as a shareholders' agreement and a buy/sell agreement are crucial when former romantic partners continue as "co-preneurs."
As for Cablevision, James and Kristin Dolans' marital troubles don't seem to have altered the company's view toward married-ins. As the Wall Street Journal article noted, at the same time Cablevision announced Kristin's promotion, it also announced that it had promoted Brian Sweeney to a new position focused on corporate strategy. Sweeney is married to James Dolan's sister.
Is it time to revamp your board?
In my "From the Editor" column in the current issue of Family Business, I note that later-generation family firms can fall prey to insularity and other foibles that can stifle innovation. That is often a fatal flaw in today's rapidly changing technological and competitive marketplace. Every generation of family owners, I write, must assess the business "with an eye toward creating opportunities, changing what isn't working and moving forward."
A board of directors that includes experienced outside members can help a family business leader to spot changes on the horizon and determine which products, processes or procedures should be rethought. But every so often, some strategic rethinking should be applied to the board itself.
At a roundtable discussion in New York in December, a group of prominent private company directors noted that while many business owners engage in rigorous planning to form their boards, they don't put any thought into changing their boards for the future. While term-limiting directors is considered a best practice for public companies, all too often private companies keep the same group of directors on their boards past their ability to help take the business to the next level.
Your company's concerns will change as your business grows, your products mature and your family prepares to transition to the next generation. Your board should evolve in parallel to the evolution of your business. Think about where you see your company in five years. Then consider bringing new members onto your board who have already taken their businesses to that place and beyond.
A group of business owners and directors will be discussing this and other topics at the Private Company Governance Summit, a national conference focused on the unique governance challenges facing family-owned and other closely held businesses. The Summit, presented jointly by Family Business Magazine and Directors & Boards Magazine, will be held May 16-17, 2013 in Washington, D.C. You can learn more about this exciting new conference at mlr.cvent.com/pcgs2013.
Every year, take some time to ask yourself these questions: What do you want from your board? And are your current directors capable of giving you what you need?
The case for sharing your story
Here at Family Business Magazine, we are humbled by the families who generously share their stories with our readers -- including not only the history and growth of their family enterprises, but also the mistakes they made along the way, the measures they took to resolve their disagreements and what challenges they see on the horizon.
As it turns out, these families aren't just sharing the secrets of their success; they're fostering healthy family relationships and resilience in future generations.
Bruce Feiler, a New York Times columnist on faith and family and a bestselling author, recently wrote about the benefits of developing "a strong family narrative."
Feiler cited a study by psychologists Marshall Duke and Robyn Fivush that assessed how much children knew about their family history. The kids who knew more family stories had a greater sense of control over their lives and higher self-esteem than their peers. They also believed that their families functioned more effectively when compared with kids who didn't know much about their families' past. And after the terrorist attacks of Sept. 11, 2001, the children with a strong sense of family history were better able to cope with the fear and stress that gripped the nation.
According to Feiler, Duke's term for this phenomenon is a strong "intergenerational self." Duke told Feiler that the most healthful narrative includes an honest account of the family's lean years as well as the good times, with a moral along the lines of, "No matter what happened, we always stuck together as a family."
Sticking together as a family doesn't mean that family members must always agree on everything. As we note in The Family Business Conflict Resolution Handbook, conflict isn't on its face a negative thing; rather, it's an opportunity for all parties to air their concerns and work collaboratively to arrive at a solution that's best for the group.
The most effective families don't neglect the periods of difficulty and conflict when telling their family stories. But they do put anecdotes into a positive framework. Feiler wrote:
When faced with a challenge, happy families, like happy people, just add a new chapter to their life story that shows them overcoming the hardship.
We in the family business community are grateful to those who share their family narrative with others.
Each time a new generation joins a family firm, new family and business life-cycle challenges arise. When the transition has proved to be successful, family members can't afford to sit back and congratulate themselves -- they must begin planning for a new cartload of generational baggage.
Founder to G2. The generation gap between the founding entrepreneur and his/her children is a quintessential challenge. Another classic source of strife stems from sibling rivalry. But there are other issues, as well.
• By the time the second generation comes aboard, most businesses have grown. Middle managers must be hired. The business may have to take on debt to fund its expansion.
• At the founder stage, there was a single decision maker; now, decisions are made by a group of family members, and perhaps key non-family managers as well. Consensus building is required.
• It may be difficult for the founding parents to accept their children as competent businesspeople and to relinquish control of their other "baby" -- the business.
• Siblings must begin to think of each other in a new way: They are now business partners as well as brothers and sisters. The presumption of equality in a sibling relationship poses problems when siblings have different business roles.
• The addition of spouses/significant others to the family can be a source of stress.
• The family must determine how the founder's retirement will be funded.
G2 to G3. Many family business experts say that this is the most difficult generational transition of all. The exponential increase in the number of heirs results in complexity that can overwhelm a family, causing a return to the proverbial "shirtsleeves."
• In order to support a larger group of family members, the business must grow significantly.
• Unlike G2 siblings, the G3 cousins didn't all grow up in the same home; they lack a shared history.
• A larger shareholder group requires a formal decision-making structure.
• An imbalance in ownership can occur if one of the family branches has more G3 descendants than the others.
• Conflicts can develop between active and inactive owners over payment of dividends.
• For these reasons, many business families consolidate ownership -- known as "pruning the family tree" -- at this stage. This process can cause resentment.
G3 to G4+. By this point, the family is likely to be widely dispersed; they are scattered all over the country, or even around the world. Some of the cousins may not even know each other.
• Later generations may not feel the same connection to the founder and the business that their forebears had.
• With a large shareholder group, it's impractical for everyone to vote. The family must develop a representative governance structure.
• Voting blocs can arise within and between family branches.
• Differences between active and inactive owners are magnified. Inactive owners may feel ignored by company managers.
• Younger-generation members may not take a stewardship approach to the family's wealth.
• Family members who rely on dividends to support their lifestyles may be more risk-averse than those who work in the business.
How does a family manage these challenges? By instituting policies (covering family employment, share inheritance, premarital agreements, etc.), creating family documents (like a mission statement and family constitution), developing governance structures (an independent board and a family council), communicating constantly and seeking outside help.
I will be discussing these issues, along with a panel of business owners representing the second, third and fifth generation of their families, at the Transitions East 2013 conference in Tampa on April 18. The panelists will discuss the work their families have done to meet the challenges of the current generation and to set themselves on the right track for the future.
The greater the number of people involved in a family enterprise, the wider the disparity of interests, talents and concerns. This diversity need not be a source of strife. Indeed, it can be a family's great strength -- if family stakeholders work on their relationships at every generational stage.
Tribulations of a non-family executive
Studies have found that many MBA candidates don't aspire to careers in family-controlled businesses because they perceive family firms to be less professionally run than non-family companies. Academic family business researchers, publications like Family Business Magazine and organizations such as Family Enterprise USA have been working diligently to combat this bad reputation.
But every now and again, a well-publicized piece of family business news comes along to undermine our efforts.
Take the recent report of changes at the helm of Pilot Flying J, based in Knoxville, Tenn. In September 2012, the company hired John Compton to replace family CEO Jimmy Haslam, who announced he was stepping down. But on February 11 -- just five months later -- Haslam announced he was returning to the helm of his family business and bumping Compton to another position.
Now, Pilot Flying J is no mom-and-pop shop -- it's North America's largest operator of travel centers and travel plazas, with more than 600 such outlets. And John Compton isn't a newly minted business school grad. Before joining Pilot, he was president of PepsiCo, and he had been considered a leading candidate to replace Indra Nooyi as chairman and CEO of the soda giant.
Haslam's original intent in vacating the top job at Pilot was to run the Cleveland Browns, the struggling NFL football team he bought for $1 billion in August 2012. But then he hired Joe Banner, former president of the Philadelphia Eagles, to be CEO of the Browns; Rob Chudzinski, former Carolina Panthers offensive coordinator, to be the coach; and Mike Lombardi, the Browns' former personnel executive turned TV analyst, to return to the team as VP of player personnel.
With seasoned football veterans in place to work on fixing the Browns' problems, Haslam evidently felt he didn't have enough to do over there. So the prodigal son returned to the business his father founded in 1958.
Haslam told the Knoxville News Sentinel that he was coming back to Pilot simply because he missed it. Haslam said:
"It's not at all about John, it's more about Jimmy having a change of heart in terms of what he wanted to do ... I realize people will look at it in different ways but that's the reality."
What will Compton do now? According to the News Sentinel, he "will work as a strategic adviser to Pilot Flying J, the Browns and the Haslam family." Asked by the newspaper whether observers are likely to view the role change as a demotion for Compton, Haslam said, "people will read into it what they want to."
In an interview with the News Sentinel, Compton appeared to be taking the switch in stride. He said he wasn't angry about the change, there had been no disagreements about the way he ran Pilot and that he wanted to help Haslam run all of his businesses.
Compton told the paper that he joined Pilot Flying J "with my eyes wide open."
"I think if I had started at age 21 or 22 building a company with my family, it would be hard to walk away from, so I understand."
Bookies who are taking bets on the Cleveland Browns' win-loss record next season might want to add a wager on how long John Compton continues to work with Jimmy Haslam.
In PwC's latest family business survey, "attracting the right talent" was one of the top four challenges that U.S. family business leaders said they would face in the next five years. Let's hope Compton's story doesn't make that challenge even more daunting.
Transaction or Transition? A Family Business Magazine Webinar
On Feb. 13, 2013, Family Business Magazine's Barbara Spector hosted a webinar exploring the three traits shared by successful business sellers. The webinar featured SEI Private Wealth Management's Michael S. Farrell, Doug Pugliese and Jeff Ladouceur. This complimentary webinar is available for viewing at any time by clicking here
Intrigue at Ikea
Ingvar Kamprad, the 86-year-old founder of Ikea, rarely speaks to the press. When he recently gave an interview to a Swedish tabloid, his comments were interesting indeed.
Last September Mikael Ohlsson, non-family CEO of the 79-year-old company, announced the Swedish furniture retailer's ambitious plan to double the pace of its expansion. Ohlsson -- who is scheduled to leave the company in September 2013 -- told the Wall Street Journal that by 2020 the chain would open 20 to 25 stores per year, compared with its present pace of six to 12 new openings annually.
As the Financial Times recounted in a Jan. 25 report, Kamprad said in an interview with the Swedish tabolid, Expressen, that these plans were news to him -- and that he wasn't thrilled with them. According to the FT's account, Kamprad told the tabloid:
"I talked with my secretary who said what was in [Swedish newspaper] Dagens Industri that we had record profits and sales and that we should build 25 new stores a year. I rang the chairman and asked how is that possible.
"We have spoken about building 10-12 stores a year until 2020 and I don't know who has sent out this information [about 20-25]."
Kamprad was emphatic in a subsequent statement to the FT: "I believe that the number of new stores should be less than what was communicated from management," the statement said.
Kamprad no longer has a formal role at Ikea, though he remains a senior adviser on the board. His family controls the company via a complex ownership structure. His three sons all have board positions in the family enterprise, "but it is unclear which, if any, will wield the ultimate power," the FT noted in a follow-up report on Jan. 30.
In responding to Kamprad, the company "underscor[ed] that the number of stores was a management decision," according to the FT's Jan. 25 account. The company said:
"There is a decision in the board where Ingvar Kamprad is a senior adviser to have a growth of 5 per cent from existing stores and 5 per cent from new stores every year. For that, 20-25 stores are needed."
But the Jan. 30 FT report said that Ikea executives "have been scrambling to play down the story," contending that the media were blowing it out of proportion and stressing that both management and the board agree that sales should be increased by 10% each year.
In the Jan. 30 report, the FT quoted Ikea's chairman, Göran Grosskopf:
"To make sure there is no misunderstanding, every single store that will be built will be examined by the board again. This is not a carte blanche for management to go ahead and build as many stores as they like."
The Jan. 25 FT report said Kamprad's remarks signal that "conflict appears to be brewing at the top of Ikea" and that "his comments caused consternation among some Ikea executives," especially since the plans had been announced four months earlier. The article cited Ikea officials who stressed that "decisions are made by management and the board."
The Jan. 30 article said some observers "worry that the current management and board may be trying to minimise Mr. Kamprad's massive influence at the company." One Ikea official reportedly said, "Why would you want to listen to an old man?"
So what's the lesson here? Is it that an 86-year-old founder should step out of the way and let the executives run the company? Or is it that the executives must take extra care to ensure that the company board and the key family member are kept fully in the loop?
What do you think?
Vive la différence
A recent article by Spencer Bailey in Bloomberg Businessweek noted that in making hiring decisions, more companies are emphasizing cultural fit over skills or experience. "A cooperative, creative atmosphere can make workdays more tolerable and head off problems before they begin," Bailey noted.
But Bailey's report also pointed out the downside of an overemphasis on cultural fit. Eric Peterson of the Society for Human Resources and Management told Bailey that "A lot of times, cultural fit is used as an excuse" for not hiring "diversity candidates" -- that is, people who are not the same race, religion or gender as company executives.
Family businesses in particular should be careful not to fall into this trap. In corporate America in general, business experts warn against the tendency to favor candidates who "look like you." In family businesses, of course, many employees literally look like the boss -- because they share the boss's DNA. If all key non-family employees are drawn from the same demographic pool, the company's brain trust runs the risk of falling into the "groupthink" trap.
Diversity in hiring is desirable for reasons other than political correctness, Bailey's article noted.
"Numerous studies have proven that diverse workforces give companies competitive advantages in skill, employee retention, innovation and profits," Bailey wrote. One such study cited by Bailey -- research conducted by University of Illinois sociologist Cedric Herring in 2009 -- found that companies with the highest levels of racial diversity reported an average of 15 times more sales revenue than other businesses.
It's important to ensure that your employees share the values that guide your business. But that doesn't mean you should hire a team full of clones. As Bailey put it, often when hiring decisions are made, "abstract notions about corporate culture collide with instinct and bias."
You might do well to heed the advice of Amy Hirsh Robinson from workplace consulting firm Interchange Group, who told Bailey:
"Sometimes you need to change your culture because there might be that one person who has a different thought that could have saved a business."
A banner year for Family Business Magazine
As we close the book on 2012, I'd like to take a minute to thank the readers of Family Business Magazine and the Family Business Magazine E-News for supporting our efforts.
The staff of Family Business is committed to bringing our readers essential tips and strategies on building and sustaining their family enterprises, as well as in-depth profiles of families who have put these techniques to work in the real world. Beginning in 2013 -- a time when many newspapers and magazines are cutting back on their publication schedules -- Family Business is expanding its frequency from five issues per year to six, without increasing our subscription price.
Our twice-yearly Transitions conferences, presented in association with Stetson University's Family Enterprise Center, offer family business owners an opportunity to learn from each other in a confidential atmosphere of sharing. Our Transitions events bring attendees who are working through challenges at the nexus of family and business together with business owners who have successfully addressed these issues. Our last Transitions conference, held in California in November, set attendance records, and we expect our next event -- Transitions East 2013, taking place in Tampa in April -- to sell out quickly.
In May 2013, Family Business will expand its conference offerings with the addition of the Private Company Governance Summit, presented in association with our sister publication, Directors & Boards. This unique event, a gathering of company owners/shareholders and directors, will focus on the governance challenges of family-owned and other types of privately held businesses, and will feature high-level discussions of best governance practices for private company boards.
We have more exciting plans in the works, so keep watching this space for announcements. I welcome your feedback and suggestions for future content. Best wishes for a happy, healthy and prosperous 2013!
Canada’s wealthiest family faces governance challenges
In the pages of Family Business Magazine and in panel discussions at our Transitions conferences, we often discuss the governance challenges that arise as a family business passes into the third generation. As I have said and written many times, these dilemmas arise organically -- they are a natural consequence of the family and business life cycle -- and thus can be predicted and addressed before they cause family strife.
The quintessential challenge involves the differing commitment levels of family shareholders who are involved in the business and those who are not. Family members not active in the business who rely on dividend checks to support their lifestyles will become disgruntled when those checks get smaller (or disappear). A liquidity mechanism must be provided for those unhappy shareholders; otherwise, the business -- and often the family as well -- will suffer.
Another governance challenge as the family group grows and disperses involves keeping all the shareholders engaged and informed. Those who don't know (or don't care) what's happening with the business are less likely to support its strategic plan -- i.e., what the business intends to do with "their money."
It's always nice to have one's observations illustrated dramatically in a front-page article in a widely read national newspaper, and so it was on Dec. 5, when the Wall Street Journal ran a lengthy piece on recent changes at Thomson Reuters PLC and at Woodbridge Co. Woodbridge is the holding company of the Thomsons, Canada's wealthiest family. Woodbridge owns 55% of media giant Thomson Reuters, as well as 13.2% of Strategic Hotels & Resorts Inc., 85% of the Globe and Mail, and $3 billion in funds managed by private equity firm General Atlantic LLC, according to the Journal.
Thomson Reuters, the family's biggest asset, generated $600 million in dividends in 2011 but, as the article reported, the company's stock price has dropped since Thomson Corp. acquired Reuters Group PLC in 2008.
The Journal report noted that in 2007, before the Thomson-Reuters deal closed, Forbes magazine ranked the Thomsons as the world's 10th-richest family, with $22 billion in assets. By March 2012, they had dropped to No. 35 on the Forbes list, with assets of $17.5 billion.
Third-generation member David Thomson is chairman of Thomson Reuters. He co-owns Woodbridge along with his brother, a sister and four cousins. As often is the case when a business family enters the third generation, the Thomsons' extended family is spread out across Canada, and many family members are pursuing their own careers, according to the Journal. Citing anonymous sources, the article said that some of the Thomsons have complained about Thomson Reuters' performance.
David Thomson, according to the Journal report, has been taking steps to address these issues. In 2011, there was a dramatic management shakeup at Thomson Reuters. Last month, the head of Woodbridge, Geoff Beattie -- "well-known as a deal-maker," as the Journal described him -- stepped down from that post. Woodbridge, the Journal article said, is shifting its focus from buying and selling assets to acting as "a more traditional holding company with a focus on income rather than new acquisitions."
To that end, according to the Journal report, family members and Woodbridge executives have discussed the possibility of "restructuring" assets:
This could involve, over time, either distributing shares in some of those other assets [besides Thomson Reuters] to family members or selling them and passing the proceeds on to the members....
The family has begun to consider a mechanism for keeping far-flung shareholders in the loop, the article said:
In a sign of how the family has tried to adapt to its growing size, members in May discussed hiring someone to write a family newsletter that would inform the clan of their investments' performance, according to one person familiar with the plan. It isn't clear whether the newsletter got off the ground.
Chairman David Thomson, described by the Journal as a reclusive sort who in the past took a hands-off approach to management of his family's flagship company, is now "playing a more assertive role," the article said. People who knew him as a young man told the Journal that Thomson feels the weight of the family legacy and has a strong desire to see the company do well.
If the Journal's account is accurate, it appears Thomson has identified the third-generation challenges and is working to address them. Because his family enterprise is so large, his family business drama is playing out on a large scale. But because many of the issues he's confronting are rooted in generational transition, his story offers lessons for business owners who haven't (yet) made the Forbes list. Even if your family firm's dividends don't run in the hundreds of millions, you must address the concerns of family members who expect their checks.
Getting on board with boards
An essential step in the growth and evolution of a family business is the establishment of an independent board of directors -- one with a majority of members who are not family members, employees, service providers or the business leader's cronies.
Too many family business leaders hesitate to form a board because they fear a loss of control. They don't realize that an independent board can help them take their company to the next level. A board can not only advise business leaders and executives on key strategic moves but also help protect a family firm from destructive conflict over family issues.
Establishing this essential component of corporate governance is particularly important once a company reaches the third generation of family ownership. At this point in its life cycle, there are key decisions to be made about family participation (because of the expanding number of descendants) and business strategy (because the company has evolved past the entrepreneurial stage).
In talking with family business stakeholders, I've found that a number of them recognize the need for a board, but they don't know how to begin forming one.
To address that need, Family Business -- in partnership with our sister publication, Directors & Boards -- is planning a new conference, The Private Company Governance Summit 2013, which will take place May 15-17 at The Fairfax at Embassy Row, Washington, D.C.
Conference sessions will include "Private Company Governance Structures," "Defining the Various Roles of the Private Company Director" and "Identifying, Securing and Paying the Best Private Company Board Members."
Information will be available on the conference website at mlr.cvent.com/pcgs2013. The site will be continually updated as speakers are confirmed.
The event will be a high-level discussion on best governance practices for private company boards, along with ample opportunities for networking with like-minded business owners, private company directors and key advisers. We hope to see you there!
Death and taxes
Now that the 2012 election is behind us, all eyes are on Congress as members consider the soon-to- expire tax cuts passed during the presidency of George W. Bush. Family business owners in particular are wondering what will happen to the federal estate tax. The current inheritance tax rate is 35% on estates worth more than $5 million. If the Bush tax cuts expire as scheduled on Dec. 31, the inheritance tax will revert to its 2001 level of 41% to 55% on estates worth more than $1 million.
As the end of the year draws closer and closer, everyone is wondering what the new estate tax rate and exemption level will be. But if family enterprise continuity is the goal, minimizing the tax burden is only one of several concerns -- and it's not the most important one.
Don't take my word for it; consider the estate-planning wisdom that experienced family business advisers have contributed to our pages over the years. Andrew Keyt, executive director of the Loyola University Chicago Family Business Center, wrote in The Family Business Succession Handbook:
If we think only about tax efficiency, and not about the implications of the ownership structure on future generations, we may be sowing the seeds of family conflict. If we try to control conflict through the provisions of trusts without teaching the next generation how to resolve disputes, we are ignoring the true opportunities to develop enduring values.
Attorneys Henry C. Krasnow and Karin C. Prangley wrote in Family Business Agenda 2009:
Successful businesses all need some of the same things: cash, leadership that can implement forward-looking plans to keep up with competition, and owners who understand the need to sacrifice short-term satisfaction for long-term goals.... Denying these to a business in order to save taxes is a very shortsighted tradeoff.
Also in Family Business Agenda 2009 (a special issue that focused on estate planning), the late Sam H. Lane, along with his Aspen Family Business Group colleagues Bill Roberts and Joe Paul, offered this observation:
In some cases, a concern with saving on estate taxes dominates the planning process and has excluded from consideration other factors, such as the impact of the plan on the family and the business. We have found when this occurs, it always presents problems down the road, if not a complete implosion of the plan, and any success at saving taxes is negated.
We advocate a more balanced approach that not only emphasizes saving estate taxes but also anticipates various issues that may arise for the family and the business when the transfer of ownership through future generations is plotted out.
The upshot of all this advice: Your estate planning should be conducted with an eye toward the non-financial legacy you are passing on to your heirs. Will they inherit wealth before they are ready to handle it? Will they be free to modify the structures and entities you are creating if family circumstances change over the years? Are your estate planning documents creating an business relationship between heirs who are unable to work together productively? Questions like these, which address the "soft" issues that are too often ignored, should be considered before you sign any papers -- no matter what Congress decides to do by December 31.
Now we are six
Family Business Publishing Co. has made a strategic move that makes me very happy -- because we are giving our subscribers more for their money!
Starting in 2013, Family Business Magazine will be published on a bimonthly basis -- six times a year instead of five -- and we are not increasing our subscription price! To borrow a line from A.A. Milne, "Now we are six."
This means we are able to offer our readers more profiles of real-life business families, more tips from renowned family business advisers, and more strategies for achieving business success while maintaining family harmony.
This represents the second time in three years that Family Business has increased its commitment to family business owners. In 2011, in partnership with Stetson University's Family Enterprise Center, we began offering our Transitions conference series twice a year -- once on the East Coast and once on the West Coast. Transitions, launched in April 2010, was an annual event until we doubled down on our programming.
Sulzberger family unity post-Punch
As New York Times staff and members of the paper's founding Sulzberger family mourn the Sept. 29 death of iconic publisher and chairman Arthur O. "Punch" Sulzberger, challenges and speculation are swirling around the New York Times Co.
The company's dismal fiscal picture -- it has lost $7 billion in market value since 1999 -- has been well publicized. In 2009, the Times Co. suspended dividend payments to shareholders.
Meanwhile, negotiations for a new contract with the Newspaper Guild have been protracted and contentious. Unions representing workers at the Times denounced a $24 million exit package given to former CEO Janet Robinson, who left at the end of 2011, including a $4.5 million one-year consulting fee. On Oct. 8, some 400 Times staffers participated in a 10- to 15-minute walkout to emphasize their demand for, in the words of the Guild, "Nothing less than fair wages and benefits." On Oct. 10, Times management agreed to the Guild's recommendation that a mediator be hired.
