Born Too Late to Lead?

By Ruta Skirius

WHAT WOULD YOU DO?Charlie McGarry had set up his two oldest sons to run Gideon Steel when he retires. But a much younger son recently came into the business, bursting with ideas on how to save the company, which is having trouble. Moving him ahead, however, means risking a family breakup. How can Charlie undo his succession plan? Should he?

"I HAVE BEEN WITH THIS COMPANY for 16 years, and I think I know something about the business," Robert McGarry says, his voice shaking with anger. "In fact, Frank and I have been thinking a lot about it lately. We feel that you've been siding with Peter. To be blunt, we think you see a lot of yourself in Peter and are pushing him ahead before he's ready."

Robert, the president of Gideon Steel Corp. in Santa Ana, California, is talking to his father, Charles McGarry, the chairman of the company. Charlie has just announced to his two oldest sons, Robert, 39, and Frank, 37, that he wants his youngest son, Peter, 27, promoted to vice-president and put in charge of new product research, marketing, and distribution for the steel services firm.

Robert is a hardworking, careful executive. The outburst is entirely unexpected, as the family rarely argues. This is the first time Charlie's oldest son has openly challenged his father's judgment. Not only that, he has questioned his father's objectivity. Charlie is shocked-and hurt.

When Charlie made Robert president and Frank vice-president back in 1981, it seemed the right thing to do. The company had been almost doubling its sales every year, and Charlie was having trouble staying on top of it all. Both sons had proven to be competent. It seemed natural that Robert, as the first born, would take charge of the business, and Frank, who had done a solid job in purchasing and accounting, would be his second-in-command.

Charlie didn't build a $7.5 million company with 60 employees by being careful. His sons refer to him proudly as "a riverboat gambler." The company distributes steel rods and a dozen similar products to cities in the West. Charlie is 67 and getting a little tired. He has told his sons he would like to retire in 1991. But he worries about the drastic changes taking place in the steel distribution industry. Business as usual will not do in this competitive climate.

The increasing frequency of memos from his youngest son, Peter, Gideon's sales manager, is forcing Charlie to confront an issue that he's been avoiding for some time. Peter's memos indicate that he is restless and eager to make changes, a viewpoint the two older sons do not share. The times seem to call for bold, innovative ideas-like Peter's. But was Peter born too late to lead the company?

In the most recent memo, Peter suggests that the company lease its own truck to deliver its products to out-of-town customers instead of using standard freight shippers. A truck, Peter reasons, will give Gideon Steel greater control over deliveries and permit it to reach distant customers faster.

Charlie wonders why Peter keeps sending memos to him, and not just Robert and Frank, on such details. After all, he has told his sons he wants to remove himself from day-to-day operations. Nevertheless, he sees merit in the proposal. Grabbing his hard hat, the entrepreneur goes looking for his sons.

He finds Robert and Frank in the steelyard. Both have seen the memo and are skeptical. Robert criticizes Peter for not doing enough homework before sending it. "We need a definitive cost analysis for using truck delivery instead of freight, not just some figures off the top of his head," he says.

Charlie agrees that Peter has to nail down the numbers, but he feels the idea is worth pursuing. "I've heard some customers grousing about delays in deliveries, We have more customers in San Diego and Phoenix now; they want their supplies fast. That's what our competitors are promising."

AFTER URGING ROBERT to ask Peter for more detailed cost estimates, Charlie returns to his office. On the way, he has another disturbing thought: Robert and Frank have always been close, especially in recent years, functioning well together as a team. On the other hand, neither has had much to do with Peter, who is so much younger. Is it possible both reject Peter's ideas without giving them any thought?

When Robert and Frank were growing up in the fifties, Charlie was a salesman for another steel distributor in Chicago and was rarely at home. He saw little of his boys and his wife, Suzy. In 1962, Charlie moved the family west to start his own venture, distributing a single line of rods produced by a major integrated steel company in Indiana. Although he worked long hours, Charlie was at home more often. His older sons soon left for college, but he spent a lot of time with Peter. He coached Peter's soccer team and enjoyed the young man's triumphs during high school. At times, Peter's brothers felt their father was spoiling him.

