Siblings

Promoting family togetherness

It took courage and spunk for two adventurous young men to launch an advertising agency in Detroit in 1929, when the country was teetering on the brink of the Great Depression.

Lawrence Michelson and Leonard Simons were fresh out of high school, with no clients and no experience. Advertising as we have come to know it was in its infancy.

Michelson and Simons' optimism paid off. The business they launched, now based in Troy, Mich., and called Simons-Michelson-Zieve Inc. (SMZ), is still going strong, three generations after its founding.

"My father definitely had something unique about him, and so did his partner, Leonard Simons," says the firm's chairman, Jim Michelson, 75, son of co-founder Lawrence Michelson. "These were two young guys who were ready to make their mark with just their personalities and creativity to sustain them."

Because Simons and Michelson had worked at a small company that dealt in trinkets, they seized on jewelry as an early advertising focus. They introduced a then-new concept: newspaper ads in different sizes that included pictures of the products they were promoting.

The young partners promoted themselves wisely. They gained the attention of jewelers across the country, and came to represent a trade association. Simons, a gifted artist, handled the visual side of the business; Michelson tapped into what his son describes as his considerable charm, organization and people skills. The synergy worked.

Jim Michelson would end up getting the formal business education his father never had. He attended the Wharton School of the University of Pennsylvania and initially aspired to enter the investment world. But a talk with his father clarified everything.

As Jim recalls it, Lawrence Michelson was so smitten with the advertising business that he hated Friday afternoons and loved Monday mornings. "I had seen this all my life, and I also noted that my dad was never bored," Jim says. "He had so much to teach me, and he wanted to share it all with me."

Leonard Simons and Lawrence Michelson never officially retired; they served in emeritus roles at the agency until their health no longer permitted it. Simons passed away in 1995, Michelson in 1997.

Jim Michelson came to the firm in 1963. "It was the best decision I ever made, along with marrying my wife, Bonnie, who I was lucky enough to meet at Penn," Jim says.

Mort Zieve, the son-in-law of Leonard Simons, had joined the agency in 1961. Zieve had been a successful producer and director of local TV shows in Detroit, including Lunch with Soupy and The Soupy Sales Show. He was also a theater director and a musician; he composed jingles that were performed by Louis Armstrong, Ethel Merman, Rosemary Clooney and other stars.

In 1977, Jim Michelson and Mort Zieve bought the Simons-Michelson agency in a smooth transition from the firm's founders. The agency, renamed Simons-Michelson-Zieve, moved its headquarters from Detroit to Troy, Mich.

Jim Michelson says the lessons his father taught him have shaped the culture of the agency. "The message I got was always about building long-lasting relationships with clients, not rushing to get more, more, more," Jim says. "Working with my father was a day-by-day lesson in how to make that happen."

Jim's wife, Bonnie, affectionately known as "The Librarian," also became an integral part of the firm. In the days before the Internet, Bonnie was the agency's assiduous market researcher, studying trends and digging for information. She was a role model for her daughters, showing them that women could make a mark in the advertising world.

"Our mother was amazing, and she kind of forged the way for us," says Pam Michelson Renusch. Bonnie Michelson passed away in 2014 at age 72.

The third generation steps up

Pam, 49, and her sister Debbie Michelson Fuger, 46, both hold the title of executive vice president/group account director at SMZ.

Pam, a Phi Beta Kappa graduate of the University of Michigan, joined the agency in 1989. She and her husband, Paul Renusch, have two children, ages 15 and 8.

Pam says she was determined to avoid the "boss's daughter" label. "I tried to work harder and longer than anyone else, taking nothing for granted," she says.

Today, she handles one of SMZ's key accounts, the Michigan Lottery. "It's definitely never dull," says Pam, who has created TV spots and developed other ways to promote the lottery. Her responsibilities include marketing, media and creative strategy development. She serves as agency liaison for the account service, creative, production, media and research departments. She also manages client budgets and oversees planning activities and client timetables.

Debbie is a graduate of Washington University in St. Louis. She started working at SMZ in 1996. Previously, she was a promotions director for a Michigan TV station, promotions and events manger for Journal Newspapers in Virginia and an associate media buyer at an advertising agency in New York.

"There was never any pressure to come here," Debbie says, "but it turned out to be the totally right move for me."

Debbie, the youngest third-generation member, was the athlete in the family. She now handles SMZ's sports clients, including the Detroit Tigers, the Detroit Red Wings and Fox Sports Detroit. She and her husband, Pierre, are the parents of 6-year-old twins.

"I think everyone in the agency appreciates that I have a pretty hectic life, and I'm surrounded by people who support that without question," Debbie says. "That makes me a very lucky mom, and so grateful that I can share my daily life with my family as well as other colleagues."

Jamie Michelson, 51, today is SMZ's president and CEO. Jamie attended his father's alma mater, the University of Pennsylvania's Wharton School; he graduated in 1987. Also like his dad, Jamie met his wife, Beth, in college.

From 1987 to 1991, the couple lived in New York City, where Jamie worked for the former Geer, DuBois ad agency as an account supervisor. "I was learning the business—how to work with different types of personalities—and meeting people," Jamie recalls. He learned from some major figures in the industry and worked on a variety of brands, including Jaguar, Barnes & Noble, BASF and Sony.

But the New York lifestyle didn't appeal to the young couple, and home seemed to beckon to Jamie. He joined SMZ in 1991. Building on the skills he had acquired in New York, he handled client accounts and got a feel for the family firm.

After several years, Jamie began to feel that he needed a change and some new challenges. "There was no issue, just my own quest to test myself in a setting other than a family business," Jamie says.

In 1996, he decided to explore new options while he and his family were still young. Jamie and Beth have two daughters, now both in their early 20s.

Jamie joined the prominent Doner agency and worked there for 10 years: five in Baltimore and five back in Michigan. Clients he served included PNC Bank, ADT Security, Old Country Buffet and Bally Total Fitness. The experience he gained at Doner was an important steppingstone, Jamie says. "It gave me confidence in my skills as a leader, and I was viewed as someone who could have an impact on the destiny of a client's business," he says. "Doner grew quickly in that era, and so did I while I worked there." He held the title of group account director at Doner.

In 2006, Jamie returned to SMZ. "I returned not as the result of a grand plan but, frankly, because it just felt right—the right time for the agency, and the right time for me," Jamie says. "As part of the third generation of SMZ, I realized that I actually felt a duty to guard the legacy of my father and grandfather and their partners."

Jim was happy to have his son back at the agency. "My hope and my expectation was that Jamie would come back and work with us," Jim says. "He and I always have had a close relationship, and I recognized his growth in the business, management and client services areas over the years."

When Jamie returned to SMZ in 2006, both Pam and Debbie were working there. Mort Zieve, who had been SMZ's chairman, had passed away a year earlier.

Was there fallout from the return of the prodigal son? "I don't want to make this sound like a fairy tale," Jamie says, "but the family was totally accepting and ready for this transition. My sisters have been gracious, welcoming and supportive. I'm grateful that this has never been about my being the oldest, and the only male sibling. It's about all of us doing what we seem best suited to do."

Pam says her brother's return felt altogether right. "It has never been a competition among us," she says. "We're family members working together to run a family business."

"We've all been supportive of each other's decisions and were glad that [Jamie] was making a move that he felt was right for him," says Debbie, who entered the family business shortly after Jamie left in 1996. "I was truly happy to have the opportunity to work together with my brother."

The patriarch, Jim, first began thinking about continuity after the death of his own father in 1997. Those stirrings returned upon the death of his partner Mort Zieve in 2005. "It's definitely a process; at least it was for me," Jim says. "You begin to look into the future with new eyes and, yes, a new mindset." Jim handed operational responsibilities to Jamie over time; today, Jim is semi-retired, but he still has ongoing client contact.

"Everything important has been reduced to writing, and my dad has been transferring shares to the third generation for the past several years as we continue to look and listen and learn from him," notes Jamie. Jim and the family members who work in the agency are the only voting shareholders.

Longtime clients have built meaningful relationships with all of the family employees. All family members usually meet new agency clients, whether they are the lead person on the account or not.

"I'm aware that while the family members are different in many ways, they also understand the fine art of collaboration, respect for clients, dedication to creativity and, yes, loyalty to one another," Jim says.

Jamie's wife, Beth, a math teacher, has taken on some tasks to support the agency over the years, such as when the firm moved offices in 2014; she also has worked on new business support and on implementing the agency's email marketing campaign.

One third-generation Michelson sibling does not work in the business: Laurie Michelson, who is Pam Michelson Ren­usch's identical twin. Laurie is United States District Judge for the Eastern District of Michigan, appointed by President Barack Obama in 2014.

"I knew that law was my path, and I think everyone in my family kind of knew it, too," Laurie says. After graduating from Northwestern University School of Law in 1992, she served as a law clerk to the Honorable Cornelia F. Kennedy of the United States Court of Appeals for the Sixth Circuit. She then joined the firm of Butzel Long, where she practiced in the areas of white-collar criminal defense and media/intellectual property law.

Laurie is a shareholder in SMZ, though she doesn't have voting rights. "I never had any doubts about my path, and while I so admire what my family does together, it just isn't the right fit for me," the judge says.