Alex Jones, co-author along with his late wife, Susan Tifft, of The Trust: The Powerful Family Behind the New York Times, wrote in The Daily Beast after Punch's passing that despite the uncertain business climate in which the company operates, the family owners have signed covenants that "make it all but impossible for the Times company to be acquired by a hostile takeover." Under an intrafamily agreement, any family member who wants to sell Class B supervoting stock must first offer it to other family members or convert it to less powerful Class A stock. Jones -- who comes from a newspaper family himself -- wrote:
"[T]here can be no doubt that the depressed stock price and disappearance of dividends in the past several years has made the family significantly poorer. It is in just such strained financial circumstances that some family members or in-laws emerge to express complaints, demand new leadership, or even put the company in play to be sold. It was just such a situation that led to the Bancroft family selling Dow Jones to Rupert Murdoch.
"As a practical matter, that couldn't happen to the Times, even if such an apostate group of family members wished it to. The covenants are too tight. The passing of Punch, who was without question the head of the family, will not change that.... Another of the family's extraordinary moves to preserve itself was to make participation in family governance open to all members of the increasingly dispersed descendants of Adolph Ochs. And to make in-laws full members of that governance, which was a brilliant stroke."
Yet according to an Oct. 10 report in DNAinfo.com New York, Punch's four children "are moving quickly to sell stock he held in [Times Co.]." The report says that Punch's $70.2 million fortune includes $41 million in Times Co. shares. Citing court records, DNAinfo.com said three of the children temporarily renounced their rights as executors "in order to facilitate a sale of the company's stock in Sulzberger's estate." The report noted that the siblings' request to the court "expressed concern that their roles in the Times Company could hurt the value of the stock sale." The article also said the heirs aim to complete the sale within four to six weeks but didn't specify whether they plan to sell all or part of the stock.
In August, the Times Co. named former BBC director general Mark Thompson as its new CEO to replace Robinson. The New York Post and New York magazine published articles indicating that family tensions beneath the surface were at play in the departure of Robinson, who had been championed by Arthur Sulzberger Jr., chairman of the company and publisher of the Times (which, assuming the reports are accurate, illustrates Alex Jones's point that family members complain about leadership when times are hard). Reports cited sources close to the family who said some members are upset about the loss of dividends, which have supported the lifestyles and hobbies of those who don't work for the company.
Recently, the Times Co. has been selling off its non-core assets. In 2011, it sold its 16 regional newspapers. Earlier this year, it sold its remaining stake in Fenway Sports Group, the owner of the Boston Red Sox, as well as its stake in the websites About.com and Indeed.com. Observers are speculating that the company will soon sell the Boston Globe, which reports to Times Co. vice chairman Michael Golden, who is Sulzberger Jr.'s cousin and also a fourth-generation family member.
The asset sales enabled the Times Co. to pay off a high-interest $250 loan from Mexican billionaire Carlos Slim Helú in 2011, before the loan was due. In an August 2012 article, Edmund Lee of Bloomberg News mused that the company might be planning to go private. "Going private would help the family reassert control of Times Co.'s cash, without having to answer to public investors," Lee wrote.
Reed Phillips, co-founder of New York investment bank DeSilva & Phillips, told Lee that if the Times Co. were to go private, "The best buyer would be the family itself." Alex Jones noted in his Daily Beast article that "a fifth generation is embedded into the fabric of the company."
Five fifth-generation members currently work for the Times Co.; a sixth G5 serves on the board along with fourth-generation members Sulzberger Jr., Golden and another G4, Steven Green. (Lynn Dolnick, also a G4, retired from the board last year.)
The DNAinfo.com article said that the central family trust has been reported to hold between $270 million and $300 million in stock.
In Jones's view, the family will set aside their differences to carry on their hallowed legacy, which was started by founder Adolph Ochs and continued by his daughter Iphigene Ochs Sulzberger and her son, Punch, whose long list of achievements includes publication of the Pentagon Papers.
"Punch will be sorely missed by his family and his many friends," Sulzberger Jr. said in a notice to Times Co. employees upon his father's death, "but we can take some comfort in the fact that his legacy and his abiding belief in the value of quality news and information will always be with us."
Family business in Spain’s sputtering economy
Last month I spent a glorious four days soaking up the culture -- and the food, and the sun -- in Barcelona. It was my first trip to Spain, and I enjoyed it immensely.
Unfortunately, shortly before my trip Spain's National Statistics Institute released data showing that the country's economy performed far worse than initially believed in 2010 and 2011. GDP grew only 0.4% in 2011; in 2010, the economy contracted by 0.3%. The revised 2011 figures also noted that exports were slightly weaker than first thought.
According to a Reuters report, these findings suggest that Spain "may find it even harder to emerge from a recession that threatens to push it into seeking a sovereign bailout."
ING Bank economist Martin van Vliet told Bloomberg, "We fear that things are likely to get worse before they get better" in Spain. "With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted toward a more protracted recession."
In early September, the New York Times reported that many people who are able to do so are transferring their savings from Spanish to British banks, and some are moving their families out of the country as well. In July, according to the Times report, "Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks, an amount equal to 7% of the country's overall economic output."
I witnessed a massive Catalonian separatist protest in Barcelona on Sept. 11, the region's national day. Officials estimated that up to 1.5 million people crowded the city center. Along with my family and friends, I watched protesters waving yellow-and-red Catalan flags and setting off noisy (and scary) fireworks on Las Ramblas, Barcelona's most famous street. Citizens of this rich region (it accounts for 19% of gross domestic product, according to the New York Times) want to reduce its contribution to a national system that redistributes tax revenue to Spain's poorer areas.
In August, Catalonia had to request 5 billion euros in emergency funds from Madrid, and its regional government has made extreme budget cuts. The separatists contend that they could refinance the region's debt and manage their deficit if they could lower their taxes and keep more of their revenue, according to a Financial Times report.
On the bright side, an August op-ed in the FT by Spanish official José María Beneyto and Harvard Fulbright scholar Alexandre Perez noted that although domestic demand is falling in Spain, exports are increasing rapidly. "In the first months of 2012 exports of goods and services reached the highest level on record." This solid private-sector export performance is likely due to strong family firms.
Family businesses are a major part of Spain's economy. According to statistics from the Family Firm Institute, 85% of Spanish businesses are categorized as family-owned, and family firms contribute 70% of Spain's GDP.
Back in February, Madrid's IE Business School and Signum International released results of a study they called the "Big Spanish Family Business Barometer 2011." El Economista reported that Spanish family businesses were most concerned about difficult access to credit, labor reforms, uncertainty and difficulties arising from the international political and economic environment and the tax system. These concerns undoubtedly sound familiar to U.S. family business owners.
The IE/Signum study revealed an optimism among family business leaders that was likely unfounded, given the current state of the local economy. The February report said that a whopping 94% of Spanish family businesses thought their sales figures would improve in 2012 or at least be the same as they were in 2011.
The IE/Signum researchers also asked Spanish business leaders about their corporate governance. An impressive 83% of the Spanish family businesses surveyed said they hold more than six board meetings per year. American family business stakeholders would do well to take a lesson from their Spanish counterparts; in Family Business Magazine's 2011 survey of U.S. family firms, only about 30% of respondents said their fiduciary board meets more than four times a year.
Interestingly, 21% of the Spanish family firms in the study said that more than a quarter of their directors are women. As one Spanish observer noted, this finding is surprising, "given Spain's macho reputation."
September/October issue: Bonus images
Have you had a chance to read the September/October 2012 issue of Family Business Magazine? This just-published edition is full of helpful advice on family banks, family codes of conduct, board member recruitment and more. In addition, we profile several business families who successfully re-engineered their enterprises.
If you've seen the issue, here are some bonus images that add context to two of the articles. If you haven't picked up your copy, I hope they whet your appetite!
• In an article entitled "Your story is important," Ann Kinkade, president of Family Enterprise USA, explains how publicly discussing your family's commitment to its business -- to the media and to elected officials -- helps to dispel the public's many misconceptions about family businesses.
Family Enterprise USA is a national, non-profit organization whose mission is to educate the public, policymakers and the media about the issues facing family firms and to promote their contributions to society. In her article, Kinkade mentions FEUSA's Capitol City Family Reunion, which took place last May. Family business owners traveled to Washington, D.C., and met with lawmakers. Here is a photo of members of the group meeting in May with Rep. Paul Ryan (R-Wis.), who in August was named as the Republican nominee for vice president.
• Kirby Rosplock, a fourth-generation owner of Babcock Lumber Co., discusses her family's 2007 sale of its 92,000-acre Crescent B Ranch (within Charlotte and Lee counties in southwest Florida) to a green developer, Kitson and Partners, in an article entitled "Being green is golden."
At the time the family closed the sale, Kitson & Partners simultaneously sold 73,000 acres of the ranch to the state of Florida for the Florida Forever Program, the state's conservation and recreation lands acquisition program. Kitson & Partners is developing the remaining 19,000 acres as a sustainable, environmentally sensitive community. The "green city" will be named Babcock Ranch in honor of the family. This map shows where Babcock Ranch will be located.
A touch of class
Well, Labor Day is over, and the academic year is now under way. Students from preschool to graduate school are about to be fully immersed in their studies. But it wouldn't hurt the rest of us to do a little learning, as well. Indeed, many of the world's most successful businesspeople cite lifelong learning as one of their personal values.
There are many opportunities available for those who want to increase their knowledge of family enterprise ownership and management:
• Universities across the country offer family business centers and forums where business owners and other stakeholders gather to hear speakers, network and learn from their peers. Some of these campuses also offer executive education programs geared especially toward family business owners. For a list of these academic programs nationwide, see Family Business Magazine's Directory of Advisers here (search under "Category" for "Academic Programs/Family Business Centers" and "Family Business Centers").
• Learning together helps a business family build unity. Consider creating a family education program with curricula that combine learning and fun. Charlotte Lamp, Ph.D., a longtime educator and family business owner, explains how to get started in an article in the July/August issue of Family Business Magazine. Read it here.
• Family business conferences bring family business stakeholders together to learn from each other in an environment of safe and candid sharing. Of course, I'm partial to our own Transitions conference (read about Transitions West 2012 here), but many other organizations offer conferences, as well. Some of them are listed in our Family Business Calendar (see it here), which is updated regularly.
• Add some family business literature to your reading pile! Many family business advisers have written books; search for them on Amazon.com or check out Family Business Magazine's "Toolbox" and "Book Corner" sections.
The family business community abounds with wise and experienced people with knowledge to share. So make your education plan today -- and then go hit the "Back to School" sales!
The importance of innovation
A recent article in the Financial Times analyzed the success of the Mittelstand, Germany's midsized, family-owned companies whose export strength is credited by many scholars for the country's economic growth in the 20th century. The FT report called these companies "the envy of the world."
Several elements of the Mittelstand business model are familiar to North American family enterprises -- for example, "Avoid debt, maintain independence and focus on the long term," as the FT put it. But there are some additional lessons of the Mittelstand that merit further study.
One principle that has led to these companies' success, the FT report noted, is continual innovation. Carl Miele, who founded appliance maker Miele International, a Mittelstand firm, more than a century ago, put the motto Semper Melior ("Always Better") on the company's first washing machines, the article said.
Hermann Simon, author of a book on the Mittelstand, Hidden Champions of the 21st Century (discussed in Family Business Magazine's Spring 2009 issue), told the FT, "There are some Mittelstand companies who file more patents in a year than an entire country like Portugal and Greece."
Another lesson from the Mittelstand, according to the FT, is the importance of diversification. The Brandstätter Group, for example, is best known for its Playmobil toys, but it also uses its expertise in molding plastic to create products in other categories, such as self-watering plant containers. Brandstätter CEO Andrea Schauer told the FT, "You can stand on one foot for quite a while but on two you stand definitely much more solidly."
More than 10% of Miele's sales come from the commercial market, though the company was founded as a maker of consumer appliances. Markus Miele, great-grandson of founder Carl Miele, told the FT, "It's an extra pillar but also an innovation generator. We create ideas here that later find application in our consumer products."
The challenge for a family business is to sustain the founder's values while being constantly on the lookout for promising new ventures -- especially in the 21st century, when technological advances are rapidly making old business models obsolete. Resistance to innovation can be a problem in later-generation family firms: Active shareholders who want to invest in new opportunities are often opposed by passive owners who rely on dividends to support their lifestyles.
The multigenerational Mittlestand firms have found a way to achieve a balance between continuity and advancement. Their philosophy is worth emulating.
CEOs on the mommy track
The business press was all aflutter in mid-July when it was disclosed that the board of tech giant Yahoo named Marissa Mayer, 37, to be the company's new CEO -- even though board members knew she was pregnant when they hired her.
Observers praised Mayer for her skills and her performance during her 13-year career at Google. Many people -- especially women -- were excited that a pregnant woman was named to lead a Fortune 500 company. At the same time, they expressed skepticism about Mayer's pledge that "My maternity leave will be a few weeks long and I'll work throughout it."
Women in family businesses know all too well the challenges of balancing work and motherhood. Indeed, many of them never get the chance. Stories abound of capable daughters who were bypassed for the top job.
Daughters who rise to the top of their family firms while juggling the responsibility of raising the next generation often find a third item on their to-do list that may not be put on a son's plate: taking care of Dad. As reporter Sharon Nelton wrote in a 2005 Family Business Magazine article on women CEOs:
[T]he biggest issue, family business women say, is finding the right balance between being CEO and being a good parent, wife and caretaking family member. Often their role is also assumed to include meeting the needs of the family patriarch. Many female family business leaders say they experience guilt over what society expects of them and what they can actually deliver.
In the book Father-Daughter Succession in a Family Business: A Cross-Cultural Perspective -- which I reviewed in Family Business Magazine's May/June 2012 issue -- Daphne Halkias and co-authors acknowledged the pressures of striving for work/life balance but offered many global examples of women who succeeded. The book quotes a Spanish successor with three children under age six: "There are times when I am tired, but I cannot be surprised because it was my choice."
Like many women (and men), I'm rooting for Mayer to succeed as a tech company CEO and as a happy mom. And I hope talented daughters who aspire to take on such daunting challenges receive a fair chance to prove that they can.
Getting to know you
When a family business is in its fourth generation and beyond, family members face a very basic challenge: getting to know each other. In a family ownership group that includes multiple, geographically dispersed branches, there's a distinct possibility that several of the cousins have never met.
There are several good reasons to rectify that situation. First of all, it's cool to meet people who share your blood and your family history. And second, extended family members who have forged a personal connection are less likely to develop irreconcilable differences.
The Eddy family -- owners of Port Blakely Companies, a forestry and land development enterprise based in the Pacific Northwest -- has done a lot of thinking about bringing family members together to share fun and educational experiences. Charlotte Lamp, Ph.D., a member of the Eddy family who was instrumental in developing its family curriculum, offers her advice in the July/August 2012 issue of Family Business Magazine.
Lamp's article details the topics that are taught in Port Blakely's family education program, which includes knowledge strands related to the company's business operations as well as the family itself. The family presents its educational programming during its annual meetings, which are held over a weekend during the summer. Lamp notes:
"Gathering family members and sharing eyeball-to-eyeball on a regular basis is important, but including some fun and entertaining activities can deepen the relationships. Family members have special talents, and those need to shine forth!"
Every few years, the Eddy family council chooses three family members to be profiled in brief videos that are shown before the family dinner at the annual meeting, Lamp writes. She tells of one family dinner that featured placemats illustrated with the Eddy family tree. The following year, the family tree was enlarged to 120 feet, with squares for each family member to stand on. "It was great for all members to look around and visualize where they fit on the tree," Lamp writes.
Family events like this move the conversation away from small talk and toward a deeper connection. If your extended family members have a history of shared experiences, odds are that they will work hard to find common ground in a debate over dividends.
Family business in the good old summertime
Though the summer holiday season is upon us, we in the family business community know that there's no escape from family enterprise. Here are some suggestions for integrating family business awareness into your summer plans.
• Summer jobs. Many family business stakeholders who worked in their family firm during summer breaks from high school or college say the experience deepened their connection to the family and the business. In the new July/August 2012 of Family Business Magazine, family business members will share their summer job memories.
• Family vacations. Getaways involving the whole extended family allow everyone to enjoy each other's company without business interruptions. As Family Business Magazine reported in a Summer 2005 article, vacations can build connections among shareholders, especially the younger set. "The older generation must accept that some family members may not be able to go and that others may not want to," reporter Deanne Stone wrote. "But if those who go enjoy themselves, more family members will probably want to go on the next one."
• Family meetings. Many families hold their annual retreats during the summer, when it's easier for everyone to get away. In a Summer 2009 article in Family Business, Tim Hussey, sixth-generation CEO of Hussey Seating Company, described how his family combined education with fun during a Family Forum gathering held at a resort off the coast of Maine. "Lobster bakes, boat rides, golf games and ‘Family Olympics' competitions have created fun for all," Hussey wrote. His 2009 article detailed a trivia contest/scavenger hunt, in which young participants had to answer questions on a variety of topics -- some related to the company and some just for fun.
• Everyday fun. Many businesses that specialize in summer fun -- such as ice cream shops, amusement parks, camps and resorts -- are family-owned. When you visit them, take time to chat with the owners about how they juggle business and family. You're likely to find that you have a lot in common -- even if your family business makes parkas or snow shovels.
Why you shouldn’t shun the spotlight
In these days of relentless self-promoters and people who are famous just for being famous, there's still one group of individuals who persist in avoiding the limelight: family business owners.
But business families who avoid the media hurt their own cause. I spoke about this in Washington, D.C., last month with participants at Family Enterprise USA's Capitol City Family Reunion. The business owners came to Washington to discuss the value of family enterprises with lawmakers, including senators from both sides of the aisle, Speaker of the House John Boehner (R-Ohio) and Chairman of the House Budget Committee Paul Ryan (R-Wis.).
The day before the group held their meetings on Capitol Hill, I participated in a panel discussion entitled "The Power of Your Story." I explained to the group that most Americans are unaware of what family enterprises really are, or how they benefit society. That's because too many family business owners hide their proverbial light under a bushel.
Talking to a reporter gives you the opportunity to explain that instead of taking advantage of other investment opportunities, your family is choosing to commit your personal wealth to sustaining your business into the next generation. You have the chance to describe the hard work and planning involved in the "family" side of the enterprise -- on top of the labor and sacrifices involved in building the "business" side. You can stress your contributions as a responsible corporate citizen and a good place to work, and the ways in which you give back to your community.
A good way to emphasize your point is to have several family members participate in interviews, not just the CEO. That demonstrates that your commitment to the business is shared among multiple family members. You might want to make your non-family executives available, as well. Including them shows that people who don't share your last name make significant contributions to your company and have opportunities to advance.
Of course, my viewpoint is biased; after all, I'm a member of the media. But I've heard the misconceptions about family businesses -- they're all small corner stores; they're not professionally run; the owners argue all day and do no actual work; the owning families look down on their non-family employees.
Someone should dispel these myths and show the public how family enterprises benefit society. It's true that there are plenty of statistics confirming this conclusion, but numbers tend to make the public's eyes glaze over.
The best way to make the case for family businesses is through inspiring family stories told by sincere business owners. So what are you waiting for?
FBN takes the pledge
What distinguishes family firms from other types of companies? We in the family business community know the main area of difference involves length of commitment. While shareholders of other companies are primarily concerned with short-term financial results, family business stakeholders are focused on preserving their enterprises for future generations.
The Family Business Network -- a worldwide, non-profit network of family businesses -- has codified that long-term commitment in a sustainability pledge. The organization has posted the document, signed by its board members, on its website. "We believe that our inherent understanding and appreciation of legacy brings an obligation to support and promote a sustainable future in all that we do," the pledge says.
The FBN board pledges:
• "To do all that we can to create and nurture workplaces and working cultures where our people flourish."
• "To be responsible global citizens making positive contributions to the communities that we work and live in."
• "To constantly search for ways to reduce the ecological impact that we create and safeguard the environment that we all share."
• "To pass on our values and long-term aspirations to future generations."
Click here to read the entire pledge and see a related video.
Back to the future
A Wall Street Journal article last month noted an entrepreneurial trend: Enterprising businesspeople are purchasing the rights to defunct brands in an effort to revive the once-beloved products or concepts. Resuscitated brands noted in the Journal report included Astro Pops, National Premium beer and the Seafood Shanty restaurant chain.
All the revivals cited in the Journal were orchestrated by entrepreneurs who are unrelated to the brands' original creators. That's what makes it a new trend. In the family business universe, on the other hand, this is nothing new. There are many examples of founders' descendants who have rescued their family's legacy from the scrap heap of history.
I wrote about one such rescue in the Autumn 2003 issue of Family Business Magazine. Neil Marko, great-grandson of hinge inventor Joseph Soss, bought back his ancestor's brainchild from the mega-corporation that had acquired it and was sorely neglecting it. Once the company was under Marko's control, he began expanding it and pursuing new ventures.
That 2003 issue also profiled Canadian brewer John Sleeman, who in1988 revived his great-grandfather's recipe for Cream Ale. The brew, developed by George Sleeman in the late 1800s, had been out of production since 1933.
And in her Publisher's Page column in our Summer 2009 issue, Caro Rock mentioned Pierre Emanuel Taittinger, who in 2006 bought back the Taittinger Champagne house from the Starwood Capital Group.
The entrepreneurs cited in the Journal article obviously feel an attachment to the brands they bought. But those who reclaim a family legacy are even more committed to their brands' success.
Neil Marko told me that when he had signed the last of the paperwork returning Soss hinges to family control, "it was a wonderful moment. It felt like I was recapturing something that had slipped away."
John Sleeman noted that the "family factor" helped draw Canadians to his product. "We showed consumers that they could trust us to make a great beer," he said, "because our roots went back 150 years."
All too often in family businesses, a decision made in the previous generation has long-term ramifications that the decision-maker didn't intend.
During workshop sessions, at the recently concluded Transitions East 2012 conference in Orlando, Fla., attendees reviewed examples of such unintended consequences. Participants discussed how they would advise the fictional families contending with problems rooted in precedents that were set long ago.
• In one case study, two siblings purchased the family firm from their father 15 years ago; a third sibling opted not to buy in. The non-participating brother's son is now working in the family business and making key contributions; the company has grown significantly. His father has expressed some bitterness and regret that his branch of the family does not have an ownership stake. Is it fair to shut this third-generation member out of ownership? If the second-generation owners follow their father's precedent and require their nephew to purchase a stake in the company, he would have to take on more debt than they did, because the company has grown. Is it practical or desirable to continue to require that all stock be purchased?
• Another case focused on a family firm whose three second-generation owners joined the company directly out of college. The three business owners, plus a fourth sibling, have a total of 15 children. Two of the 15 third-generation members are now working in the business; both of them also joined the company without any outside work experience. Now three more members of the third generation are preparing for their university graduations; meanwhile, the company has experienced some pressure on profits. The second-generation owners are wrestling with some tough dilemmas. Is it practical or desirable to continue to permit next-generation members to join the business straight from college? If they decide that future third-generation employees must have outside experience, a fairness issue will arise, since two third-generation members are already working for the company, and neither they nor their parents worked elsewhere first. If the family institutes a requirement for outside experience, how will they explain it to the three college seniors hoping to join the business?
In The Family Business Succession Handbook, Andrew Keyt of Loyola University Chicago's Family Business Center wrote that business owners must look beyond immediate succession concerns to ensure that the framework they create won't entrap future generations. If the goal is business survival across multiple generations, Keyt wrote, "we must move from tactics to process ... from focusing only on this generation to recognizing the impact on future generations." He added:
If the family council or the board of directors thinks of succession only in the context of the current generation's needs, we may limit the opportunities for future generations. If we think only about tax efficiency, and not about the implications of the ownership structure on future generations, we may be sowing the seeds of future conflict. If we try to control conflict through the provisions of trusts without teaching the next generation how to resolve disputes, we are ignoring the true opportunities to develop enduring values.
Many disagreements between siblings or cousins did not originate in their generation; their elders' choices set them up for conflict -- often unwittingly. You can avoid falling into this trap by choosing advisers who can guide you in long-term thinking.
What price success?
What defines a "successful" family business? Should we consider a family firm to be a shining star in the corporate firmament if the enterprise has grown into a thriving multinational, billion-dollar corporation -- but the family shareholders despise each other?
In a recent column, provocatively entitled "A family feud is not always a bad thing," Andrew Hill of the Financial Times raised this issue. Hill argued that feuds, though inadvisable, "create a rocket fuel that powers certain ruthless, entrepreneurial family members and the companies they head to the top."
