Relationships: General

Build a family 'social contract' that will strengthen succession

Walking into Newbury Corp.’s headquarters for the first time, we were taken aback by the three-story-high painting of the founder that dominated the entry atrium. We had been invited by the current leadership team — a combination of next-generation family leaders and non-family executives — to help build a strategy for the future of the company. (“Newbury Corp.” is a fictional name of a real company, changed to protect confidentiality.) We had been told that the founder would not be participating in the process, given his stated interest in “leaving leadership in the hands of the next generation.” However, he still was active in the business and showed up at the office most days.

Immediately, we suspected there was work to do on the likely gap between stated aspirations and reality if this strategy process was going to succeed. The music (showing up every day, asking questions, offering “another opinion”) didn’t match the words (wanting to empower the next generation to take up leadership), and the portrait was important data.

Our team had seen such mismatches in other family businesses. Unwritten rules about culture, participation and decision making influenced work on strategy. The NextGen saw the pattern, chalked it up to “the way it is” and plowed ahead anyway, though change would be an uphill climb.

Tacit agreements
Families, and their businesses, operate under a complex set of rules — some written down and explicit, but many not. Clues to these rules can be found in artifacts around the office, how people interact within the family and business systems, and the stories passed down through the generations. As illustrated in the true story above, there are signs (sometimes not so subtle!) of the agreements that govern not only decisions, but also behaviors and norms that greatly influence what’s possible. In this example, one might hypothesize that the founder still has a strong voice, that those around him are expected to be deferential, that the team still has much of their own identity tied to the founder’s, that a focus on the founder’s behavior makes a focus on their own less urgent, etc. These clues point to the culture in place — how members of the family and business make sense of the world — and the social contract that dictates the rules of engagement within the culture.

Culture shapes what it means to be part of a family. It guides — often by assumption —use of language (not just choice of words but also what they mean), norms, belief systems and behaviors. This is the social contract. It is social because it is grounded in relationships and reinforced by modes of interaction. It is a contract because it lives in the world of “gives” and “gets” and has consequences attached. The social contract in families guides what gets discussed or not discussed, what choices are supported or not and what is expected of individual members or groups. It has a powerful influence on how people choose to engage.

The “social contract” concept is not new; early thinkers such as Hobbes, Locke and Rousseau wrote extensively on the topic. Their work focused on the relationship between governments and their constituents. The application of this idea to families underscores what makes continuity across generations possible. Surfacing and discussing these often-tacit expectations at key transition points can renew a powerful and important connection to a collective through discovery, discussion, negotiation and shared agreements about what will be most important for the future.

Time for a change
Implicit social contracts — expectations about who gets to participate, where people live, who really makes decisions — are in place for reasons that made sense at the time they took shape. These are the rules that have gotten a family to the point where transition is on the table. Yet as families and their enterprises grow and change, new agreements are often needed to let in fresh ideas and adaptations that may be vital to keeping family members engaged and businesses successful. Rewriting the social contract in any meaningful way can be difficult. But when family members stop accepting the existing social contract (or when they opt out of it), things can unravel quickly. For this reason, creating a process to make the social contract explicit and reshape it together is a key to continuity.

Sounds reasonable, right? So why does the idea of raising questions about current rules and norms want to make you run for the hills? It’s probably because perceived “violation” of the rules feels risky, and we imagine that conversations about revisiting longstanding expectations will bring anger or disappointment. This apprehension often leads to a lack of dialogue, even if that’s what is most needed.

How can families begin exploring this topic, particularly when they have various components of governance either in place or in development?

It starts with some bravery — and some acknowledgment that all is not working smoothly. Bring up specific examples of someone bumping into a roadblock. Perhaps a non-employed family member innocently stopped by to use Dad’s part-time office space for a conference call, inadvertently upsetting their employed siblings and raising questions about their motivations. Or maybe a family member posted something on social media that others disagree with. Has the social contract been broken in some fundamental way through this small, seemingly inconsequential decision? It’s crucial to approach the topic from a standpoint of curiosity instead of frustration or anger.

Then, set the conditions for a dialogue that enables experimentation and learning, even if it feels challenging. We have found that setting ground rules to guide how this topic is discussed is a key first step. Remember, the current social contract exists because it has worked well enough for long enough that people have accepted it, and it’s invisible. The topic can be very emotionally charged, as people are accustomed to doing things in a certain way without always considering the reasons why. The goal of the family, therefore, is not to poke holes in the way things were or currently are. Instead, the focus should be on what has changed — in the family, company, economy, government, etc. — and how it challenges the accepted norms. For example, if geography has played a large role in a family’s decision making around employment, but now 95% of the family live in different parts of the world, what needs to change in the family social contract, especially if family involvement in the business is an aspiration? Is physical proximity necessary?

Once rules are established for how the social contract is discussed, creating a forum for openly discussing the aspects of the social contract is the next step. Families should invite a broad, representative group to the table, potentially including spouses and NextGen family members, and come prepared to explore topics such as:

• Rules and norms that were created over time implicitly and put into action. You can tell it is a norm or a rule when someone in the family — sometimes a NextGen or a married-in just learning the rules of the road — bumps up against it and comes to understand some boundary has been crossed. The questions relevant for different families will vary, but might include things like: Who gets to participate in what? How does compensation get determined? What gets invested in? How does the family handle wealth transfer?

• Agreements that made sense at one stage of the family’s lifecycle may or may not “fit” a later stage, and it is important to ask why. How might current agreements be advancing current goals or setting them back?

• Values should be made explicit, What is most important to preserve and why? It could be that there is a new application of an important goal or aspect of family identity. Discuss how to apply it today.

• Assumptions about “how we do things around here” — what still serves the business and the family, and what gets in the way of a future together? What may be assumed and acted on but not actually tested or accurate?

Finally, the family must link any new agreements to both current and future initiatives. Some items may feel mundane, like adjusting expectations for when someone needs to be in the office. Others may feel tactical, like communicating a new process for selecting recipients for charitable donations. And some may feel monumental, like determining the resources to invest in the business versus providing near-term liquidity to shareholders, or shifting the strategic direction of a foundation or investment fund to act on the passions of upcoming generations. But aligning under an explicit, documented social contract will pay dividends to the family.

The truth is that once this initial attempt at codifying the social contract is completed, it immediately begins to age. But this is OK. It is the ongoing, complex “social” work of the family that makes a good “contract” possible. The work on it continues through time — as new members enter the family through birth or marriage, as family members exit the business, as new challenges arise in the market. The need to make the social contract explicit and regularly reexamine it must become a core focus of your family governance structures.

Back at Newbury Corp., the strategy work has taken shape powerfully, with innovative and rigorous strategic shifts to keep the business vital, solid financial targets and a clear execution plan. Perhaps more important, the process prompted a discussion about the social contract among the family. They agreed on new decision-making rules that clarified expectations and authority in the next generation and created a cross-generational brain trust charged explicitly with vetting new strategic ideas and exploring their connection to family goals and values.

A few months into the new strategy, we entered Newbury’s headquarters to find another new development: The portrait in the atrium had been replaced with a photo from the family’s most recent gathering — four generations together in a large frame.                        

Debbie Bing is president and principal and Todd Smith is a principal at CFAR (www.cfar.com).

Copyright 2021 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.  

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Traditions reunite family, business

I have heard from several clients that they never really get a chance to talk with their father, but they do get to talk with the owner of the company (who happens to be their father) every day. Another client told me that although he knew the volume of stocks that his brother traded, he only recently learned that his brother had had a cancer scare.

When you work side by side with your family, sometimes it is easy to forget that you are relatives and not just co-workers or business partners. That’s why it is so important for business families to take time during the holidays to reconnect with each other—to bring the family back into the family business.

Let’s conduct an experiment. Close your eyes and think of your favorite family holiday tradition. Visualize every part of that memory—the people, foods, activities, music and more. Think about what it was like as a child, how that tradition made you feel, and how much you looked forward to it every year.