Looking toward the future

Although it's possible that a "cousin cohort" might emerge, currently none of the older fourth-generation members has expressed interest in joining the agency.

"I credit my late wife with helping to create the atmosphere here," says Jim. "We celebrate holidays together, even vacation together, and I hope what the grandchildren experience will eventually influence their own lives."

SMZ, which now has 40 employees, hopes to expand on its already wide-ranging client base. The firm has come a long way since the time when print was the dominant advertising medium; its capabilities include digital technology, social media and search, in addition to broadcast, print, outdoor and point-of-service.

Every Friday, there's an agency-wide ritual: Everyone indulges in treats, especially M&Ms. "It does create a nice end-of-the-week feeling," says Jamie.

Jamie occasionally is accompanied to work by Derby, his golden retriever—a continuation of a tradition started by his father, who brought the adored Michelson family dog, Webster the labradoodle, to the office.

"I'm aware that while family members are different in many ways, they also must understand the fine art of collaboration, respect for one another and, yes, loyalty to one another," says proud father Jim Michelson.

"I genuinely cherish the history and tradition of this company," says Jamie. "Yet I also feel the pressure to look forward—to look after what's been created as best I can, and in my own way."

Sally Friedman is a writer based in the Philadelphia area.

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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Six siblings make a partnership work

When six brothers and sisters are involved, managing a family business can be complicated. Not so for Smyth Automotive—at least not according to Steve Smyth, 48, who manages store operations at the Cincinnati-based company. Although he declines to reveal sales figures, Steve says the company's revenue increased 10.5% during the first quarter of 2015.

Steve's father, George Smyth Sr., started selling used cars in 1963. He added a salvage yard to have parts available and in 1965 moved into selling parts over the counter—the start of Smyth Automotive. When George Sr. retired in 1983, he turned the business over to his children. Joe, the oldest, became president, and when he passed away in 2010, Jim, the next oldest, took over while remaining head buyer. George Smyth Jr., who worked in sales, passed away after George Sr. retired. Six of the eight surviving siblings run the business.

Ask Steve Smyth on a day when he's stepping in for one of his store managers how many stores the company has and he'll laugh and say, "Too many." There are 23 retail stores, five warehouse distributors, a battery division, two machine shops, one automotive repair shop and eight paint centers throughout Greater Cincinnati, Dayton, and Columbus, Ohio, and in Kentucky. The company also has more than 250 trucks and close to 400 employees.

Bill Smyth is general manager of two retail stores, Bob Smyth manages the machine shops, and Rita Summers is general manager and buyer for the paint centers as well as manager of outside sales for the paint and body division. Lynette Simpson, the oldest sibling, is CFO and treasurer. The brothers and sisters assumed their positions more or less according to their early experiences; all of them worked in the business as kids. As Steve recalls, "Mom and Pop were always at work, so we always went to work after school and in the summer."

"I worked in the parts department as a teen and hated having to pick up greasy bearings," Rita says, "so I moved to the paint division as soon as I could." She adds that Lynette learned the financial end early from their mother, Ruth Smyth Ross.

What's it like to work in such a large sibling partnership? Steve and Rita make it sound relatively easy. "It's a lot of give and take," Steve explains. "We were raised that if something is worth anything, it's hard."

The siblings keep their areas of responsibility separate, which helps to keep the peace, Steve says. "We'll help each other, but we try to let everyone do their own thing," he explains. "I don't like to meddle, because then you start crossing paths and there are two captains trying to drive the boat. That's when arguments start." Steve says he's glad to lend a hand or give advice, but if he sees a sibling crossing boundaries, he'll say, "That's so-and-so's job."

The six make group decisions when warranted. Steve says that if an idea doesn't sound right to him, he tries to explain his reasoning. He asks the person who proposed the idea to explain how the business would benefit and how long it will take to see results. "It might just have to wait," he says.

Rita says the six siblings run their business without meetings. "We communicate through email and phone. Maybe we meet once a year, as strange as that sounds," she says. "Everyone has his or her own identity, knows what to do and does it."

Besides the siblings' well-defined roles, there's another reason behind their success: They rely on non-family members in key positions to assist them, such as outside sales managers and district store managers. "We couldn't do it without them," Rita says.

Patricia Olsen is a freelance business writer whose work has appeared in the New York Times, Continental, Harvard Business Review online and other publications.

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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March/April 2013 Toolbox

Tips for sibling business partners

Siblings and the Family Business
By Stephanie Brun de Pontet, Craig E. Aronoff, Drew S. Mendoza and John L. Ward
Palgrave Macmillan, 2012 • 105 pp. • $23

The transition of a family business from the founder to the second generation is fraught with complications. The potential for sibling rivalry is the most obvious, but there are others. The growth (and thus the increasing complexity) of the business poses challenges; so does the need to shift from an authoritarian to a more collaborative management style when more stakeholders are involved.

Indeed, note the authors of Siblings and the Family Business, “there is nothing natural or automatic about the process [of transition from the first to second generation]. Rather, it requires a great deal of effort and planning on the part of all involved.”

This is a slim volume, but the authors—all from the Family Business Consulting Group—pack a lot of valuable information into their little book. Siblings and the Family Business suggests structures, policies and procedures that can help ensure a smooth first-to-second-generation transition. The book also describes where the process can go wrong, and why.

Included are suggested actions that parents, spouses and the siblings themselves can take to support the sibling partnership, as well as other practical “how-to” advice. Drawing from their research and their consulting experience, Stephanie Brun de Pontet and her coauthors devote chapters to “why this transition is so hard” and “sticky issues and predictable bumps in the road.”

The authors offer advice on discussing touchy situations. “Words and behavior used while addressing a problem will long be remembered,” they warn.

Siblings should celebrate their differences because diversity strengthens a team, Brun de Pontet and colleagues advise. They note, for example, that “while the sibling team that is entirely focused on cautious growth may agree more quickly on strategy, a sibling team with a balance of aggressive and cautious temperaments may strike the right balance of reaching for opportunities without taking excessive risks.”

The book presents tips on how to strengthen bonds between siblings who are active in the business and those who own shares but don’t work for the family firm. Prenuptial agreements are addressed, as are strategies for welcoming spouses into the family (and taking steps to prevent the in-laws from driving a wedge between sibling partners).

The authors also discuss the all-too-common scenarios of the founder who won’t let go and the patriarch or matriarch who resists the next-generation members’ efforts to implement change.

One of the keys to a successful sibling partnership, Brun de Pontet and coauthors note, is articulating a shared purpose and developing mission, vision and values statements. “The success of the sibling generation,” they write, “depends on the team’s ability to focus on something larger than the concerns of each sibling, such as the good of the business or the family or their mission.”

 

 

 


 

 

 

An introduction to family business from an academic perspective

 

Understanding the Family Business
By Keanon J. Alderson
Business Expert Press, 2011 • 133 pp. • $29.95
Also available as an e-book

 

 

 

The academic community has been investigating family enterprise since the 1980s. The findings of these studies can help family business owners address the challenges they face each day. But few business owners have the time or inclination to wade through research journal jargon in hopes of uncovering a practical tidbit or two.

In Understanding the Family Business, Keanon Alderson, a business school professor at California Baptist University in Riverside, aims to introduce readers to academic work in the field and demonstrate how the research and theories can be applied to real-world family business situations. Among the topics addressed are how family businesses differ from non-family firms, generational differences and governance structures.

Studies discussed in the book include Renato Tagiuri and John Davis’s classic “three-circle” model (representing family membership, business ownership and business management) and Managing for the Long Run, Danny Miller and Isabelle LeBreton-Miller’s examination of large, long-enduring family firms. Alderson also presents his own research on decision making in the family business.

Appendices include a glossary and a list of questions for families to consider (examples: “Are there policies for family members to join or exit the business?” “Is the compensation system based on market value?” “Is the business financially healthy?”).

In his preface, Alderson describes his experience as a 17-year employee of his family’s manufacturing and distribution business. The company experienced rapid growth in the 1970s and 1980s but experienced a decline after the loss of its largest customer in the late ’80s. After building sales back up to their previous level, the family sold the company. The author notes that his family, who were not aware of the existence of family business consultants, could have benefited from professional advice.

The book is especially helpful in describing the issues confronted by family businesses in the second generation. Many of the problems stem from the contrast between a founding entrepreneur’s authoritative decision-making style and the consultative style that’s required in the second generation, when both the business (departmental managers) and the family (sibling partners) have grown. Because decision making has been Alderson’s research focus, he offers valuable insights here.

Understanding the Family Business has a drawback, however: A couple of the studies Alderson cites are outdated. For example, the author frequently references the 2002 American Family Business Survey, conducted by MassMutual and the now-defunct Raymond Institute. He doesn’t mention an update to the survey that was conducted in 2007 and released under the auspices of MassMutual, Kennesaw State University’s Coles College of Business and the Family Firm Institute.

Disturbingly, in citing the 2002 American Family Business Survey, Alderson refers to the “$10,000 gift exclusion.” Under the federal estate and gift tax law, the annual gift tax exclusion—the amount that taxpayers can give as a gift per recipient without federal tax consequences—was raised from $10,000 to $11,000 in 2002, to $12,000 in 2006 and to $13,000 in 2009. This year, the exclusion rises to $14,000.