To make his point, Hill cited two family business leaders that made headlines this spring. One was Gina Rinehart, who controls Hancock Prospecting (the giant Australian mining company founded by her father) and is being sued by three of our four children. "I think the ruthless vigour with which she has prosecuted this and other family feuds ... is also part of the reason for her success," Hill wrote of Rinehart, who is Australia's richest woman.
The columnist also mentioned Ferdinand Piëch, chairman of Volkswagen, who has long been engaged in a power struggle with his cousin Wolfgang Porsche. Control of VW under Piëch's branch of the family was recently ensured when his wife, Ursula, was nominated to the carmaker's board, a move that "flouts corporate orthodoxy so flagrantly it takes the breath away," Hill wrote.
Hill noted that both Piëch and Rinehart have said publicly that their companies come first -- even before family. He wrote that this attitude gives them an advantage against takeover artists such as LVMH's Bernard Arnault: "[H]ard-hearted insiders who have already neutralised their less competent, or less ambitious, relatives are proof against the predations of such opportunists."
Hill, in other words, is lauding these ruthless moguls for keeping their businesses in the family, by whatever means necessary. But they might be alienating their relatives to the point that there are no family members left to inherit the business.
There are many ways to define family enterprise "success," and each business family must develop its own definition. For many families, feud avoidance will continue to be an ingredient in the recipe.
The pitfalls of professionalism
Professionalizing your family business is a good thing, right? Don't the experts all agree that formal structures, outside directors and management best practices can ensure the sustainability of your family firm?
Well, yes -- but professionalism alone won't guarantee a healthy family business. In the March/April issue of Family Business Magazine, Andreas Raharso of the Hay Group's Singapore-based Global R&D Center for Strategy Execution writes, "A strategy that overemphasizes professionalism and neglects the family will lead to a deteriorating family business."
As a case in point, consider the Bancroft family, who controlled Dow Jones & Co. (publisher of the Wall Street Journal) before selling that company to Rupert Murdoch's News Corp. in 2007. As family business adviser Jim Barrett noted in a 2011 Family Business column, Bancroft matriarch Jessie B. Cox, who died in 1982, decreed that the family would "leave the business to the professionals."
But Cox went too far in her insistence that the family not meddle in the day-to-day running of their investment. As the Bancrofts debated whether to sell the company, Cox's grandson Crawford Hill lamented in a letter to his relatives, "[T]here has absolutely never existed any kind of family-wide/cross-branch culture of teaching what it means to be an active, engaged owner and more crucially, a family director.... We are actually now paying the price for our passivity over the past 25 years."
Barrett observed in his 2011 FB column that as the years went on and the Bancroft family grew bigger, dissent began to fester among the various family branches. As Internet competition heated up and Dow Jones' stock price fell, family members grew less inclined to hold on to the company. We all know what happened next.
"The initial success attained through professionalizing family firms is often offset by problems, squabbles or even family feuds," Raharso cautions in our current issue. In addition to recruiting key non-family managers and outside directors, you must also focus on developing your next-generation family owners if you want your business to stay in the family.
Theories of relativity
In the just-published March/April issue of Family Business Magazine, attorney Joe Goodman explains that because of today's demographic and medical realities -- divorce and remarriage, increased longevity, unmarried and gay couples raising children, in vitro fertilization and gestational surrogacy -- estate planning is more complicated than it used to be.
In my March/April "From the Editor" column, I note that these new realities also complicate the question of who should be considered part of "the family," and thus who is permitted to own or inherit stock in the family business. A panel of family enterprise stakeholders will discuss this topic at our forthcoming Transitions East 2012 conference, which will be held in Orlando, Fla., April 25-27.
Each family must determine its own stock ownership policies by considering the family values and how family units might be formed in the future. It is instructive, however, to consider how others have answered those questions.
With the enactment of the Family Office Rule, which Congress inserted into the Investment Advisers Act of 1940 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Securities and Exchange Commission has considered this question, as well. The Family Office Rule determines whether a family office must register as an investment adviser with the SEC. Family offices that provide investment advice to people not considered as family clients must register.
On a "Frequently Asked Questions" page on the SEC's website, staff of the SEC's Division of Investment Management tell us who they consider to be "family members," for the purpose of determining compliance with the Family Office Rule:
• Same-sex domestic partners and unmarried opposite-sex partners are considered family members. (Presumably, so are lawfully married spouses.)
• However, "in-laws related through the spouse of the common ancestor, or through spouses or spousal equivalents" do not qualify as family members.
• Spouses or descendants of a stepchild whose parent later divorced the family member stepparent are not considered family members under the rule.
Whether or not you agree with the U.S. government on these matters (or if you find the SEC's wording to be so confusing that you don't know whether you agree!), these definitions are a way of opening a discussion on this topic with your family members.
The small-business advantage
Owners of small family businesses often tout their connection to their communities as one of their strengths. A new study by researchers at Baylor and Louisiana State universities offers some evidence to prove it.
In an article in the Cambridge Journal of Regions, Economy and Society, sociologists Troy Blanchard of LSU and Charles Tolbert and Carson Mencken of Baylor analyzed health statistics from more than 3,000 U.S. counties and parishes (what Louisiana calls its counties). They found that counties with a greater concentration of small, locally owned businesses had lower rates of mortality, obesity and diabetes, based on their review of national population, health, business and housing data.
At first blush, this conclusion seems counterintuitive, since small businesses are not known for providing their employees with lavish health insurance coverage. But the co-authors note that it's in the financial best interests of small, local companies to take actions such as supporting bond issues for health infrastructure, promote community health programs and support local farmers' markets. The researchers write:
"Small-business owners produce important noneconomic rewards for communities, such as enhanced stocks of social capital and collective efficacy. In this way, the small-business sector may produce salutary rather than unfavourable community health outcomes.... Entrepreneurial culture provides a local orientation that allows for greater levels of interaction and trust among community members. This, in turn, helps to create collective efficacy, which has positive effects on community health in a number of ways...."
The sociologists also note that the trend in large, multinational companies is to lay off workers, whereas small-business owners strive to retain their employees -- especially if those employees are their family members or neighbors.
"In addition to health, we expect that our entrepreneurial culture approach could be applied to a variety of indicators of well-being, such as crime, suicide, population growth and school performance."
Evidently, small-business owners' investment of their social capital is paying off.
Are two heads worse than one?
In a recent column in the Financial Times, business writer Andrew Hill reflected on the departure of former co-CEOs Jim Balsillie and Mike Lazaridis from Research In Motion, the troubled BlackBerry maker.
Hill acknowledged that RIM's problems -- the company did not respond quickly enough to challenges from iPhone and Android -- could also have occurred at a firm with a single CEO. "That said," he added, "I nurse an innate suspicion of co-chief executives."
And indeed, according to a January 2012 article in the Toronto Globe and Mail, the co-CEO arrangement at RIM may have played a part in the Waterloo, Ontario-based company's inability to quickly produce a smartphone that rivaled the functionality of the popular new competitors. Some RIM employees, the article said, "believe the unusual two-headed structure of the company ... slowed things down."
What's more, the Boy Genius Report blog noted in July 2011 that Lazaridis and Balsillie had "titanic" arguments in front of employees.
In his FT column, Hill wrote that many family firms use the dual-CEO structure and that "toxic sibling rivalry" is often a byproduct. (You knew he would go there, right?) To prove his point, he cited the case of Robert Mondavi Corp., where rivalries between second-generation co-leaders Timothy and Michael Mondavi repeated a pattern established in their father's generation. (After feuding with his brother Peter at the family's Charles Krug Winery, the elder Mondavi left to form his eponymous company.)
But not every co-leadership arrangement -- in family or non-family firms -- is doomed to end in disaster. The key is to ensure that the partners at the top respect each other, define their respective roles in the partnership, and present a unified front to the staff.
"Build in lots of communication on a regular basis," family business adviser Jim Barrett wrote in a 2003 Family Business Magazine column on co-leaders. "If they don't enjoy each other's company or are content merely to trust each other, this ain't gonna work."
At our Transitions East 2012 conference in Orlando, Fla., to be held April 25-27, brothers Ben and David Grossman, co-presidents of Grossman Marketing Group, will discuss their focus on alignment of interests, and how each brother celebrates his sibling's success as his own. They signal to each other through a window between their offices.
In my years of working with family businesses, I've found that co-CEOs can work quite well together -- if the leadership team members are willing and able to work on their partnership. One of the issues that must be resolved at the outset, for example, is how deadlocks will be resolved.
Co-leadership arrangements don't inevitably lead to "toxic sibling rivalries." And it's also important to note that "toxic rivalries" can occur even if the co-leaders are not related by blood.
Customers like to ‘buy American’
Anheuser-Busch, the brewer of Budweiser, was once the largest U.S. brewer. Then in 2008, the Busch family of St. Louis sold their company to InBev in a $52 billion deal.
Coors, once brewed by the Coors family of Colorado, merged with Canadian brewer Molson in 2005 and three years later entered a joint venture with SABMiller -- established in 2002 when South African Breweries bought U.S.-based Miller Brewing Company. Today the brewer is known as MillerCoors.
With these popular brands now operated by foreign conglomerates, who is the largest American brewer? As of 2012, it's D.G. Yuengling and Son of Pottsville, Pa. Founded in 1829 and now in the fifth generation of family ownership, Yuengling is also America's oldest brewer. (Family Business Magazine profiled Yuengling in our Spring 2010 issue.)
Citing statistics from trade magazine Beer Marketer's Insights, the Morning Call newspaper of Lehigh Valley, Pa., reported that Yuengling's 2011 sales surpassed those of the Boston Beer Company (brewers of Samuel Adams), making Yuengling the largest American brewery, though the flagship Yuengling Lager and the company's other beers are available in only 14 states.
Of course, the company known as Anheuser-Busch InBev still sells more beer. In 2011, the no-longer-American company sold 98.8 million barrels in the U.S., compared with 2.5 million barrels sold by Yuengling, the Morning Call reported.
But the sales figures reveal an interesting fact: Anheuser-Busch InBev sales dropped 7.7% in 2011, while sales of Yuengling rose nearly 40% during the same period, according to the newspaper article.
Why did this happen? In 2011, Yuengling entered the Ohio market, so the additional territory obviously played a role in its revenue surge. Anheuser-Busch's Belgian owners changed the company's marketing strategy, which may have contributed to the drop in Budweiser's sales. But David Casinelli, Yuengling's non-family chief operating officer, told the Morning Call that something else might be going on, as well. After the Anheuser-Busch InBev merger was announced, Casinelli said, Yuengling was inundated with letters from customers begging the family not to sell their company.
"There are obviously a lot of people who pay attention to that stuff and take it seriously," Casinelli told the Morning Call.
Anheuser-Busch InBev continues to employ Americans, of course, but American ownership seems to affect U.S. beer drinkers' choice of brew. Yuengling's fifth-generation owner, Dick Yuengling, told the Morning Call that his customers needn't worry that his family will sell out:
"Our game is longevity. Being the biggest doesn't matter. We want to see how long we can survive. My daughters Jennifer and Wendy are in the business now and we want their kids to be able to run it some day. That's what's satisfying to us."
Even if you neither make nor drink beer, you should be paying attention to this news. The bottom line is that American customers care about who makes the products they buy. This is likely even more true as high unemployment continues to plague the country.
In the Winter 2012 issue of Family Business Magazine, I mention a free way for American family businesses to promote themselves. The website www.madeinusabyfamilybusiness.com offers artwork, at no charge, that you can use on your website or packaging.
Yuengling's rising fortunes are evidence that American family-owned companies satisfy customers' thirst.
Planning for the unknown
For years, Family Business Magazine has been advising readers that the talents and abilities that are required of family business successors are likely to be far different from those required current and past leaders. In today's business climate, this is more true than ever.
In the current issue of Family Business, PwC's Ken Esch writes that since the global financial crisis, "uncertainty may be a defining characteristic of the new normal, not a temporary condition." Citing findings from PwC studies, Esch notes that significantly more leaders of private companies are uncertain about the U.S. economy (49%) than are optimistic about it (27%).
Business writers like to use the phrase "seeing around corners" to refer to the skill of anticipating future market trends, conditions and needs. The late Steve Jobs was a master at it. Imagine what technology might be like today if Jobs had been intent on doing things the way they had always been done.
How do you train your next-generation members to see around corners? In his article, Esch recommends that they receive training in macroeconomics and strategic planning (including scenario planning) via a combination of higher education and work experience outside the family company. He also suggests that senior leaders carefully build an executive team that includes non-family executives. "A leadership team, with a wide base of knowledge and expertise," Esch writes, "is often able to manage change better than a single person can, particularly when that change occurs suddenly and on multiple fronts." In fact, Esch notes, it might be wise to consider whether a non-family member might be best equipped to be your company's next CEO.
The bottom line, according to Esch, is that family companies must assume an uncertain future when developing their strategic plans. The challenge will be to ensure your next business leader is prepared to steer the company in an uncertain world.
Family enterprise stars in ‘The Descendants’
When I went to see The Descendants, I hadn't read much about the film. I knew only that the performance by the star, George Clooney, had been highly praised by critics and that the director was Alexander Payne, who previous credits include Election, Sideways and About Schmidt. As I sat in the theater, riveted to my seat, I was surprised that the film addressed so many of the issues I encounter each day in my professional life (although, alas, my workdays involve neither Mr. Clooney nor Hawaii, where the action takes place).
In mid-December, I called some family business advisers who also had seen the film to share our thoughts on the issues of wealth and inheritance confronted by the characters.
(Warning: The rest of this post is full of spoilers. If you haven't yet seen the film -- and I highly recommend that you do -- stop reading now if you'd prefer not to learn key plot details.)
The film, shot on location, is based on the novel by Kaui Hart Hemmings, who grew up in Hawaii. George Clooney's character, Matt King, is one of many cousins in a prominent family descended from the marriage of a Hawaiian princess to a white banker generations ago. Matt, an attorney, is the sole trustee of 25,000 acres of unspoiled land on Kaua'i held in a family trust. Because of the common law rule against perpetuities, the trust is due to expire in seven years.
Matt has lived frugally (too frugally, his father-in-law complains), saving all his income from the trust and living solely off his earnings as a lawyer. Some of his cousins, however, have spent all their trust income. Evidently, few of them work. ("All I have is time," says one cousin who offers to give Matt and his family a ride on Kaua'i.) Most of the cousins want to sell the family's land quickly.
A subset of the large group of cousins has been meeting regularly in Matt's law firm's conference room to discuss offers for the property. They have rejected the highest bid, from a Chicago group seeking to build big-box stores on the property. Instead, they favor an offer from a Kaua'i man, Don Holitzer, who plans to turn the land into a golf course and residences (though two of the King cousins oppose any sale of the property). A shareholder vote has been scheduled to confirm the family's decision.
At the same time that Matt is pondering the sale of his ancestral property, he is dealing with a devastating situation in his nuclear family. His wife, Elizabeth, lies in a coma after having been injured in an accident on a rented boat. Doctors have told him that she will not recover, and under the terms of her living will she must be taken off life support. By his own admission, Matt up until now has focused primarily on his work and has assumed the role of "back-up parent," but because of Elizabeth's accident is now serving as single dad to his two daughters: substance-abusing 17-year-old Alexandra and ten-year-old Scottie, who has been acting out at school.
That's a lot for Matt to deal with, but there's more. Matt learns that Elizabeth had been having an affair and at the time of her accident hoped to run off with her paramour. Midway through the movie, Matt finds out that the man his wife had been seeing is a real estate agent who is Holitzer's brother-in-law and would stand to profit considerably if the deal the King family favors is closed.
"The movie portrayed [Matt's] conflict very effectively," says Allison Shipley, a principal at PwC. "The role of a trustee is really a hard thing to take on." The responsibilities are especially challenging for a sole trustee acting on behalf of an extended family, Shipley notes. "It's an unbelievable job for that one person," she says. "There's an incredible amount of pressure."
"[Matt] was a trustee in so many ways," observes Justin Zamparelli, a partner at Withers Bergman LLP. "He was even entrusted to protect people's feelings." For example, Zamparelli notes, Elizabeth's father blames her accident on Matt (angrily speculating that she wouldn't have injured himself if Matt had bought her a boat of her own) and calls her a faithful wife, an assertion that Matt doesn't contradict. In another scene, Matt hosts a gathering for all Elizabeth's friends (significantly, no King cousins are present) and invites them to go to the hospital to say goodbye to her -- without mentioning her affair and its effect on him. He enlists Alexandra's help in protecting her younger sister's memories of her mother.
I was struck by the portrayal of the extended King family as a group that lives near each other yet is not close-knit. Matt and his daughters run into several King cousins at various points in the movie, but these relatives express only a perfunctory interest in Elizabeth's condition -- and none of them offers much in the way of consolation to the young girls whose mother is dying.
Obviously, the King cousins could have benefited from family governance and education efforts. "There doesn't seem to have been any real effort by the family to cement the relationship between the family and the asset," comments David Lansky, a principal consultant with the Family Business Consulting Group.
The King ancestors, PwC's Shipley observes, had created a trust to preserve their land, but had taken no measures to preserve the family values. "Clearly," she says, "that family hadn't done anything to reinforce, or even establish, the cultural importance of the land." Even though the family hadn't inherited a governance structure, Matt could have worked with his relatives to institute one, Lansky points out. "He was the trustee, but he really didn't see himself as the family leader," Lansky says.
Throughout the film, local residents whom Matt encounters urge him not to sell the property, and after those conversations an internal conflict registers on Clooney's face. "The whole state of Hawaii had an investment in keeping the land pristine," FBCG's Lansky notes. "Should [the King family] do anything about that? What does it mean to be a steward?"
The film's dual plot lines -- Elizabeth King's marital infidelity and the King cousin consortium's planned infidelity to their legacy -- intertwine as Matt takes his daughters (and Sid, a slacker friend of older daughter Alexandra) on a trip to Kaua'i to visit the land and get a look at the man who has been sleeping with his wife.
As the family gazes at the pristine property, Alexandra reminisces about her experiences camping on the land with her mother. (Interestingly, it was her mother -- not her father, the parent with the ancestral tie -- who instilled in Alexandra a connection to the land.) Younger daughter Scottie plaintively asks, "What about me?"
To PwC's Shipley, that question is a pivotal turning point in the film. Revisiting the family's land, she says, gives Matt "the perspective of the ancestors, and of the daughters." I agree. Though one can think of several alternative titles for the film, The Descendants is the most appropriate, and that scene demonstrates why this is so.
As Clooney prepares the ancestral property for the arrival of his cousins who will gather to vote on the sale, the camera lingers on portraits of his ancestors and other family mementos. The family stakeholders cast their votes and, unsurprisingly, they overwhelmingly favor a sale to Holitzer. In the end, however, Matt refuses to sign the papers. His cousin Hugh (played by Beau Bridges) warns Matt that the family would sue him. "Then I might see more of you," Matt responds.
The King family, Zamparelli says, "basically were fortunate members of a DNA pool that owned this property; they hadn't earned it. And at the end of the day, I think that was part of [Matt's] decision."
Of course, there are more alternatives available to the family than just selling or not selling the land. The Kings could work with advisers to find a way to generate some cash from the property while preserving a significant portion as open space. A family council or family office could provide a forum for them to explore such options in the seven years before the trust expires -- if, after the contentious issue of the vote, the cousins could possibly agree to establish such structures.
Matt never tells his cousins that someone connected with the Holitzer bid had had an affair with his wife. His failure to disclose the relationship would not necessarily help his cousins prevail in a suit against him, attorney Zamparelli says, because Matt did not benefit in a pecuniary way from his decision not to sell -- and it would be difficult for them to prove that the situation was a factor in his decision.
In the film's penultimate scene, Matt and his daughters board a boat and scatter Elizabeth's ashes at sea. Zamparelli says he was taken by the camera's focus on the serene coastline, followed quickly by a view of unsightly developed land off the coast.
Matt's refusal to sign the papers feels like a victory to the audience in the theater. Whether or not the fictional family ever could come to terms with his action, they certainly would always view it as a pivotal point in their shared history.
If your extended family is planning to gather together over the next week, you have a built-in opportunity to foster engagement of your next-generation members, married-ins and other relatives who have a stake in your family business, though they may not work there.
Unlike other activities related to the holiday season, this one does not require any shopping, decorating or cooking. It gets everyone interacting together and thinking positively. And there are no costs involved!
When your family gathers in your living room or around your dining table, start a conversation about the history of your company. Don't just recite the narrative that's on your company website; use your founder's story as the basis for a discussion in which everyone can participate -- even the youngsters and in-laws who never got to meet Granddad.
How do you make this happen? By sprinkling the family story with questions designed to get people thinking. Here are just a few examples:
- How did your founder (and subsequent business leaders) cope in tough economic times? Are there lessons that can be adapted to today's economic challenges?
- What were the major innovations that enabled the company to grow?
- How did each succeeding generation put their own stamp on the company?
- How did the founder's spouse contribute to strengthening the family and building the business?
- If you had the opportunity to go back in time and ask the founder one question, what would it be?
- What fact about the family business makes you the most proud?
Questions like these get everyone focused on what is special about your family and its business. And they can spark a brainstorming session that takes your relatives to a new level of collaborative thinking. That's a gift no one will want to return.
Planning for a dispute
In the past couple of blog posts, I have cited findings from our U.S. Family Business Survey that raise some red flags. Today -- during this season of family get-togethers -- I note another area of concern:
Only 31.7% of the U.S. business owners who participated in our survey said their company has a redemption plan or other mechanism to remove a disgruntled shareholder.
One might expect older family firms (which tend to have a larger shareholder group) and larger family companies (where more money is at stake) to have a better track record in this regard. But results for these companies are not that dramatically different. Only 38.6% of those whose companies are in the third generation or older have such a plan. Of those whose companies generate annual revenues of $26 million and above, the percentage rises only slightly, to 43%.
Why is this a problem? Because one disgruntled shareholder who continues to hold stock can cripple your business (financially) and your family (emotionally).
Many families don't want to consider the possibility that today's harmonious relationships might turn sour in the future. One participant in our survey commented, "It's kind of assumed that anyone who was given stock and leaves the company will give stock back."
Rather than put your trust in assumptions, consider codifying an agreement that will set the tone for smooth dispute resolution and help prevent litigation, or even the breakup of the company. Yes, this will require your family members to meet and discuss various unpleasant scenarios. But consider how much easier it is to do this work while everyone is getting along.
Watch out for that beer truck
Bob Rock -- the president of Family Business Publishing Company and the husband of our publisher, Caro Rock -- is fond of posing a rhetorical question involving a beer truck. Bob, who serves on a number of corporate and non-profit boards, believes every company's board and managers should prepare an answer to this question: What would happen if the CEO were to be fatally struck by a beer truck while crossing the street?
It seems that not enough family business leaders have considered close encounters with beverage-bearing vehicles. Our Family Business Survey, conducted this past summer, found that 45% of the respondents' companies lack an emergency succession plan that covers the leader's unexpected death or severe disability. (More than 400 family business owners responded to the survey, which was published in Family Business Agenda 2011.)
Keith L. Alm, the retired president and CEO of Hallmark Cards International and a board member at family firms Follett Corp. and McKee Foods Corp., wrote in the 2009 Family Business Agenda that emergency succession planning is "a crucial board responsibility." Alm noted:
Should an emergency occur, it's essential that operational confidence be restored as quickly and effectively as possible. Boards that have a solid plan in place engender confidence -- both within and outside the company -- that the business and its continuity are well in hand, heading off potential damage due to either poor decision making or lack thereof, and protecting the interests of all shareholders.
Having an emergency plan is arguably even more important in a family-led company than in a non-family firm. It's imprudent to make essential decisions hastily at a time when key members of the board and executive team are in mourning.
The next time you convene a meeting of your key stakeholders, it might be a good idea to put a beer truck on your agenda.
Breaking ties can prevent broken hearts
Over the summer, Family Business Magazine conducted a survey of U.S. family business owners. We received responses from 431 qualified individuals (senior leaders of U.S. family businesses or those in executive positions). Respondents' companies generate an average of $75.54 million in annual revenues. The average survey participant's company is between the second and third generation of family ownership (2.78).
The survey enables to take a snapshot of the diversity in the practices and policies of American family businesses today. We are very excited about the results, which we're releasing in Family Business Agenda 2011. The issue is currently on its way to subscribers.
Here's a preview of one interesting finding from the survey: More than two-thirds (72.6%) of the respondents said they have a formal shareholder agreement. But only 29.4% of these agreements establish a tie-breaking process in the event of a dispute.
The lack of a tie-breaking process, individual or entity can cause problems that imperil the future of the family business. Frederick D. Lipman, an attorney with the law firm of Blank Rome LLP, offered an example of how this can happen in his book The Family Business Guide. (Full disclosure: I moderated a panel discussion at a program featuring Lipman and his book.) The case he cited went to the Wyoming Supreme Court.
