Greed and Animosity in the Second Generation

By Leon Danco

Business needs are tossed aside as more and more stakeholders lobby for jobs and perks.

In my 30 years of advising family companies, the problems I have seen have multiplied with the number of people who have a stake in the firm. In the old days, when a business was growing like a baby bull and Dad was having trouble keeping it under control, the kids were impatient to take over and would fight among themselves. But everyone knew there would be only one successor — usually the oldest son. And even when "the kids" were in their 20s or 30s, their rivalries had not yet developed into lifelong hatreds, fueled by the in-laws. The problems were fixable, if caught in time.

For that same company, the problems today are probably far more complex and snarled in family politics. By now, the founder might have passed from the scene. In a last burst of generosity, Dad distributed sizable chunks of stock to his children and the grandchildren. There are now several families sharing in the goodies, many parents lobbying for jobs or perks for their kids, and no one to umpire their disagreements. The business's needs are tossed aside. Entitlement is rampant; greed is labeled "ambition," and deep-seated animosities are often given righteous justifications. Nowadays, more members of the younger generation have been led to expect a shot at being the leader — younger sons, daughters, sons-in-law, cousins. Their parents want to give them all "a piece of the action"; they fondly hope their offspring can work as a team.

Certainly, these developments have some positive aspects. The business has, after all, survived into a second and third generation. The pool of available talent is overflowing. And "teamwork" is a word that has many fans.

In all too many businesses, however, the proliferation of stakeholders has threatened to destroy the company. If America has become a society of entitlements, as many have said, nowhere is that sense of entitlement more focused — or more destructive — than in the family business.

In one company, the family managers needed money for continued growth, but the non-participating shareholders — who for years had been milking the company for income while contributing zilch to its success — would not hear of it. This business had a bunch of feisty, antagonistic, successor-generation shareholders who understood little about the business and felt they were getting cheated. Both family and nonfamily managers, who had kept the business afloat, asked themselves: What can be done?

This sense of entitlement begins early, when kids are taught they have some God-given right to benefit from the business without concern for what they contribute. The message heard from too many parents is not, "Work hard to be accepted." Instead, the kids hear: "Whatever you get out of the business is your right."

My prescriptions in these matters are well known. In choosing successors, the best guarantee that only the qualified will be considered is the existence of an operable board, with outsiders on it; in a meritocracy, someone has to be the judge.

Children who lack aptitude or commitment to the business should be encouraged to look for employment elsewhere. When siblings can't get along, when their rivalries persist into adulthood, you shouldn't bring them all into the business. You shouldn't give stock to children when they're juveniles just to save some tax money. Hostile spouses can be a powerfully divisive force; wait to see whom the children marry and whether or not their spouses can accommodate the needs of the family and the business.

Unfortunately, many owners do not confront these issues. They bring warring family members into the firm in hopes of teaching them to get along better. The business is expected to provide therapy rather taking care of the economic well-being of the family.

While it becomes clear that kids in some families will never work as a team, their parents still search for a solution that will keep everyone "happy." Some owners try to create separate areas within the business so that siblings can have their own turf and never have to come in contact with their brothers and sisters and cousins. Wounds continue to fester beneath this Band-Aid, however; sooner or later, the blood-letting resumes, usually four cars back from the flowers at the funeral.

Some other owners prefer to believe that conflict in their family doesn't exist. They can be brought to their senses and mobilized to act rationally only when given a blunt warning: When they are gone, their grieving widow will be left to deal with the problems they ignored.

One CEO I know employed his sister's husband in a most responsible job for years, even though the man was both increasingly incompetent and uncooperative. The sister did everything she could to prevent the husband from being fired or even reassigned, going as far as promising to leave her stock to her brother's children if he would continue to protect the man. When I asked this CEO whether he felt his sister really loved him, he said no, she didn't. What reason could he possibly have, then, for keeping the man? The brother saw the light, and eventually threw the husband out, but not before going through unbelievable anguish and letting the company drift.

While a founder is alive and in the business, he may be able to keep warring siblings apart, through threats and promises. And sometimes after the father is gone, the peace is kept "for mother's sake." When both parents pass on, however, no one is around to prevent war from breaking out.

Solutions that call for the sharing of power — equal multiple partnerships, co-presidencies, rotating presidencies — are mostly naive fantasies. It's all well and good for a big public company to have an Office of Chairman with five or six professional managers sharing the decision-making. If s a lot harder in family companies that are divided by deeply personal issues.

In my experience a family business can have only one leader, whose control is established by majority stock ownership, by a voting trust, or by board consensus. I have seen sibling "partnerships" work, but only when one sibling is fully acknowledged as best qualified to lead, and the others defer to that person on major decisions. In all cases, however, the leader's decisions should be subject to review by a board that includes outside directors.

Siblings who cannot cooperate should be asked to leave. When dissident shareholders become disruptive, the only solution is to get rid of them, to "prune the tree." In the long run, buying them out is the cheapest way to solve the problem. The longer the owner waits, the more costly — and rougher — the solutions are for all concerned.

Natural leaders bring out leadership in others. They understand that responsibilities go along with rights. They are strong and secure enough to patiently explain their actions and get others to buy in. To them, succession is not the golf club memberships or company cars, but the opportunity to work hard for the glory of the enterprise and the welfare of all.

Léon Danco is the founder of the Center for Family Business in Cleveland, and the author of four books on family business.

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Summer 1992

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