Charlie tried to prepare all three sons for eventual participation in the business, beginning with various summer jobs. Robert joined Gideon Steel after graduating from college in 1973 with a degree in business administration. Frank, who had earned an accounting degree, also came on board right after college. Both worked as salesmen for several years and reported directly to Charlie. In 1981, when he felt they were ready to assume more responsibility, Charlie appointed them to executive and board positions. To reinforce their sense of ownership, he began gifting stock to them each year. Charlie retained the title of chairman and created a board consisting of himself, his wife, and the two older sons.

Then, in 1986, Peter arrived at Gideon Steel-and began roiling the waters. The youngest son had worked in the steelyard and finishing plant during high school His_ older brothers, who already held management positions, made sure that Peter worked hard, and occasionally reprimanded him.

Peter went on to earn scholastic honors at an Ivy League college and become president of the student body. Upon graduation, he joined a larger steel distributor, where be went through an executive development program. At the time, he expressed very frankly his reservations about working at Gideon. The top management slots had already been assigned, he noted in a discussion with his father. "I don't want to remain a salesman forever," he said.

Two years later he changed his mind and came back to Gideon. He did so partly out of loyalty to the family and partly because he wanted to be in a smaller firm where he could participate in decisions on all phases of the business.

Like his brothers, Peter started as a salesman. Although frequently on the road, he was often seen in Santa Ana, roaming through the office, the shop, or the yard, talking with workers and supervisors. He became an enthusiastic participant in the occasional planning meetings his father held with his brothers and Gideon's other top officers. He began circulating memos with ambitious plans for the company.

IN HIS FIRST MEMO TO CHARLIE, he argued that strategic planning should be made an integral function of the management group. Peter wrote: "I feel if s important for our company at this time to reassess its role in the marketplace. Through a number of 'brainstorming' sessions, perhaps we can establish a list of priorities and identify areas of interest."

Peter noted that the company had been lucky to survive the shakeout of steel services firms that took place from 1982 to 1986. The recession had left Gideon with inventories that had declined sharply in value. Meanwhile, their customers were demanding customized products, better quality, just-in-time delivery.

Peter proposed that the company study ways to create new products and services, to expand into new territories. His most dramatic proposal was to buy steel from Japanese and Korean producers; Far Eastern steel was generally considered better quality than that available on the domestic market. Such a move would jeopardize the company's strong bonds with their traditional source in Indiana, but it seemed worth it.

None of these proposals made much headway. Robert thought that 10-year plans were "a little far fetched" for their small company; Frank remarked that his younger brother was a bit impetuous." Both felt that since it had taken them nearly 10 years to learn enough about the business to run it smoothly, Peter should put in the same amount of time before proposing such grandiose schemes.

Charlie agreed that Peter was sometimes too aggressive in pushing his ideas. He felt his older sons provided the essential balance. But Charlie saw Robert as overly deliberate and lacking in vision.He constantly stressed to Robert the importance of developing new goals and directions for the business. instead, it was Charlie and Peter who harped on the need for innovation. Charlie, for example, believed the company could make money distributing steel belts, and assigned Peter the job of looking into the feasibility of making the belts and testing customer reaction.

Soon Peter had demonstrated that he was not just an idea man but could follow through on his projects. Before long, he presented Charlie with an in-depth study of alternative methods of making the steel belts. He then spent long hours training the workers assigned to cutting and molding the belts, and Gideon went into production with them in 1988.

Robert's attitude did not seriously concern Charlie until hard times began to batter the company. Gideon Steel's revenues leveled off and began to decline. The company was losing customers to larger distributors who were buying from Japan and Korea and offering more services.

When Gideon's sales manager left the next year, Peter got the job. At last, he felt, he was getting a chance to show what he could do. He inspired the sales staff with his energy and enthusiasm; he introduced a new, more attractive incentive plan and hired new full-time reps in San Diego and Phoenix. For the first time in years, sales rose.