Alderson’s book, weighing in at less than 150 pages, is an easy read for business owners who are unaware of academic work in the field. Readers should be aware, however, of the existence of newer studies that measure family business owners’ views and actions in this current climate of economic uncertainty.





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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A pioneer in the concession industry

At the 1893 World’s Fair, a Ferris wheel pierced the sky. Tosty Rosty, a small mechanical clown, peered from a steam-powered popcorn machine.

Charles Cretors invented that machine, which debuted alongside the lofty Ferris wheel. C. Cretors & Company, the concession equipment manufacturing business he founded in 1885, is still owned by his family and based in Chicago.

Equipment produced by Cretors includes corn poppers, ice shavers, cotton candy makers, topping dispensers and hot dog makers. Among its customers are Frito-Lay and Malt-O-Meal. Annual revenues range from $15 million to $20 million.

The company created the first large horse-drawn popcorn wagon, the first electric popcorn maker and the first popping machine with an automatic oil pump. C.J. Cretors and his son Charlie, now the CEO, developed the first continuous hot air popcorn machine featuring a hot air fluidized bed oven.

“People say, ‘You’re a great entrepreneur.’ And I say, ‘I’m not. I’m fourth-generation. I build great stuff and people buy it,’” says Charlie Cretors, 71, who joined the business in 1967 and holds about 15 patents.

Fifth-generation siblings Andrew, Bud and Beth Cretors joined the family business after working at other companies. “When my kids came to work here, they did so because they wanted to,” Charlie Cretors says.

Andrew Cretors, 40, the company president, has an MBA and a B.S. in business from Michigan Tech University. He joined Cretors as IT manager in 1997, then held positions in sales, marketing, manufacturing and operations.

Customers drive the market for new products, family members say. The Diplomat, a corn popper for movie theaters, was Cretors’ main machine through 2008, Andrew says. The Mach 5, unveiled in 2009, features internal heat lamps and a one-piece kettle design. Customers placed orders at a 2008 trade show before even seeing the product. “That is a testament to the design and quality of the Mach, and our reputation in the industry,” Andrew says. Cretors has 78 employees working at plants in Bismark, Mo., and Chicago.

Bud Cretors, 42, the quality control engineer, joined the company in 2004. He has a B.S. in industrial technology and worked for auto industry suppliers. Bud took over Andrew’s “lean initiative” to cut waste from Cretors’ manufacturing process.

Beth Cretors, 45, has a graduate degree in journalism and worked in advertising before becoming her father’s assistant. Today, she is the marketing manager and has taken on other assignments. “Just recently, I was involved in working with Andrew, creating and launching a new product to diversify our supply line,” she says.

>Each sibling has found a niche that plays to his or her strengths. “I think Andrew, Bud and I all have our own places in the company and we are well-suited where we are,” Beth says. “We don’t step on each other’s toes.”

“I am the youngest, and it is not unusual for people to think of the younger brother as being picked on, but that is not the case,” Andrew says. “There is mutual respect.”

Andrew solves problems with input from his siblings. At weekly lunches, the family discusses pressing issues and formulates solutions.

“Ideas surface and everything comes together and we go with it. Many times working drawings come from hand sketches on napkins,” says Bud, who designed the company’s 125th anniversary limited-edition popcorn machine.

Charlie began gifting stock to Andrew, Bud and Beth when they were in college. “The kids now own 50%,” he says. “If you are managing it, then you’ll have control over it.”

The fifth generation plans to keep things popping smoothly.

Sarah Louise Klose is a Chicago-based freelance writer.

 

 

 

 


 

 

 

 

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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A fluid sibling partnership

The Flottman Company, a 91-year-old commercial printing firm near Cincinnati, found a unique way to balance the ambitions and desires of three siblings with the leadership needs of a company in an embattled industry. The firm did it with a Solomon-esque management succession plan that calls for rotating the president’s job among the three third-generation owners of the company. The plan has worked well for 20 years, but the next scheduled transition may not take place.

The Flottman Company has its roots in the commercial printing industry, but it doesn’t describe itself as a printing company anymore. Rather, it’s a “marketing solutions provider,” according to the company president, Sue Flottman Steller. “We do ink on paper like commercial printing —brochures and things like that—and pharmaceutical printing,” Sue explains. “But we also take technology and intertwine it with social media, the digital world and direct marketing.” Pharmaceutical printing is the company’s bread and butter, accounting for more than half its annual revenues, followed by traditional printing jobs in numerous formats. But digital marketing services like cross-media campaigns that use print, web and mobile technologies such as QR codes are growing rapidly, according to CEO Tom Flottman, Sue’s eldest brother.

Gen 3’s mission: ‘Run with it’

The company got its start when their grandfather, printer F.E. Flottman, lost his job because the Molitor Stove Company, where he worked, was purchased by another company that had its own advertising and printing operation. Instead of looking for a new job somewhere else, the entrepreneurial founder bought the equipment he’d been using and set up his own shop in 1921. His son, Rod, joined him in the 1940s and became president in 1968. Rod, father of the current owners, oversaw the company’s evolution into a full-color lithographer.

Having grown up in the business, Rod knew printing technology inside and out, but he also knew how to respond to customer needs. When a large pharmaceutical manufacturer asked for help in meeting new Food and Drug Administration requirements to include leaflets with each package in the 1970s, Rod acquired the specialized machinery and know-how to micro-fold tens of millions of inserts and developed a strong niche in the business.

The company grew steadily in the years that followed, according to Tom. “We had eight people with $300,000 in sales in 1973 when I graduated from college,” he says. By 1998, sales had reached $2 million. Today, the company has about 45 employees and generates $6 million in annual sales. It operates a 20,000-square-foot plant in Crestview Hills, Ky., a suburb of Cincinnati. Printing Industries of Ohio and Northern Kentucky, a trade association, named the Flottman Company its 2011 Printer of the Year; in 2010, the University of Cincinnati honored the firm with the Tri-State Family Business of the Year Award.

Rod Flottman and his wife, Sally, have six children. All worked in the company as they grew up, but three—Tom, Sue and Peter—decided to make it their careers. When he retired in 1992, Rod wanted to transfer ownership to the three of them (providing for his remaining children otherwise in his estate planning), but he didn’t want to dictate how they operated. “I gave them the business and said, ‘Run with it,’” recalls Rod, now 86. “I left them alone, and they’ve done great.” He did, however, have some strong suggestions.

“My father came to us and said, ‘You’re going to have to figure out your remuneration and who’s going to be the leader,’” Tom, 60, explains. Ownership was divided in three equal parts when Rod gave them the company. “He suggested we should all make the same amount of money,” Tom says. “That’s generally not the best idea, because there are different talents and work ethics, but we’ve somehow managed.”

Sue, 52, adds, “We talked about who was going to be president and how it would evolve. We decided at the time that Tom was better suited to the role but that after ten years it would be good for the company to have somebody new come on and bring fresh ideas and possibly a new approach.” Tom was president from 1992 to 2002; Sue took over in 2003 and Tom moved up to the newly created position of CEO. Peter, 48, is unofficially slated to become president next year.

“We all were very capable,” Sue points out, “but we had different experiences at the time [Rod] retired. It really worked for us all.” She adds another big advantage to the plan: “Interestingly enough, we are about the same age when we take on that role [as president].” Tom was 40 when he assumed the title; Sue was 43.

“We kind of mentor each other,” Sue explains. “You learn from the person in front of you and you have someone to go to when you need some guidance.”

“Bottom line, titles don’t really matter,” Tom says. “The three principals own equal amounts of the company and make major decisions as a group. We each gravitated in the direction where our interests and talents lay and where we were needed.”

Tom’s interests are sales and strategic planning. “When I graduated,” he explains, “we needed more top-line revenue, so my dad said, ‘Here’s a briefcase and some calling cards.’ I soon gave myself the title of ‘sales manager,’ and we hired some more salespeople. Next thing you know, we’re building a new building.” Today Tom continues to handle key accounts representing about half of the company’s revenue. “When I was president,” he says, “I saw the need for organizational development and strategic planning, so I went in that direction.”

Lesson #1: Sales

Rod made sure all three siblings got valuable sales experience, whether they wanted it or not. “If they’re out there beating on customers’ doors,” he says, “it gives them an idea of what has to be done.”

Sue was an eager acolyte. “When I worked in the office, I was intrigued by what the salesmen did,” she says. “One evening at home, I told my father that I thought sales would be fun to do. Within a couple of days I had calling cards. After graduation, I moved into sales.” Today, even with her title of president, Sue concentrates primarily on sales and marketing. “I work with the salesmen on prospecting and building accounts,” she says. The company has a marketing committee, but there is also a marketing director who reports to Sue.

Peter, the youngest, worked in the accounting department when he got out of school, did some production management and also worked in sales. He says, “Dad kind of shoved me out the door and said, ‘Go make some calls.’ I’m not the salesman type, but at least I have an understanding of how hard that salesman’s job is.” Peter found his satisfaction in another direction. “I’m very inward-facing,” he says, “I’m in charge of the company’s accounting and finances. The production manager reports directly to me. I’m in charge of operations and how the plant runs.”