Of course, things changed over the years as everyone got older, but those memories are ingrained into our brains, including every emotion we felt when we had these experiences in the past. Even though we are now adults, those memories take us back to a time when we didn’t have the weight of the world on our shoulders, such as all the pressures that come with running a family business.

When we get to the point of people acting like business partners and forgetting that they are family members, problems develop that only serve to hinder the running of the family business. What starts out as increasingly distant relationships and reduced interactions (such as not telling one’s brother about a cancer diagnosis) can evolve into a total communication breakdown. Pent-up hurt feelings escalate over time, and things get said in meetings that never would have been said in the past. Then before you know it, there is an erosion of mutual trust and respect within the family and the business.

But it doesn’t have to be like this! Every family can do something about the situation before it gets to a breaking point. That is why we love using the holidays as a yearly recalibration for business families. The end of the year is when most people—including business owners—take time out of their work schedules to be with their family.
Family holiday traditions bring back memories of the love and security we felt flowing from our parents or the bonds we felt when we were together with our siblings. They carry tremendous emotional power.

Memories of cooking or setting the table together on Thanksgiving, going as a family to church (or to a Chinese restaurant) on Christmas Eve, anticipating Santa’s arrival, lighting candles and eating latkes on Hanukkah or even emulating the cast of Seinfeld and engaging in feats of strength on Festivus make us feel like kids again. These emotions help us remember where we came from, who we are and how much we care for each other. When we engage in these activities today, we stir up the same emotions and family connections.

After the holidays, make an effort to carry the good feelings and happy memories into the office. Instead of making a harsh comment out of anger in a meeting, remember that you are a family. Hold your tongue or rephrase your comment out of respect for your loved ones.

We understand that it can be difficult to corral all of the family into one place. Often, adult children with families of their own have created new traditions. But just one family event is all it takes to hit the reset button. So, if you are thinking about bailing out on the annual family Thanksgiving touch football game, maybe you should reconsider.                                   

Michael D. DeVine, M.S., LPC-S, is the owner and CEO of DeVine Consulting, which provides executive coaching and leadership development as well as family business advising (www.devinetalentconsulting.com).

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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The entitlement impediment

Many of my colleagues express frustration that their clients are resisting or delaying implementation of expertly (and expensively!) crafted strategies. Our best-laid plans are only as good as our clients' willingness to follow them, and when clients drag their feet in acting on good advice, they can seem downright irrational. Most of the time, when there appears to be no rational basis for a client's inaction, the client knows something the adviser doesn't, and the adviser must dig deeper to uncover the impediment.

One major impediment I see is a self-perpetuating cycle in which parents: (1) foster entitlement in their children, (2) recognize unproductive behaviors stemming from the entitlement, (3) feel guilty about having fostered it and, paradoxically, (4) reinforce it.

Take, for example, the 70-something mother who knows her 50-something son's entitled attitude has caused him trouble throughout his life, such as in his career (or lack thereof) and his relationships (or lack thereof). She knows that continuing to "rescue" him, let alone continuing to indulge his unreasonable expectations, only enables him to remain fixated in a state of arrested adolescence. At the same time, she feels guilty, knowing she helped sow the seeds of his entitlement when he was a minor; in those days, she and her late husband were busy getting the family business, now worth more than $100 million, off the ground.

In such a case, the "cycle of entitlement" easily can impede the mother's willingness to act on sound advice. For instance, she may chronically delay the termination of the son's employment in the family business although she knows he underperforms and abuses the company's resources.

The primary progenitor of entitlement is parenting, particularly parenting in the single-digit years of life (when a high-net-worth parent may be consumed with building a family business and may overindulge the child to compensate for guilt over the neglect). While I wish I could say, "It's never too late to reverse entitlement," unfortunately, that's false. Entitlement is rooted in narcissism, which can be ingrained by parental overindulgence and/or parental neglect. Once entitlement is ingrained, it tends to be highly resistant to change over time. That said, it's never too late (and better late than never!) to stop compounding and start containing the unproductive effects of entitlement.

At the individual level, parents can stop "feeding" entitlement. At the broader family system level, they can erect barriers so the effects of entitlement become less likely to reverberate through the family (and successive generations thereof). Philosophically, these recommendations require a "tough love" mindset in which parents are willing to endure the short-term (and potentially protracted) ire of an entitled child, secure in the knowledge that the long-term best interests of both the child and the family will be served if they take a hard line. My recommendations require difficult conversations, perhaps including admissions of guilt and expressions of regret, culminating in the establishment of new and clear boundaries.

Setting these boundaries may include actions like placing limitations on, or entirely eliminating, the circumstances under which money will be provided or even discussed. But establishing interpersonal behavioral boundaries (particularly where none have previously existed) can be difficult, even for intelligent, otherwise successful people.

It's impossible to provide a conversation-starter "script" that will work in every situation, but parents may want to consider opening with something like, "By not challenging you to show more independence, I haven't served you well, and I need to change that while I still can."

Once parents have set productive boundaries, they must anticipate and resist the temptation to cross those boundaries—to do what feels better in a moment rather than what works better in the long run.

Brian Russell is a Ph.D. psychologist and an attorney and also holds an MBA. He specializes in the interaction of family dynamics with legal and financial dynamics in family business contexts. He's the author of Stop Moaning, Start Owning: How Entitlement Is Ruining America and How Personal Responsibility Can Fix It (HCI Books, 2015) and co-host of the Investigation Discovery network show Fatal Vows, which chronicles deadly serious family dysfunction.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Road to sweet success paved by reconciliation

 

Savannah's Candy Kitchen has been part of Rhett Strickland's life for as long as he can remember. "Every day when I came home from school, we'd come down to the candy store" where his parents, Stan and Tonya Strickland were working, says Rhett, now 22 and the production manager for the family business in Savannah, Ga. "I had to literally sleep under the table while they packed packages at Christmastime."

But during his teenage years, the business took a new direction.

Savannah's Candy Kitchen had an unusual relationship with one of its competitors, River Street Sweets. The business that eventually became River Street Sweets was founded in 1973—by Stan and his first wife, Pam Strickland. When they divorced in 1991, they split the business. Pam kept the River Street Sweets name.

For years, the two sides of the family didn't communicate. Stan and Pam's children, Jennifer and Tim, eventually bought River Street Sweets from their mother, and they worked together to run it. Both businesses grew and were successful on their own.

In 2004, the family's story took an unexpected turn: a reconciliation, which eventually led to both sides of the family joining forces and cooperating rather than competing, to the surprise of customers and employees. In 2013, the family formed a jointly owned franchise business, called River Street Sweets • Savannah's Candy Kitchen, which it is looking to expand.

"We all believe that what we can do together is much bigger and better than what we've done individually," says Jennifer Strickland, 51.

Gift shop origins

Stan and Pam Strickland started out in business in 1973 in Savannah, trying to make a success of a shop that sold Christmas merchandise year-round. "Everything went wrong," Stan, 73, says of the first shop. "We were buying what we liked, but there was nobody to sell it to."

In 1978, they made a trip to the Atlanta Gift Market trade show, looking for merchandise that would have wider appeal. Tim, then 11, found a fudge-making machine and begged his parents to buy it. They did, and the family brought it back to Savannah. Stan bought a 7,800-pound slab of marble from a gravestone company—a cool, flat, smooth surface that would help cool the candy quickly and evenly—and they made chocolate mint fudge for St. Patrick's Day. It was a hit with customers.

"We started thinking, 'Maybe we ought to get into the candy business,' " Stan says. His mother had worked in a candy factory, he says, so "I had a little of it in my blood."

They next started working on pralines, experimenting with different recipes until "we hit on a smell and a taste that was like nothing we had ever had," Stan says. This started a transition in the business: They increased the number of candy items sold while stocking fewer non-candy items. Ultimately, they renamed the business River Street Sweets.