But Gideon was still in trouble. Net profit had sunk in one decade from almost $550,000 in 1979 to barely above break-even in 1989. Charlie began to worry about Gideon's long-range survival. Not the least of his concerns was whether he and Suzy would have enough to live on if Gideon did, in fact, go down. Most of their lifetime earnings were tied up in Gideon stock.

One afternoon, while these questions were preying on Charlie's mind, Peter showed up in his office and asked to discuss a confidential matter. "Robert and Frank have treated me decently," be began. "But I don't think they have any ideas on where the company could go. There's a bunch of new products and services we could be thinking about. We have to assign responsibilities and timetables to get things done."

"Son," Charlie said, "I believe in chain of command. I realize you've been frustrated, but your brothers do know a thing or two. You have to persuade them. When you send me memos, they feel circumvented."

"By the time I bring them around, it'll be too late," Peter replied. "They have a lot more managerial experience than I do, it's true. But I seem to be the only one here who's thinking ahead-besides you, that is."

Peter is telling Charlie only what the father already knows: Peter may be the company's best hope for the future. He fears that if the younger son's frustration continues he will leave. But Peter is not yet ready to take charge.

THESE UNSPOKEN TENSIONS burst into open argument after Peter circulates a memo to his brothers and Charlie with detailed cost comparisons on leasing delivery trucks versus using common carriers. Peter's memo shows that the company can save $1,000 a month by leasing a rig and hiring its own drivers. Charlie is persuaded and tells Robert so. "It's not so much that we'll save a little money. The important thing is that we'll have more control over our deliveries," he says.

Robert disagrees vehemently. He argues that having a truck may actually make the company's distribution schedule less flexible. "What do we do if the truck is on its way to Phoenix and we get a request for a delivery in San Francisco? Then we have to hire a common carrier anyway."

Charlie agonizes over his conversation with Robert. He wants to avoid a family quarrel over the trucking issue, yet the discussion has convinced him that Gideon needs different leadership. He wonders whether he can push Peter on his brothers without alienating them, which might even lead to the breakup of the company. Charlie and Suzy still own 45 percent of Gideon's stock, but over time, they have given Robert and Frank 22 percent each, and Peter only 11 percent.

After discussing the situation with a business confidant and friend, Charlie decides to lay it on the line with Robert and Frank. The next morning he calls them into his office. Charlie tells them how important they have been to the company, but confesses his deep fear that the company may be headed for disaster. They cannot afford to lose their younger brother's talents. They must be more open to Peter's ideas; they have to accept him as a partner in the enterprise.

Then Charlie breaks the news that he wants Peter promoted to vice-president. He also tells them that he plans to sell more stock to Peter during the coming year. At this point the usually reserved Robert blows up and accuses his father of siding with Peter and promoting him before he is ready.

The McGarrys are clearly in an unenviable situation, one that many business owners may face when they become locked into a succession plan before all their children are fully mature. Can the McGarry brothers share control? Or will the business falter without a single, strong leader? Should the problem be resolved among the brothers themselves, or must Charlie continue to take a strong hand?

Some suggested answers to these questions are on the next page. See if you agree. Then use the "Your Turn" fax sheet on page 35 and tell us what you'd recommend.

 

Ruta Skirius wrote this case when she was a graduate student at the University of Southern California. It comes from the files of the Owner Managed Business Institute in Santa Barbara,names and some details have been fictionalized.

 

 

HOW THE EXPERTS SEE IT

OWNER
WILLIAM ALEXANDER
Chairman, H.B. Alexander & Sons Inc., a third-generation construction company based in Harrisburg, Pa.

Charlie must take decisive steps to restructure his operation. His most important task is to create a framework for peaceful coexistence between the sons.

He should divide the company into three divisions. The eldest son, Robert, should be responsible for operations and sales in the core business-domestically produced steel rods. Peter should take over the second division and be responsible for all new product development and sales. Finally, a support division should be placed under Frank, responsible for financial control and transportation in support of the two operating divisions.