The three work closely together, according to Rod. “Each one has a special interest and qualifications that complement each other,” he says. “No matter which way you mix them up, they work together.”

As Peter explains, “Our job functions have always been intertwined. We work on each other’s strengths. I’m not the salesperson, Tom is. When he’s out there, he’s not technically minded. He’s good at the customer interface, I’m good with the technical side. I give him what he needs to do his job. Sue is the same way. I handle some accounts and I’ll go in to her when I’m faced with a situation and ask, ‘How would you deal with this?’ We support each other that way.”

Time for a title change?

All three siblings like what they do, which raises the question of whether Peter will become president next year. “We put this into place many years ago,” Peter muses. “We can do it, but why does it need to be done? What advantage is there? Honestly, in the role that Sue plays here and in the industry, I’m not sure it needs to change. I’m the secretary-treasurer and the CFO. That works well with our financial backers. I haven’t discussed this with her and Tom, but I’m not sure the titles need to change.”

Peter also points out that even though the basic responsibilities of each sibling wouldn’t be modified if he succeeds Sue, he would have some additional tasks. “There are certain things the president needs to sign off on. On a company cultural level, I’ll have to conduct the company meetings, telling the employees what’s going on, where we are, where we’re going, and what opportunities and obstacles are there.” He says he’s not sure he’s the person best suited for that role.

When asked to comment on Peter’s thoughts, Tom becomes reflective. “What’s in a title?,” he asks. “Maybe having one of the lead roles doesn’t appeal to [Peter]. If he’s thinking that way, maybe we should have a conversation about it.” He adds, “Everybody’s doing a good job. If we want to continue with me as CEO, Sue as president, and Peter as controller and VP-operations, that’s certainly OK with me.”

Tom also points out that both he and Sue may be looking at retirement around the same time—although that’s some years away—which would leave Peter on his own in a job he might not really want. “It’s entirely possible we could hire a president and keep Pete in the position where’s he’s happy,” Tom says. “But that’s a conversation that would take place way down the road.”

Larry Grypp, president of the Goering Center for Family & Private Business at the University of Cincinnati, says the Flottman succession plan has worked for them for a simple reason. “They build consensus,” he says. “The Flottmans have excellent communication both within the family members and with the management team and employees. That sounds fundamental, but it’s not [universal] within family businesses. Often there is a lot of dysfunction.”

Future challenges

The Flottmans don’t hesitate to use resources like the -Goering Center, which Rod was instrumental in founding. Both Sue and Peter went through the center’s leadership development program and regularly attend topical meetings. Tom serves on the board. Last year, he was recognized as the center’s volunteer of the year. Numerous Flottman employees also attend workshops and training provided by the center.

One thing the Flottmans have learned, whether from the center, their father or the stern teacher of experience, is to look ahead. “They review their strategy and the systems that support it regularly,” Grypp observes. “They are very disciplined that way. Their strategy constantly evolves.”

They are now looking at governance and composition of the board, which currently consists of the three siblings. “That’s one of those areas we will probably need to address in the next few years,” Sue says. “As we mature personally and the company continues to grow and expand in multiple areas, we may need outside people to come in and help.”

There is also the fourth generation to consider. “At this point, I don’t think there’s going to be any change in ownership,” Sue says. “We would love it if members of the fourth generation came forward to take over. It hasn’t happened so far, but that doesn’t mean it won’t. We all have young adult children who have careers that will give them backgrounds that would help them here. We’re careful about not forcing or pushing them.” The three siblings have a total of nine children, most of whom are in their twenties.

“Our biggest challenge is the fourth generation,” Tom acknowledges. “Fortunately, they’re not going to be handling the reins anytime soon. But it’s going to work itself out. We want them to get three to five years of experience elsewhere and a master’s degree. Some of them are doing that now.”

The more immediate question of who will hold the president’s job next year is still unanswered, but as Peter points out, “This was a decision made 20 years ago. It’s fluid. There is nothing guaranteed in life except change.”

Dave Donelson is a business writer in West Harrison, N.Y. He is the author of the Dynamic Manager Guides and Handbooks.

 

 

 


 

 

 

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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Managing sibling wealth disparity

Forging a close relationship among siblings during childhood is hard enough, but as siblings become adults, disparities in wealth that may develop can challenge even the strongest relationships. In business-owning families, the potential ramifications are extensive. The dynamic doesn’t just play out in the personal lives of the immediate family; it also can impact the alignment of corporate vision, tolerance for risk and overall decision making, thus affecting all stakeholders.

Understanding sibling wealth disparity

The underlying causes of sibling wealth disparity are important to consider because they raise issues of entitlement, individual responsibility, fairness and intention. Did the wealthy sibling earn his or her wealth through hard work and talent? Did the less well-off sibling lose his or her wealth through bad judgment, frivolous spending or illness? Did one sibling marry into wealth? Did the allocation of inheritance benefit one branch disproportionately? Do all siblings agree that more inheritance was due to the one who cared for Mom and Dad in their old age? Do the siblings share the same understanding of what caused the disparity in wealth?

Sibling wealth disparity also must be viewed in terms of relative need, or perceived need. The brother with no children, a good job and a modest lifestyle may view a significant inheritance as a windfall that enables him to travel. His sister may be facing college tuition for her three children, a mortgage and expenses barely covered by her income and her husband’s. To her, the same inheritance may just help cover necessities, and she may feel that, based on her needs, she should have received a larger share. It is easy to imagine how resentments over inherited money could take root between these siblings.

Behavior, lifestyle choices and frugality all derive from one’s core values. When these are not shared or mutually respected, siblings’ perceptions of financial need may not be aligned. This can lead to misunderstandings, miscommunication and outright conflict. Put another way, without common values and mutual respect, the siblings may lack a common language to talk about the use and purpose of money.

The existence of sibling wealth disparity does not, in itself, cause conflict. Although there may be jealousy or disrespect lurking in the background, how the family responds is determined by how the wealth is used (or not used), coupled with perceptions of individual need among the siblings and the underlying causes of the wealth disparity.

The sibling relationship

Siblings typically experience each other as children and go through a period of separation. During the separation period, they establish a sense of self, independence and purpose. The re-establishment of siblings as a family unit in their adult years must often be an intentional process. The process requires energy and commitment from each sibling, as they each must overcome the emotional baggage and behavior patterns they carry from childhood.

Enterprising families may face an additional complication. Family wealth or access to a family business may delay or inhibit the process of separation and self-discovery. Siblings who remain connected to the family for financial and professional reasons may have difficulty growing out of their childhood relationships. They may fear the loss of economic benefits if they don’t stay connected to the family (or the family business).

The rewards for siblings who can re-engage successfully as adults are significant, because the sibling bond can be the most durable and reliable of all relationships. They may not always be the closest of relationships, with frequent contact and camaraderie, but they can still be among the deepest. The ability to manage wealth disparity can be of great value for strengthening bonds among siblings.

Steps for handling sibling wealth disparity

The starting point for dealing with wealth disparity is having a common understanding of what family means for this generation and developing a shared vision for how to be a family in the future. This shared vision, based on the identification of shared values and expectations, should provide insight into the following questions:

• What does it mean to be a close, multi-branch family?

• How close to or involved with each other do we want to be?

• To what extent should we be able to rely on each other emotionally, financially and socially?

• What is our shared mission as a multi-branch family? Do we have one?

• How might we each deal with differences in our lifestyles, values and behavior?

If siblings can answer these questions in ways that are compatible with each other, they will have a strong foundation to manage the challenges of wealth disparity. Beyond identification of a shared vision and commitment to that vision, there are practical steps that can be taken to manage sibling wealth disparity.

1. Try to forge a common understanding of the reasons underlying the wealth disparity as well as the relative financial needs of each sibling. These discussions are likely to touch on issues of respect, entitlement, values congruence, differing perceptions of history and a host of other difficult topics. It is often useful to have a facilitator experienced in family wealth advising to help the siblings, and their branches, find a way to understand and accommodate the inevitable differences among them.

2. Create a shared understanding for (or an agreement to disagree about) how wealth should be used, preserved, borrowed and shared for the purpose of achieving the shared family vision. Find opportunities for purposeful dialogue around these topics. Individual branches may want to first discuss this among themselves in order to clarify their own values concerning wealth. Inter-branch loans should be carefully considered and managed by a third party if possible.

3. Institutionalize decision making regarding items that reflect shared family values and the family mission regarding wealth. For example, if education is a family value, the wealthier siblings might create a shared education fund to benefit the children of the less well-off siblings. Similarly, if entrepreneurism is valued, a family venture fund might be created. These and other similar funds could be defined and their objectives articulated in a family charter. A family council might be created to manage and govern the application of these benefits through succeeding generations. There are many models that families have used to manage shared wealth, such as family foundations and family offices.

4. Parents can help by making their intentions clear and by seeking proper advice concerning their estate plans. So often, the futile search for what is “fair” ends up creating an even more difficult situation for the next generation. Parents should have the courage to tell their children why they have made specific decisions and allow them to share their thoughts. In addition, parents must understand that there is a limit to what they can do to make things “fair.” They must also instill in their children the responsibility to treat each other fairly.