Today, Stan says, "If it's sweet, we make it": chocolates, taffy, divinity, fudge and the company's flagship product, pralines.

When Stan and Pam divorced in 1991, the business had four stores; each ex-spouse took two of them. Since Pam had the River Street Sweets name, Stan used a different name, Savannah's Candy Kitchen, for his locations.

Jennifer, who with her brother Tim had grown up working in the business, had recently graduated from college and was managing one of the stores. Tim was a senior in college at the time. He soon joined Jennifer and their mother in working at her stores.

"We had grown up working together in the business," Jennifer says. "I learned my times tables and did my homework in the back room. I had summer jobs there. I remember making pralines and pulling all-nighters with my mom and dad to package candy. When we became estranged, it was really tough."

"We completely separated and really became competitors," Stan says. Neither of the stores he received in the divorce settlement was located in Savannah, so he soon found a store in the city that he could open.

"For 16 or 17 years—way too long—we were making exactly the same thing, using exactly the same recipes," Stan says. "There was enough business for everybody to make a living, but the family was not together."

Bridging the divide

A turning point for the family—and eventually for the two businesses—came in 2004, when Jennifer adopted a son.

"I had missed my dad a ton," Jennifer says. "I remember thinking when my son was a baby that I needed to be able to tell him about all of my family, and that was a real hole in my life."

She called her father. The reconciliation "didn't happen overnight, but it started overnight," she says. By 2007, they were reconciling as businesses as well as on a personal level. At this point, Pam was part of the business but not involved in daily operations.

"We started communicating as people first," Jennifer says. "Because business is part of our DNA, we began to ask each other questions and help each other out." They discussed vendors and pricing. They shared supplies. Jennifer and Tim started buying log rolls from their father instead of from an outside vendor. Gradually the cooperation became more formal—until finally they decided to start a third business together.

Today, the family is involved in three businesses, all with their headquarters in Savannah:

• Savannah's Candy Kitchen is owned by Stan Strickland and has seven locations, including two in Savannah, and 188 employees.

• River Street Sweets is owned by Jennifer Strickland and Tim Strickland. It has 168 employees and stores in eight locations, including two in Savannah.

• The new entity is called River Street Sweets • Savannah's Candy Kitchen. Its owners are Stan Strickland, Jennifer Strickland and Tim Strickland. The company has opened one franchise in Pooler, Ga., and is opening two more in 2017: one in Key West, Fla., and one in Lancaster, Pa. The franchise uses a combined logo created for the family brand.

The businesses share the Savannah's Candy Kitchen production facility and work together on the three companies' mail-order businesses. Combined annual revenues are $35 million.

"It felt like we had been doing it forever once we started," Rhett says. The divorce, it turned out, had not changed the values or the goals of the two companies. "I think that even though they weren't in communication, everybody had the same idea," Rhett says. "They wanted to put Savannah on the map, and they wanted to put pralines on the map." When they got back together, there was more volume, but the work and the goals were the same.

The new normal

The story of the split and the reuniting of the two businesses drew a lot of attention.

"They're huge stores" in Savannah, Jennifer says. "People knew we were competitors. From a vendor standpoint, from a banker standpoint and from a personal friends and customer standpoint, we had an overwhelmingly great response. Divorce is not an unusual thing for people to go through. We've had people reach out and say, 'What a happy story.' I say happy endings are always a work in progress."

"Everybody in Savannah knew the story," Stan says. "So when the competition was over, so to speak, and they saw the family get back together, it made everybody happy."

After years of competition, employees of the two stores had mixed feelings, the family acknowledges. "There was a lot of hope, anxiety and hard work," Jennifer says. "We believed that things would be better for everybody together than apart, and we would not have been able to do what we have without their support and hard work. We have made huge strides."

And even though the family was more complicated than before the divorce, with Stan's marriage to Tonya and the addition of their son Rhett, the family reaction was positive as well.

"I think it was a very natural progression," says Tonya Strickland, 54, general manager of Savannah's Candy Kitchen. She says she was grateful—and not surprised—that the reconciliation happened. "It probably should have been like that all along."

Pam, Tim and Jennifer's mother, was semi-retired when the family members reconciled. "She had a little trepidation, like any mother would," says Tim, 50, co-owner of River Street Sweets and co-founder of River Street Sweets • Savannah's Candy Kitchen. But he and Jennifer say she is now grateful for the re-established relationships. (Pam was not available for an interview for this article.)

"Everybody has made an adjustment," Stan says. "We've all given and taken. The end result is that everybody is pretty satisfied."

The family decided to take the best practices from both businesses to create a model for franchises. Although the two companies use the same CPA and legal services, the family has opted not to work formally with a family business adviser.

And despite the complicated family history, the family members have not taken formal steps to separate family and business matters.

"We all care about each other and have a good time together away from work," Jennifer says. "But because we grew up this way and it was part of the family, part of who we were and who we are—we can't separate that."

The family is using lessons learned from the growth of both businesses.

"Growing the business was probably the biggest challenge. When you start out, everything is small," Tonya Strickland says. "You can handle everything on your own—you can run the cash register, make the candy and make everything look pretty."

It can be challenging to ensure the consistency of the candy and packaging as more people become involved. All the family members have learned over the years of growth that they can't always be as hands-on as they used to. "You can't do everything that your heart loves doing," Tonya says.

Franchises as the future

The family plans to use the joint company not only for expanding its franchise business but also for opening new stores that the family members run. A realistic goal is to open 25 to 30 new stores in the next five years, Tim says: "After five years, we will make some decisions about growing faster or slowing down growth."

"We see the future being bigger than where we are today," Jennifer says. "We're planning on opening more stores together this year than either of us could have opened individually."

Jennifer and Tim are looking at the next generation's role in the business as well. Tim has a daughter in college who is planning to work for the business. Jennifer's two sons are younger, but "the store is a part of their lives, just as it is ours," she says.

Still undecided is exactly how ownership of the three businesses will eventually change. And for now, at least, there are no plans to combine all the stores under one brand. "The two brands are so strong, it just wouldn't make sense to come under one name," Stan says. "What we're really excited about is taking our strong regional brand and basically making it national," Jennifer says. They plan for growth to come through the mail order business as well as through franchising.

"We have evolved from one product to now hundreds of products that we make," Jennifer says. "Every year we try to make new products; every year we try to be better. We're going to keep evolving."

Margaret Steen is a freelance writer based in Los Altos, Calif.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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The secret to family happiness: Include laughter in your culture

Ever wonder if there might be a secret sauce that, if poured on family members, would make them easier to get along with? Or maybe a specially formulated epoxy that could repair broken family relationships? Many families are searching for something akin to great-great-grandma's secret lasagna recipe—the one that had the ability to bring everyone together from near and far, even if only for one joyous evening.

Thousands of books and resources are available to help family members revive, repair and maintain family relationships. These materials are replete with tips on how to communicate better, resolve conflicts and make decisions as a family enterprise and an enterprising family. Yet there is one secret to family happiness that is rarely written about or discussed: laughter. Laughter is the secret ingredient for creating a positive family culture.

Laughter has a way of connecting one's heart, head and soul with others'. It is a social sport, for without an audience, it dies quickly. Although occasionally one will laugh at oneself, it is not the same as having someone with whom to share the joy of laughter. Laughter simply dies in isolation. Yet it's contagious when shared.

A physiological change occurs when we laugh. Even if only for a nanosecond, laughing opens up our receptors to listening and hearing what others have to say. Children and adults alike learn best where there is an element of fun and laughter incorporated into the learning experience. Consider your cherished memories of friends and family members. In talking with families, we find that their fondest memories include shared positive experiences sprinkled with laughter.