Lipman cited the case of Imperial Homes Inc., a Wyoming construction company founded by Raymond Woods. Woods transferred his shares in the company to a trust, which remained the majority shareholder after his death; the other shares were divided among his four children and his brother. His sons Steven and Roger were named as successor co-trustees.
Disputes arose between the two brothers, and Roger sued Steven. The district court ultimately removed both of them as trustees and named a bank as the sole successor trustee. The bank "exercised the trust's rights as majority shareholder and served on Imperial's board of directors," Lipman wrote. "A bank trust officer was eventually named president of the company."
If Raymond Woods had provided for an impartial tiebreaker -- perhaps a trusted friend -- to mediate disputes between Steven and Roger, that person could have hired a non-family member to serve as Imperial's president. "The failure of Raymond Woods to include an impartial tiebreaker provision in his succession plan resulted in a bank trust officer ultimately running his family business," Lipman wrote.
There are many different approaches to family business ownership. But some "best practices" merit serious consideration. A tie-breaking provision is one of them.
Big birthday for an important association
Last week I was in Boston to attend the annual conference of the Family Firm Institute, a global association of professionals serving family enterprises. At this year's conference, FFI marked its 25th anniversary.
FFI is an important organization because it fosters professionalism and promotes scholarship in the field of family business advising (69% of its members are advisers or consultants to family enterprises, 23% are educators or researchers, and 8% are students).
The organization publishes an academic journal, Family Business Review. It has developed training and certification programs for family and wealth advisers and recognizes members with exceptional expertise as FFI Fellows. It also presents interdisciplinary seminars worldwide and convenes regional study groups that members can attend to explore critical issues affecting family enterprises.
Because of FFI's efforts, advisers to family businesses are better trained and more professional. Happy 25th birthday!
Business owners often ask me for referrals to family business resources. Here are some answers to frequently asked questions.
Where can I find statistics on family businesses' economic impact? Data on the prevalence of family businesses and their economic impact are posted on the website of the Family Firm Institute at www.ffi.org/default.asp?id=398
Can you refer me to a family business adviser? Family Business Magazine offers a Directory of Advisers, both in print and online, that's searchable by professional specialty as well as by region. The online version includes links to the advisers' websites.
Would Family Business Magazine publish my dissertation or research study? As a business-to-business publication, Family Business does not publish academic research. Research findings on family enterprise are published in Family Business Review and the Journal of Family Business Strategy.
I'm a business owner based outside the U.S. Where can I find networking resources? Information on family businesses outside the U.S. is available via the Family Business Network, a global association. See www.fbn-i.org.
Though the U.S. Armed Forces mandate unity of command, family businesses throughout history have grown and prospered under co-leadership arrangements. In the founding generation, husbands and wives work together as "co-preneurs" to nurture a fledgling business (though for centuries the wives labored without compensation or credit). In the second generation, many a firm has appointed sibling partners as co-presidents or co-CEOs. Some family companies even perpetuate the team approach to leadership when they reach the cousin stage.
Business consultants have been known to criticize such arrangements, often implying that they arise not because they are the optimal choice for the company, but because the senior generation has been too chicken to select one of sibling as first among equals. But under the right circumstances -- with an auspicious blend of personalities, abundant mutual respect and the proper governance structures in place -- co-leadership can work beautifully.
Ross Born, who serves as co-CEO of candy company Just Born Inc. along with his cousin David Shaffer, shared their philosophy with me. "The secret of our success," said Born, whose company makes marshmallow Peeps and Mike and Ike, "is that we have the same values and the same commitment to the business."
Guess what? It seems that non-family companies -- including some big ones -- have adopted this model, too. A recent article in the St. Louis Business Journal cited a study by Stephen Ferris of the Financial Research Institute at the University of Missouri Trulaske College of Business, who identified 111 publicly traded companies that had a co-CEO leadership structure between 1998 and 2008. Among them are Bed, Bath & Beyond; food conglomerate Ralcorp; and CGA Global Partners, the parent company of flooring, lighting mortgage banking and cycling companies.
According to the Business Journal report, Ferris found that co-CEOs stayed in their positions for 4.5 years, compared with an average of six years for solitary CEOs. He also found that combined median cash compensation for a pair of co-CEOs was slightly lower than the median cash compensation for two solo CEOs. In other words, two heads are better than one, cost-wise.
These newly released findings come at a time when co-leadership has been very much on my mind. The Autumn 2011 issue of Family Business Magazine features several examples of such arrangements. In my "From the Editor" column you'll find more comments from Ross Born, as well as some thoughts from David and Ben Grossman, co-presidents of Grossman Marketing Group in Somerville, Mass.
Our Autumn issue also includes profiles of two family companies that have taken the co-leadership concept to an extreme. Both Magid Glove & Safety Manufacturing Co. of Chicago and Times-Shamrock Communications, based in Pennsylvania, have established teams of four partners at the top. These two family firms have done a lot of work to ensure that their unconventional structure functions smoothly. Despite their success, I doubt that Wall Street will be adopting a four-headed model anytime soon.
These interesting times
"May you live in interesting times" is said to be a Chinese curse (although the origin of the phrase is in question). Lately the global economy has been "interesting" indeed. Though we may yearn for dull, predictable prosperity, the challenges we face today are likely to preoccupy us for quite a while.
Threats to business competitiveness and investment assets during these uncertain times are keeping many family enterprise leaders up at night. Family stakeholders who would rarely be heard from in a thriving economy are coming forward to voice their concerns. Meanwhile, employees' worries about keeping food on the table may be affecting job performance. With so many distractions, it's hard to keep one's eyes on the road.
While some circumstances are beyond anyone's control, it's helpful to consider what can be done to put your business in the best possible position to succeed -- and to maintain family harmony through the economy's harrowing twists and turns.
- Keep the lines of communication open. Give your stakeholders a chance to air their concerns. Share stories of how your business weathered tough times in the past. Encourage cooperation and teamwork. Ask for cost-cutting suggestions and other ways to make the most of limited resources.
- Take advantage of ‘teachable moments.' This is a great time to teach next-generation members about wealth management and other financial issues. When times are good, there is less incentive to pay attention.
- Consider the future. Brainstorm about ways to leverage strengths and reposition your business. If some of your family stakeholders don't understand why you shouldn't just stick to the old ways of doing things, consider engaging outside experts to educate them.
- Embrace change, and focus on risks. In today's environment, change and uncertainty are inevitable -- and adapting to them involves risk-taking. Educate your successor generation about risk management, in business strategy as well as investing. Whether they will be business leaders or family council members, they must understand the risks entailed in running a family enterprise.
Family Business Magazine receives awards
Family Business Magazine was recently honored with several awards for editorial excellence.
"The accidental CEO," by Margaret Steen (FB, Spring 2010) -- a profile of Anne Eiting Klamar, CEO of Midmark Corp., based in Versailles, Ohio -- received a Gold editorial award in the Focus/Profile article category in the national Tabbie Awards competition. The Tabbies are presented by Trade Association Business Publications International.
Steen's article also received a Regional Silver Azbee Award of Excellence (Individual Profile category) in the annual competition of the American Society of Business Publication Editors (ASBPE).
"A family summit gets the succession conversation started," by Josh Wimmer (FB, Spring 2010) received a National Gold Azbee Award (How-To article category) in the ASBPE competition. Wimmer's article is a first-person account of a family meeting that was specially designed to introduce next-generation members to his family's business, Wimmer's Diamonds of Fargo, N.D. The article includes step-by-step advice for business families seeking to develop their own family summit, including a schedule of events and a budget.
We at Family Business extend our congratulations to writers Margaret and Josh, and to the family stakeholders at Midmark Corp. and Wimmer's Diamonds, who generously shared their stories.
Succession and the Murdochs
Since the eruption on July 4 of the phone-hacking scandal at News Corp.'s now-shuttered tabloid News of the World, numerous reports have described the media giant's flawed corporate governance and questionable management decisions, as well as tensions among members of the controlling Murdoch family.
As the hacking revelations proliferated, observers worldwide were questioning James Murdoch's viability as a successor to his father, 80-year-old News Corp. CEO Rupert Murdoch -- even before two former executives from News International, the conglomerate's British subsidiary, publicly disputed statements James made in his July 19 testimony before a U.K. parliamentary committee investigating the hacking.
Although his testimony indicated otherwise, the former executives said James knew that the hacking involved more than just one "rogue reporter," and that he was fully informed when he authorized an unusually large amount of money to settle a lawsuit brought by hacking victim Gordon Taylor. British police are now considering an investigation into the two executives' claims that James's testimony was "mistaken."
The Taylor settlement was one of James's first big decisions after he became head of News Corp.'s Europe and Asia operations in 2007, according to the Wall Street Journal (which is owned by News Corp.). As the Journal pointed out, James didn't work for the company at the time the hacking occurred. But he was expected to resolve the problem, as a report in the Financial Times noted. The scandal's explosion "rais[es] questions about his crisis management skills," the FT article said.
The resignation on July 15 of Rebekah Brooks, former News of the World editor and News International chief executive -- who was James's lieutenant -- "will move the spotlight onto James Murdoch," Labour lawmaker Tom Watson said on British TV, according to a Bloomberg report. "Terrible things happened over a long period of time in that company, and they tried to cover it up."
James did clear one hurdle on July 28, when the board of pay-TV provider British Sky Broadcasting unanimously voted to retain him as chairman. News Corp. owns a 39% stake in BSkyB and had planned to bid for the remainder, but withdrew its offer -- the largest deal ever attempted by News Corp. -- after the hacking scandal erupted.
The Journal reported that in voting to retain James as chairman, the BSkyB board apparently considered the fact that the TV company "has been largely untouched by the scandal" but will watch out for what a source euphemistically called "any external issues."
According to a New York Times report, James -- who ran BSkyB from 2003 to 2007 and was respected for his performance there -- was "the principal champion of the BSkyB purchase within the News Corporation." The Times said James had argued that the News Corp. should continue to press for regulatory approval of the deal even amid the scandal but was overruled by his father and by News Corp. chief operating officer Chase Carey.
There's little wonder why James wanted to do the deal. As the Times noted:
With BSkyB reporting to James, who runs the News Corporation's European and Asian operations, the businesses in his portfolio would account for half of all the News Corporation's revenue.
Indeed, James devoted a lot of energy to jockeying for position in the company, according to a July 19 Journal report. In his rapid rise to his current post, the article said:
[James] got ahead of himself, some people familiar with the matter say. He clashed with management in the U.S., asserting strong opinions over personnel matters and business decisions that were at times viewed as acting outside of his territory....
As he took over in Europe, James began hiring corporate staff, leading executives inside the company to joke that he was building a "shadow government," according to people familiar with the situation.
James had been scheduled to move to the New York office this summer. The Journal article cited sources who said the move was "not a promotion, but a plan to unite two different power centers: James's operation in London and headquarters in New York."
There's been jockeying for position within the family, too, according to reports. A fascinating account in AdWeek by Michael Wolff, author of a biography of Rupert Murdoch, called James "his father's closest family ally in accommodating Wendi -- the patriarch's divisive third wife."
James's sister Elisabeth, Wolff wrote, "has a tense relationship with Wendi," and James's relationship with Elisabeth is also tense. Rupert's oldest son, Lachlan, Wolff wrote, "fights with his brother and is most closely aligned with his sister Elisabeth. Their older half sister, Prudence, is aligned with James." (The Journal indicated that the rift between James and his siblings Lachlan and Elisabeth may have arisen because James has recently become more involved in News Corp., while the latter two have been away from it.)
Wolff and others have noted that each of the four adult Murdoch children have equal votes in the Murdoch Family Trust, which holds Rupert's voting shares in News Corp., thus giving the family control of the company. The four, according to Wolff's account, are split 2-2 against each other.
News Corp.'s board of directors has also been roundly criticized. The board includes Rupert, James and Lachlan; next year, Elisabeth (whose TV production company, Shine, was acquired by News Corp. in a deal that prompted a shareholder lawsuit) will also join it. Other board members are Rupert Murdoch's confidants and current or former executives.
Many observers -- including the shareholders who sued in an effort to block the Shine acquisition -- have decried News Corp.'s poor stock performance, called the "Murdoch discount" because many of the company's strategic moves seem to have been made to indulge Rupert's whims.
"The company must be reformed from the top," the Financial Times' John Gapper wrote.
Instead of a board of insiders who obey [Rupert] Murdoch's whims, it needs a new chairman who can recruit new directors and provide the oversight that its executives plainly need. The dual-class share structure, through which the Murdochs hold power ... should be dismantled and its non-voting shareholders enfranchised.
In a scathing New York Times column, David Carr opined:
James Murdoch is done. He and his father both know that. His testimony curdled as he emitted it, and within two days a couple of former News Corporation executives publicly challenged it. The hooks are still in him, as Prime Minister David Cameron made clear when he said James still had "questions to answer." And so he will, gradually sinking further into the mess he has overseen.
Several analysts have predicted that COO Chase Carey will eventually take the top job. FT media editor Andew Edgecliffe-Johnson noted that Carey is untainted by the hacking scandal and is on good terms with James, Lachlan and Elisabeth. Edgecliffe-Johnson wrote:
"Unless something absolutely drastic happens, there is no way Rupert would give up on James," one person close to the board says. But with drastic developments occurring every day, no one is ruling anything out.
The Journal cited sources who said Rupert Murdoch has considered taking the title of executive chairman and making Carey the CEO. "But even if Mr. Murdoch decided to make such a change," the Journal article said, "one of the people said he wouldn't do it right now, so close to the current turmoil."
The FT's Gapper wrote that if Carey were to lead News Corp.,
This would not preclude James, Elisabeth or Lachlan occupying executive roles but it would stop the company being run for the benefit of their family instead of investors. It would probably also reward them financially, since the family's 12 per cent economic stake would be worth a great deal more without the Murdoch discount.
Back in April, when James Murdoch had just been promoted to his current post, I wrote that his performance should be assessed on its merits. "[S]ometimes family businesses name the wrong person as the successor (usually for the wrong reasons)," I asserted, "but that doesn't mean all family business successors are destined to fail."
Well, it appears that Rupert Murdoch and the News Corp. board indeed elevated James "for the wrong reasons." And it seems we will be learning more about the wide-ranging ramifications of this and other family-centered decisions at Murdoch's powerful global company.
U.S. family business owners: Please complete our survey
Earlier this month, we marked the 235th anniversary of American independence and commemorated the heroism and foresight of the country's founding fathers.
While those celebrated citizens laid the foundation for our government, American enterprise -- and, especially, American family enterprise -- has been the engine of the country's growth. How has this been achieved?
Family Business Magazine is planning to find out by conducting a survey of family enterprises in the USA (http://www.surveymonkey.com/s/BKY7YRW). We plan to assess the scope of their diversity in leadership and ownership. We will also study the policies and systems they have established to achieve their economic goals of growth and prosperity while preserving family harmony and loyalty. In short, we plan to offer a snapshot of U.S. family businesses and their practices.
To that end, we have developed a confidential online survey, and we are inviting U.S. family business owners to participate. (To obtain the most accurate results, we request that the questionnaire be completed by only one member of each owning family -- preferably the senior leader, or someone in an executive position.) The questions are brief; most can be answered with a single click.
The deadline for completing this survey is August 15, 2011, but if you could fill it out sooner, we'd appreciate it. You can find it by clicking the link below:
Your answers will be held in the strictest confidence and used only to create pooled averages.
The results of this anonymous survey will be included in Family Business Agenda 2011 -- a special issue focusing on "The State of U.S. Family Business." This special edition will be published in late October.
We know that in matters involving the creative mix of family and business, there is no one-size-fits-all prescription. Through classic American ingenuity, enterprising families have devised a range of ways to manage the complexities. We'd like you to tell us what works for you -- to identify the processes that helped you discover your successful approaches, and the decision makers who worked out the details.
Family businesses play an instrumental role in making America great. Please take a few minutes to tell us how you keep your enterprise running smoothly.
Thank you for your participation.
The pitfalls of going public
Financial Times columnist Michael Skapinker recently weighed in on the acquisition of Timberland, the publicly traded, family-controlled manufacturer of boots and other outdoor sportswear, by VF Corporation, whose brands include North Face and Wrangler.
Skapinker -- who noted in his column that he is a fan of Timberland boots -- said he admired the founding Swartz family's sense of corporate social responsibility.
Skapinker cited an October 2010 FT interview with third-generation CEO Jeffrey Swartz. The 2010 article discussed Timberland's standard-setting environmental reporting, its installation of solar panels at company headquarters and its garden where Timberland employees, on company time, grew vegetables for a local food bank.
In lamenting the change of ownership that might well result in the disappearance of these socially responsible practices, Skapinker wrote, "[C]orporate responsibility can survive only if it improves the financial outcome...." He added:
If, as in Timberland's case, your margins are less than half those of your peers, many shareholders will begin to wonder where all the eco-consciousness and community work is getting them.
A privately owned socially aware company can, of course, decide to live with reduced profitability.... [W]hen a family-run business lists on a stock market, its destiny passes to others, who may have less time for its ethos than we customers do for our old boots.
I haven't always agreed with Skapinker's views, but in this case he is right. Way back in our Spring 1996 issue, Family Business Magazine published an article titled "Perspectives on going public," in which author Monica Wagen reported the results of a study of 200 family businesses in Europe, Asia and the U.S. conducted at international business school IMD.
Wagen's article noted that there were several advantages of publicly listing a family company's stock, including greater marketability of shares, increased value of the company, cheaper capital, incentives for non-family managers and increased prestige.
But there are key disadvantages as well, Wagen noted: Going public leaves a family company vulnerable to a takeover by an investor, entrepreneur or competitor. It gives outsiders a say in the family business's operations.
And, unlike family owners, public shareholders tend to judge management's performance solely in terms of dividends, profits, and stock price.
Skapinker noted that in a webcast, acquirer VF promised to maintain the corporate culture at Timberland. "But," he wrote, "its executives spent more time vowing to raise Timberland's 9 per cent operating margins to somewhere closer to VF's 20 per cent on its outdoor products."
One size does not fit all
Family business owners frequently call me for referrals to sources of help. More times than I can count, I have been asked where one can find "a template" for a succession plan or a family buy-sell agreement.
There are many places to turn for information on developing plans, policies and agreements. (Our Family Business Handbooks are a great place to start.) But these processes are more complicated than simply plugging names, dates and numbers into blank spaces on a form.
In order to preserve family harmony, foster business success and encourage long-term stewardship, these processes must be rooted in your family values and your business legacy.
Optimally, before developing succession plans or shareholders' agreements, you should sit down with your family members and create a shared vision about what makes your family business unique, where it came from and where it might be headed. Plans that are rooted in what's often referred to as a "shared dream" have the greatest chance of long-term success.
Family business advisers can help you do this work, but it's up to you and your family stakeholders to set your own course for the future.
Yes, this will take a considerable amount of time, and yes, it probably will involve some uncomfortable family discussions before the stakeholder group reaches an accord.
But a plan that you develop with input from your family will be infinitely more effective than one that you copy from someone else.
Even after all these years of working in the family business realm, I continue to be amazed at the number of successful family companies in which one or more family members (or an entire family branch) left the company under contentious circumstances.
Often, the family members who remain in the business refuse to discuss the reasons behind the split. Indeed, I've found that the percentage of people who are willing to talk about their acrimonious divorce is higher than the percentage who will tell me why their relative left the family firm -- even if the split occurred a generation or more ago.
This is true even when the business is obviously thriving under the current family management. Aunt Fanny's departure may have been the best thing that ever happened to the family enterprise, but no one will speak on the record about what went wrong with Aunt Fanny.
Of course, I understand family members' reluctance to reopen old wounds -- especially if the conversation is on the record. What I find astounding is how commonly such splits occur, and (apparently, given the widespread silence) how the hard feelings can persist for so many years in so many different families.
A family council can provide a forum for airing family issues. Even if some family members end up not getting their way in a business dispute, the blow is often softened if they feel their concerns were given a fair hearing.
In some cases, though, the disagreements are so all-encompassing that a family council can't resolve them. If this is the case in your company, you can at least take comfort in knowing that there are many others in your situation.
There are places to turn to ease the pain of a family rift. At peer networking groups, such as those offered at university family business centers, you'll meet families who are going through similar experiences; most of these gatherings are closed to the press. If you'd like to take steps toward healing in your family, there are experienced family business consultants who can assist with that process.
In some cases, unfortunately, the parties involved will not be able to reconcile. There is hope, however, that the next generation can bridge the gap. To increase the chance that this will happen, be careful to raise your kids without animosity toward your estranged relatives.
Bin Laden’s family business roots
Like most news junkies, I've read a great deal about the death of Osama bin Laden since the news broke on May 1 that a special team of U.S. Navy SEALs had killed the al-Qaeda founder in the Pakistan compound where he had been hiding. I've been paying particular attention to descriptions of bin Laden's family business background, which have figured prominently in his obituaries.
Osama's father, Muhammad bin Laden, was a penniless emigrant from Yemen who in 1931 founded a construction firm in Saudi Arabia; through his efforts, it became the Saudi Binladen Group, the royal family's favorite contractor and one of the world's most successful family businesses. Osama's mother was a teenager when she married Muhammad; she was his tenth wife, according to The Guardian. Osama was Muhammad's 17th child (there were 52 total) and seventh son.
Muhammad soon divorced Osama's mother and arranged for her to remarry one of his employees; Osama grew up with four stepsiblings and visited his father's family on weekends. The New York Times' obituary noted:
All of the Bin Laden children were required to work for the family company, meaning that Osama spent summers working on road projects. Muhammad bin Laden died in a plane crash in 1967, when Osama was 10. The siblings each inherited millions -- the precise amount was a matter of some debate -- and led a life of near-royalty.
Osama seems to have been an outsider within the family. Notably, he was the only one of his siblings who never studied abroad. While the other bin Laden children were exposed to Western culture, Osama was educated in a strict, anti-Western sect of Islam, the Times obituary said. As a student at King Abdulaziz University in Jeddah, where he studied civil engineering, he became involved with the Muslim Brotherhood, a radical group.
The Washington Post's obituary noted that Osama left the university to take a job with the family business as a Mecca-based manager. The company, under leadership of Salem, an older brother of Osama, had been awarded the job of renovating the holy cities of Mecca and Medina.
When the Soviets invaded Afghanistan in 1979, Osama at first "served essentially as a philanthropic activist," the Post article said. In the 1980s, he "threw himself more actively into the war."
An obituary in the Financial Times said that at the time, according to those who knew him, Osama had two motivations:
He was imbued by a pride in his family construction company's role in refurbishing the holy places of Mecca and Medina. And he was fired by Islamic duty to liberate Afghanistan....
The Post obituary noted:
Using equipment supplied by his family's firm, he helped build roads north toward Tora Bora, a mountainous region in eastern Afghanistan, and a warren of caves to serve as shelters and arms depot.... Even after Moscow announced plans in 1988 to begin withdrawing from Afghanistan, bin Laden hoped to develop a larger Arab force and employ it in a broader jihad.
In late 1989, Osama returned to Saudi Arabia and the family business, which by that time had become a global conglomerate with interests in industrial and power contracts, oil exploration, mining and telecommunications, according to the Post. Osama's brother Bakr had taken over after Salem's death in a plane crash in Texas.
Tensions began to mount between Osama and Saudi authorities. The Saudis were concerned about his support for Islamist rebels in Yemen and his opposition to the government. Osama was opposed to the Saudis' acceptance of U.S. troops in the country during the Iraq-Kuwait war in the early 1990s. Osama moved to Sudan, set up businesses that would help finance al-Qaeda, and ... you know the rest of the story.
The New York Times obituary noted that Osama's family, "which had become rich on its relations with the [Saudi] royal family, denounced him publicly after he was caught smuggling weapons from Yemen." A U.S. attorney representing the Saudi Binladen Group wrote in a 2004 letter to Thomas Kean, chairman of the National Commission on Terrorist Acts Upon the United States:
"By taking aggressive, well-publicized steps against a member of their own family as early as 1994, the Binladen family sought to do what it could to limit the influence of [Osama] and his followers.... In addition, [the Saudi Binladen Group] has a clear record of support for and cooperation with the U.S. government."
Khaled Batarfi, a childhood friend of Osama's, told Bloomberg after the terrorist's death:
"The general mood in the family is that this was a page of history that's closed and that family members hope there will be no violent responses."
The Philadelphia Inquirer reported that the U.S. government confirmed Osama's death by DNA analysis that "compared material collected from the body with that from (so far unspecified) bin Laden relatives."