5. Create guidelines for situations like shared vacations, use of shared vacation properties and holiday gift giving. The guidelines should enable each branch to participate in a manner that is affordable and reflects the family’s shared vision.

6. Create standards for wealth preservation, including estate planning, insurance, investment management, inter-branch loans, prenuptial agreement requirements and social behavior (e.g., sobriety, risk taking). Provide access to appropriate professionals for all branches.

7. When a family business lies at the heart of the family wealth, it is important to professionalize the business. Create a proper, independent board and have well-articulated policies governing executive compensation, dividend distribution, family employment and conflict management.

8. Understand that it is not necessarily the wealth disparity that causes conflict; rather, the values, history and behavior related to the wealth are at issue.

A foundation for the future

The adult siblings’ relationship will serve as a model for the next generation (the generation of cousins). An incentive for this work is that it will, hopefully, build a stronger and more cohesive next generation.

Working and owning assets together is challenging, but sibling wealth disparity does not have to separate families. Developing a shared understanding and vision for the family, forging a common understanding of the causes of the wealth disparity, understanding both shared and individual values concerning wealth, and developing clearly defined goals and processes go a long way toward managing conflict over generations. If well managed, potential conflicts related to wealth can be opportunities for making the family business more successful and the family stronger.

Douglas Baumoel is founder and principal and Blair Trippe is partner at Continuity Family Business Consulting in Beverly, Mass. (www.ContinuityFBC.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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Autumn 2007 Openers

We are a fourth-generation company whose chairman, our father, died last November. It is now myself (the eldest), my sister, her son and my brother, ten years younger than I. Since our father’s death, my brother’s ego has gone through the roof. He also has a problem keeping employees. I am treated as his employee, and he demands an explanation from me for every move I make, even though I am the president of the holding company.Can you offer some advice?

Experts’ replies:

In my experience, the majority of family business conflicts have their origins somewhere outside the issue that people think they’re arguing about. Old unresolved disputes or unforgiven affronts can simmer under the surface for years and then erupt into open warfare when some unrelated event in the family or the business pulls the trigger. Or a family member’s frustration and hurt when his or her place in the business suddenly changes can boil up as external hostility that reflects, but doesn’t resemble, the inner turmoil that’s causing it.

The death of a senior family business owner and active company executive invariably affects both the family, with a sense of loss and grief, and the business, with a sense that an era has ended. Even with the best of contingency planning, things are no longer as they were, and people may react in unexpected ways.

Your brother may feel his position in the company has been either elevated or downgraded by your father’s death. Or perhaps he believes that your position has been either elevated or downgraded and is reacting to that. Maybe your own behavior has changed, and what you’re seeing is your brother’s reaction to that change. Or your brother could be having a crisis of confidence in you as president of the company without your father’s hand on your shoulder.

You didn’t mention if your sister and her son also find your brother’s behavior unsettling. But in any case, it’s important for all of you to distinguish behavior that’s simply annoying from behavior that’s interfering with sound management decision making and threatening employee productivity in the short term and the continuity of family ownership in the longer term. If it’s the latter, you should move deliberately to analyze the problem, identify who “owns” it and its root cause, and take corrective action. Your business was built up over three generations, but it can be brought down in one.

Remember that this is a time of profound change for all of you, and taking charge of change is the best way to ensure that it produces improvement in your business and doesn’t undermine its stability and purpose. Consider organizing a series of retreats during which the four of you can sort through all the effects of your father’s death on family and business dynamics; you could be surprised by what you discover. You might even work together to modify the executive structure to more effectively manage the business in his absence.

Because there’s already evidence of family tension, bring in a facilitator experienced with family business issues to help guide the process of resolving concerns and clarifying roles. Commit yourselves to drawing up a new strategic framework that will restore your common focus and preserve both the business’s integrity and the family’s legacy and financial security.

James W. Lea, Ph.D.
Lea, a professor at the University of North Carolina at Chapel Hill,
is a family business speaker and adviser (james.lea@yourfamilybusiness.net).

The writer is experiencing the ripple effects of change. Dad’s passing changed the family dynamic; he may have been the buffer or mediator between the older brother and the younger. His passing also changed the business ownership dynamic; now, perhaps for the first time, the younger brother is taking an active, interested role in the operations of the family enterprise. An overall unease about coping with the changes in the family, ownership, work and wealth dynamics triggered the request for advice.

Note that the stated problem is only from one sibling’s perspective. To paraphrase: “My brother is out of control, he is managing poorly and he is not observing the chain of command.” If another sibling wrote the letter, the comments likely would have been different.

Entrepreneurial family business owners are fast-paced people, and they want speedy solutions to their problems. In this case, it looks as if the writer would like someone to “fix” his brother. The reality is that these problems took a long time—perhaps decades—to manifest themselves, and solutions to the problems will require a process of gradual change (evolution, not revolution).

What this family and business need is strategy and structure. The first step is to understand the system better by interviewing every stakeholder and soliciting each person’s view of the situation. The family may need outside help; if their communication is reasonably safe and sound, it’s OK for them to meet together to attempt to brainstorm potential solutions. The family should undertake an objective view of the family enterprise. Which businesses are vital and viable going forward, and which should be closed or sold?

In terms of strategy, the family needs a common vision for where the business is headed. In multi-generation family businesses, it is rare that individuals share a common philosophy on business strategy. Finding alignment there would offer a tremendous boost.

As for structure, most family businesses have underdeveloped systems of accountability. The writer’s lament that his brother “demands an explanation from me” may say that either he’s never been held accountable before or he doesn’t want to be held accountable. The management team should determine what business decisions can be made unilaterally, what decisions should be made by consensus, what decisions must be made by vote and what decisions must be made unanimously. In addition, job descriptions and accountability metrics would help keep everyone honest with respect to day-to-day job performance.

While the writer might be sorely vexed by the changes in the family business system, he should know that the passing of his father creates an opportunity for review and revitalization that could help this enterprise surge from the fourth generation into the fifth.

Wayne Rivers
Rivers is co-founder and president of the Family Business Institute Inc.
in Raleigh, N.C. (info@familybusinessinstitute.com).

Clarity, clarity, clarity within a family business matters almost as much as “location, location, location” matters in real estate. Sometimes it’s useful for everyone in the family to draw an organization chart. I wouldn’t be surprised if no two are alike.

In your position as president of the holding company, who ordinarily reports to you? Does your younger brother have clear authority over one division? How do your sister and her son fit into the chart? To whom do which non-family employees report?

Your father’s management style may have something to do with the current confusion. Some successful entrepreneurs see themselves as the hub of a wheel, relating to everyone in the circle that surrounds them. As long as they are competent this can work well, depending on the size and breadth of the company, but an unplanned departure will create significant problems.

In my years of study and work with many families I have learned one thing: What people do always makes sense, unless they are on drugs or have major brain damage. We just have to work long and hard enough to try to understand what is behind behavior that seems puzzling. Would your father have promised your brother something without telling you? Is there unresolved sibling stuff left over from childhood? Were you always in charge at home? Did your brother get a better bicycle? Maybe he doesn’t believe in monarchy anymore, and no longer believes that the eldest son should inherit the kingdom.

How has ownership been transmitted? Who controls the voting stock? If you are equals in ownership, the control of the company may be ambiguous. Do you have an active, professional board that has endorsed your leadership? Who chairs that board, which is the ultimate authority for any company?

The first step is communication, communication, communication. I suggest you meet privately with your brother, away from the office, so you can describe the feedback you have been getting and your personal concerns. Sharing observable facts plus your feelings (without labeling his “ego” as the problem) is the best formula for a clean confrontation. He may have some explanation that will surprise you. If his performance with employees continues to be a problem, you might become his advocate by encouraging him to get more training in supervision or management skills. If he doesn’t respond, and you have a controlling interest, you will have to take a tougher approach, perhaps including a 360 review of his performance (and other managers’, too), so you have data to back up your decisions.

Since you are a fourth-generation company (congratulations!), you must have a track record of resolving problems in the past. The question now is whether you, your sister and your brother can build a viable sibling partnership without your dad in the center. Confronting the problem sooner rather than later is in everyone’s best interest.

Ellen Frankenberg, Ph.D.
Frankenberg is a Cincinnati-based family business consultant who facilitates family meetings
and coaches executives and successors (ellen@frankenberggroup.com).

From your question, it appears that your brother was responsible for day-to-day operations while your father served as chairman of the board. His death may have triggered some unresolved tensions and lack of clarity about leadership and responsibilities. For example, when your father was alive, was your brother’s problem with employee retention apparent? If so, was it addressed? Has your brother’s role changed since your father’s death? As president of the holding company, are you clear what your role is within the operating business?

While this transition has created tension within the family, it provides an opportunity for the ownership group to get together and discuss how the fourth generation plans to own and manage this business. In a time of change, it is always good to refresh your vision and update your plan for the future—for the business as well as for the owners. Hiring a family business specialist trained in family dynamics as well as planning and problem solving can be crucial for success. Family members often have difficulty discussing sensitive issues because they are worried about causing irresolvable rifts. A trained expert will create an atmosphere where people can envision the future and solve problems.