Laughter across generations

Watch grandparents play with their grandkids. You can see the elder's inner child emerge, and smiles appear on often-serious faces. Besides the obvious genetic pride between grandparents and grandchildren, older adults enjoy being around younger children because they enjoy watching them do funny, outrageous, "you-can't-make-this-stuff-up" things that make them laugh.

I witnessed a family who, for many years, had the following arrangement: The great-aunt and great-uncle, in their 70s, took care of a sister's grandchildren, starting at ages 5 and 7, for 11 weeks each summer. Although the couple were doing this to help their great-niece, a struggling single mom, the arrangement continued for seven years. One motivating factor was a sense of obligation, but mostly the older couple did it because they got so much joy from being around these kids. They didn't want it to end. These children made them laugh!

Part of the reason the arrangement was so successful was that the great-aunt and great-uncle did not allow electronics to be a part of daily activities. Instead, they chose to do things with the children that would create opportunities for laughter . . . and it worked. It also led to great stories.

Connecting older generations with younger ones is a magical force, especially when they can laugh together. Finding ways for grandparents and grandkids to laugh during the early years creates lifetime bonds. Incorporating humor into parent-child relationships can be a bit more challenging, especially given today's electronic distractions and hectic schedules. Yet if you want to create a positive family culture and you still have children living at home, make it a priority to incorporate humor and laughter into your daily routines.

When it comes to laughing with your family, all humor should be positive and affirming. One family asked their funniest member to be in charge of family fun. This gave her, and by proxy other family members, permission to keep laughing. Even as she grew up and became more serious, she continued to bring levity to the family environment. Is there anyone in your family who could serve as "Chief Humor Officer"?

Laughing with people is different from laughing at them. What you are striving for is good, clean humor. If someone isn't laughing with you, don't make them the butt of the jokes.

Laughing together is a sign of healthy relationships. Conversely, a lack of laughter in families is likely a sign that problems exist. Even worse are family gatherings marked by biting sarcasm, eye rolling, lack of regard for one another's time and interrupting one another with sharp, unforgiving comments. Who wants to be a part of that environment?

In these challenged families, words like exhaustion, danger, beware, thin ice, and walking on eggshells are often part of the family lexicon. It can be draining for everyone.

Two brothers who have challenged each other for years have exhausted themselves and the whole family. One brother said, "Look at me; I've aged 20 years in the last five just dealing with him." Their sister added, "My brothers have not laughed together since they were 5."

Why is laughter such a powerful antidote? Because it affects every level of our being. Its positive health benefits are physical, mental and social.

In an article entitled "Laughter Is the Best Medicine" on HelpGuide.org, Melinda Smith and Jeanne Segal write, "Laughter is a powerful antidote to stress, pain, and conflict. Nothing works faster or more dependably to bring your mind and body back into balance than a good laugh. Humor lightens your burdens, inspires hopes, connects you to others, and keeps you grounded, focused, and alert. With so much power to heal and renew, the ability to laugh easily and frequently is a tremendous resource for surmounting problems, enhancing your relationships, and supporting both physical and emotional health."

Using laughter to repair broken relationships

Laughter has the power to mend broken relationships and make life more enjoyable. For example, in one family a long misunderstanding existed between mother and daughter. Family gatherings were always tense, and the sooner the gathering ended, the better it was for everyone. Then a new person entered into the equation, a future son-in-law. He was a very successful businessman who had a way of defusing tense conversations. Although he never tried to get the mother and daughter to be best friends, he insisted on having casual family gatherings on a regular basis. The daughter was reluctant to go every time, but complied. At these gatherings the new son-in-law would get everyone laughing or at least smiling (even if they were just smiling and shaking their heads at him). He would start discussions and then add humor to the conversation with his quick wit. Often, he was the target of his own humor. But it worked.

During the laughing moments, the mother and daughter would occasionally make eye contact, even if just for a few seconds. Their eyes would meet while they were still smiling. At the end of the evening, enough smiles had been shared that it would have been weird for the mother and daughter to not say a cordial good-bye, sometimes accompanied by a short hug. Although it took years, slowly the walls came down and today they continue to laugh together. The past events that caused the rift were never discussed, but the bond of laughter made it possible for them to have a relationship again.

A funny thing about humor

We were enjoying a nice talk over dinner with some family members. The eldest sister, who ran the family business, was talking about retiring within the next year. Her sons said they were already preparing themselves to be the next-generation business managers. When the sister's two brothers arrived, the conversation went in a completely different direction. The elder brothers were laughing and carrying on in a silly, humorous way. They were not only ridiculing each other, but also laughing at themselves. They would say crazy things and then crack up laughing.

The sister smiled and shook her head as she watched them. It was obvious that these brothers laughed together a lot and mixed humor into their everyday conversations. Because of this rapport, they were able to talk about anything. It wasn't that they made light of serious situations; they simply said things to one another with smiles and kindness. There was no level of intensity in their tone with one another, just respect and love. And the best part of all is that their nephews were soaking it all in. They were watching how brothers could solve complex issues in a healthy, humorous way. These older brothers were modeling a positive family culture for the succeeding generation.

In "Laughter Is the Best Medicine," Smith and Segal write that incorporating humor and laughter in relationships allows you to be more spontaneous, let go of defensiveness, release inhibitions and express your true feelings. "All emotional sharing builds strong and lasting relationship bonds, but sharing laughter and play also adds joy, vitality, and resilience," they write. "And humor is a powerful and effective way to heal resentments, disagreements, and hurts."

Think about the humor and laughter factor in your family's culture. How inviting is it?

Everyone is attracted to laughter. When you hear it, even at a restaurant or in a side conversation, you want to know, "What was so funny?" The bottom line is, who doesn't want to be a part of a family that laughs together?

Amy M. Zehnder, Ph.D. is a strategic wealth coach for Ascent Private Capital Management of U.S. Bank (ascent.usbank.com). She works with families to articulate their purpose and passions through family meetings and retreats covering topics such as leadership, governance, trust and communication.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Sharing an asset requires intention and skill building

Last year, my wife and I decided to buy an iPod as a Christmas present to be shared by our two youngest children. Although we knew the "sharing" part might not come easily, we thought the experience would help develop their life skills. They found the iPod wrapped with both of their names on the tag; even so, my son took it and unwrapped it. "Awesome," he said. "Thanks for getting me this." How quickly he forgot that his sister's name was also on the tag and that we'd said the gift was for both of them to share.

All too often, sharing does not come naturally. It requires intention, skill and practice. What happened to our children and their shared iPod is analogous to what happens with many adults who have to share assets with their siblings and cousins. Family members don't necessarily have the same perspectives, values and interests. If you add a little stress, a lack of trust or some conflict into the mix, sharing can be even harder.

These issues often surface when family members must make a decision about a shared family asset, such as management of a family business, the use of a vacation home or the operation of a family foundation. I have witnessed families arguing heatedly even over a noble issue like a charitable donation. ("I would rather give to a different cause." "That charity's mission includes [fill in the blank], and I don't agree with that." "I believe we should only give to charities in our local community.")

If a parent or other senior family member funds the family foundation, that person often makes the final decisions, and the other family members follow along. But when more than one person has skin in the game, a decision about the foundation or other shared family asset must be made collaboratively. Merely being related by blood or marriage is not enough to ensure agreement about how to share the asset.

When I refer to a shared family asset such as a family business, I do not necessarily mean that all family members technically own it, work in it or set its strategy. I mean that the asset is part of the family portfolio and therefore plays a role in the family system. In many cases, a family business is like another child in the family: Significant time, emotion and treasure have been invested in it.

 

Skill-building exercise

In my experience, when multiple generations of a family share an asset, the elder generation will step in to make the final decision when they sense that conflict is brewing among members of the younger generation, in the same way that my wife or I intervened when our children disagreed about whose turn it was to use the iPod. When I work with multiple generations of the same family, I set aside time for the siblings or cousins to practice making decisions together without the involvement of their parents or grandparents. Because each family inevitably has a shared family asset, however small or large it may be, it is important that family members work toward developing a set of foundational relationship skills, such as decision making, negotiating and managing differences.