Would Osama bin Laden have become a terrorist if his family background had been different? We can't know the answer to that. Certainly, other factors were involved, among them Osama's exposure to religious extremism and his experiences during the Soviet invasion of Afghanistan.
We can speculate, however, that without his connection to the giant Saudi Binladen Group, Osama probably would not have had the means to go as far as he did in creating what the Post called "one of the most ruthless, far-flung terrorist networks in history."
And indeed, it seems that Osama may not have entirely renounced the trappings of wealth, after all. As Inquirer columnist Trudy Rubin pointed out, "The image of the indomitable ascetic has been smashed as we learn he was living comfortably in an urban mansion."
Bloomberg Businessweek's Brendan Greeley put it this way:
Remember him as a thug and a murderer, but also as a self-obsessed diva with a gift for timing and spectacle. Bin Laden was a trust funder who took up performance art.
It's no secret that wealth and privilege have their dark side. Perhaps because of his family background or perhaps despite it, Osama bin Laden took that dark side to its most hideous extreme.
The recent Passover/Easter holiday season got me thinking about family traditions. Several years ago, when I took over the responsibility of hosting our family's celebration, I realized I had the opportunity to create new traditions that might make the holiday more meaningful for my generation -- but I also had the obligation to honor the memory of our past celebrations around my parents' dining table.
The dichotomy of tradition and reinvention was a topic of discussion at the recent "Transitions 2011" conference, sponsored by Family Business Magazine and Stetson University's Family Enterprise Center. As each new generation assumes leadership roles in the family and the business, they must determine which parts of the legacy should be preserved and which are actually hindering family unity or business growth.
Charlotte Lamp, an owner of the Port Blakely Companies, told conference attendees that one of her family council's most important -- but sensitive -- tasks was "de-mything" the family's long-held myths. (She also wrote about this in Family Business Magazine's Autumn 2007 issue.) Scott Livingston, president and CEO of Horst Engineering in East Hartford, Conn., noted that family legacies of traditionalism and frugality can actually impede business progress. Family business stakeholders must continually monitor which legacies are propelling the business forward and which might be holding it back.
My family seems to be pleased with my incorporation of a few new twists into our holiday ritual. It took some scouting around to find the recipes and readings that would make our meal memorable, but judging from the feedback, my search was worth it.
Of course, setting a multigenerational business family on a new course is much more complicated than reinterpreting a holiday celebration. While I could unilaterally decide to put a new appetizer on my table, setting a new course for a business family requires consultation and consensus building. But, as our conference speakers told us, the rewards might well outweigh the risks.
Nepotism at News Corp.
Among the major business headlines of last month was the promotion of James Murdoch, the 38-year-old son of News Corp. chairman and CEO Rupert Murdoch, to the newly created position of deputy COO and head of international operations at the media conglomerate. Although News Corp. spokespersons declined comment on succession plans at the company, analysts believe the move signals that James Murdoch will one day succeed his 80-year-old father as CEO of the giant global corporation.
Earlier in March, News Corp. shareholders filed suit against the company and Rupert Murdoch over its agreement to buy Shine Group, a London TV production company owned by Rupert's daughter Elisabeth, for $675 million. The suit alleged that the deal was an act of nepotism because "the transaction makes little or no sense for News Corp." and "is far above a price any independent, disinterested party would pay for Shine." Meanwhile, Rupert's eldest son, Lachlan, who was once News Corp.'s heir apparent, is reportedly preparing to resume a role in the business.
The Financial Times' "Lex" column on March 30 had an interesting take on James Murdoch's elevation. The column noted that there are two ways of looking at the promotion. On one hand, the shareholders who sued over the Shine acquisition would argue that "such practices make a mockery of public companies."
On the other hand, the FT column pointed out, "... News Corp. has always been completely open about the role of family in its business (the creation of non-voting shares for outsiders is a fairly big hint). If you don't like the set-up, don't buy the shares."
A week later, another FT writer, Michael Skapinker, penned an op-ed piece postulating that family business succession is falling out of vogue (although you and I can cite numerous examples to the contrary). The author compared family business successors such as the young Murdochs to royal family members. Indeed, Skapinker went even further than that, harrumphing:
All parents want the best for their offspring and, in ancient societies, it was the norm for leaders' children to succeed them. But democracy generally puts paid to that. The uprisings in the Middle East -- in Egypt, Libya and Syria -- are, in large part, revolts against dictators handing power to their sons.
So family business successors -- whose employees, shareholders, customers, lenders and suppliers are free to cut ties to their companies -- are akin to a new generation of dictators? Give me a break. Even the most passionate left-wing detractors of Murdoch's Fox News must admit that Skapinker's portrayal of family business succession is hyperbole at its worst.
True, sometimes family businesses name the wrong person as the successor (usually for the wrong reasons) -- but that doesn't mean all family business successors are destined to fail.
James E. Barrett, a family business adviser and frequent contributor to Family Business Magazine, addressed the issue of nepotism in family-controlled companies in our Autumn 2007 issue. In an article titled "The war against family control" (which, by the way, won an APEX Award for Publication Excellence), Barrett wrote:
... The assumption is that family successors ... lack the competence, motivation, common sense and business judgment to run a company, especially a huge one.
Most of society's biases have been addressed: Race, religion, gender, ethnic origin, disabilities, etc. are recognized as areas in which unfair negative bias existed and created damage and loss. It will be quite a while before much sympathy is mustered for executives who began with silver spoons and have had every advantage for their entire lives. Still, it is unfair to assume automatically that they're not up to the job. My experience, after three decades in management succession, is that most rise to the occasion when given the top job. Those who can't, or won't, generally have gone into another career track either voluntarily or with assistance.
The FT's "Lex" column noted that News Corp. shareholders might do better to focus their scrutiny on Rupert Murdoch rather than on any of his kids:
Rupert's undeniable passion for media is sometimes at odds with maximizing shareholder return. Over the past 15 years, News Corp. has lagged behind the S&P 500 index by a third.
The fact that James Murdoch is the CEO's son, by itself, is no reason to think he won't -- or shouldn't -- succeed.
Professionalizing your board
In its current issue, Family Business's sister publication, Directors & Boards, features an article by a pair of executives from search firm Heidrick & Struggles on including independent directors on the board of a family-controlled business.
Most of D&B's readers are directors of public companies or executives at those companies, so the article focused on directors of family-controlled firms that are publicly traded. But many of the points raised are applicable to privately held family firms as well -- even the smaller ones.
The authors -- John Wood, vice chairman and global managing partner of Heidrick's Chief Executive Officer and Board of Directors Practice, and Thames Fulton, a principal with the firm's Chief Executive Officer and Board of Directors Practice -- noted:
Longstanding agendas of different sides of the family -- some that may go back for decades -- can complicate board service, creating the need for a "voice of reason" to counterweight family factionalism and historical bias.
Wood and Fulton point out that, compared with non-family firms, family businesses need independent directors who have "a more nuanced set of behavior and people skills." They recommend two qualities that family companies should look for when interviewing prospective outside directors:
- "Deft candor": In addition to empathy and patience in the face of family drama, outside directors should be "super-independent"; they should be unafraid to offer candid opinions about board and management decisions.
- Diplomacy: Independent directors should be skilled at bringing together people who have divergent interests (such as factions within the family). These directors should advocate for the company as a whole rather than for any one faction.
The authors note that independent directors in family companies must tread the find line "between being empathetic to a family's long-held beliefs and values and being able to see when they are getting in the way of the company's growth and profitability."
If your company has not yet engaged any independent directors, consider whether two or three individuals with these skills could help your board work its way out of deadlocks.
Tradition vs. innovation
Wal-Mart may be the world's largest family business, but it's not immune to missteps. A recent Page One headline in the Wall Street Journal proclaimed, "Wal-Mart Tries to Recapture Mr. Sam's Winning Formula."
"Mr. Sam" refers to the company's late founder, Sam Walton, who built his empire on the philosophy of selling utilitarian goods to working-class customers at cut-rate prices.
The company -- whose current chairman is S. Robson Walton, Sam's son -- tried to compete with "cheap chic" retailer Target by stocking organic food and trendier clothes, raising prices on some items and changing store layouts to reduce clutter, the Journal article said. The strategy bombed, and Wal-Mart's U.S. same-store sales declined for two years in a row. A former Wal-Mart executive told the Journal:
"The basic Wal-Mart customer didn't leave Wal-Mart. What happened is that Wal-Mart left the customer."
Of course, you needn't feel too sorry for Wal-Mart. The company is still the world's largest retailer as well as the largest family business. Yet the behemoth's recent woes serve as a larger-than-life example of what happens when a family firm strays too far from its legacy.
This is not to say that every family business must blindly follow its founder's original vision. Indeed, doing so will often get a company into trouble. Consider, for example, the case of Fidelitone Logistics of Wauconda, Ill., a company profiled in Family Business Magazine's Autumn 2010 issue.
Fidelitone was founded in 1929 as a maker of phonograph needles. If the company had stuck with that business model, there's little chance that it would still be around in the 21st century.
Fidelitone's owners -- the Hudson family -- came to that conclusion way back in the early 1970s, when cassette tapes first became popular and threatened to replace phonograph records. The family opted to transform the company, building on its legacy of innovation and its expertise in distributing its product around the world rather than on its original mission. Under their leadership, Fidelitone evolved from a phonograph maker to a provider of supply-chain management and logistics services. The company now offers global support services to some of the world's largest brand names. It has grown through acquisition and generates $360 million in annual revenues -- a far cry from how it would have fared if it still produced parts for record players.
The challenge for next-generation leaders is to understand the difference between a business model that should be maintained (like Wal-Mart's) and one that must be changed (like Fidelitone's in its original incarnation). This is not always easy, especially in families who honor the founder and revere their legacy. (The Hudsons acknowledged their company's history by retaining the Fidelitone name after ditching the original mission.)
A board of directors that includes members not affiliated with the family or the company can help family members view the situation from an objective, market-based perspective. Even at a giant corporation like Wal-Mart, it can be tricky to manage the tension between tradition and innovation.
The Journal report noted this observation from a Wal-Mart executive at an investor meeting:
"You might say, in short, that we were trying to be something that maybe we're not."
Does your company need a Gen Y makeover?
In a recent Harvard Business Review article, Vineet Nayar -- CEO of HCL Technologies, a global information technology services company based in India -- speculated on what would happen if members of Generation Y were permitted to reinvent companies.
Members of this generation -- who were born in between the late 1970s and the early 1990s -- have a tendency "to question how things are done, rather than following instructions," Nayar wrote.
[K]eep in mind how alien most organizational environments must seem to them. Used to the web's meritocracy, they face rigid hierarchies. Comfortable with the transparency of social networking sites, they bump up against information silos and knowledge hoarding.
Nayar noted some of the entries in a business-school competition his firm sponsors, which asks students to imagine the organization of the future. Themes that have emerged from submissions from this year's crop of young people, he wrote, include "increasing democratic influence on the appointment of leaders," "giving people the chance to shape their work and organizations" and "creating ways to bypass the filters that impede direct communications." He observed:
This new generation is driven by the unwillingness to inherit some of the negative features of traditional management; indeed, by a sense of indignation that corporate citizens haven't already demanded better for themselves.
Many family business leaders are now in the process of welcoming Gen Y family members into their companies -- and are shocked to find that the young family employees expect to remake the company on their first day of work.
In the Autumn 2010 issue of Family Business Magazine, Stetson University professor Greg McCann and a former student, Gen Yer Leah Sullivan, wrote that members of this generation "have high potential yet are challenging to manage."
They have the highest education, the largest social networks and the best support system of any generation in history. Sine they were young, they've been told that they could do anything and be anyone.... Delayed gratification is a struggle for them. They want it all, they want it soon, and they want your support in getting it.... Gen Yers' unrealistic expectations and sense of entitlement can leave a less than positive impression.
These idealistic yet exasperating people are the future of your company. "If you can understand and engage Gen Y," McCann and Sullivan wrote, "you will have greater access to this talent pool, retain those workers more effectively and even better understand your clients, customers and other stakeholders who are Gen Yers."
At the upcoming Family Business/Stetson University "Transitions" conference, a group of Gen Yers will meet to discuss their concerns and expectations about their future roles in their family companies, and then report on these issues to the older conference participants. I'm looking forward to hearing their thoughts on how their family businesses could be reinvented.
A global problem: Slacker kids
If you're struggling to rein in younger-generation members who think their status as the founder's descendants means they needn't pull their weight in the family firm, take comfort in the fact that you're not alone. Even in war-torn Afghanistan, business owners are facing the same issues.
Last month, the Wharton School blog Knowledge@Wharton reported that Afghan participants in Goldman Sachs' "10,000 Women" program -- a philanthropic effort to promote social change through economic empowerment of women -- are learning the hard way that trouble ensues when family employees aren't held to the same standards as non-family workers.
The article cited the experience of business owner Fatema Akbari, whose company makes wooden furniture and toys. Akbari has hired 82 women whose husbands have been killed or wounded in the war. At one time, she also employed her daughter and her son. That didn't work out so well, she told Knowledge@Wharton with the help of a translator:
"My daughter was fine but my son wasn't doing what I expected of him. Even if your employees are family members, they have to have responsibilities and be accountable for what they are doing."
Mahbouba Seraj, an instructor for the 10,000 Women program from the American University of Afghanistan, trains the business owners to hold family members to the same standards as their non-family co-workers. Seraj told Knowledge@Wharton:
"I tell women entrepreneurs that they shouldn't treat family members any differently than other employees. They should clearly spell out the expectations in the beginning, give them a trial period and keep up on their progress.... Otherwise, family members will take advantage of the situation, especially the boys."
If an entrepreneur in an impoverished country besieged by war can ease out an underperforming relative, so can you.
Meeting a community’s needs
(Click image to view video)
The auto industry took a huge and well-publicized hit in the recent recession, yet Dallas-based Chacon Autos generated year-over-year profit growth. The third-generation company -- profiled in Family Business Magazine's current (Winter 2011) issue -- operates two Suzuki dealerships and six used-car stores in Dallas-Fort Worth and San Antonio.
As reporter Dave Donelson noted, used cars represent 90% of Chacon's sales, which total about $80 million annually. The company, which has about 160 employees, primarily sells low-mileage used cars to customers with damaged credit. It also finances nearly all of them itself. Although this strategy is risky, it contributed to the company's success during the downturn. The company's rigorous but informal credit approval process might not be viable under non-family corporate ownership, family members say.
Second-generation brothers Darrell and Gary Cheney run the business along with a group of third-generation relatives. Many of Chacon's customers have bought three, four or even five cars from the Cheneys over the years, and some car buyers are third-generation clients.
In 2010, Baylor University's Texas Family Business of the Year program presented Chacon Autos with the Founders Award, given to "the successful family business that has grown and adapted to present and future markets while maintaining the identity and original concept of the founder." The accompanying video was prepared for the award ceremony. You can find our Winter 2011 profile of the company here.
At the magazine where I worked before I came to Family Business, a group of colleagues would lunch together in the cafeteria each day. As we ate our sandwiches and salads, we'd discuss our families, our weekend plans and the books we'd read. Often, the conversation would turn to politics. That's when things got interesting.
Our group included passionate liberals as well as ardent conservatives. We came from a variety of faith traditions. Several of these lunch buddies had firmly held beliefs and did not hesitate to express them. As could be expected of a group of well-informed professional communicators, there were heated debates that involved pointed criticism of the other side's views. And, also not surprisingly, no one ever succeeded in changing anyone else's mind. Inevitably, the conversation would wind its way back to movies we'd seen or places we'd visited or what we were planning to have for dinner.
Though we didn't vote as a bloc, we worked as a team. At deadline time, it didn't matter who was a Republican and who was a Democrat -- we bonded around our shared mission. We've since scattered to the four winds, but we've kept in touch. We occasionally reunite for lunch, but these days we're more interested in catching up with each other's news than in advocating for our preferred politicians.
As I read the horrifying accounts of the shootings at an Arizona "Congress on Your Corner" event on Jan. 8 -- in which a Jewish Democratic congresswoman was among 14 people wounded and a Christian Republican judge who had come to say hello to her was one of six people killed -- I reflected on my ideologically diverse group of former colleagues. While lunching together never resulted in any political conversions, it did something more important -- it strengthened our respect for each other.
As President Obama said in Tucson on Jan. 12 at a memorial for the shooting victims:
"[L]et's use this occasion to expand our moral imaginations, to listen to each other more carefully, to sharpen our instincts for empathy and remind ourselves of all the ways that our hopes and dreams are bound together."
Many family business owners, especially those whose enterprises are small, tend to surround themselves with people whose views are similar to theirs. But we must get to know each other in order for our country to get past its present destructive divisiveness. Moving beyond partisanship will help us bring about economic progress -- and will make our society safer.
Sins of the father
The suicide of Mark Madoff, the eldest son of convicted Ponzi schemer Bernard Madoff, on the second anniversary of his father's arrest calls attention to the devastation the elder Madoff wrought not only on his unwitting clients, but also on his family.
As the New York Times reported, Mark Madoff, 46, hanged himself in his Manhattan apartment on December 11, with his two-year-old son in an adjoining bedroom. The Times account cited a person close to the family who said
Mr. Madoff had expressed both continuing bitterness toward his father and anxiety about a series of lawsuits that were filed against him, his brother Andrew and other family members.... Mr. Madoff was particularly upset that [bankruptcy trustee Irving Picard, working on behalf of victims of the scheme,] had named his young children as defendants in a lawsuit filed in late November seeking the recovery of money Bernard Madoff had paid out to his extended family over the years....
According to the Wall Street Journal, a friend of Mark Madoff's said he "worried about his children, whether they'd face a life of harassment because they were Madoffs."
A post on the Times' "DealBook" blog noted that Mark Madoff's wife, Stephanie, had applied to the court this year to have her surname and that of her two children with Madoff changed to "Morgan." The blog quoted a friend of Mark Madoff's, who said:
"He had always been so proud of his name and being the guy who was Bernie Madoff's son. And then afterwards all anyone ever saw in him was that he was Bernie Madoff's son."
Mark and Andrew Madoff were the ones who first confronted their father and then reported his confession to authorities. The Times article noted that "on the advice of his lawyer, Mark Madoff ... had no contact with his parents since the day before his father's arrest two years ago."
The "DealBook" report quoted another person close to Mark Madoff, who said:
"He was deeply, deeply angry at what his father had done to him -- to everybody. That anger just seemed to feed on itself."
Another family friend and business associate told "DealBook" he found it unlikely Mark Madoff knew about his father's fraud because Mark "was always a nervous wreck. He never could have stood it -- keeping a secret like that would have torn him apart."
By all accounts, the Madoffs had been a close family. That closeness, combined with Mark Madoff's role as head of trading at his father's firm, led Picard and others to question whether Mark really was unaware of the fraudulent scheme.
"Contrarian's Notebook" columnist Dan Rottenberg wrote in Family Business Magazine in Summer 2009 that Bernard Madoff's guilty plea and refusal to cooperate with authorities against other individuals
implies that Madoff is covering up for others. It points a finger of suspicion at his closest relatives even though they may indeed have been unaware of his criminal activity. And by confessing to his family before he confessed to the feds, Bernie effectively made his loved ones accessories to his crime, forcing them to turn him in, lest they be arrested as well.
The Wall Street Journal reported that Andrew Madoff "has had moments of intense grief" since his brother's death. "[T]he loss of his childhood family is complete," the article noted.
According to news reports, Mark Madoff was cremated, and no funeral service was held. A private memorial service took place at an undisclosed location.
His children, the youngest of whom are two and four, are now fatherless. News accounts have reported that Picard's lawsuits will continue despite Mark's death.
Whether or not Mark Madoff played a role in his father's grand swindle, the sins are being visited on a third generation.
A two-year estate tax compromise
Unless you've been hiding under a rock, you've heard that President Obama has signed into law a bill that extends the expiring Bush tax cuts for all Americans for two years, extends unemployment insurance benefits for 13 months and cuts payroll taxes by 2% in 2011. The bill -- the result of a compromise between the president and congressional Republicans -- also resurrects the estate tax, which had been temporarily repealed in 2010, but at a lower rate than scheduled under the Bush law.
For the next two years, the estate tax rate will be 35% for inheritances above $5 million for individuals ($10 million for couples). Before the new bill was enacted, the estate tax had been scheduled to return in 2011 to its 2000 levels: a 55% rate on inheritances above $1 million for individuals ($2 million for couples).
For business families and families of wealth, the bill alleviates uncertainty about the future of the tax -- but only until 2012. A Wall Street Journal article published before the bill was passed lamented that a temporary solution requires owners of small family businesses to pay significant fees to lawyers, accountants, appraisers and other advisers to help them with strategic planning and "to keep up with the shifting code." The Journal cited the case of John E. Anthony, patriarch of Anthony Timberlands Inc. in Bearden, Ark.
Each time the tax code changes, Mr. Anthony re-evaluates his succession plan and analyzes his exposure to the tax. Because it is uncertain what the tax rate will be when he dies, he and his hired advisers develop several "what-if" scenarios.
Under the newly enacted bill, the heirs of any wealthy American who survives past December 31 will forgo a windfall (the Wall Street Journal estimated that the family of New York Yankees owner George Steinbrenner, who died July 13, 2010, saved up to $600 million in estate taxes), but they will pay less than they would have paid if the new law had not been passed.
Estate tax opponents plan to continue their advocacy for lower rates. According to some reports, they will push to have the rate lowered to 15% and the exemption level for couples raised to a level as high as $14 million for couples when the current compromise expires in two years.
But tax avoidance isn't necessarily what these families should be most concerned about. Consider this advice, offered by attorney Joe Goodman in Family Business Agenda 2009:
Do not be preoccupied with minimizing taxes. Family dynamics, asset protection and raising good kids are three examples of objectives that should be considered in the financial and estate plan for people of wealth. This is not the place to cut corners, minimize time or save a few thousand dollars.
In the same issue, attorneys Henry C. Krasnow and Karin C. Prangley warned:
Successful businesses all need some of the same things: cash, leadership that can implement forward-looking plans to keep up with competition, and owners who understand the need to sacrifice short-term satisfaction for long-term goals.... Denying these to a business in order to save taxes is a very shortsighted tradeoff. Unfortunately, business owners often ask their advisers only for tax-saving techniques.... Think long and hard about several "what-if" scenarios and come up with a solution that will best ensure the continued success of the business..... [R]emember that the manner in which the stock of the business is distributed can have a profound impact on how the company is managed.
Planning for the unexpected
A recent article in the Financial Times noted that more organizations are practicing the art of scenario planning in response to the world's multiplying uncertainties and the escalating stakes in the current economy.
According to the FT report, Royal Dutch Shell introduced scenario planning in the 1970s, when it began to anticipate conditions in the energy industry.
Since [the 1980s], the practice has gone in and out of fashion, generally becoming more popular at times of greater uncertainty. In 2000, it was used regularly by about 35 per cent of companies, according to the Management Tools and Trends survey, published every two years by Bain & Company, the consultancy. After the terrorist attacks of September 11, 2001, this figure rose sharply to reach 70 per cent by 2002, before falling back again. Today, it stands at about 42 per cent, and rising....
Family Business Magazine has long been an advocate of scenario planning. In an article in The Family Business Conflict Resolution Handbook, author J. Peter Duncan presented templates to help family business owners identify changes that might occur in their company's market segment, and separate facts from assumptions.
Scenario planning is also extremely useful in preparing to address family crises. Way back in Family Business Magazine's Autumn 1997 issue, family business adviser Bonnie Brown (now Bonnie B. Hartley) identified a number of scenario-planning strategies -- she called them "fire drills" -- to "teach individuals to build skills that help family management and ownership systems not only to survive major transitions, but thrive on the challenges that surface in the process."
The most common family business "fire drill" involves pretending that the business leader is dead. Who should be informed, and what do they do next?
Hartley's 1997 article suggested other drills, as well. In one of them, for example, senior-generation members devise a plan for achieving economic and emotional independence from the business. In another, business owners pore over the shareholders' agreement to check for potential landmines.
If you're not convinced that it's worth taking time from daily operations to conduct these drills, consider this anecdote that Luc de Brabandere, a partner and managing director at Boston Consulting Group's Paris office, related to the FT. A client of Brabandere's was having trouble choosing among three potential candidates for a senior position. The organization, which had recently conducted a scenario-planning exercise, discussed the scenarios with the candidates. Brabandere told the FT:
"Putting each of them into the scenarios revealed quickly that one of the three was much more robust, and could deal much better with turbulence, than the others."
Time for post-election regrouping
By now you undoubtedly have read numerous analyses of the U.S.'s midterm elections. There's little left for me to add.