Your board of directors can be beneficial in this time of leadership and ownership transition, particularly if it is an active board with trusted outside directors. If it is not, developing this governance structure can be very helpful. This is an action item that probably would come from your planning process.

As owners review their plans for the business, it is crucial that they develop trust in the one with responsibility for day-to-day operations. Leadership should be held accountable for running the business efficiently and maintaining profitability. Strategic planning that includes top managers can create a road map for maximizing the business’s strengths and addressing its weaknesses. As part of this process, the problem of employee retention may be addressed and a strategy developed.

If the leadership your brother is providing creates significant issues, the family business adviser can coach him to improve his management style. Some leaders can learn to be more effective; other times, hiring people who relate better to the leader’s style may be more appropriate. Ultimately, however, it is the role of the board of directors to hire the best leader possible for the business. As businesses go into the fourth and fifth generations, they frequently employ a professional or non-family manager.

Joining together as a family to address these business issues and to develop solutions that are beneficial to all is a challenge, but the results can be very satisfying. Most businesses were created and grown through hard work and struggle. This is just one more chapter.

Margery Engel Loeb
Loeb, president of Loeb & Associates LLC, consults nationally to families in business
on transition, change, communication and planning (mloeb@loebgroup.com).

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Equal pay for equal work equals a lack of equanimity

Of all the challenges facing a family-owned business, one of the most difficult is how to compensate family members working in the business. It’s not just pay for performance; there’s much more involved.

Equal pay: the default option

In most Americans’ estate planning—unless a child has an obvious and serious special need—all offspring tend to be treated the same. After all, notions of equality are deeply embedded in the American psyche, so allocating on any other basis seems unfair. Furthermore, quantifying anticipated or even real differences is difficult at best. Yet after all that effort, there will certainly still be hurt feelings, possibly even from those who receive more. (The good news is that the bad feelings may be deferrable until the will is read.)

When the family estate includes a family business (typically the largest percentage of the estate’s value), the parent/CEO is generally confronted by a desire to make lifetime allocations through employment opportunities and compensation. There is a tendency to make “equal pay” the default option. While it may be true that “all men are created equal,” no one believes that all siblings will perform equally. Yet in many family businesses, all the siblings receive the same compensation and perquisites, despite their varying talents, capabilities, dedication, roles and market values.

Treating all of one’s children the same is understandable in many aspects of life; it is consistent with the family doctrine of loving one’s children equally. The condemned political model of “separate but equal” is not just tolerable in child rearing; it’s preferable. If one child wants ice cream and the other wants pretzels, what’s the harm in separate but equal? But extending the “no harm, no foul” principle to family businesses is problematic, because there the kids may be truly unequal, and the consequences are measurable.

When children first enter the family business, they are likely to be at the stage of least differentiation. Even at the start, they may have varying levels of education and even experience, but most likely, years of working at the family business will multiply the degrees of differentiation, making those initial differences seem inconsequential. In other words, one might justify equal pay at entry level, but the problem tends to be continually exacerbated as each child gains in-house practical experience and demonstrates his or her specific performance and achievement along the way.

As time goes on, siblings who believe they are performing better will start to wonder why they are not being compensated better. And if fraternal love enables the subjugation of such feelings, their spouses frequently are up to the task of causing the feelings to surface. Sometimes, more than one sibling, or even all of them, have such feelings. After all, as each sibling comes home, bragging to his wife about his conquering heroics at the office that day and expressing workday frustrations by deriding the mistakes and work ethic of his sibling, his value elevates, perhaps even unrealistically, in his loving wife’s eyes. She can’t imagine how her father-in-law could be so unfair as not to reward the “obvious” higher value of her husband.

Untangling the compensation quagmire

The parent, who is content burying his head in the sand, will not see the brewing compensation problems until it is too late. Indeed, by then, the remainder of the parent’s body may have joined the head in the ground, thereby avoiding having to deal with the uncomfortable situation entirely. In that case, the dilemma is left for the directly interested parties to resolve—not a pretty picture. And if instead of equally compensated siblings, we have equally compensated cousins, in addition to general inertia, there is also the inertia bred by the “equality was good enough for our parents” factor. And in that case, when the recognition that “fair isn’t equal” finally hits, the parties don’t even have fraternal love to soften the blows.

The beginning of any solution is understanding the problems and their causes. All family members should understand, for example, that compensation in family businesses, while generally stated as a single number, frequently has several components:

a. Fair value for the services provided. This is actually determined in two fundamentally different ways:

i. How much the business would have to pay to hire a non-family member to perform the same services.

ii. How much the particular family member could earn elsewhere, working for a totally independent employer.

To most, the first factor seems compelling, while the second factor appears slanted in favor of the particular family member (i.e., nepotism) by paying her more than the business should pay to get the job done. However, there are situations in which hiring above the required talent level is recommended, such as if the company is on a growth trend and is anticipating near-future needs.

In family businesses, paying a family member more than could be earned elsewhere may also be dictated by the desire to continue family involvement in the business, part of the long-term perspective. Such involvement, and even advance investments to achieve that, is justified by the likelihood of better financial results when family members are involved in a business (20% to 25% higher return on investment capital), according to research by John Ward, my colleague and co-director at the Kellogg School’s Center for Family Enterprises.

b. The equivalent of dividends. Even if the family employee is not a shareholder, compensation is a convenient way for a parent to move assets from his estate and perhaps higher income tax bracket to a child’s lower bracket and, in certain circumstances, to avoid double taxation. The dividend equivalent, if it had been paid to the parent, would be taxed at his income tax bracket (let’s assume 40% for state and federal), and the balance (60%) would be in his estate, so on his death, transfers to his children would be subject to an estate tax (let’s assume 55%). Therefore, the child would receive only $27 for every $100 taken as a dividend. If instead, the company increased the child’s bonus by that $100, the child would receive $70 (assuming she is in the 30% combined bracket), and that would not be subject to estate tax when the parents die. The result would be skewed even more if the business were operated as a C corporation, which gets no deduction for dividends but does get a deduction for bonuses paid. There, the amount of a dividend to be received by the parent would be reduced by the income tax the employer must pay on its corporate income (approximately 35% to 40%), and the balance, say $65, would be subject to the parent’s income tax bracket, so the parent would get only $45, which would then be subject to estate tax, leaving only $20.25 left for the children. (In these examples, I have ignored employment taxes, such as FICA.)

c. Family businesses are generally more willing to adapt to family needs by allowing flex-time employment. In some cases, this is done so that a family employee can take care of children, siblings or parents, thus effectively fulfilling the familial obligations of other family members (e.g., care for the CEO’s parents, children or grandchildren). The child of the CEO, who gets full pay even though she “starts work” at 1 p.m. every day, after spending all morning caring for the CEO’s mother (or, worse yet, her child, who is the CEO’s only grandchild), is an example of a family business effectively paying for care given to the CEO’s mother/grandchild. Assuming the CEO owns all the company stock, the issues include: (i) whether the offspring’s compensation is fair value (see a. i. and ii. above), a difficult issue at best, and (ii) whether the siblings are comfortable with the arrangement.

d. To supplement a child’s income and thus support a lifestyle desired by the child, the parent or both. The child might crave a better lifestyle, or the parent may wish the same or even more for the child. The cause for this desire may simply be parental love, or it can be far more complex—a parent’s desire to keep the child in the same town or to control the child’s future. The effect of switching some compensation from the parent to the child is the same as explained in b. above.

e. Once the decision is made to provide quasi-dividends or flex-needs and lifestyle adjustments for a child, the parent generally considers “The Family Theory of Relativity,” i.e., the differences in family members’ pay, regardless of their value to the company. The child earning less than his siblings is often unhappy about that discrepancy, even if he earns far more than he is worth. The “relativity adjustment” is the equalizing factor, which the parent applies to avoid having to choose one child over another. While such choosing is not by any means as grave as that depicted in the movie Sophie’s Choice, the “head-in-sand” approach of many parents running family businesses clearly indicates that they loathe making even these choices.

f. For a variety of obvious reasons, these components usually are not dealt with separately, and only an aggregate dollar amount is used as the children’s compensation. An example of two children, each making $200,000, might be helpful:

 

Components Child A Child B
A. Fair Value for Services $115,000 $80,000
B. Quasi Dividend 50,000 50,000
C. Flex-Needs Make-up 25,000
D. Lifestyle Adjustment 35,000 35,000
E. Relativity Equalizer 10,000

 

Even though the total of $200,000 is the only number recorded, it is incumbent on all involved to determine and to understand those separate components and to be mindful of the components during discussions with family members regarding compensation.

Bringing clarity to the compensation plan

In addition to the reluctance of the parent/CEO to address the compensation issue, a further complicating factor can be legal agreements that emerged, somewhat as a result of the “head in the sand” approach and somewhat because a lawyer, trying to serve his or her client by being extremely sensitive to the need for corroborating evidence, may not have been thinking about the price one might pay for everything being so precisely and all-inclusively documented.

Lawyers frequently urge the documentation of existing arrangements. Sometimes doing so is necessary; family members must think carefully about whether documentation serves their overall interests. To the extent that shareholder and/or employment agreements exist, the solutions to equal pay may be more difficult to achieve, requiring resolution of legal as well as emotional commitments.