To assist them in developing this set of skills, I will often have my clients go through a governance exercise. Typically, I will identify a shared family asset that has relevance to most, if not all, of the adult family members—let's say a family business. I will pose a scenario to the next generation, and ask the elder generation to refrain from participating in the exercise.

For example, I might say, "Your parents have asked you to make a decision regarding the sale of the family business. Someone has made a very attractive offer to buy the business, and they want a response in the next 30 days or they will withdraw their offer. Your parents want you to make the decision without them." I then add, "For the purpose of this exercise, I do not want you to make the actual decision. I would like you to propose a process for how you all would make the decision together in the next 30 days."

Next, I divide them into groups to work on their proposed decision-making processes. After a while, I ask each group to share their proposed process with one another as well as with their parents. I instruct the parents to just listen to their children's proposals and not weigh in.

In the last part of the governance exercise, the entire family works together to integrate the best of each proposal into one governance process that the family can use in the future to manage real-life cases like the hypothetical one I gave them. This is a very powerful first-time experience for most families, especially those in the next generation. The skills they build are vital to their long-term success in planning how to manage their shared family assets.

 

Relationship skills

Decision making, negotiating and other skills are important to the success of families in business together. But other foundational relationship skills must be part of the family portfolio as well. Here are ten additional skills to be developed and honed by family members:

1. Communicating: Family members must be able to clearly articulate what they feel, think and need, and to use language reflecting "ownership" of their feelings, thoughts and needs (for example, "I" statements).

2. Listening: Family members must be able not only to hear the words of others, but also to understand those words by reflecting back what they've heard. While listening, they should intentionally try to put themselves in the shoes of the speaker to better understand what they are hearing. It has been said that we have two ears and one mouth, so we should listen twice as much as we speak.

3. Staying open: Family members should acknowledge that they may not know everything there is to know about a topic, situation or person. They should ask discovery questions and be receptive to new information, even if it doesn't fit their preexisting assumptions.

4. Adapting: Family members must be able to adapt to new information, circumstances and people.

5. Defining roles: It is important to be clear on what role, if any, each family member has in the family business. For example, is this person an owner? An employee? A manager? A board member? During group interactions or conversations between two family members, clarify which "hat(s)" the participants should be wearing. Is this a father-and-son conversation or a boss-and-employee interaction?

6. Goal setting: Family members must know how to set short- and long-term goals, whether these goals pertain to their own development, the development of others or the growth of a business. Family members also must know the difference between procedural goals and outcome goals. The former are defined and measurable activities that are intended to contribute to achieving the latter.

7. Not assuming: Family members should not assume they know others' motivations and intentions. The only way to arrive at an accurate understanding about why someone did, said or felt something is to ask that person directly.

8. Accepting personal responsibility: Family members must understand that although they are interacting at times within the context of the family—and as a result, can be affected by others' actions, words or decisions—each person is ultimately responsible for how he or she responds to those actions, words or decisions. Similarly, each person is ultimately responsible for what he or she does not do, say or decide.

9. Forgiving: If a family member disappoints, hurts or abuses another, intentionally or unintentionally, it is important for the injured party to work though his or her process of forgiving. Forgiveness may help heal a troubled relationship, depending on the severity of the offense. At a minimum, it will help the aggrieved family member heal and move on.

10. Trusting: The level of trust one family member has toward another depends on how highly developed the aforementioned skills are within the family. For example, if a family member is not a good listener, is not interested in negotiating, is ineffective in managing differences and doesn't take personal responsibility for his or her actions, the rest of the family will tend to have a low level of trust when interacting with this person. Trusting someone is a deeply personal decision. Some family members start by fully trusting each other just because they're family, and others start from a posture that their family members must prove themselves and earn their trust. In either case, the ability to trust those who are trustworthy is very important to the success of a family.

In a recent family meeting that I facilitated, one of the family members leaned over to me and whispered, "I love my family, but working through these business issues requires so much effort because we have such different approaches." This statement encapsulates the vital importance of these foundational relational abilities, especially to the overall success of the family and the business.

Just because people are related by blood or marriage does not mean that decision making will be any easier. The family may have to work hard to develop their relationship skills before they can plan together for the future.

Richard Orlando, Ph.D., is the founder and CEO of Legacy Capitals LLC (www.legacycapitals.com) and the author of LEGACY: The Hidden Keys to Optimizing Your Family Wealth Decisions.

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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When it's best not to resolve family discord

Should every challenging family business relationship or dynamic be repaired? Some family disputes are not fixable. However, even if an educated guess says they are, could it be that in some circumstances attempts to resolve the underlying issues might actually be detrimental to the family and business?

I have considered these questions deeply over several decades of working with family firms. The behaviors and relationships of family business members vary not only among families, but also among individual members of particular families. Some interactions are chronically challenging. Extraordinary amounts of resources—time, energy, money, emotion—are expended in never-ending attempts to improve those relationships and behaviors (not even counting the cost of the antacids and Valium!).

In many cases the relationships do improve, and the positive results can be profoundly gratifying for family members, other stakeholders in the business and consultants. I've been fortunate to experience such gratification many times. That may make my next statement rather surprising: In certain cases, trying to improve bad family business relationships is counterproductive, and everyone would be better off if no such attempts were made.

Sometimes it is better to do nothing about a difficult family business relationship because the costs of taking action likely would outweigh any benefits.

My new book, Invent Reinvent Thrive, recounts stories told to me by prominent family businesspeople. Two of those families—the Pritzkers and the Bronfmans—provide good examples of situations that could have been defused more strategically. In these two real-life cases, doing less, or at least placing less priority on certain activities, might have been preferable to the way the issues were handled.

The Pritzkers

The high-profile Pritzker family owns extensive assets, including Hyatt Corp., the result of decades of savvy hard work starting with A.N. Pritzker and his sons, Jay, Bob and Don. The family's success and wealth continued to grow after Jay's death in 1999. So too did distrust and discord, likely due to inappropriate governance practices and poor transparency, resulting from and enabled by foreign trusts that earlier generations had instituted to reduce taxes and "unwarranted" access. A decade-long battle involving multiple rifts, liquidation of major assets and divisions of ownership ensued.

Had those sources of distrust been handled before the asset-related issues, some relationships might not have ruptured. Other, more seriously damaged bonds could have been addressed later. Critical problems could have been treated more quickly and certainly more privately.

The discord resulted in cousins and even siblings communicating only through lawyers. The separation of assets was the tourniquet needed to stop the bleeding. It was also the easiest solution. Mending the fractured relationships was complicated at best, and would take a long time, during which assets could have been compromised. Ultimately, as Jay's son and family trustee Tom Pritzker said, "Quibbling shareholders can damage a company... I didn't want that instability for them [family members]... I decided to let go." Thus, the assets were divided and interdependency among family members minimized.

Some relationships have improved; others haven't but perhaps will over time. Had the upfront focus been on attempting to hold the family together, the value of assets and businesses might have decreased as key employees departed rather than be caught in crossfire. That would have exacerbated the existing problems of emotional bloodshed, public embarrassment and high legal costs. Ultimately, perhaps the soundness of the Pritzkers' businesses and assets made the family "too big to fail." But most family businesses lack that scale. Nevertheless, the Pritzkers' travails and solutions provide valuable lessons for others, no matter their size.

The Bronfmans

Samuel Bronfman founded Seagram, producers of Seagram's spirits and other valuable brands. As per his wishes, his sons Edgar and Charles became co-chairmen after his death, but younger brother Charles stepped aside eventually to make Edgar the sole leader. Edgar's son, Edgar Jr., succeeded his father, and sold Seagram to Vivendi in an infamous deal that resulted in a multibillion-dollar loss for the family.