Charlie must remain as CEO long enough to coordinate the divisions and allocate financial and other resources to them as necessary. He should also begin gifting stock to Peter to bring the youngest son's holdings to a level equal to that of his brothers.

Timing is important. Charlie has to stay around long enough to ensure Peter the opportunity to demonstrate to his brothers that he has what it takes to lead. If past performance holds, Peter's division will soon be the driving force behind the company's sales and profitability. Charlie can then put his remaining 34 percent ownership interest in trust, with Peter as trustee. That will give Peter 56 percent, and with it, effective control of the company.

Robert will be bitter, but must accept the fact that he has had his chance to prove himself; that is all a son can ask of his father. The parallel here to the Biblical story of Joseph and his brothers is striking. The talented youngest son, cast out by his older brothers, returns to rule the flock.

ORGANIZATIONAL EXPERT
LOUIS B. BARNES
Professor of organizational behavior at the Harvard Business School.

The title of the case reflects its greatest problem: the assumption of primogeniture. Charlie has set up Robert to rule Gideon Steel upon his retirement. Now he must undo that, painful as it may seem. Gideon Steel is close to a crisis, and neither Robert nor Frank appear to recognize it.

Charlie has begun damage control belatedly. Unfortunately, it's now too late for him to just walk away and retire. Gideon needs a transition period. If I were Charlie, I would:

 

  1. Make inquiries among my nonfamily senior managers whose judgment I can count on. I would ask: Am I assessing the situation correctly? Are Robert and Frank as tradition-bound and stifling as I fear?

     

  2. Meet with my three sons immediately. This is potentially both a business and family emergency. I would emphasize my concern that the business is in grave difficulty and stress the supporting evidence. And I would tell them that when I ask for action, accusations of favoritism are not the answer.

     

  3. I would ask the three brothers to jointly prepare, within a week, a set of proposals to get the company moving again. Charlie needs to assess quickly whether the three brothers can work together. If they can't pull off the joint plan, it will show what the problems are and where the weaknesses lie.

     

  4. Return to active management for a year, and push the company to its growth limits. Robert and Frank might not be able to take the pace. Or they might learn to do so. I would help Peter cut loose from his brothers' constraints, so he could set in motion new products and practices.

     

At the end of the year, under these forced-march conditions, I suspect that I would know who the new CEO should be-and so would my sons.

CONSULTANT
JOHN A. DAVIS
Executive director, Owner Managed Business Institute, Santa Barbara, Calif.

Charlie should discuss with his three sons the need for a leadership transition. He and his wife, Suzy, should lay out their financial needs and their goals for the business and the family; they should encourage Robert, Frank, and Peter to lay out theirs as well.

The purpose of the meetings should be to work toward a solution that gives each family member as much of what he or she wants as possible. Given the high level of anger and frustration in the family, the presence of a trained professional would be helpful. Charlie should present the evidence for his belief that in order to survive, Gideon Steel has to be innovative and not just financially sensible.

At least three succession scenarios are possible:

  1. The three brothers share equally in ownership and management.

     

  2. One becomes majority owner and top manager.

     

  3. The family appoints a manager from outside the family, and in a few years chooses one of the brothers to be the new leader.

     

The choice of the new leader should be based on competence alone. Charlie should let his sons discuss this issue on their own, to force them to decide if they can run the company together, or if they can agree on the best candidate among them.

By siding with Robert, Charlie is reducing the need for his sons to settle issues on their own. Charlie should exhort them to come up with their own plan for passing on control and management.

If they can agree on a CEO, that person should be allowed to purchase majority control. If they can't agree, chances are they will never be able to run the company together, and Charlie will have to decide.

If this is the outcome, then Charlie should inform the family that he plans to appoint Peter chairman when he retires. Peter should then have the right to purchase majority control from the company's earnings.

-- R.S.

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December 1990

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