It's clear that the new Congress will press for changes in the Obama administration's plans, including health care reform as well as environmental and financial regulations. The expiring 2001 and 2003 tax cuts may well be renewed for all Americans -- not just individuals with annual income of less than $200,000 per year and families earning less than $250,000, as President Obama and the Democrats would prefer.
Many family business owners spent the past two years huddling with their advisers to consider potential ramifications of the administration's proposed policies and plot their response. Some of those plans can be set aside until the new Congress acts. Some will have to be completely revised.
While you and your advisers are in wait-and-see mode, why not seize the opportunity to address other family business issues you may have been neglecting? Successor mentoring, shareholder relations and potential new strategic opportunities are some of the areas where an investment of time can pay off handsomely.
Odds are that your family's discussion of these topics will be less contentious than Congress's debate over the country's future.
Tragedy in Phila.: A self-defense plan that backfired
Philadelphia jeweler William Glatz paid the ultimate price for his devotion to the neighborhood where his father, a German immigrant, had founded his family business more than 60 years ago. On October 21, Glatz was killed in an armed robbery attempt at his store.
As the Philadelphia Inquirer reported, Glatz, 67, had kept his store in the Northeast Philadelphia neighborhood, even as other family businesses relocated to escape the area's rising crime rate. In the last year, as reported in an Inquirer follow-up story, the street where Glatz's store stood had experienced a bank robbery, two store robberies and four burglaries. In 2004, two restaurant employees were killed in a robbery in the area.
A friend of Glatz's whose family used to operate a nearby deli and beer distributorship told the Inquirer:
"I think everybody saw the neighborhood changing, but he wanted to hang in. This is where his dad and mom had been."
Glatz died in an exchange of gunfire with two robbers, one of whom had escaped from prison earlier in the month and had a record of 13 arrests. Glatz, who had been working in the back when the robbers arrived, emerged with his .357 Smith & Wesson revolver in hand, and a shootout occurred.
According to the Inquirer's account, a jewelry sales representative who was in the store at the time was also armed. When the intruders announced their intent to rob the store, the sales rep attempted to pull out his gun but dropped it when the robbers ordered him to do so. A store employee was able to escape. Then Glatz appeared with his weapon. The intruder who had escaped from prison was also killed in the resulting barrage of gunfire.
As I read these news reports, I wondered: If Glatz had followed the sales rep's lead and not raised his weapon, would he still be alive today? Did the steps he took to protect himself actually cause his death?
Back in 1999, when I was on the staff of Jewelers' Circular Keystone, a trade magazine for the jewelry industry, I wrote a report entitled "Facing Fear: Jewelers and Guns," which examined the issue from a variety of perspectives. I wrote:
The Jewelers' Security Alliance, Jewelers Mutual Insurance Co., and law-enforcement officials are unequivocal about how to handle [a robbery]: Cooperate with the robbers. Give them what they want. Don't attempt to arm yourself.
This advice notwithstanding, many jewelers -- a tempting target for robbers because their wares are both pricey and portable -- keep guns in their stores, my report found.
For my 1999 article, I interviewed five jewelers who had confronted armed criminals and lived to tell the story. Some of these business owners had been armed; some had not. The outcomes varied widely. Two jewelers I interviewed fired successfully at thieves and avoided harm to themselves. One of those jewelers, Gary Baker of Richmond, Va., killed two robbers in an epic gun battle in which 33 shots were fired. Baker's actions garnered him a visit from former Virginia Gov. George Allen and an award from the National Rifle Association.
But Mark Chilutti, a Philadelphian like the late William Glatz, was left a paraplegic after being shot by a robber; though Chilutti had a gun, he never had the chance to reach for it. Another jewelry store owner, Jack Schram of West Palm Beach, Fla., brandished a gun during a robbery attempt but neglected to take the safety off; the robber shot him five times, took his weapon and would have killed him if the gun he pointed at Schram's head had not been out of bullets.
Barry Nicholls of Naples, Fla., was not in his store when two thieves bound his manager, Dell Jenkins, and held a knife to her throat. Jenkins was unarmed and did not resist, and the thieves made off with merchandise whose worth Nicholls estimated to be between $50,000 and $120,000. The robbers were never caught.
Nicholls told me that immediately after the incident, "it was like the end of the world. But upon deeper thought, I realized that I was insured and the insurance would cover me." Most important, Nicholls said, was the fact that Jenkins survived the robbery.
The debate over gun ownership in the U.S. will never subside; citizens on either side of the issue are passionate and vocal. There are few statements on the subject that everyone will agree with, but I will offer this: What happened to William Glatz is heartbreaking.
According to an Inquirer account, a note attached to a wreath on the door of his shuttered shop read:
"William Glatz, Child of God ... husband, father, family man, friend, entrepreneur, provider, community icon, neighbor, and neighborhood hero. You will be missed. God loves you and so do we!"
Where America shops ... and Slim’s son registers
Carlos Slim Domit, the eldest son of Carlos Slim Helu -- the world's richest man -- married Maria Torruco on Oct. 9 in a Mexico City ceremony whose guest list included former Spanish Prime Minister Felipe Gonzalez, Mexican President Felipe Calderon and U.S. investor Warren Buffett, according to Reuters.
The Reuters report noted that Torruco and Slim Domit -- vice chairman of holding company Carso Global Telecom and chairman of the board of Telefonos de Mexico -- registered for wedding gifts at ... Sears.
Why would an heir to a $50 billion fortune ask his A-list wedding guests to select presents from a downscale chain? Because, as Reuters pointed out, Sears is one of the Slim empire's holdings. Why not ask your guests to support your family business?
Longtime Family Business contributor James E. Barrett touched on this issue in an Autumn 2002 column. "Most families expect all members to be loyal to the company," wrote Barrett, who heads the family business practice of Cresheim Inc. in Philadelphia. "But what does that mean? Who decides? How important is it? What's the cost of disloyalty?"
The owner of an American-brand auto dealership might be angry if his son, the company's sales manager, is seen tooling around town in a Porsche, Barrett noted. But in some cases, the adviser wrote, patronizing the competition can be justified -- for example, if the family sells high-end products that younger members couldn't afford even with a discount.
Barrett noted that while "a rigid ‘loyalty policy' flies in the face of common sense," certain standards are expected from a family that's well known in their community. "[B]eing part of a family business, even at the outer fringes, involves some responsibilities along with the goodies," he cautioned.
No one would bat an eye if Carlos Slim Domit and his new bride had registered at Neiman Marcus. But requesting gifts from Sears -- including a $2 kitchen bowl set, according to Reuters (do you think that's what Buffett got them?) -- sends a message about where their loyalties lie.
Reinventing the family business
The current (Autumn 2010) issue of Family Business Magazine features a profile of Fidelitone Logistics, a company based in the Chicago area that generates $360 million in annual revenues and employs more than 600 people in 20 locations worldwide. The company, owned and operated by the Hudson family, was founded in 1929 as a manufacturer and distributor of phonograph needles.
Yes, you read that correctly. Eighty-one years after the family started making a now-obsolete product, they're enjoying nine-figure sales. How did the Hudsons achieve this high level of success? The answer is simple: Starting in the 1970s, the company began to evolve away from the phonograph needle business. Reporter Deanne Stone tells Fidelitone's story:
With its one product on the path to obsolescence and its revenues dwindling, the company had to move quickly to stay afloat. It had had years of experience distributing its own product around the world, so why couldn't it do the same for other companies? Today Fidelitone Logistics is recognized as an innovator in supply-chain management and third-party logistics.... Fidelitone Logistics provides global support services to some of the biggest brands in retail, consumer goods, electronics and medical devices.
The company's current CEO, Craig Hudson, credits the leadership skills of his father and predecessor, Douglas Hudson Sr., who steered the company through the transition.
Many a family business has gotten tripped up by a reluctance to change the business model. Family members must recognize that it's possible to revere and respect their ancestor who founded the company while at the same time responding to the demands of today's market.
Way back in the Summer 1994 issue of Family Business, Léon Danco -- the dean of family business consultants -- wrote:
To avoid being blindsided by change, successful business owners must be open to new ideas and innovations. They must rely on people I call "agitators with love" -- outside board members and truly committed advisors who will prod them to look to the future instead of looking back. They must constantly ask themselves how attitudes, society and their markets may be changing, what new technologies are coming along, what skills their successors will need to lead the company.
In our Summer 2003 issue, family business consultant Ellen Frankenberg wrote:
Family-controlled firms sometimes hold an advantage in quick decision-making, when owners share a common history, close communication and the ability to anticipate each other's thinking. But the weight of shared history and a family mind-set -- "We've always done it this way" -- can stifle innovative thinking.
And consultant Richard L. Narva offered this advice in The Family Business Mentoring Handbook:
However great a genius the founder was, he or she should always be perceived as an inspiration, not a model to be aped.
Think of it this way: If your ancestor were confronted with today's business environment, wouldn't he (or she) recognize the need to adapt to it? As Narva advised in our mentoring handbook, it's incumbent on the current business leaders to "view the company through the lens of the current business environment -- to see it for what it is, not what it was."
Partners in economic recovery?
A news brief on Portfolio.com this week noted that the Business Roundtable -- an association of CEOs of large U.S. companies -- has released a study touting the mega-firms' partnership with small business.
The study found that
on average, each large U.S. corporation purchases more than $3 billion worth of goods and services from American small businesses. Collectively, these large firms generate an estimated $1.5 trillion in sales for small businesses annually.
A Business Roundtable press release touting the report includes this quote from the group's chairman, Ivan Seidenberg, who is also chairman and CEO of Verizon Communications:
"This study underscores that the supplier-buyer relationship between American small businesses and large U.S. multinationals is a fundamental and entrenched aspect of our economy. American business -- small and large together -- drives economic growth and job creation."
The Business Roundtable, of course, has an ulterior motive for reminding us of its partnership with small businesses, Portfolio.com noted:
Given all the love that small business has been getting from politicians and economists, who view small companies as the critical engine of job growth, it's no surprise that big business is feeling left out.
Indeed, the Business Roundtable press release subtly ended with this sentence:
With large business purchases comprising nearly 13 percent of all small business sales, ensuring the health of large companies is critical to the success of small companies.
For the owners of smaller businesses, though, this partnership can sometimes be frustrating. Take for example the case of Mitchell Liss, owner (with his brother-in-law) of Edsal Manufacturing, a Chicago-based maker of shelving and steel furniture.
Edsal's U.S.-made products are sold at Home Depot, Lowe's and Sam's Club. But the company has not been able to make any inroads with Costco, which sells a competing product that's made in China. Liss explained his situation in an interview with Today's Machining World:
[Costco gets] roughly 180 items in a container at $20 a foot. That's $20 in freight on top of an item that they are paying $100 for. That's 20 percent of the cost in freight. Over here, if our labor cost is, on the high end say 15 percent of product cost, but we have no freight, and they've already got 20 percent of the cost in freight, why should Costco be asking, "Well, how could the U.S. possibly compete with China on such an item?" Even if labor were free here, it wouldn't equal the freight costs.... Obviously the current supplier, who is an importer and has a product made in China, has convinced them for whatever reason to not talk to anybody else.
Edsal was started by Liss's father-in-law in 1957 "in a garage with about $800 of borrowed money," and now employs about 1,000 people in four states, Liss wrote me in a recent e-mail. "We have a very low cost structure that does allow us to compete with Chinese and other companies abroad.... We are the epitome of the mid-sized business that is poised to add jobs here in the USA."
If the large companies were willing to broaden their partnership, smaller firms like Liss's could hire even more Americans.
A few bad eggs can hurt all family firms
A nationwide recall of eggs connected to widespread salmonella poisoning caused millions of wary Americans to alter their breakfast menus this summer, as federal investigators scrambled to find the source of the outbreak.
An Iowa family enterprise has been linked to the egg recall. The Des Moines Register reported that the giant DeCoster family agribusiness enterprise, which owns Wright County Egg, recalled millions of eggs it had shipped to wholesalers, distribution centers and food service companies in eight states. A New York Times article, citing a Food and Drug Administration official, said salmonella was found in feed given to pullets raised by a DeCoster facility and was also found in bone meal, an ingredient in DeCoster's feed.
[FDA] inspection visits to Wright County egg found barns with abundant rodent holes and gaps in doors, siding and foundations where rodents could enter. Inspectors spotted mice scampering about 11 laying houses.... The report on Wright County Egg also described pits beneath laying houses where chicken manure was piled four to eight feet high.
Austin Jackson DeCoster moved to Iowa from Maine and established large hog and chicken operations, Register reporter Philip Brasher told National Public Radio. The business, now primarily run by DeCoster's son, Peter, has been cited many times for environmental, labor and immigration violations.
The elder DeCoster paid $2.1 million in penalties after pleading guilty to federal immigration charges in 2003, Brasher reported in the Register. According to the New York Times:
Neighbors sued the DeCosters' farms for what they said were noxious gases, millions of gallons of uncovered manure and putrid animal carcasses left on roadways. The Iowa Department of Natural Resources declared [A.J.] DeCoster a "habitual violator" ... for [the business's] handling of hog waste. And Mr. DeCoster paid more than $1.5 million as part of a settlement with 11 female workers, most of them Mexican, at his egg facilities over sexual harassment and assault charges, including rapes by supervisors.
In late August, as news of DeCoster's misdeeds circulated, the Associated Press reported that a federal judge recommended approval of a $12 million settlement for victims of another salmonella outbreak caused by a family-owned business: Peanut Corporation of America, run by second-generation leader Stewart Parnell. PCA's products were linked to nine deaths and some 700 illnesses in 2009. PCA later filed for Chapter 7 bankruptcy.
Of course, family business misdeeds aren't confined to the agriculture industry. We have all heard stories of family firms in retailing, manufacturing, business services and other fields that have been cited by authorities for violations related to labor, safety, false advertising, tax evasion and other nefarious practices. Sadly, many of us know of other family businesses -- small as well as large operations -- that have committed similar transgressions and gotten away with them.
Numerous non-family corporations also disregard the welfare of their neighbors, employees and customers in the never-ending quest for profits. But when a family company makes headlines for serious violations, the fallout taints all other family-owned businesses, large and small, in every industry.
Family companies already must fight the perception that the controlling family is out to skim money from the business and create make-work jobs for undeserving family members. Counterbalancing this negative public image is the impression that family business owners, in contrast to faceless corporations, care about their communities and are concerned about future sustainability. When a family enterprise makes news for harming others, the negative image overshadows the positive one.
Once again, the good eggs in the family business community have gotten shelled.
Musings on the sale of America’s oldest family farm
About three weeks ago, the Boston Globe reported on the Tuttle family's plans to sell Tuttle Farm in Dover, N.H. The farm, founded in the 1630s, is the oldest continually operating family farm in the U.S. and No. 2 on Family Business Magazine's list of America's oldest family businesses.
The report was quickly picked up by other news organizations, and readers have expressed sadness that such a venerable family enterprise is coming to an end.
Certainly, as the editor of a magazine devoted to building and sustaining family businesses -- and celebrating the achievements of families who succeed in doing so -- I am sorry to see a high-ranking name disappear from our list of long-lived family firms. But it's important to note that a family shouldn't continue their business solely for the sake of corporate longevity or bragging rights. If their hearts tell them to sell, then selling is the right thing to do -- no matter how old the company is.
In the case of Tuttle Farm, the Tuttle family apparently grew weary of competition with large grocery chains. Will Tuttle, 63, who began helping his grandfather on the farm at age six, told the Globe:
"This is a different business now. Farming at any level is a labor of love, but now the future is so uncertain. Looking forward, I don't see much opportunity for small farms to thrive. It's a tough grind."
His wife, Michelle Tuttle, told the newspaper:
"A lot of people won't drive a few miles for fresh vegetables. They are going to Wal-Mart and Target and trying to save whatever they can, and we don't have the buying power to compete."
I can't help comparing the Tuttles' clear-headed decision making about the future of their farm to the 2006 acquisition of Japanese temple builder Kongo Gumi -- once the world's oldest family company (founded in the year 578!) -- by a public corporation, Takamatsu Construction. As family business adviser James Olan Hutcheson wrote in the Autumn 2008 issue of Family Business, Kongo Gumi's family owners took on excessive debt, a problem compounded by a recession in the company's primary business. Hutcheson wrote:
The circumstances that led to Kongo Gumi's dissolution ... were based on the astounding runup in Japanese real estate values during the 1980s, as well as the equally shocking collapse of the country's land prices that followed in the 1990s. What seemed reasonable adventures into real estate speculation thus led to $343 million in debt, which proved unsustainable as Kongo Gumi's temple-building business, affected by a secularization trend in Japanese culture, also declined significantly.
The Takamatsu executive who took over as Kongo Gumi's president after the acquisition also cited "reliance on overly expensive longtime suppliers and excessive executive perks," Hutcheson's report noted.
The Tuttles, rather than taking on debt or trying risky new strategies to compete in a cutthroat economy, are opting to exit on their own terms. They plan to maintain their ties to the land; they will move to a home they own next door to the farm. Because of a conservation restriction, they noted, the historic property will remain as open space for them to look upon proudly.
"I didn't want this to become a burden," Will Tuttle said in explaining his decision to the Globe. To me, that sounds like solid logic.
Family Business Magazine is honored
Family Business Magazine recently was honored with several trade press awards.
The 20th anniversary issue (Autumn 2009) received an Apex Award for Publication Excellence in the "Magazines & Journals - Print Over 32 Pages" category. The Apex Award is a national honor that recognizes excellence in publications work by professional communicators.
On July 28, I accepted two additional awards on behalf of our editorial and publishing team at the 2010 Northeast Region Azbee Awards of Excellence banquet, held in New York City. The Azbees are presented by the American Society of Business Publication Editors.
Margaret Steen's report on an unusual approach to succession planning at W.S. Darley & Co., a third-generation company in Itasca, Ill. ("Planning a smooth succession," FB, Summer 2009), received a Regional Gold Azbee Award. The award category was "Editorial Excellence - Case History."
Deanne Stone's profile of ABC Recycling Ltd. in Vancouver, British Columbia, a fourth-generation company owned by the Yochlowitz family ("Communication and commitment," FB, Summer 2009), received a Regional Silver Azbee Award for "Editorial Excellence - Organization Profile."
Of course, this recognition would not have been possible had the Darley and Yochlowitz families not shared their stories with us. We're thrilled the competition judges agreed that telling these stories provided a valuable service to our readers.
The name game
Earlier this month, Bloomberg reported that Gucci Group, now owned by PPR SA of France, filed a lawsuit in Florence, Italy, against Elisabetta Gucci, a great-granddaughter of Gucci's founder, seeking to block her from opening a hotel chain under the name EG Hotels by Elisabetta Gucci.
In an e-mail to Bloomberg, Gucci Group said:
"Gucci wants to make it clear that it has no relationship to Elisabetta Gucci Hotels and that it is not involved in any project whatsoever with Elisabetta Gucci Hotels. If necessary, Gucci will take any needful step to protect its rights."
Elisabetta Gucci seems to understand the importance of clarifying her independence from the company her great-grandfather founded. Her website says she has "no involvement with fashion herself or the main designer brand."
This case brings to mind Walter S. Taylor, the late owner of Bully Hill Vineyards in Hammondsport, N.Y. Taylor, a descendant of the family that owned Taylor Wine Co., was fired from Taylor by his uncles for criticizing the company's winemaking practices and started Bully Hill, which was formally launched in 1970.
When Taylor Wine Co. was sold to Coca-Cola, Walter Taylor was no longer permitted to use his surname on Bully Hill's labels. In protest, he blacked out his last name and featured a goat on his labels (which showcased his original artwork). His slogan was: "They have my name and my heritage, but they didn't get my goat."
Taylor -- who became a quadriplegic after a 1990 car accident and died at age 69 in 2001 -- renamed the entrance to his winery Greyton Taylor Memorial Drive, in honor of his father. The labels included the winery's address -- a roundabout way of getting Taylor's last name onto the bottles.
Another famous lawsuit over use of the family name involved winemakers Ernest and Julio Gallo and their younger brother Joseph, who had worked in the family wine business but didn't have an ownership stake. When Joseph opened a cheese business in 1983 and named it the Joseph Gallo Cheese Company, his brothers sued him for trademark infringement and won. (He renamed his business Joseph Farms.) Joseph later filed a countersuit in which he argued that his brothers owed him one-third interest in the wine business; he lost that suit as well. He was estranged from his brothers until his death in 2007.
A family policy on use of the family name -- one that anticipates what would happen to the name if the business is sold -- might avoid the tragedy of a family lawsuit. But a policy won't necessarily heal the hurt feelings of a family member who has been forbidden to use his or her own name. As Lorenz Ziller, managing director of the EG Hotels company, told Bloomberg:
"Elisabetta Gucci is doing her job. She cannot cancel her name or her background. If she has a famous name or a famous background, that's not her fault and we are not trying to use it as [such]."
The national pastime
In honor of the USA's 234th birthday, many citizens will spend the July Fourth weekend participating in time-honored American traditions: attending barbecues, marching in parades, watching fireworks -- and complaining about high taxes.
U.S. business owners and high-net-worth individuals have long railed against the federal estate tax, in particular. As part of a graduated series of tax reform provisions enacted by Congress in 2001, the estate tax was allowed to lapse in 2010. On Jan. 1, 2011, the tax is scheduled to return at a rate of 55% on estates of more than $1 million, unless Congress passes changes to the Economic Growth and Tax Relief Reconciliation Act of 2001.
Attorney Doug Raymond of DrinkerBiddle told attendees at the Family Business Magazine/Stetson University "Transitions" conference in April that a compromise being floated in the Congress would impose a tax of 45% on estates over $3.5 million. (A proposed tax of 35% for estates over $5 million would not meet "pay as you go" guidelines, he said.) "Because of the importance of this issue to so many people, and so many small businesses in particular ... it's likely that something will happen so that we don't end up with a 55% tax on January 1," Raymond said. "But if you're hoping to get much better than 45%, you're probably whistling in the dark."
Estate taxes weren't a problem for the heirs of Texas pipeline tycoon Dan L. Duncan, who died in March and was recently identified by the New York Times as possibly the first U.S. billionaire to pass his estate to his heirs tax-free. Forbes had estimated him to be the 74th-wealthiest person in the world, with a fortune of about $9 billion. Among the assets he left to his descendants were his holdings in EPCO and Dan Duncan LLP, two entities in his natural gas and pipeline empire, according to the Times report.
The tax savings to Mr. Duncan's four children and four grandchildren "is sure to be unsettling to those who have paid estate taxes on more modest wealth," the Times article noted. "Many lawyers say Mr. Duncan's heirs have the means and motivation to wage a fierce court battle to challenge the constitutionality of any retroactive tax."
I have previously written about the efforts of some terminally ill people and their families as 2009 drew to a close to prolong their lives past Jan. 1, 2010, so as to avoid the estate tax. Mr. Duncan, who died of a brain hemorrhage, made it to 77 -- relatively young by today's standards. Let's hope his heirs are sorry he died too soon, rather than happy that he picked a good year to expire.
Though Mr. Duncan's billions will be going to his heirs rather than into the federal government's coffers, there is hope that the beneficiaries will use some of their extra inheritance to benefit society. His will provided for donations to several philanthropic causes and directed that any funds or assets not otherwise specified for a relative or charity be put into two family charitable trusts, according to the Times report.
10 lessons from 10 years of experience
During the first week in July, I will mark my 10th anniversary with Family Business Magazine. It has been a rewarding decade, both personally and professionally -- not only because I have met many fascinating people while doing work I love, but also because I've learned so much along the way.
When I started at the magazine, I considered myself savvy about family businesses. After all, I had grown up in a business-owning family, and I had previously worked for a trade magazine in an industry composed primarily of family enterprises.
But back then, as the saying goes, I didn't know what I didn't know. After a decade of conversations with wise and generous teachers -- senior- and next-generation owners of family businesses (both successful and struggling), family business advisers from a wide variety of disciplines, academic researchers specializing in entrepreneurship and family businesses, directors of forums where family business owners gather to share experiences -- I've gained perspective on the scope of the challenges and the various paths to resolution.
To commemorate my 10 years at Family Business, here are 10 of the most important lessons I've learned since my arrival here:
1. Every family is unique; thus, every family business is unique. Resolutions to family business dilemmas must be tailored to each family's particular set of dynamics. Many family businesses have found that adoption of policies and procedures widely considered to be "family business best practices" has helped preserve family harmony and foster business success. (Examples: don't pay all siblings the same salary regardless of job title; require successors to work elsewhere before joining the family firm; establish a mission statement and a list of family values). Yet there are some thriving family companies that have bucked this conventional wisdom. The essential elements, it seems, are an awareness of such practices' effect on family relationships and business prosperity, and a readiness to change them when a new way of thinking is warranted.