The Bronfmans had a serious underlying issue: complex, non-communicative relationships, especially between Edgar and Charles. These stemmed in part from their relationships with their father, based on both love and fear. They had witnessed Samuel's outbursts at others, as well as his legal battle with and estrangement from his cousins. Such experience had lasting influence, and contributed to the family's poor prioritization in handling its issues.

Specifically, the Bronfmans focused excessively on appearances of propriety and compassionate concern for the impact on other stakeholders, prompting Charles to resign as co-chair. In effect, they rearranged the deck chairs (titles, etc.) instead of resolving the fundamental communication problem. Dealing with governance before communications can, as it did here, make good governance a near-impossible goal. As a result, Charles, though a proven communicator with others, was later unwilling to address challenging issues such as the Vivendi deal with his brother and his nephew. Had they prioritized communications and deferred governance issues, such as whether to have co-chairs, then Charles could have expressed his concerns as a stockholder to Edgar, regardless of Charles's exact governance role. Charles did ultimately attempt to resolve the relationship problems, but the damage had been done, and the debacle had obliterated a huge portion of the family's wealth.

When less is more

The Pritzker and Bronfman stories offer examples of how triaging problems more carefully could have paid off. Now let's discuss several situations where such strategies may be of benefit.

Wide range of challenging relationships. Typically, the most difficult challenges involve a minority of family members. The proverbial "80-20 rule" is often in effect here: 80% of the most perplexing problems may be caused by or affect only 20% of family members, or even fewer. In such cases, it may be advisable to defer, possibly in perpetuity, addressing the most challenging relationships (such as long-time estrangement or situations where the one perceived to be wronged has passed away but descendants have not forgiven). That's because trying to improve the most difficult situation might be a distraction, slowing progress on other, more approachable fronts while an inordinate share of financial and emotional resources is expended on unsolvable problems. Furthermore, addressing the most extreme issues early violates one of my key rules of tackling any complex family business situation: Always aim for early successes, to build confidence and momentum.

Deferring handling the largest challenge enables the family leaders to devote greater resources to the easier challenges, or to improve the most amendable situations. That likely won't solve all the issues among family members, but it can give the majority (the 80%) some hope, and may even convince those responsible for the largest challenges (the 20%) to board the "resolution train" before it leaves the station, lest they lose leverage and their chance for sufficient air time. On the other hand, if you (as a family member or consultant) try to tackle the largest challenges first, the more amenable family members will tire quickly and will likely assume you can't do any better with the situation than they can (or than the last four consultants who tried and failed).

Ticking time bombs. We all have been in or witnessed interpersonal situations where quiet, long-term avoidance turns quickly into loud confrontations. Sometimes the inflection point is a single sentence (or even a word) or action. These "time bomb" situations are common in family firms, where divergent expectations about roles, succession, money and a whole host of other issues can lead to simmering tensions that flare without warning.

While it's tempting to bring such issues into the open, the problem is that the blowouts that typically follow can have pervasive negative effects on the broader family and business. Even much more benign relationships among family members can be sucked into the vortex and develop tensions of their own, as members take sides or push their agendas.

Turnarounds. When negative business (operating) results seem to be in imminent turnaround, it may pay to delay attempts at fixing family relationship issues. For one, tending to the "open sores" of family relationships might retard the pace of business improvement or diminish its trajectory, given the required diversion of resources and the potential for increased short-term discord, as suggested above. The negative business results could, in turn, contribute to even more challenging relationships. Thus, even good intentions can result in a vicious cycle with devastating consequences.

An additional benefit of waiting in this circumstance is that the higher returns—such as earnings or morale—associated with successful turnaround results might enable you to "buy" interpersonal peace through increased dividends, redemptions or other means, or at least to make difficult conversations less likely to spiral into the aforementioned vicious cycle. I've observed, time and again, that a rising tide of profitability lifts many boats in a family business.

Setting priorities

There is a tendency to try to fix everything, based on the dangerous assumptions that everything can indeed be improved and that attempts to do so are cost-free. However, if the family is sufficiently functional to keep the business healthy, you are ahead of many other family firms. In other words, if it's not clearly broken, there may be no need to fix it, and attempts to do so may actually worsen the situation.

Holding back may involve resisting natural pressures to press onward. Family members who are so exasperated that they have agreed (perhaps for the first time in years) to hire a consultant want to see results. Consultants, eager to prove their value, may be tempted to try to solve all problems as quickly as possible. The decision to start with the most intractable problem may stem from our conditioning by untold generations of mothers to eat our brussel sprouts before we get dessert.

The next time you consider approaching a series of family challenges, think twice about which issues should be prioritized and which are best deferred. I'm not suggesting you start every meal with dessert, but do consider taking the path that leads to crucial early success.

Lloyd E. Shefsky is the author of Invent Reinvent Thrive (www.inventreinventthrive.com)and Entrepreneurs Are Made Not Born, both published by McGraw-Hill. He is Clinical Professor of Entrepreneurship and founder and co-director of the Center for Family Enterprises at Northwestern University's Kellogg School of Management.

Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Reality bites

Although I am not a fan of reality TV shows, my son Tom coaxed me into watching a favorite of his—Pawn Stars, a hugely popular American reality show on the History Channel. Pawn Stars, which takes place in Las Vegas, stars the Harrison family, who run the Gold & Silver Pawn Shop. It basically is a 24-hour family business led by patriarch Richard Harrison; it has been operating for 24 years.

Harrison, his son Rick, and Rick’s son Corey, along with Corey’s friend Austin “Chumlee” Russell, wrangle over the price of objects with customers who want to either sell or pawn the items. Frequently, the items have interesting historical value, and a local expert is brought in to determine the authenticity and appraise its worth.

According to Nielsen, 9 million to 10 million Americans tune in each week to watch the trials and tribulations of this family in business. The challenges faced by small businesses such as the pawn shop are basically the same as those confronting larger family companies, although their management style and governance may differ. Issues addressed on the show include how they relate to each other, manage their family and employees, and plan for the future.

Pawn Stars spawned other family business reality shows such as American Restoration, featuring antiques restorer Rick Dale, wife Kelly Mayer, younger brother Ron Dale, son Tyler Dale, stepson Brettly Otterman and staff. Kelly handles the finances, budgets and payroll, while Rick and Ron select the items to be restored and Tyler and Brettly learn the restoration trade.

In addition to restoration challenges, the show exposes complex family issues. Topics such as motivating and mentoring the next generation and setting compensation are often discussed in between sandblasting and hand-painting. Tempers flare, mainly because of the stress of being filmed for TV while negotiating these sensitive family issues. However, by the end of each episode, conflicts are resolved and the business continues. 

Apparently, exposing the family dynamics to millions of viewers has had a positive effect on these businesses. Duck Commander, a Louisiana maker of duck calls, saw a huge increase in sales after the debut of reality show Duck Dynasty. Owner Willie Robertson sold 300,000 duck calls after the A&E show aired in 2012, compared with 60,000 in 2011.

While my son did not convert me to a regular viewer, I did enjoy the camaraderie and banter, and actually learned a few more lessons about family business. However, I cautioned him that many family issues aren’t as easily wrapped up Hollywood style, and it often takes an expert working with the family to settle discord.

 


 

Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Distributions and family financial dynamics

When a potential leveraged buyout of a third-generation manufacturing business failed to close, a long-simmering conflict boiled over. Two family shareholders not involved in day-to-day operations wanted higher annual dividends and resented what they saw as elaborate compensation for the two family members running the company as chief executive and chief financial officer. The CEO and CFO and their non-family management team felt that, in the midst of an industry-wide downturn, the company’s free cash flow should go to ramp up operations at its newly purchased plant in Mexico and not be paid out to shareholders in a dividend.

The crisis could not have come at a worse time—but there’s never a good time for a family business conflict. And few issues are more contentious than shareholder distributions.