Finding solutions to sibling compensation issues

Once the problem is recognized, solutions must be found quickly, hopefully by the preceding generation and before it is too late, i.e., before latent feelings grow into bitter or openly hostile reactions. Both the solutions and the processes to get there can be extremely painful, but steps can be taken to avoid or reduce the pain.

Resolving such problems may be daunting for a parent but may be easier if handled by the independent directors on the family business’s board. Indeed, the decisions of the board, if supplemented by lessons and mentoring, can help the owner’s children develop better and more rapidly in the company. Of course, the authority of and respect for such directors tends to increase over time, so for this and many other reasons, steps should be taken to have such directors in place earlier rather than later.

Because compensation issues often surface years or even decades after equality was put into place, the delay itself creates its own inertia. There are implicit promises made to family members who are paid more than they are worth—namely, “equality is a family value that you can rely on.” In fact, there most likely never was a discussion or determination of such a family value; at best it resulted from apathy or, more likely, from a desire to avoid confrontation. However, as often happens, perception trumps reality. Therefore, it becomes a contest between the fairness of reliance on such implicit promises vs. the fairness of compensation.

In the final analysis, unfair compensation, even if hidden in equality, is an artificial form of price fixing, and in the long run, no price fixing can float. In these circumstances, price fixing might end upon the parent’s passing, unless employment and shareholder agreements were the parent’s attempt to control from the grave.

It is possible and advisable to establish compensation systems for family members employed in the family’s business that recognize the different value factors that each family member brings to the business. Each member of a generation deserves to be dealt with in a fair manner. If the parent/CEO cannot muster the fortitude to create and implement a sound and reasonable compensation program for her progeny, she should at least install mechanisms, like good governance structure, to facilitate accomplishing the goal—and, of course, she should do so before it’s too late. For reasons stated above, the earlier independent directors are brought on board, the better the odds that they will be helpful when issues like compensation become relevant. If nothing else, it will reduce the need for antacids and sleeping pills and put the family business on the path to long-term success. Outlasting the average limited life expectancy of family businesses is tough enough; why not avoid any solvable pitfalls? Compensation issues can and should be solved without the customary default option of equality.

Lloyd E. Shefsky is a clinical professor at the Kellogg School of Management, Northwestern University, with extensive experience in counseling family businesses. He is founder and co-director of Kellogg’s Center for Family Enterprises, which sponsors the executive education program “Governing the Family Business” (www.kellogg.northwestern.edu/exceed/programs/LEAD06/index.htm).

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The power of 5

For anyone who loved The Sound of Music or The Partridge Family, Five Sisters Productions is a fantasy come to life. Five Burton sisters have banded together to create an artistic venture in the image of these American cultural icons—but all grown up.

The five Burton siblings are artists in every possible sense: They act, sing, write, make movies and travel the country promoting their films and spreading their message. Their parents are on the payroll, and now that one sister is a mom, the next generation has joined in the fun, handing out fliers at opening night and taste-testing movie-house popcorn.

Sounds charming. Except, of course, that this is a life of hard work, constant collaboration and compromise, and many, many nights of making dinner out of canned tuna and concession-stand leftovers, according to the sisters. Although the staff of the Los Angeles-based company expands during filming and production—as it did for their 2002 theatrical release, Manna from Heaven—the core firm is made up of just the seven Burtons: Maria, Jennifer, Ursula, Gabrielle, Charity and their parents, Roger and Gabrielle Sr.

And there's more than enough work to go around, the Burtons report. “When we were on the road with Manna from Heaven, I was handing out fliers to people in line at a theater, and one man said to me, ‘Wow, you're living the dream!';” recalls Maria, the oldest of the 30-something sisters. (Mindful of Hollywood's youth obsession, they decline to reveal their precise ages.) “I thought, ‘He's got to be kidding!' I'm working 12- to 14-hour days doing grassroots marketing. This is not the glamorous life that people think of when they think of filmmakers.”

Manna is a comedic fable about what happens when you get a “gift from God” (a financial windfall), but many years later you find out it was a just a loan—and it's due immediately. The ensemble cast includes Shirley Jones, Cloris Leachman and Shelley Duvall. Middle sister Ursula plays a lead role. The movie—with a screenplay written by Gabrielle Sr., the sisters' mom—was released last spring on DVD.

The sisters hope their tiny company makes it big. “An executive said to us recently, ‘You have a reputation of being a boutique company that makes high-quality films and doesn't want to be corrupted by Hollywood's money,'” says Charity, the youngest Burton. “On one hand, we thought, ‘What? Corrupt us!'”

But until “corruption” comes knocking, Five Sisters is carving out its own way of making a company run. The sisters' management style is largely collaborative. They have constant, connecting, evolving conversations that help them prioritize their efforts, produce their art and, ultimately, support each other. They communicate regularly, via cell phone when necessary, to keep all five in the decision-making loop.

Last year, for example, Five Sisters was approached with an unusual business proposition. A company wanted to hire Five Sisters to help distribute a film. (Five Sisters had made a bit of name for itself in independent film circles for handling the distribution and marketing of Manna in-house.) The idea was intriguing—and potentially lucrative—but it was not a strictly artistic project and therefore a departure from the core business plan. The five caucused via cell phone—across multiple states and time zones. Tapping their free cell-to-cell wireless calling plan, the sisters were able to discuss the project, craft a counteroffer and make the corporate decision to move forward, all within an hour.

Not every decision happens that quickly. They schedule regular retreats in which the five leave their work behind and devote several days to discussing business goals. And they are always on the lookout for new ways to keep the conversation going. “When we were growing up,” recalls Jennifer, “there was a focus: How do we keep seven lives afloat at the expense of none? How do we do that without having the mother, father, or any of the siblings stuck with all the work? We had to figure out ways of thinking through problems so that everyone is able to get as much of their needs met as possible.” Take, for example, the selection of a director for Manna. Who would hold this title? Maria, the sister with the most direction experience, seemed a logical choice. But film-school-trained Gabrielle also wanted the job. The resolution: They co-directed.

A natural beginning

The company came together by organic inspiration rather than master plan. In 1997, Maria was at work in the film industry, directing a project in which Ursula was acting. Gabrielle, who at the time was fresh out of film school, also helped out. “When there's so much work to do, you just turn to your sisters, and they were right there to bail me out,” says Maria. It felt natural, she remembers. And it was the genesis of what would become the family business. On a weeklong retreat, the five hashed out their artistic vision, and their company was born.

From the start, they eschewed traditional hierarchy. There is no CEO of Five Sisters. Instead, they agree as a group to parcel out responsibilities according to talent, availability and willingness. Jennifer, who is married with a young son, manages much of the financial and business systems work; she coordinates with investors, manages e-mail and cell phone systems and, when pressed, takes the role of CFO. Gabrielle handles media relations and publicity.

Since they launched Five Sisters, the Burtons have produced a steady stream of projects, including three feature films—Temps, Just Friends and Manna from Heaven—and a short film set for release later this year titled The Happiest Day of His Life, a send-up of wedding rituals in which traditional male and female roles are reversed.

In many ways, companies like Five Sisters are rewriting the roles of the traditional family business, says Douglas Breunlin, director of the family business program at the Family Institute at Northwestern University. Traditionally, he notes, family businesses leadership was passed down from father to son. But today's family businesses are exploring new paths to power. “The next horizon for the family business will be tackling this multiple-leader type of arrangement,” Breunlin says.

Still, as the company has matured, some traditional business structure has seeped into the workings. Jennifer has tackled the standardization of everyone's e-mail and virtual address books. A new rule puts a time limit on the sisters' freewheeling discussion sessions. Now, when a point person makes a decision, the others have 24 hours to respond with ideas or changes. And additional efforts have been made to carve out time during the week for each sister to work on individual rather than group projects. Maria is directing a documentary. Charity is a teacher in the Los Angeles public school system. Ursula had a part in the movie Divine Secrets of the Ya-Ya Sisterhood. “We support each other as artists, so it's a balance between business decisions and artistic interests,” says Ursula.

‘Clap loudly for your sister'

Outsiders often comment on the notion of five siblings working together, the sisters report. “People either can't imagine how we work with each other—telling us they can't even get through a lunch with their siblings—or they think we just have fun all the time,” says Maria. “The truth is that we love working together, as we like each other—we often socialize together as well—but it's also lots of hard work. The hard part about working with your family is you don't have a separate family not connected to your work.”

Do they fight? It's a question asked so often, they've put the answer in the FAQ section on their website, www.fivesistersproductions.com. (Their answer reads, in part, “Obviously, everyone fights, but as sisters, we can disagree, yet know that we are on the same side, or more easily see where the other is coming from—and, at the end of the day, we know that we're going to be spending every holiday together—so we have a base level of trust on top of our shared artistic values.”)

It helps to have had a childhood steeped in collaboration training. In grade school, both Jennifer and Ursula tried out for the same part in a school play. Jennifer got it. “My parents' friend said to me, ‘Clap loudly for your sister. Next time she'll be in your audience,'” Ursula recalls. “This has turned out to be a sort of motto for us.”