2. If your company is affected by family strife, you are not alone. Most family business forums (generally, though not exclusively, offered through university extension programs) host peer discussion sessions where senior-generation leaders, successor-generation members, family business women and others can share experiences and concerns in an atmosphere of confidentiality. These meetings are revelatory to those accustomed to suffering in silence, mistaken in their belief that no other family has ever faced the issue that's troubling them. It's important to remember that even some of the world's most prosperous business families (think Chicago's Pritzkers of Hyatt Hotels Corp., or India's Ambanis of the giant Reliance conglomerate) struggle with relationship issues. Often a sympathetic outsider can offer a comforting perspective, or suggest a way to handle the situation.
3. Family business leaders must understand the difference between respecting the past and being tethered to the past. The founder of your company may have been an entrepreneurial genius who parlayed a great idea and a small amount of money into a prosperous business. But if that great idea is past its prime (and, given the rapid pace of change in today's marketplace, it may very well be), a new way of thinking -- and operating, branding and selling -- is in order. Too many senior-generation leaders look for successors who will continue to do things the way things traditionally have been done. What they should be doing is cultivating the ability to transform the business so it can prosper in the future.
4. Wise family business decision-makers consider the impact of their actions on future generations. When establishing an estate plan, a governance structure or other long-term entities, family business leaders tend to consider only the generations that are currently alive, and to focus narrowly on immediate concerns such as minimizing estate taxes. It's important to bear in mind that as the generations multiply, new family branches will form, and all these future shareholders will not be equally committed to the family enterprise. Consider, for example, the potential for family strife if trust provisions do not permit the trustee to buy out shares held in trust for a family member or branch.
5. Later-generation family business leaders must devote as much energy to family shareholders' issues as they do to business issues. Inactive family shareholders wield considerable power. Dissident family owners can sink a family firm. Family business leaders -- especially newly named successors -- must ensure that inactive shareholders are kept in the loop on key business decisions and understand why those decisions are made. The company should regularly communicate with family shareholders and offer training in business fundamentals and other relevant topics. Inactive owners must feel that their concerns are being heard and that their opinions are respected. And if the shareholders want to exit, they should be offered an opportunity to cash out.
6. Developing a truly viable and effective system of family governance requires a lot of hard work. Here are just a few of the many questions to be answered: Which family members are eligible to serve on a family council? Does every family member have a vote, or is each branch represented by one vote? What committees are needed (nominating, governance, etc.), and who is eligible to serve on these committees? Should family members be compensated for travel to family council meetings? Who will create the various components of a family constitution (mission statement, family values, policies, etc.)? Especially in large families, it can take years to create a governance structure that will last for multiple generations.
7. Written policies and agreements can prevent conflicts down the road. Family employment policies, prenuptial agreement policies, buy-sell agreements, dividend policies and family codes of conduct provide a predetermined way of handling contentious issues before these issues arise. If everyone knows that the family has a longstanding employment policy, for example, a prospective job applicant who is required to adhere to the policy won't feel unfairly singled out.
8. Future family business owners must be educated on the subject of risk taking. Business management and wealth management both involve risk. The economic downturn of 2008-09 taught us what can happen when risk isn't properly understood. On the other hand, calculated risk taking is necessary for business success. (If the founder hadn't taken a risk, the family business wouldn't exist.) Family business stakeholders must learn how to weigh risks and potential consequences.
9. Selling the family business should not be dismissed as unthinkable. Family business owners, naturally, feel a strong emotional attachment to the founder's legacy. But sometimes selling the family company offers the best opportunity for family members to achieve happiness and fulfillment. Family business owners weighing a sale might find it helpful to make a list of the pros and cons. (Families who don't want to sell their company but don't want to run it, either, might also consider hiring non-family executives and stepping into the role of investors rather than owners.)
10. A family can have an enterprise without running an operating company. Many families who have sold their legacy businesses continue to work together in private investment companies or family offices. Family foundations offer another opportunity for family members to continue a working relationship after the family firm has been sold. (It should be noted, however, that managing philanthropic activities is as much of a minefield for conflict as managing business operations.)
There is much more wisdom to be gleaned. Family business continues to evolve as a field of research and professional practice (and forward-thinking families are constantly developing new approaches to the dilemmas they face). The economic and social changes that are sure to come in the next 10 years will uncover new keys to long-term family business sustainability.
In mid-May, the Puget Sound Business Journal reported that a prominent Seattle family, the Binghams, lost "a substantial amount of its family fortune" in a series of failed real estate deals involving tens of millions of dollars. The federal government is investigating officials from the firm that arranged the real estate transactions, Centurion Financial Group. Washington state's Department of Financial Institutions is also looking into how Centurion raised money from investors, the article said.
The Bingham family matriarch, Frances Graham, inherited what the journal called "a fortune built over a century" from a diverse collection of businesses, including flour milling, broadcasting, real estate and the Internet. The initial family business, Fisher Flouring Mills Co., was founded in 1910 by Oliver David Fisher. (The family's holding company sold the mill business in 2000.)
Through their companies Bingo Investments and Bingo Properties, the family invested in the complex deals through Centurion, initially making a profit and then taking large losses when the commercial real estate market crashed in 2008 and 2009, the article said.
Banks that lent the family money to invest based on Graham's wealth have seized or moved to seize family assets, including yachts, luxury cars and multimillion-dollar homes, records in King County Superior Court show.
The Binghams got involved with Centurion around 2005 because a family member, David Bingham, was a friend of a partner in Centurion, Scott Switzer, the Puget Sound Business Journal reported. David Bingham is married to Frances Graham's daughter Sharon.
The Bingo investments proved profitable until the financial crisis hit and the market for real estate collapsed. Like a row of dominoes, developers couldn't make their loan payments to Bingo, and Bingo fell behind on its bank loans, according to court records.
Henry Dean, CEO of the Bingo companies and a lawyer for the Bingham family, told the journal that the family "thought of themselves as ‘mezzanine lenders.' They didn't understand what [Switzer's Centurion associate, Thomas Hazelrigg III] did for a living."
An attorney representing Patrick and Jan Cavanaugh, who lost millions of dollars in a Bingo deal, told the Puget Sound Business Journal:
"I don't think Centurion cared if Bingo was repaid. Centurion could see the golden goose would be dead pretty quickly and they wanted to get as many deals done as they could. The deals collapsed and Centurion walked away with the money."
This case brings to mind the losses suffered by the business families (unfortunately, there are many of them) who invested with Ponzi schemer Bernie Madoff. More sad stories are out there: In my hometown of Philadelphia, two "mini-Madoffs," one of whom has died, have made headlines and devastated families.
John Benevides, president of Family Office Exchange (FOX) -- a provider of education and peer networking to high-net-worth families -- discussed the ramifications of the Madoff swindle and the economic downturn at "Transitions," a conference hosted by Family Business Magazine and Stetson University's Family Enterprise Center in April.
Benevides told conference attendees that many of the families FOX serves now recognize that they had misunderstood their tolerance for risk and -- because they had enjoyed the upside of investment risk for so long -- failed to understand the potential for negative events.
In response to the events of 2007-09, Benevides said, families are changing their approach to investment risk. Among other measures, they're adjusting their due diligence process and focusing more on ongoing oversight, reevaluating adviser incentives and potential conflicts, shifting to investments and vehicles that offer transparency and liquidity, embedding more checks and balances in family investment processes, and using tools that facilitate discussions about risk.
"The silver lining" of all the unfortunate negative events, Benevides said, was the opportunity they have afforded for family conversations about investment risk. Will your family take advantage of this opportunity, or -- now that there are signs of an economic uptick -- will you just put the past behind you and forgo the chance to learn from it?
Test your family business brand awareness
Some family-owned or family-controlled companies actively promote their family heritage, but many do not. Do U.S. consumers know which major companies have family roots?
IMD, a leading international business school based Switzerland, designed a test in 2009 to measure the public's awareness of family DNA in European and South Korean corporate brands. The interesting finding of the test was that many family firms were not recognized as such. Some non-family firms were even falsely recognized as family businesses.
Is this also true for U.S. family businesses? To answer this questions, IMD has designed a U.S. version of the test, which is available online at www.imd.ch/brandtest. To assess your family business brand awareness, please visit the site and complete this quick quiz.
The results will be published in the Autumn 2010 issue of Family Business Magazine.
I just flew in from Florida ...
And no, my arms aren't tired (I'm an editor, not a Borsht Belt comedian), but my mind is swimming with ideas and action plans inspired by discussions with participants at "Transitions: The Changing Environment for Family Companies," a conference presented last month in Celebration, Fla., by Family Business in partnership with Stetson University.
Many themes emerged during the two-day event: preparing the next generation to lead, managing risk, fostering responsible stewardship. But what struck me most were the connections that resulted from the sharing of family stories.
Ross Born's family company makes candy. Bob Finfrock's company designs and builds parking structures. Howdy Holmes is a fourth-generation CEO. Chris Marlow is a college freshman. That's a diverse group of family business stakeholders -- but all of them offered valuable insights on preparing for a generational transition.
The succession challenges faced by each of these speakers' families were wide-ranging. Stories recounted at the conference involved marketplace issues, intrafamily conflict and generation gaps, among other hurdles.
Of course, because every company is unique and every family is unique, the solution that works well for one family may not be a viable option for another. What is helpful, though, is learning how another business family approached their challenges. You might not be able to adopt that family's exact approach in your business, but certain elements -- the forming of a family council or the creation of a values statement, for instance -- might help you develop your own strategy.
Sharing stories of how real-life family business owners resolved real-world dilemmas is the mission of Family Business Magazine. Many of the speakers, and even some of the attendees, have been featured in our pages over the years. The "Transitions" conference added the opportunity for discussion and enabled participants -- speakers, attendees and hosts -- to learn from each other. What's more, the conference was held at a family-owned hotel (the Celebration Hotel, owned by The Kessler Enterprise Inc.) and included dinner at a family-owned restaurant (Columbia Restaurant, owned by the Gonzmart family) -- and the CEOs of both the hotel and the restaurant spoke to our group.
Several speakers noted that businesses must continually evolve in order to survive -- a special challenge for family companies, which are often reluctant to alter the founder's business model. This conference represents one way in which we at Family Business are evolving. We have already begun planning for the next conference -- and we are exploring other ways to bring our content to life. Stay tuned.
The (big) bucks stop here
Several weeks ago, the Wall Street Journal released its annual survey of CEO compensation, analyzed by the Hay Group management consulting firm. (Full disclosure: Milton L. Rock, chairman of Family Business Publishing Company, was the managing director of the Hay Group until Hay was sold in 1984.)
The Journal survey assessed salaries, bonuses, long-term incentives, and grants of stock and stock options for CEOs of 200 publicly traded U.S. corporations. The survey found that the median compensation for the CEOs studied declined 0.9%, to $6.5 million. The highest-paid CEO surveyed is Ray R. Irani of Occidental Petroleum Corp., who took home $52.2 million.
Of the family-controlled public company leaders on the Journal list, Paul Jacobs, the second-generation CEO of Qualcomm, is the top name (No. 11). He received $16.8 million in compensation for 2009, a 6.8% decline from his 2008 pay. The next-highest-paid CEO of a family-controlled firm is Daniel Amos, the second-generation leader of Aflac (No. 31). Amos's 2009 compensation -- nearly $13 million -- increased by 22.4% over the 2008 figure.
Near the bottom of the Journal's list is Donald Graham, third-generation CEO of the Washington Post Co. (No. 193), who received only $400,000, plus a $12,740 contribution to his 401(k) retirement plan. As the Associated Press noted in a March 24 article, Graham's pay declined from $811,960 in 2008 because the Post CEO refused a bonus in 2009. The AP report noted:
The Post's board of directors believes Graham is underpaid, according to [a Securities and Exchange Commission] filing, but Graham wanted his salary to remain at $400,000 -- the same as in 2008.... Unlike most CEOs, Graham doesn't get annual grants of stock options or other similar incentives because he is the company's largest individual shareholder.
The Post Co.'s flagship publication, the Washington Post, is facing declining advertising revenues, a problem plaguing the entire newspaper industry. Yet at another family-controlled newspaper company, the New York Times Co., non-family CEO Janet Robinson took home total compensation of $6.2 million in 2009. The Times Co.'s chairman and publisher, Arthur Sulzberger Jr. -- a member of the controlling Ochs-Sulzberger family -- received $5.9 million, according to Editor & Publisher, a trade publication. (Robinson and Sulzberger's salaries were not included in the Wall Street Journal survey.) According to the E&P report:
The majority of both executives' compensation was tied to financial targets set by the company. Robinson and Sulzberger's salaries were less than their target but they both exceeded the mark with their annual bonuses: Robinson had an annual bonus target of $1 million and actually made $1.35 million, while Sulzberger had a target of $1.087 million and actually made $1.451 million. Robinson was compensated $893,750 under a four-year long-term incentive program and $1.4 million in stock options. Sulzberger was compensated $962,500 and $1.085 million, respectively.
The E&P report also noted that in 2009, the Times Co. temporarily reduced salaries of non-union employees at the Media Group by 5%; the Newspaper Guild voted to reduce salaries by 5%; and executives took a 5% cut in their base salaries.
The news about Robinson and Sulzberger's compensation did not sit will with members of the Boston Newspaper Guild, the largest union at the Boston Globe, which is owned by the Times Co. Dan Kennedy, author of the Media Nation blog, quoted a draft of a letter to the Times CEO and chairman from the Boston Newspaper Guild, the largest union at the Globe. According to Media Nation, the draft of the letter said:
We were astonished to learn that the two of you received more than $10 million in stock awards and options in 2009. During the year for which you were so richly rewarded, the 600 members of the Boston Newspaper Guild gave back almost the same amount in pay and benefit reductions --$10 million, to be exact -- after you threatened to close our newspaper, lay off hundreds of people, and strip Massachusetts of its largest newspaper.... [T]he recent SEC filings make it look like almost all of our sacrifices went to pay the two of you.
The downside of starring in your own ads
For the cover story of Family Business Magazine back in January/February 1991, we profiled members of business families who star in their company's ads. Our cover photo featured Gert and Tim Boyle, the mother-son duo who control Portland, Ore.-based outerwear maker Columbia Sportswear. The Boyles have amused generations of customers with their "overbearing mother and long-suffering son" ad campaigns. (One magazine ad featured a photo of Tim holding an empty hanger and the slogan, "Mother wouldn't approve a single ski parka for this ad," followed by a two-page spread in which Gert offered "three damn good reasons why" -- Columbia's outergarment, the ad copy explained, was actually three parkas in one.)
Being your own spokesmodel has its drawbacks, our 1991 article noted. "The business that aspires to become a high-tech, global company," our report said, "may want to keep its family origins in the background."
Bernie and Phyl Rubin, the entrepreneurial couple who in 1983 founded Bernie & Phyl's, now one of New England's largest furniture emporiums, discovered another downside to pitchmanship, the Boston Globe recently reported. The Rubins, known throughout the region as the stars of their company's folksy TV commercials, tried to keep Phyl's multiple sclerosis under wraps -- even among their friends, family, customers and employees. But viewers flooded the company with e-mails and phone calls wondering about her condition. Not all of these communications were supportive, Bernie Rubin told the Globe.
"Most of the time I'd just say she's fine. It's been that way since day one. Most of the nasty e-mails I never told her about. You get mad but what can you do?"
Why did Phyl want to keep her disease a secret? She told Globe reporter Jenn Abelson:
"I am a private person. I didn't think it was anybody's business."
She persisted in filming the successful ads out of dedication to her business, donning a wig when an experimental drug she took made her hair fall out. Her son Larry, the company president, admitted to Abelson that this caused "a tricky situation":
"When you're on TV and you're trying to promote your company, you want to put forward the best public image. You don't want to raise questions.... We want to sell furniture, we want to promote our furniture store."
Phyl, who is now semiretired, has decided at last to go public with her illness. As the Globe reported, she and Bernie are now appearing in a new series of ads -- public service announcements to raise awareness of multiple sclerosis and help others with the disease. In May, she'll be honored by her local chapter of the National Multiple Sclerosis Society. Like actor Michael J. Fox, who initially concealed his Parkinson's disease, she may find a new leading role as an advocate for medical research.
I often receive calls from family business owners seeking referrals to an adviser who can help them resolve a nettlesome issue (usually, though not always, related to succession).
This request in some ways is analogous to asking a matchmaker to find you a spouse. You'll receive a list of names, but you need to spend time with the candidates to find the one who's right for you. If you're going to share sensitive information about your family relationships with an outsider, the chemistry between you must be right. And, just as in the dating scene, you must understand that there are bad apples out there.
Family business owners have been recognized as "a market" since the 1990s and, consequently, the number of firms calling themselves family business advisers has mushroomed. How can you distinguish those who can really help you work toward resolution of your particular dilemmas from those who just want to sell you a prepackaged service?
There are hundreds of consultants around the globe who truly understand the challenges of mixing family and business, and the many ways in which family enterprises differ from companies not owned and operated by a family. The Family Firm Institute, for example, provides opportunities for professionals in the field to discuss the latest academic research, share insights gleaned from their individual practices and facilitate interdisciplinary collaboration. FFI offers a certification program to recognize practitioners who have met rigorous knowledge standards.
Over the years, Family Business Magazine has published several articles offering tips on interviewing family business advisers, and on working with them once you've hired them. (To address many complex family business challenges, a multidisciplinary team of advisers is needed.) You can find some of our most helpful articles here, here, here and here.
To the wise suggestions presented by those authors, I'll add my two cents' worth: When interviewing consultants who want your business, consider their message carefully. Do their comments help you view family enterprise in a new light, or are they rehashing conventional wisdom? Are they offering generic advice that doesn't take family relationships into account, or do their comments address the unique concerns of a family business? Are they demonstrating thought leadership, or giving you a sales pitch?
When a business owner approaches me for a referral, I encourage him or her to visit Family Business's Directory of Advisers, which is available in each print edition of our magazine as well as online. (You can find it here.) Our directory connects you with advisers' websites so you can obtain information about their approach before you make the first phone call.
Like dating, searching for the right adviser is a learning experience. Educate yourself about what's out there before taking the plunge.
Have you created a list of company values and put them into writing? If your company values were created by a previous generation, have you assessed whether they need to be revised?
Some business owners insist that developing company values is a waste of precious time and brainpower. Others come up with a list of values -- usually because a consultant told them to do it, or they read a book that said it was something they needed to do -- and promptly forget about it. The values are listed in writing, but no one from the company ever looks at the list.
For those business owners who doubt the value of values, I offer one giant cautionary tale that's been all over the news lately: the case of Toyota Motor Corp.
Toyota president Akio Toyoda, grandson of the company founder, appears to have recognized that his company had a problem with values disconnect before the recent mass recalls of Toyota vehicles. The Wall Street Journal reported (emphasis added):
In a news conference immediately after taking over last June, Mr. Toyoda said the company erred in the last decade with an all-out push to become the world's largest car maker, drifting away from its core value of focusing on the customer.
In a Feb. 23 op-ed article in the Journal, Toyoda wrote:
"When my grandfather brought Toyota into the auto business in 1937, he created a set of principles that has always guided how we operate. We call it the Toyota Way, and its pillars are 'respect for people' and 'continuous improvement.' I believe in these core principles. And I am convinced that the only way for Toyota to emerge stronger from this experience is to adhere more closely to them."
A recent Bloomberg News report said that in 2005, Toyota's then-president, Katsuaki Watanabe (now a Toyota vice chairman), boasted to New York's financial community that a cost-control program he designed had yielded $10 billion in savings over six years, and that he planned to roll out a more "aggressive version" of the program. Citing Toyota's "obsession with cost reductions and rapid growth," Bloomberg called the cost-control initiative "a steroid shot to Toyota's trademark ‘kaizen' approach of steady, gradual cost reduction."
But there were warning signs. The Journal report noted that between 2005 and 2008, as the company expanded its North American operations in its quest to become the auto industry's leading player, "Toyota was confronted with quality problems." In 2006, Watanabe -- who is an economist, not an engineer -- delayed introductions of some new models and eliminated some planned products altogether, the Journal article said.
After a two-month review, Toyota concluded that its product-development process was fraying at the edges due to its emphasis on its global expansion.... Toyota engineers reached [in January 2010] said they wondered whether current problems are an echo of product-development problems tackled under the former president. Mr. Watanabe's "remedies were supposed to have fixed the problem," said one Toyota engineering director. As the company resumed its rapid growth, more problems surfaced.
A Business Week article said that "Millions of Toyota's cars currently on the road were engineered and manufactured before the company launched its quality crackdown."
Jim Press, Toyota's former U.S. chief (he left in 2007), told Bloomberg:
"The root cause of their problems is that the company was hijacked, some years ago, by anti-[Toyoda] family, financially oriented pirates."
Mikiharu Aoki, who worked at Toyota for 26 years and in 2007 founded a consulting firm to teach Toyota's lean manufacturing system, told the Journal:
"[Toyota] has failed to comply with the principles that it had created."
Now Akio Toyoda is in the unenviable position of having to repair his company's damaged reputation. As the Business Week article pointed out:
After years of being the benchmark for quality, Toyota has been losing its edge even as its rivals catch up. And while vehicle recalls are fairly common, those of this magnitude and seriousness tend to stick in consumers' minds.... Ultimately, Toyota will have to decide if being the biggest car company on the planet is worth sacrificing the attention to detail that made it such a formidable competitor.
Toyoda must salvage his family's reputation as well. He wrote in the Journal op-ed:
All Toyota vehicles bear my name. when cars are damaged, it is as though I am as well.
In The Family Business Shareholder's Handbook, family business consultant Margery Engel Loeb explains how values guide a business:
- Values provide direction and purpose and serve to energize the organization's culture. ...When a business develops strategies based on the values embraced by shareholders and managers, the entire organization is more likely to support the plan because the rationale is clear.
- Values demand action. When business leaders live by their values, their behavior will be reflected throughout the business.... If a company proclaims excellence as its defining quality, employees often receive tools, training and management support to offer the best products and services possible.
- Values make a company stand out. The organization's values define its purpose and differentiate it.
I recall (no pun intended) a conversation I had some years ago with a successful family business CEO who told me that whenever her company faced a major decision, she and her staff would consult the company's values to determine whether the proposed course of action aligned with those values. Perhaps if Toyota executives had routinely conducted a similar exercise, the company could have avoided its current predicament.
McKinsey report adds two circles
The January 2010 issue of McKinsey Quarterly, published by McKinsey & Co., one of the world's most respected consulting firms, features a report entitled "The Five Attributes of Enduring Family Businesses."
The McKinsey report quotes the oft-cited statistic that less than 30% of family businesses survive into the third generation of family business ownership. It adds:
Those that do, however, tend to perform well over time compared with their corporate peers, according to recent McKinsey research.
Family business owners (and readers of Family Business Magazine) will not be surprised at the authors' observation that:
To be successful as both the company and the family grow, a family business must meet two intertwined challenges: achieving strong business performance and keeping the family committed to and capable of carrying on as the owner.
To achieve this dual objective, the authors write:
Five dimensions of activity must work well and in synchrony: harmonious relations within the family and an understanding of how it should be involved with the business, an ownership structure that provides sufficient capital for growth while allowing the family to control key parts of the business, strong governance of the company and a dynamic business portfolio, professional management of the family's wealth, and charitable foundations to promote family values across generations.
To illustrate these five dimensions, the authors provide a five-circle model (representing "family," "ownership," "wealth management," "business and portfolio governance" and "foundations"). Their diagram is an odd variation of the widely referenced three-circle model (representing family membership, business management and business ownership) developed by Renato Tagiuri and John Davis and published in Family Business Review in 1996.
Several family business researchers have challenged the Tagiuri-Davis three-circle model in the past, as Davis himself noted in Family Business Magazine's Autumn 2009 issue. While one could argue, for example, about whether the family business board of directors should have its own circle, perhaps the most significant feature of the Tagiuri-Davis model is the overlap of the three realms. In the McKinsey model, not all the circles overlap. Significantly, the circle representing "family" is over to one side, interacting only with "ownership" and, oddly, not with any of the others.
Another interesting feature of the McKinsey group's report is the importance given to foundations. Is it necessary for members of a business family -- particularly a large and diverse one -- to conduct their charitable activities jointly?
The McKinsey authors write:
Charity is an important element in keeping families committed to the business, by providing meaningful jobs for family members who don't work in it and by promoting family values as the generations come and go.
Certainly, family members who aren't active in the operating business must chart a productive and meaningful course in life, and family values must be sustained. But is a collective philanthropic activity the best way to achieve these goals? That, I submit, is debatable.