Who gets how much, and when? Should excess free cash flow be reinvested in the business or distributed to shareholders? How can companies balance the desire to grow the business with the legitimate financial needs of family members not on the payroll? For family firms in the second generation and later, the question is not whether there will be conflict over distributions, but when.

Having an explicit, thoughtfully crafted distribution policy can help avoid expensive conflicts that can force a sale of the business to resolve the dispute. It helps to anticipate where stress points can occur over distributions, to educate shareholders outside the business about operations and finances, to understand the financial alternatives available and to know what legal challenges can arise.


Why does the conflict start?

Family businesses frequently struggle with competing visions for the company and its future. One generation wants to grow the business by implementing new technology and processes and developing new products and markets, while long-time owners think things are just fine “the way we’ve always done it.” Disagreements over family businesses arise between shareholders who work in the company every day and those who do not want to work in the business but do want a current return on their capital. If mismanaged, these disagreements result in an “us vs. them” fracture among family shareholders that may find family dividing into two distinct camps: “insider” and “outsider.” These are not exactly the sort of classifications that breed family harmony, mutual respect and trust—or good business decisions.

The fundamental conflict typically mirrors what happened in the manufacturing company we counseled: Family insiders push for capital reinvestment and long-term appreciation, while outsiders want distributions for a current yield.

Let’s start by acknowledging that both sides have merit. Family shareholders are justifiably proud of earlier generations’ accomplishments. For insiders, the top priority is to continue growing their business legacy for future generations, which means nurturing it, keeping it competitive and reinvesting in it.

Of course, that’s easy for insiders to say. After all, they get compensation from the company in the form of salaries and benefits. Many also get perks such as vehicles, travel and country club memberships. Sometimes, things are taken to an extreme: The child of a controlling shareholder in a family business we know of was hired—just out of college—as its human resources manager at a salary five times the market rate!

Outsiders see all this and recognize that their capital is being put at risk, and they have no way to exit the illiquid private investment if they do not like the decisions being made. Frankly, life is short, and if they are not receiving distributions from family business ownership, outsiders will often favor selling the company and cashing out. This decision can come at the wrong time in the business life cycle, and value can be sacrificed.

It is important to understand that outsiders usually are not being unreasonable in their demands and that efforts should be made to provide them some return on their investment. This should be a priority not only to maintain family harmony at family gatherings, and to facilitate good business decisions, but also because there are potential legal pitfalls to ignoring outsiders’ perspective.


How squabbles can escalate

Many family business owners may not realize it, but there is no legal obligation for a company to pay dividends on common or preferred stock. Unlike debt payments, dividend payments are completely discretionary. A company’s board of directors is charged with making disinterested decisions, in good faith and with due care, about whether long-term shareholder value will be maximized by reinvesting cash in the business or distributing it to shareholders. If the board’s decisions can be shown to be in the best interests of the corporation and its shareholders, they cannot be second-guessed by a court.

There are also some legal constraints that prevent shareholder distributions (for instance, capital requirements set by lenders and statutory requirements about business solvency). And the company’s cash flow requirements take priority, of course.

Let’s consider minority shareholders, a status that describes many family business outsiders. Historically in a court action, the burden of proof was on the complaining shareholder to show fraud, bad faith or unreasonableness. But in the past two decades, there have been enough instances of unfair exercise of majority control to trigger a shift. Now, there is a general expectation that an equity participant has a right to a proportionate share of corporate earnings and a general notion that returns should exist.

If the decision to forgo or sharply curtail distributions is perceived as a way to squeeze out certain family owners or enhance the employment positions of others, a lawsuit might be considered viable. The board’s defense, of course, would be to show that curbing distributions is good business judgment and there was no oppressive conduct by the majority. Having all the proper legal documents in place before conflict occurs—such as buy-sell agreements, voting trusts and agreements, and articles of formation—is essential.

We often see clients resort to buying out family shareholders who dig in their heels and will not be appeased. It hurts, but legal battles and estrangements are worse. We remind clients that their children are watching them and learning how to treat their siblings and cousins. Adult family members are wise to address powerful and often volatile subjects—like whether to reinvest or harvest profits—with neutral counsel and fair process.


Getting to amicable resolutions

There is a path to prevent conflict, or arrest it before squabbles turn into battles and wind up in court. We’ve found that outsiders concerned about distributions are almost always willing to be patient if they are given a transparent plan for long-term growth with evidence that the board is implementing that plan.

The keys are communication, transparency and education—along with concrete milestones that show promises are becoming reality. Also, establishing and then meeting reasonable milestones will go a long way toward avoiding legal disputes.

Nowhere was the success of this approach demonstrated more vividly than in the case of the manufacturing firm we mentioned up front. Instead of ignoring or dismissing them, its board of directors responded vigorously to the outsiders’ complaints. They ordered a business valuation and cash flow and balance sheet analyses. They had serious discussions about whether to take on more debt in order to provide liquidity for additional cash -disbursements.

A review of upcoming capital projects was put on the table, along with a detailed plan showing the likely increase in corporate value and returns from these expenditures. The family engaged a highly experienced family business consulting firm, which all sides agreed was objective, to lead them all through a comprehensive review of the information and, as a family shareholder group, decide what priority would be given to continued business growth and profitability vs. liquidity.

The outsiders’ worries about unfair compensation were also addressed, and an independent analysis was done to benchmark salaries. Eventually, that analysis determined that compensation for the CEO and CFO was within industry norms. Next, a valuation formula was designed so that family members could trade stock among themselves as an alternative to liquidity or, as is often the case, hold their ownership positions.

If the board wants to consider alternative, more complex and customized forms of distributions to address specific shareholder goals, such as leveraged recapitalizations, share repurchase or exchange plans, an investment banker can be enlisted to assist in the analysis and structuring of the plan and in the determination of what is “market” under the circumstances. When an independent outsider “runs the numbers” and takes the mystery out of the financial decision-making process, it generally works to everyone’s benefit.

The breakthroughs in the manufacturing family helped everyone agree on appropriate dividend levels and on the principle that they should be dependent not just on the needs of outsiders, but also on company earnings, capital requirements and balance sheet integrity.


Lessons to be learned

Shareholder goals must be positively and continually aligned around the basic sentiments of the enterprise and the family. What purposes do the business and the family serve? What do insiders and outsiders want from the business today, and what should it provide for them and their children over the long term?

It helps enormously to hold regular meetings that include an overview of company history and values, as well as education about the industry and how its profitability fluctuates over time. It’s especially important to make sure that outsiders, who may be only tangentially familiar with the business, attend. Ask everyone to participate in discussions about how family ownership benefits the company and how the company benefits from family ownership.

Making sure that all your family shareholders achieve a high level of financial acumen and financial self-management can have a huge impact on their determinations about what level of distribution is sufficient. So can discussions that demonstrate how family members’ dependence on shareholder distributions to maintain elaborate lifestyles is dangerous; it can increase pressure to sell the company—or parts of it—at reduced value.

We caution clients not to forget that parents can set good examples with understated lifestyles. They also can clarify that compensation for employment in the company is not the same thing as dollars paid for the use of one’s capital or for putting one’s capital at risk.

When a board of directors acknowledges that family shareholders should get a return on their capital and it sets defensible expectations for the company’s need for capital—through strategic planning and budgeting—it should be clear to both insiders and outsiders what excess capital will be available for owner distributions this year and in years to come.

Frederic Floberg is managing director of The Chicago Corporation, an investment banking firm (www.thechicagocorp.com). Drew Mendoza is managing principal of The Family Business Consulting Group (www.efamilybusiness.com). Michael Zdeb is a partner at the law firm of Holland & Knight in Chicago (www.hklaw.com).

 

 

 



Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

 

 

 

 

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How to manage behind-the-scenes power players

One Monday afternoon, Henry Pullman found himself embroiled in a heated argument with his brother George, co-chair of the board of their family business, about compensation for their non-family CEO. George wanted to reverse a decision they had affirmed the week before. He said it went against the family’s values. Henry was mystified. They had worked through a transparent and rigorous process to come to the decision, and he and his brother had been in agreement every step of the way. Where was this coming from?