Charity tells the story of a trip she and the other sisters took to Paris when Jennifer was living there and singing in nightclub. “We were going to sing something together at the club,” she recounts. “Well, someone—not me—thought it would be a good idea to perform the song in the Paris subway as practice. I hated it. I felt like I couldn't say no, but I didn't want to do it. We ended up talking about it afterwards and deciding that there shouldn't be any command performances. It led to something that is a ruling principle of our company: People are there by choice, and even though we are a family that works together, we each can decide on a project-by-project basis what we want our involvement to be. Good communication and maintaining personal and professional boundaries are critical to maintaining a company of creative people—particularly when you';re related to each other.”

That's esential, says Northwestern University's Breunlin, since the breaking point of many family businesses comes when individual interests get lost. “The trick to collaboration is to manage it such a way that individuals don't end up feeling overly compromised,” he says. “It's a delicate process, requiring a lot of conversations among family members.” That's something the five Burton sisters know well.

Ellen Neuborne is a business writer based in New York City.

First Turn: How the Burton sisters resolve conflictsHow do five sisters make a decision? Most of the time, the Burtons debate until they reach consensus. Sometimes, they take a vote. But in other cases, they reach back into childhood for a tactic that has stood the test of time in the Burton family: “First Turn.”

It was a system developed by the Burton parents when the girls were young to cut down on the “My turn!” whining that inevitably comes with childhood. The parents assigned each of their daughters a day of the week. On that day, that daughter would be first—the first to ride in the front seat, the first to use a special toy, the first to choose a chocolate from the box.

As the girls got older, First Turn was tweaked not only to grant privileges but also to assign chores, such as cooking dinner and taking care of the family dog.

Now that the five Burton sisters are business partners, First Turn lives on, both as an organizational system and as a reminder that they’ve shared a lifetime of solving problems and working as a team.

Idiosyncratic conflict-resolution mechanisms that are deeply rooted in a family’s history are common in sibling partnerships, according to Ivan Lansberg, a family business consultant with Lansberg Gersick & Associates in New Haven, Conn. “These strategies are often unorthodox from a management standpoint and imbued with the culture and folklore of the families who invent them,” Lansberg wrote in his 1999 book Succeeding Generations: Realizing the Dream of Families in Business. “I have seen enough of these conflict-management arrangements to conclude that the particular mechanism is not as important as the existence of a pre-established dispute-resolution process that the family is willing to accept. The specific mechanisms work in most cases because they openly acknowledge that disagreements are inevitable and because they promote a sense of fair play and equity over time.”

—E.N.

FROM OUR ARTICLES LIBRARY Seven sisters’ success in electrical contracting fieldSeven Sisters Inc., a commercial and industrial electrical contracting firm in Sedro-Woolley, Wash., is owned by the seven Snelson sisters, though not all of them work for the firm.

“My six sister-partners and I … grew up in the construction business and were raised to be independent and to believe we could do anything we wanted if we worked hard and smart enough,” wrote vice president Christine M. Thompson in “The sisters’ secret weapons” (FB, Winter 2001). “Since it never occurred to us that others might not think seven young women belonged in the electrical contracting business, [in 1980] we just went ahead and acquired an under-used electrical division that was being phased out by our father’s construction company, Snelson Inc.”

The company name “has been an excellent marketing tool,” Thompson wrote. “It makes us stand out in the contracting business, where a company’s identity is critically important. Just mentioning our name is a great conversation-starter. ‘Are you really electrical contractors?’ general contractors ask. ‘Are there really seven of you?’ Once they hear our name, they’re unlikely to forget it—and that awareness is the first step toward landing a job.”

To read the whole article—including Thompson’s account of the difficulties she and her sisters encountered in starting their business—see our Articles Library at www.familybusinessmagazine.com.

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Building a sibling partnership involves insight and foresight

Way back in Spring 1997, I wrote an article in Family Business entitled “Sibling behavior decoded” (see the Articles Library at www.familybusinessmagazine.com). Nine years later, the topic still resonates with family business owners. Building strong sibling partnerships is one of the biggest challenges for business families.

Suppose your dad has decided to transfer the family business to you and your four siblings in five equal shares, even though your two youngest sisters have never worked in the business, and have no plans to do so. What must happen to make this partnership successful?

1. Deal with “unfinished business.” The sibling relationship is the longest relationship in a person's life, since sibs usually outlive parents and appear long before spouses. Competition and rivalry are built in, as surely as one baby displaces another in a mother's arms. If there are any unhealed wounds from childhood, now is the time to deal with them.

An investment in a weekend retreat with a facilitator who can introduce conflict management skills and interpret family dynamics may be an economical idea, especially if the childhood scrapes were significant enough to fester into adulthood.

At the end of the weekend someone may decide that becoming a responsible owner of the family business is not a priority. You may then, with good legal and financial counsel, develop a buy-sell agreement to consolidate ownership among those who are committed to the business. Both your business and your family relationships may benefit.

2. Write job descriptions and draw an organization chart. When Dad was the unilateral decision-maker, there wasn't much ambiguity about who did what. But in a professionalized business operated by several equal partners, it's critical to determine who will fill what niche, and how responsibilities will be delegated. Who will be accountable to whom? What kinds of performance reviews will be conducted? Who will determine the goals against which performance will be measured?

Will Joe, an “idea guy,” manage a complex department, or will he be given a marketing assignment and report to Sam, his younger brother, who can expedite any project he encounters? An objective assessment of key business competencies using tools available on the Internet, such as the Devine Inventory, can help identify how each partner can best contribute to the business.

3. Determine the rhythm of your communication. Some partners prefer stand-up morning meetings lasting no more than ten minutes. Others like to hold weekly lunch meetings away from the office.

Monthly sit-down reviews of financials (lasting no more than an hour) will help you stay attuned to your business. Your financial advisers can help you design a one-page “dashboard” report covering the critical metrics for your business—sales per week, inventory turns, overtime hours or profit per product.

In-depth quarterly or semiannual reviews of company performance, relative to strategic plan, can help you determine if you're heading in the right direction, or whether you're ever going to reach your destination.

While the partners' style should determine how often they meet, no meetings at all is not an option. Fear of opening a can of worms will only lead to more worms.

4. Don't let the sun go down on your anger. On a calm day, develop a written agreement about how you will manage conflict. For example, agree to get together within 48 hours of an incident. To avoid an escalation of the disagreement, focus on reviewing facts and sharing feelings, neither of which is debatable. “When you blew off the meeting with our premier customer, it made me mad ...”

Long-term relationships work best with a 5:1 ratio—five positive interactions for every negative one. (And there will be negative ones, even in the most harmonious families.)

What's your current positive-to-negative ratio with your partners? When was the last time you gave your sister a compliment?

5. Build an effective family forum. As families grow, with spouses and adult children added to the mix, it makes sense to convene the family stakeholders once or twice each year. Agenda items for these family forums might include: reviewing information about best business practices, developing policies for family participation in the business, building support for company strategy, and sharing financial data (so everyone understands why there will —or won't—be dividends this year).

Partners who know they have the support of all those who will benefit from the success of the company— without second-guessing from uninformed family members—will work together much more confidently.

6. Take your board of advisers seriously. If your family has five equal sibling partners, each with different competencies, it might be a good idea to select two or three to represent all the family owners on your board of advisers. You can rotate the terms so everyone has a chance to serve.

This arrangement leaves room on the board for business leaders from companies that are one step ahead of yours. These outsiders will provide expertise that doesn't show up on your payroll—and will challenge your managers when needed.

Even though the owners retain the final vote, outside experts who can analyze significant business decisions in collaboration with family members provide assurance that the final decision—whatever it may be— is well made.

7. Develop a sibling code of conduct. Clear, written guidelines may prevent the kind of hostility that can destroy a business. For example, who gets first choice for the NFL tickets? How frequently will company equipment be used for home projects? Whose alma mater gets a hefty annual donation? How much social interaction (dating?) with employees is acceptable? What financial information (about, for example, extra gifts from Mom and Dad, prenuptial agreements, personal lawsuits, independent business deals generated through company contacts) will be shared among partners?

8. Find ways to enjoy each other's company away from the business. Your relationship as brothers and sisters remains a priority. What can you do once or twice a year to strengthen your bonds as family, without focusing on the business? Examples include a weekend family camping trip, a family subscription to a local theater company and volunteering at a soup kitchen.

9. Develop clear compensation policies. You probably got the same allowance as kids, but compensation in your business should be based on job performance according to industry standards in your region. When Dad no longer decides who gets paid what, money issues will arise. It helps to have a compensation policy in place before the situation erupts. Even though partners' salaries differ, bonuses may be based on an equal percentage of company profits.

10. Determine whether you share the same dream. Talking out loud about your hopes and fears can fortify your partnership. If one partner wants to build the company to $200 million in ten years, and another wants to retire at 40, your partnership may falter. How do your dreams intersect? What can you do to support each other's dreams?

Native Americans made decisions based on the principle of the seventh generation: How will this choice affect our descendants seven generations from now? If you can build a healthy partnership now, your children and grandchildren will thank you, because your business and your family relationships will prosper.

Ellen Frankenberg, Ph.D., is a family business consultant who facilitates family meetings and coaches executives and successors (ellen@frankenberggroup.com).

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