The authors' concluding paragraph, on the other hand, is indisputable:
Almost all companies start out as family businesses, but only those that master the challenges intrinsic to this form of ownership structure endure and prosper over the generations. The work involved is complex, extensive, and never-ending, but the evidence suggests that it is worth the effort for the family, the business, and society at large.
New Year’s resolutions from YPO-WPO
Did you make any New Year's resolutions for 2010? In addition to your personal goals -- lose weight, stop smoking, exercise more -- have you resolved to take steps to sustain your family enterprise?
In its January newsletter, the Young Presidents' Organization-World Presidents' Organization Family Business Network published 20 suggested New Year's resolutions for 2010. The resolutions were submitted by members of the YPO-WPO Family Business Network as well as leading international family business advisers and researchers.
The Family Business Network has given me permission to publish some of the resolutions here. Following these steps will help you strengthen your family and your business this year.
- Hold a meeting with all of your professional advisers together. Gather your advisers and tell them your long-term ownership vision, your succession plans and your personal financial plans. -- John L. Ward, Ph.D., Professor, Northwestern University's Kellogg School of Management and Principal, Family Business Consulting Group
- Have your family, for one of its meetings, visit with a successful family business. Tour their operations and talk to family members as a way of gaining new ideas and inspiring family members to be supportive of the business and its leadership. If you can't visit with another family business, have one of their leaders give a presentation at your family meeting. -- Joseph Astrachan, Ph.D., Director, Cox Family Enterprise Center, Kennesaw State University
- Protect your nest eggs. Regularly review your insurances, entity structures, titling of assets and operational procedures for gaps that may expose you, your family and/or your business to potential loss. -- Joan K. Crain, Senior Director, Chief Fiduciary Officer, BNY Mellon Wealth Management
- Include non-family senior executives in the decision-making process. Successful businesses are committed to transparency and open communication with their key associates. -- Jill Belconis (YPO Chicago), YPO-WPO International Chairman for 2010-2011
- Establish a summer program for next-generation owners like one we are implementing called "Project: Sweat Equity." Program a fun three-day, on-property "day camp" for 8- to 12-year-olds (where the "counselors" are older cousins and grandparents) and a customized work program for 15- to 22-year-olds to facilitate personal connections to your business. -- Chris Herschend (YPO Southern 7), Family Business Network Committee Member
- Hold a family meeting where each family member, regardless of age, brings an article about a management situation or solution that they read, and either liked or disagreed with the solution proposed by the author. Everybody comes to the family meeting prepared to lead a discussion about the article -- it doesn't need to be specifically about a family business, but rather about an approach or decision that somebody in business made that has multiple solutions. This exercise is an ice-breaker but also may lead to a deeper understanding of how each member of the team thinks or comprehends issues. -- Steve Fazio (YPO Santa Monica Bay, Las Virgenes)
- Focus on growing the quality and impact of your management team as a key part of your business strategy. For years our business strategy was dominated by my grandfather. Since his illness and passing, it has fallen on me to fill the vacuum of his departure. To grow your management team, do as we intend to. Set up focus groups with key employees to get their input on strategic decisions while making them accountable for the results. -- Michael Friedman (YPO New England), Family Business Network Communication Chair
Famed eatery’s demise means new beginning for unsuccessful successor
The renowned 75-year-old Tavern on the Green in New York's Central Park, which served its last meal on New Year's Eve, sold off its fixtures, silverware, knickknacks and other relics -- 25,000 items in all -- at a three-day auction beginning Jan. 13 to cover the bankrupt restaurant's $8 million debt, the Associated Press reported.
Ownership of the objects had been in dispute. The New York Times' "Diner's Journal" blog noted that a day before the auction was set to begin, a federal bankruptcy judge ruled that all but one of the items (the steel frame of the restaurant's canopy) belonged to the LeRoy family, who had run the Tavern until their license expired Dec. 31, rather than the city, whose Parks Department had issued the license. A decision has yet to be rendered on who owns the restaurant's name, which is valued at about $19 million.
The Tavern was once America's highest-grossing restaurant, according to an earlier AP report. Impresario Warner LeRoy, son of Wizard of Oz producer Mervyn LeRoy, took over the Tavern's lease in the 1970s. The AP report noted that Warner LeRoy, a flamboyant character with over-the-top tastes, decorated the eatery with "whimsical objects purchased around the world."
Auction attendee Joan Gelman told the "Diner's Journal" that the event "seemed like a wake."
"Warner was the greatest showman of all time. And this makes me so sad."
After Warner LeRoy died in 2001, his youngest daughter Jennifer -- then a 22-year-old college dropout -- took control of the Tavern and another famous New York restaurant, the Russian Tea Room. The latter eatery, which Warner LeRoy had bought in 1996 and spent $30 million renovating, closed amid crushing debt 17 months after Jennifer took over.
Writing about the demise of the Russian Tea Room in the Winter 2003 issue of Family Business Magazine, financial adviser Sid Friedman noted:
Imagine being in your early 20s and having such a spectacular failure on your résumé. Would you wish that on your child? ... As the LeRoy case demonstrates, there's no substitute for high-level experience.
At Tavern, Jennifer LeRoy tried to be fiscally conservative, Linda Fickenscher pointed out in Crain's New York Business. Warner LeRoy had developed an overly generous profit-sharing plan under which managers earned hundreds of thousands of dollars in bonuses, Fickenscher reported.
Shortly after [Jennifer] took over, the bonus program was restructured.... It would be the first of several major moves as Ms. LeRoy put her stamp on the restaurant and grew into her role.
However, Fickenscher wrote, "Even as Ms. LeRoy matured in her role, she fell short." A branch of Tavern in an equestrian club in Florida closed after two years. Efforts to further expand the brand fizzled because investors lacked assurances that the LeRoys' lease for Tavern would be extended.
[I]n the end, Tavern remained a stand-alone restaurant inexorably tied to a city that no longer wants the LeRoy family operating it -- a reality for which the family was unprepared.
Jennifer LeRoy, now 31, is angry about losing the Tavern, Fickenscher reported.
She finds the city's rejection of her family cold-hearted and ungrateful.... As of Nov. 1, at the request of Tavern's creditors, she stopped receiving her $250,000 annual salary.
Fickenscher observed that the loss of the Tavern will present a new opportunity for Jennifer LeRoy.
For the first time, she can step out of her legendary father's shadow and create something of her own.
The Tavern's COO, Michael Desiderio, told Fickenscher, "Jenny is fully committed to being involved in the hospitality business."
Family stewardship at Nordstrom
Shortly before Christmas, the Wall Street Journal reported that Nordstrom Inc. has been faring better in the economic downturn than some rival chains because the Seattle company "acted earlier than many retailers on signs of the recession."
I wasn't surprised to learn that the company, which is 25% owned by the Nordstrom family, had been proactive in anticipating the recession and then, as the Journal reported, taking measures like creating less expensive lines, entering more sales channels, postponing store renovations and reducing back-office operations. The Nordstroms have established a tradition of being prudent stewards of their company.
In 2000, Bruce Nordstrom, grandson of the founder, returned to the chairman's post after five years of retirement to repair the company's reputation, which had been damaged by an ill-fitting marketing strategy put in place under non-family leadership.
Bruce Nordstrom retired again in 2006; his son Blake is now president. Blake Nordstrom's brothers, Pete and Erik, also hold the titles of president -- of merchandising and stores, respectively. Family members occupy three of nine seats on the company's board.
Blake, Pete and Erik Nordstrom can mine their family business's history for lessons in successful fraternal collaboration. The founder's sons, Everett (Bruce Nordstrom's father), Elmer and Lloyd Nordstrom, shared leadership responsibilities, wrote Robert Spector (no relation to your blogger) and Patrick D. McCarthy in their 1995 book The Nordstrom Way. The book, which is excerpted in The Family Business Leadership Handbook, noted:
Like all successful entrepreneurs, the three brothers shared a single-minded devotion to the business.... They never went to lunch together because their policy was that one of them should be present in the store at all times.... At the end of the day, they were the last ones to leave the store.
Three cousins of Blake, Pete and Erik left the company in the 2000s. Dan Nordstrom, who had been CEO of Nordstrom.com, resigned in 2002. Bill Nordstrom, who had been executive vice president and general manager of Nordstrom's East Coast operations, and Jim Nordstrom, who had been a co-president in charge of Nordstrom full-line stores, both left in 2000.
Stayin’ alive—to avoid the taxman
In the Winter 2002 issue of Family Business Magazine, Dan Rottenberg -- then the magazine's editor -- wrote, with tongue in cheek, that 2010 would be a good year to die.
For the benefit for those who have been living under a rock for the past decade (and if you're such a person, you probably have fewer worries than those of us who endured the '00s), here's what Rottenberg was referring to: In 2001 Congress enacted tax reform provisions under which the amount exempted from estate taxes was raised each year from 2001 to 2009. In 2010, under the reform provisions, the tax is eliminated entirely. But in 2011, the changes are set to expire and the estate tax will return, with a higher tax rate and a lower exemption.
"This is good news -- if you can choose the date of your death," Rottenberg wrote in 2002.
Back then Rottenberg, like many observers, didn't think the estate tax would ever really be eliminated:
"Of course, with two presidential elections and four congressional elections before the scheduled repeal, the rules could (and doubtless will) change again at any time."
Well, as we all know, those who assumed change would come before 2010 assumed incorrectly. And, in case you missed the article amid all the holiday hubbub, the Wall Street Journal reported on Dec. 30 that as 2009 drew to a close some people on their deathbeds were focused on making it to 2010 -- not to savor their last precious moments with their loved ones, but to avoid the tax. A New York attorney told the Journal:
"I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days."
Another terminally ill man's lawyer reported this to the Journal:
"Whenever he wakes up, he says: ‘What day is it? Is it Jan. 1 yet?'"
Some people wrote such a scenario into their advance health care directives, the Journal noted:
To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law.
And, the Journal noted, a Los Angeles lawyer said an elderly client of his is considering euthanasia (in a country where it's legal) to avoid the tax.
Most of us have heard the cliché, "Nobody says on their deathbed that they wish they'd spent more time at the office." But apparently there are some people out there who are spending their last days on Earth thinking about taxes.
As several authors noted in the 2009 edition of our Family Business Agenda, which focused on estate planning, family business decisions made solely for the purpose of avoiding estate taxes can have unintended consequences that threaten business stability and/or family harmony. Family business adviser Margery Engel Loeb wrote:
Reduction of taxes is an important component of estate planning, but it is probably best addressed after first determining the larger goals and vision for the transfer of wealth and ownership. The tax planning drapes around the shape of what the givers want as their legacy as well as what will be communicated to their beneficiaries.
As you labor to draw your last breaths, do you really want your loved ones to be thinking about the taxes they're going to pay on the money you leave to them? The attorney with two clients on life support as 2009 drew to a close suggested to the Wall Street Journal that these people's family members might have regrets later:
"Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"
The Journal article said that Congress could pass an estate tax in 2010 and make it retroactive to Jan. 1, though a retroactive law would surely be challenged in court.
If the estate tax returns in 2011, as currently scheduled, will those who are elderly and infirm on Dec. 31, 2010 be anxious to die? As Rottenberg wrote in 2002:
"Tax-wise, that New Year's Eve will be a good time for families with large estates to gather on some convenient cliff to dispose of their parents."
A family trust threatened by marital mistrust
Every entrepreneurial couple is aware (if not acutely, then at least subconsciously) that their mom-and-pop venture could face great risks if Mom and Pop were to divorce. But even a hugely successful conglomerate is not immune to disruptions due to martial discord. Consider the Hearst family, descendants of one of America's most legendary businessmen, whose multibillion-dollar media empire was threatened by the demise of the founder's grandson third marriage.
A recent lengthy article in Fortune recounts the scandalous tale of John Randolph "Bunky" Hearst, and his doomed marriage to Barbara. Bunky, the favorite grandchild of newspaper magnate William Randolph Hearst and a cousin of kidnap victim Patty Hearst, married Barbara in June 1990, about seven months into Bunky's recovery from a severe stroke. According to court documents, the article said, Barbara took over Bunky's finances and had documents drafted that essentially gave her legal ownership of his entire estate.
After they moved into a lavish new home in 1995, Barbara began distancing herself from Bunky. Arguing ensued, and the marriage fell apart. In 2004, during a dinner party hosted by the couple, Barbara served Bunky with divorce papers, saying, "Remember one thing: I am much smarter than you are," the Fortune article reports.
Bunky couldn't allege that Barbara had committed adultery because, for one thing, he had no concrete proof that Barbara had been unfaithful (though he had reason to suspect so, as the article luridly notes) and, for another, he himself had strayed (more lurid details along these lines are given in the report). So in 2006, as the case dragged on, Bunky's lawyers sued Barbara for fraud, alleging that he signed the papers that gave Barbara control of his assets while in a "weakened" and "vulnerable" condition.
Two years later, in August 2008, the Fortune article says:
Barbara's attorneys filed the motion they believed would make Bunky cry uncle and bring the proceedings to a quite favorable settlement: Barbara's attorneys served Hearst Corp. with a subpoena seeking all documents, from the time of Bunky's stroke until Barbara filed for divorce, that reflected Bunky's "actions and involvement" as a member of Hearst's board.... In other words, if Bunky was so incompetent that [Barbara] could commandeer his entire fortune, how could he be leading one of the world's great media corporations into the 21st century? ... That the documents would also reveal the secrets of a famously private company was, to believe Barbara's attorneys, merely a coincidence.
The Fortune report notes that according to the terms of William Randolph Hearst's will, Hearst Corp. is owned by the Hearst Family Trust. Five of the 13 seats on the board of trustees are reserved for Hearst's descendants -- currently Bunky and four of his cousins. The remaining eight seats are held by current or former senior company executives. "There are no real outsiders," the article notes.
The 13 trustees also sit on the company's 20-member board of directors. The other seven members, according to Fortune, are "Hearst family members, Hearst Corp. executives, or those who are both, like Stephen T. Hearst, head of the corporation's ranching and timber operations." Fortune reports that Hearst Corp. is "almost certainly the largest company managed by trustees."
Those trustees do not want corporate records released, the article says. After Patty Hearst's kidnapping in 1974, the trustees successfully petitioned the California probate court to seal Hearst's will and trust so they could not be accessed by future potential kidnapers.
Since  the trustees have gone to extraordinary lengths to keep the family business private. Skeptics -- among them some renegade Hearst family members -- have suggested that the trustees' fondness for secrecy has more to do with their fear of being sued and preservation of their own sinecures than with protection of the family.
The Fortune article pointed out that if Hearst Corp. released the documents Barbara's attorneys requested, the papers would be available not only to Bunky's estranged wife, but also to the company's competitors, business partners and other very interested parties.
In a September 2008 response to Barbara's motion, Fortune reports, Hearst Corp. offered to stipulate that Bunky was "legally competent" in exchange for not having to turn over legal papers. Barbara's lawyers declined the offer. In December 2008, Bunky agreed to withdraw his fraud action in exchange for a divorce, and agreed to allow Barbara to keep most of the assets he had claimed she had embezzled. In response to Fortune's questions, Hearst Corp.'s attorney insisted the company had not forced Bunky to settle.
In the 58 years since William Randolph Hearst's death, the article notes, Hearst Corp.'s professional managers "have increased the company's value by about 2,500% while paying out multimillion-dollar disbursements." While competitors Conde Nast and Time Inc. are folding titles, Hearst reportedly has $1 billion available for acquisitions. One reason, as University of Delaware governance expert Charles M. Elson told Fortune, is that while Hearst's descendants have a voice, they have no control, since non-family members outnumber family members on the board of directors by a margin of 12-8.
The infighting that marked the Bancroft family's last days as the owners of Dow Jones couldn't happen at Hearst, as the family doesn't have enough votes to, say, quibble over a sale.
Fortune notes that the trust "has been sued by Hearsts and their ex-wives for three generations now" yet has remained unscathed -- though it will come to an end, and the company will be divided up, when the last of William Randolph Hearst's grandchildren dies.
[T]he case provided a test of how ironclad the Hearst trust is when compared with, say, the dual-class stock system that the Graham family of the Washington Post or the Sulzbergers of the New York Times use to control their dynasties.
Hearst Corp.'s financial success -- which, amazingly, has been achieved without the benefit of outside directors -- speaks for itself. The Hearst family's efforts to keep their dramas private, at least in this case, were somewhat less successful. I have written before about the role family members play in generating publicity, negative as well as positive, for their family and their company.
When structuring their companies, family business owners should consider all possible future ramifications, no matter how far-fetched they might seem. As Fortune wrote of Hearst Corp.:
How the corporation got dragged into the last throes of Bunky's marriage is now a cautionary tale in corporate governance.
Sowing the seeds of a sustainable legacy
According to a recent Associated Press report, the Montana Historical Society has launched an effort to identify families that have farmed or ranched on the same land for 100 years or more. The aim of the initiative, called the Centennial Farm and Ranch Program, is
to honor Montana's heritage while compiling family histories to be archived and eventually compiled for the society's Web site.
Sustaining a family farm for a century or more is not easy. The AP report said that in 1920, Montana had some 57,000 agriculture operations; today, there are about half that number.
As employment pressures and the lure of faraway opportunities split apart agricultural families, many farms and ranches have been consolidated, sliced into subdivisions or converted into oversized estates for the wealthy.
College student Desirae Dickinson reflected on the pressures facing next-generation members of farm families in the Autumn 2006 issue of Family Business Magazine. Dickinson wrote that her uncle's California farm has been in the family for three generations, "but with none of the cousins preparing to take over, its future remains uncertain."
Though the farm's future isn't clear now, the Chapmans are a proud family, and we all know someone will step forward to take over.
Kevin Spafford, a Certified Financial Planner and business consultant specializing in agricultural management, writes in his book Legacy by Design that the three leading reasons why a family farm does not pass to the next generation are inadequate estate planning, insufficient capitalization and failure to prepare the next generation properly. An underlying cause, Spafford notes, is the failure to communicate with family members.
Farming is the quintessential family business. No other business endeavor is as emotionally charged as the family farm. Improving the communication necessary for comprehensive succession planning for America's agricultural industry can potentially affect every family-owned farm or agribusiness in America.
Interestingly, despite the many challenges of passing on an agribusiness, counterbalanced against the attractions of selling out to a developer for big bucks (an option that became somewhat less viable in the Great Recession), an impressive number of U.S. families have managed to sustain their agriculture enterprises. In Family Business Magazine's most recent (2008) list of America's 100 oldest family companies, 26 were engaged in farming, agriculture, horticulture or ranching. The oldest such enterprise was the Tuttle Farm of Dover, N.H., which dates from the 1630s.
Do tough times encourage abusive bosses?
A recent article in the Philadelphia Inquirer's business section noted that in these times of high unemployment and a recessionary economy, workers are apt to agree to accept pay cuts, furloughs, reduced benefits and other concessions. The author -- Alvin Clay, CEO of Davidson Trust Co. in Radnor, Pa. -- mused:
In times of stress, people are willing to accept behavior that they would not accept otherwise. The question is whether the behavior is truly an appropriate response to the circumstances, or an excuse to take advantage of people at a time of weakness.
Clay recalled counseling someone whose employer had no compunction about calling the employee's home with complaints at all hours and would yell and curse at staff members. When the employee finally quit, the boss responded: "You can't quit. Where are you going to get a job in this economy?" Clay wrote:
Just because employees understand that pay raises may have to be postponed, and they understand they are fortunate just to have a job, doesn't mean they are worthy of less dignity and respect.
Clay's article reminded me of a column that family business adviser Ivan Lansberg wrote in Family Business Magazine's Winter 2001 issue about abusive bosses in family businesses. Lansberg noted:
[T]he very factors that enhance the appeal of family companies -- such as the high level of inclusion, the deep loyalty toward the family, the high regard for privacy and the direct control of decision making exerted by the owners -- can also trap employees into staying with abusive bosses.
In addition to loyal non-family employees, family members can be the target of an abusive boss's wrath, Lansberg wrote:
Contrary to the stereotypical notion of the protected scion in a cushy job, junior family employees under abusive bosses are often subjected to a boot-camp approach to mentoring -- that is, "If this doesn't kill you, it will make you stronger." ... These leaders are quick to recognize inadequacies in their own children that they despise about themselves.
In tough economic times, victimized employees may have a tough time escaping from the abusive situation. But ultimately, the real loser will be the abusive boss's company. Clay wrote:
Before we act, we much ask ourselves how our decisions will be judged when economic conditions improve and our employees and vendors have choices. Will we be the fair-minded owner or manager who made the tough calls and balanced the needs of everyone when times were tough? Or will we be the arrogant jerk who took unfair advantage?
Cadbury’s roots as a family firm
In the continuing saga of Kraft Foods Inc.'s hostile bid for Cadbury PLC, little has been noted about Cadbury's origins as a family company. John Cadbury (1801-1889) founded the company in Birmingham, England; he began by selling tea and coffee but soon branched out into cocoa beverages.
Dan Rottenberg, my predecessor as Family Business's editor-in-chief, included Cadbury -- a family firm from its 1824 founding until 1969 -- in his "Family Business Pantheon," a list of what he considered the world's greatest family firms.
In the Summer 2001 issue of Family Business, Rottenberg noted that in 1868, second-generation brothers Richard and George Cadbury introduced the concept of chocolate pieces sold by the box. In 1897, George Cadbury perfected a Swiss formula for milk chocolate. In addition to developing delicious confections, the Cadburys, active Quakers, taught classes to slum-dwelling adults and spoke out against slavery.
Cadbury became a publicly traded company in 1962. In 1969, it merged with Schweppes Ltd. and became Cadbury Schweppes PLC. Alongside Rottenberg's "Pantheon" profile, our Summer 2001 issue featured an article by Sir Adrian Cadbury, the former chairman of Cadbury Schweppes and great-grandson of the founder. Sir Adrian's article -- excerpted from a 2000 Focus magazine piece -- described Cadbury's evolution from a family-run enterprise to a publicly traded company and then to a merged firm. The transformation, Sir Adrian wrote, began when the company developed a board of directors.
When we were purely a family board, we met every Monday morning at nine o'clock. As a result, we adopted a weekly perspective that kept us focused on the company's operational routines at the expense of strategy and policy. When outside directors joined, they made us think about the longer term.
Cadbury Schweppes acquired Adams Confectionery, makers of Trident and Dentyne gum, in 2003. In 2006, the firm sold the European beverages business; in 2008, it demerged the Americas beverages business, which now trades as Dr. Pepper Snapple Group.
As the business world speculates on whether Kraft will ultimately acquire Cadbury and, if so, at what price, I recall Sir Adrian's text:
Family members must learn -- and this is quite difficult -- that they're just like any other shareholders. They have a say in the election of directors. But once the directors have been elected, the family must let the directors get on with the business.
A values-based approach to layoffs
A recent article in Business Week cited a study of Boeing employees during the tumultuous years 1996-2006, when the company laid off tens of thousands of workers. The researchers were surprised to find that the people who were laid off were often happier than those who kept their jobs. A human resources specialist at the company described
"the survivors' guilt of the people who were left, who were waiting and not knowing if the hatchet was going to fall on them. They experienced the worst stress."
These survivors worried that the loss of institutional knowledge at the company would affect their ability to do their jobs. They had higher rates of depression and more chronic health problems than their laid-off colleagues, the Business Week article said. "[T]hanks to the unceasing uncertainty inside Boeing, those who left felt as though they had escaped a bad marriage."
Compare this atmosphere to the scene at Luck Stone Inc., a family company that concluded in late 2008 that it needed to undergo a reduction in force in order to survive. Reporter Margaret Steen profiled Luck Stone in the Spring 2009 issue of Family Business. CEO Charlie Luck told Steen:
"We wanted our employees to say, ‘It's an awful thing to do, but you all did it better than everybody else.' We wanted people to say, ‘This is how a values-based company does this.'"
The company showed a video to employees in all its facilities in which Luck explained the decision, noting how economic conditions had changed and how the company had tried to avoid job cuts. After the cuts, Luck and his management team held frequent small-group meetings at which the remaining employees aired their concerns. Luck Stone managers encouraged the remaining staff to stay in touch with those who had lost their jobs.
In public companies undergoing layoffs, Luck Stone manager Steve Rosser told Steen, communications related to the job cuts are aimed at the financial community, not the employees. At Luck Stone, by contrast, the third-generation CEO considered his family values and his company's history of strong bonds with its employees when planning how the reduction in force would be conducted.
When the ax is wielded brutally, ill will abounds among the staff. Business owners whose names are on the door are perhaps more likely than non-family investors to recognize the damage this can do to a company's reputation.