Henry realized that he and his brother were at odds more frequently. The conflicts took a toll in time, credibility and productivity—and damaged their relationship. Henry realized that these conversations had some common elements: They led to revisiting decisions already made, they were tied to intangible or what seemed irrelevant rationales and they resulted in heated conversations that were difficult to resolve. And they always followed a weekend when George had spent significant time with their father.

George Pullman Sr. had left the business a year ago after an ownership transition from the second to third generation. The Pullmans had managed this transition thoughtfully. They had “professionalized” their company two years ago with a non-family CEO who was doing well. They had an outside board of directors and a flexible governance structure that allowed for appropriate participation of many stakeholders. Yet George Sr. was still exercising the influence of someone in charge, although from behind the scenes. He advanced strong opinions about day-to-day operations through old colleagues in the business, over golf or at social events. He gave his son George endless advice about things to watch out for. Henry was worried that if they couldn’t work through this new, troubling (but not entirely surprising) wrinkle, all of the energy and effort to make the transition to the next stage would fail.

The back-channel effect

The Pullmans are not a real family, but their story is a common one. In family businesses, influence is an important currency, as authority is typically tightly held. It is expected that older family businesses will have many stakeholders with diverging interests. But when influence is exerted from the sidelines and disrupts an organization’s decision-making process, dysfunction results. This kind of influence doesn’t show up on an organizational chart and is difficult to recognize, discuss openly and respond to.

In the Pullmans’ case, a patriarch who has put the structures in place to effect succession—and no longer has ownership or any role in the operating company —nonetheless has opinions that influence the principals still involved. We have seen this kind of influence take many forms, all with similar results:

• A spouse creating friction from home.

• A younger owner/employee in an entry-level job who exerts pressure on family members with management roles.

• Alliances among family members—in branches, for example—that play out in critical business decisions.

• A family member who seeks advice from friends outside the business, disregarding confidentiality.

In many of these cases, back-channel influencers have legitimate stakes and good intentions. George Pullman Sr. cared about what happened, and others listened because he’d been so successful. Yet his sons had their own success and needed real room to run the business.


Unproductive outcomes

For family members, these situations trigger unproductive dynamics rooted in old patterns of communication and deeply embedded relationships. Because these are critical family relationships, we feel pulled to pay attention to them, perhaps more so than we would in another setting. Consider these comments:

“My father built this business from nothing; how can I ignore his advice?”

“My spouse is equally affected by the performance of the business, and he/she has my interests at heart more than others.”

“Everyone thinks this is the best course for our business, but my cousin will never let it happen.”

These types of situations are exponentially more difficult for non-family executives in the family business. While they often feel stymied in decision making on critical issues, it may take a long time to realize what’s going on behind the scenes, and the situation may hinder the executive’s ability to do his or her job effectively. If not addressed, this kind of influence can have a negative impact on both relationships and performance.


What to do about it

So what do you do when the boundaries of leadership and decision making extend to those who have no accountability for the outcomes of their advice—who express their views in unproductive ways, who undermine the transparency that enlightened businesses depend on? You can’t simply remove the web of relationships surrounding the business, or hope that they won’t be relevant. Nor would you want to. The relationships surrounding a family business are often its greatest source of longevity and strength. But there are things you can do to translate back-channel influence into transparent and productive communication:

• Refresh your governance and modes of participation. Governance structures can clarify who gets to participate in what kinds of decisions. Yet even those with good governance rules can experience this dynamic. When influencers are creating a politicized environment for your business, that can be a flag to revisit governing mechanisms to enhance the avenues for consultation, input, information and discussion, as well as to clarify guidelines about where authority lies for any given decision. Transitions in a family are a good time to do this. Should the habitual ways of working be revisited to incorporate new voices? Is additional education or discussion needed to ensure that the governance fits the current configuration of your business and family?

• Be inclusive. One thing is certain: You cannot shut down the opinions, feelings and ideas that come from many places in a family business. Many people are affected by what happens, both emotionally and financially. Spouses may or may not be allowed to participate in ownership or employment, but they are affected by the outcomes and their children are often the key players of the future. Those who work in the business may have different levels of knowledge and involvement than those who have ownership alone, but they all feel a stake in the future and have interests that they will find ways to advance. There are many legitimate venues to include people in different roles without ceding control inappropriately, from family councils and assemblies to annual reunions or newsletters. The strongest family enterprises seek out their disparate voices, bringing them into the conversation rather than forcing them to find other ways to vent.

• Step up to leadership. Back-channel influence in a family business undermines the credibility and efficacy of the company’s organizational and leadership structure. And while leaders may be the “victims” of this dynamic, they have a responsibility to step up to the challenge of addressing it. I have seen this go two ways. Sometimes, an outside executive must raise a difficult issue with a family member:

“I understand that I work in a family business. However, it is difficult for me to play the role you have asked me to play if I don’t know the content and source of concerns being voiced. We need to find a way to improve direct talk about legitimate concerns so that we can decide if and how to address them.”

More often, family leaders must step up to the challenge of putting appropriate boundaries back in place. When faced with a situation like this, a former client of mine who was the chair of his family company’s board went to his parents and asked them to raise their concerns directly through him in his role as chair rather than through their longtime employees at the company. “Look,” he said, “if you want to keep this business in the family, you need to let the professionals we have hired do their job, and stay out of the day to day.” Not easy, perhaps, but it is the job of leaders to reset boundaries that have been blurred.

• Attend to transitions. There is a great deal written about the transition out of a role in the family business, but much less attention paid to creating an alternative way for the departing leader to play a role. The transitions out of management and ownership are hard and often require a reorientation around role and control. If your family is experiencing transitions of this kind or expects to, it is good to get ahead of them by thinking about how the role will change before it does. The Pullmans were so focused on making a full ownership transition that they under-attended to the expectations that went along with changing control. As a result, George Sr. did what he knew how to do best: He told his son what to do, with a full expectation that he would do it, just as he always had.

• Learn from those who have been there. For better or worse, this is familiar territory for family businesses. Find ways to connect with other businesses or with advisers who have faced these situations and come up with creative ways to get things back on track productively. If you have an outside board, they can also be a source (and an enforcer) of good practice. Often, the best solution is one that you don’t have to create from scratch, but one that someone else has tested that you can adapt.

• Don’t avoid the conversation. Perhaps most important, do something. You may wish that over time, back-channel influence will diminish on its own or that you can avoid dealing with it directly. We worry that having direct conversations will damage relationships or unleash a set of dynamics that will be difficult to control. The truth is, if you are experiencing dysfunctional influence over your business, these dynamics are already unleashed, and they are not in your control anyway. It is no harder to have the conversation you don’t want to have than it is to deal with the repercussions of letting things lie.

Just raising the topic is the right beginning. Imagine Henry Pullman beginning the conversation with George.

“I think we have done a really good job making a transition to our generation, and that took work on our part and Dad’s. But I’ve noticed lately that Dad sometimes tries to influence decisions that we have all agreed he wouldn’t be involved in, and it creates conflict between us. Is it time to revisit this with him?”


Risk taking pays off

For the Pullmans, the ending was a good one, but not without effort. Henry and George, with the help of an outside board member, spent time thinking through their disconnects and ultimately built a strategy to help reorient their dad’s contribution—reinstituting meetings with him as a pair. They also reinvigorated their family meetings so they had a place to address issues when they first came up.

It may seem risky to uncover and discuss back-channel influencers in your business. But like so many things in family businesses, once you are able to redirect the well-intended energy and attention to places where it can be productive, you’ll wonder what took you so long.

Debbie Bing is a principal at CFAR, a management consulting firm specializing in strategy and organizational development (www.cfar.com).

 

 

 


 

 

 

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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