July/August 2012 Toolbox

By Henry Hutcheson

Keeping your family business afloat.

Sink or Swim: How Lessons from the Titanic Can Save Your Family Business
By Priscilla M. Cale and David C. Tate, Ph.D.
Praeger, 2011
233 pp., $48


The literature on family businesses has grown to an impressive level over the last two decades. However, knowledge without action is meaningless. This could be the true purpose behind the book Sink or Swim: How Lessons from the Titanic Can Save Your Family Business, by Priscilla M. Cale and David C. Tate. In analyzing a complex family business situation in which the company seemed to be headed straight for the rocks with no one trying to stop it, the authors were struck by the parallels to the sinking of the famous ship. Upon further research, such a strong correlation between the causes of the Titanic disaster and the reasons for family business failure appeared that the idea of writing a book emerged. Given that 2012 is the centennial anniversary of the Titanic sinking, the timing could not be better.

While the information provided about family businesses is impressively comprehensive, tying it to such a terrible tragedy invokes strong emotion and sears the information in the reader’s mind, emphasizing the importance of taking steps to avert disaster. The authors stress that family business failure, though quite common, is completely avoidable, just as was true of the sinking of the Titanic. (The book also presents all the juicy facts about what went wrong with the ill-fated ship from the very beginning.) The authors focus on five fatal flaws:

1. Overconfidence. The public relations machine of the Titanic’s owners, White Star Line, called the ship “unsinkable” and broadcast that message so aggressively that even the owners and employees believed it.

Of critical importance was the ship’s captain, Edward Smith. He was held in such high regard that the company had him postpone retirement to lead the Titanic’s maiden voyage. He was so overconfident that he sailed at a higher than normal speed, even though visibility was poor and the Titanic had received seven ice warnings from other ships. Also pivotal was the decision to install only half the lifeboats required to evacuate a full ship. Amazingly, the passenger and crew confidence was so high that many did not get into the lifeboats even when the ship was sinking!

From a family business perspective, the authors discuss over-optimism about business performance and underestimation of risks. Over-optimism can lead family businesses into risky ventures, unrealistic goals and the suppression of bad news. Along with this comes minimization of issues, or even complete denial. Other characteristics can include arrogance, a grandiose sense of self-importance, entitlement and lack of empathy for others.

2. Ineffective leadership. Captain Smith failed to heed the ice warnings and neglected to pass this critical information on to the members of his team. Moreover, he made important decisions without considering all relevant information. Finally, he failed to relay decisive commands during the crisis. At the same time, the White Star Line owner, Bruce Ismay, circumvented Smith and instructed the chief engineer to run the ship at maximum speed.

Effective leadership in the family firm is critical. The book expounds on this idea by presenting 12 leadership challenges for a family business. It also explores non-family leadership, boards of directors and family councils. It notes that family business leaders must have high emotional intelligence.

3. Lack of planning and preparation. The crew of the Titanic failed to plan how they would navigate through an iceberg zone. They failed to provide adequate lifeboats, to prepare the passengers for a possible emergency and to plan for a full evacuation of the ship. Had some of this preparation taken place, perhaps the disaster could have been avoided, or there would have been enough boats to save everyone, or at least all the lifeboats would have been filled to capacity. In the end, 68% of the passengers died.

In a strange coincidence, family businesses fail at virtually the same rate as the death rate of Titanic passengers on April 15, 1912. Authors Tate and Cale show how planning and preparation can greatly improve this statistic. The book outlines six areas where planning should take place, including succession, business strategy and estate planning. Also explored are three unexpected areas where planning should take place: contingency, business continuity and risk management.

4. Frail architecture. While the Titanic boasted a double bottom and watertight compartments, to save on costs it included a higher than optimal proportion of rivets made of iron, a lower-performance material than steel. Hence, the damage to the ship was much worse than it should have been. Another flaw is that the main engine, which powered the rudder, could not go in reverse; only the small outer engines could move in that direction. When the crew threw the ship into reverse, the thrust was too weak and the ability to turn was compromised. Some argue that had the crew simply turned the ship, it might have missed the iceberg.

The authors compare the Titanic architecture to the governance structure and policies related to the core operational areas of a business. If they are not constructed well, they will break under stress. A family business needs up-to-date shareholder agreements and business valuations, along with a comprehensive estate plan that clarifies objectives, ensures wealth transfer and minimizes taxes. Having all of these elements appropriately in place will help avoid “icebergs.”

5. Team fragmentation. The Titanic had three major team breakdowns. First, Captain Smith rearranged the senior officer team by calling in a new chief officer who arrived only hours before the voyage. Second, the reorganization made the old second officer unnecessary, and he disembarked. This would not have been a problem, except that he had the key to the locker containing the binoculars for the lookouts! Third, the people in charge of communications (receiving the iceberg warnings) did not work for the ship or report to the captain and were paid to send messages, not receive them. The Titanic received its last warning only 45 minutes before its collision with the iceberg. The message was never relayed.

Family businesses, too, have an inherent potential for team fragmentation, the authors contend. All family members bring their own family baggage, and try to walk the line between individual achievement and family harmony. The authors note that family businesses have “invisible fault lines” that can crack a family team apart under stress or change. There is also the potential for family conflict between parent and child, copreneurs and siblings, as well as rifts among family and non-family employees, between generations, and between genders.

Raising awareness
While it is too late for the Titanic, extensive U.S. Senate investigations led to many changes in the industry that have prevented similar disasters. (Unfortunately, the recent case of the Costa Concordia in Italy shows that overconfidence is difficult to eliminate completely.) Where family businesses differ from the cruise ship industry is that there is not just one major historical catastrophe, but many of them all the time. Thus, much is known about what it takes to prevent family businesses failure.

Sink or Swim does an excellent job of describing the similarities between the Titanic’s flaws and the issues facing family businesses. But the true benefit of the book is that it raises the level of awareness to such a degree that the reader is compelled to take action. Tate, a licensed clinical psychologist and an assistant clinical professor in psychiatry at Yale University, and Cale, a consultant and the former director of the University of Connecticut’s Family Business Program, include sidebars featuring input from noted family business advisers such as Bonnie Brown Hartley, Dennis Jaffe and Henry Krasnow. The book also offers helpful charts, graphs, lists and diagrams to convey complex concepts, as well as brief summaries at the end of every chapter. The extensive notes and bibliography provide an excellent resource for further research.

The authors of Sink or Swim have done an exceptional job describing the causes of the Titanic disaster and drawing parallels to family business issues. In doing so they drive home the importance of taking action before it is too late. So if you are a family business leader, be sure to heed important warnings, check the lifeboats and make sure your crew is working as a team.

Henry Hutcheson is a partner at Regeneration Partners, a family business consulting firm (www.regeneration-partners.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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