The lessons of stew-gate

His Connecticut food emporium was long held up as a model of a successful family business. Four experts examine what Stew Leonard's downfall tells us about the pressures that lead to such tragedies.

By Jayne Pearl

The shocking case of Stew Leonard Sr., who was sentenced to prison last year after pleading guilty to an elaborate tax evasion scheme, has received considerable publicity. Though the media thrives on stories about how the mighty have fallen, a family business audience is likely to find tragedy in the downfall of the highly acclaimed, third-generation leader of Stew Leonard’s Dairy.

The 63-year-old Leonard admitted that he had skimmed $17 million over 10 years from the Norwalk store in what Federal officials called the largest retail tax fraud involving computers in U.S. history. Two of Stew Sr.’s brothers-in-law who worked in the business, and another employee, were also charged in the case. Stew Sr. pleaded guilty and was sentenced to 52 months in prison, plus payments of $15 million in unpaid taxes, interest and penalties, $850,000 in additional penalties, and $97,000 to cover his incarceration costs. His brothers-in-law received lighter sentences.

Supermarket Business magazine reported that Stew Leonard Jr., president of the Norwalk store and the oldest of Leonard’s four children, “was aware of the skimming scheme...and at times initiated the computer program that changed sales records and hid the true receipt totals.” Several newspapers reported that Stew Jr. was granted immunity by prosecutors as part of his father’s plea agreement.

What went wrong? Family businesses have always taken pride in high ethical standards and their reputation in the community. Stew Leonard Sr. had it all: wealth, the joys of working with family, even national celebrity; in 1986 he received a Presidential Award for Entrepreneurial Achievement from Ronald Reagan. Why did he risk it all on a hare-brained scheme straight out of a second-rate novel?

Believing there are lessons in Stew Sr.’s downfall, we asked four experts who have worked extensively with family businesses to comment on how such aberrant behavior can occur in a family company. The four were interviewed by Jayne Pearl, former senior editor of Family Business. She also invited Stew Sr., who is serving his term in McKean federal prison in Bradford, PA, to share his thoughts with us, but he declined, saying the time was not right to set the record straight. What follows does not attempt to explain Stew Sr.’s motives, which at this point would be highly speculative. Rather, it is an effort to identify the broad pressures and cultural factors that may result in such tragedies. -The Editors

Organizational Psychologist

Ivan Lansberg, Private consultant, New Haven, CT, and Family Business columnist.

There is as much diversity in ethical standards among family businesses as there is in the general population. When a family business owner does slip, the reasons tend to be complex. I don’t pretend to understand all of them, but there are a few hypotheses that might account for such behavior.

First, I have observed that some parents create a culture in the family that legitimizes such behavior. They tell each other, “We’re working extraordinarily hard. That entitles us to take short cuts.” The more successful the family becomes, the more the members feel removed from the laws that apply to everybody else.

What happened in Stew Leonard’s case has to do not just with individual psychology but with group psychology. He didn’t wake up one morning and say, “I’m going to break the law.” You slide into behavior like that. There’s a gradual legitimizing mentality.

Second, there is a dark, narcissistic side to entrepreneurship that can lead to self-destructive behavior. When people are driven to be in the public eye, it may be because they have something to hide. Yet they take risks; they feel immune from discovery. Some may feel that they don’t deserve what they’ve built, so they set out to destroy it. Others are so in love with what they’ve built that when they face retirement they begin to feel: “If I can’t be the head honcho forever, I’ll be damned if anyone else will.” So they end up blowing the system to pieces.

Yet another theory, from Kurt DeVries’ book, Leadership and Narcissism, holds that successful owners have had to step on a lot of toes to get where they are. They have had to ask for many favors and say no to a lot of people. Leaders facing retirement sometimes feel that if they step down from their position of power, a lot of their debts will be called in; people they’ve ticked off over the years will come after them. So they hang on. This can lead to self-destructiveness, too.

None of this necessarily applies to Stew Sr.’s case, of course. These are merely tendencies of some entrepreneurs.

What interests me is how members of the next generation react when they observe their parents’ ethical standards in the business. As kids climb the ladder, they learn first-hand that being a leader is tough. To build a business, you need to wrestle with ethical dilemmas. When they find out about some of the things the parents have had to do, they don’t feel very good about it.

Some kids have the moral rectitude to try to make the family culture better. Others, through family socialization, buy into the notion that, “It’s okay for us to do that.” They tell themselves: “This is Dad’s secret. If I tell anyone about it, I’m ungrateful; I’m being a bad kid.”

Even when they take the high ground, however, they discover that there are always ethical dilemmas in business that cannot be resolved properly. Obviously, there are some clear boundaries that most people don’t cross. The fact that Stew Sr. did cross over that line doesn’t take away all the good things he has done in his life. Not in my book, at least. What he did was not right. But he has always been an extraordinarily giving man.

One of the most moving quotes in newspaper accounts of the case was Stew Sr.’s statement that he had tried to explain to his granddaughter why he was going to jail. That, he told the court, was the most painful part of his experience.

What was nice about that quote was that Stew Sr. saw the need to explain his behavior to a small child. When a family can discuss a problem like this, even with children, there is hope. The reaction of some families might be simple denial; because of the shame they say, “Let’s not deal with it.” Often children see themselves as victims of “bad people who are coming after Grandpa.”

Stew Sr.’s quote suggests that he is trying to understand his behavior; he knows he owes others an explanation. Families that run from the truth rip themselves apart. Families that survive don’t just circle the wagons. They digest the lessons.

Family Therapist

Leslie Dashew, President, Human Side of Enterprise, organizational consultants in Atlanta.

When Stew Leonard Sr. spoke at the Family Firm Institute’s conference two years ago, he arrived in a bus with a number of his kids. At the time, I wondered how truthful he was about some of the stories he told. He seemed to be more of a PR person than an open human being. He suggested that everything was always rosy and harmonious in his family. His answer to a question that I asked him at that meeting seems now, in retrospect, very telling.

“When conflict does come up, how do you address it in this family?” I asked. He said, “We don’t have conflict.” That could have been part of the dynamic that led to his current problems.

In the healthiest family businesses, there is healthy conflict. When strategies and directions are part of a dialogue, there is an opportunity to address ethical dilemmas. If there really was no conflict, it means that Stew Sr. was making decisions about how the business would operate without entertaining different perspectives. That’s the kind of laboratory in which antisocial behavior can occur.

Anthropologist Margaret Mead said that family dialogues must include the perspectives of three generations: the oldest generation, to talk about how things were; the middle generation to talk about how things are; and the youngest generation to talk about how things can be. So if the middle generation is unwilling to think about a different way of operating the family business may be in trouble. A leader who is secretive and tightly controlling, who doesn’t honorably enter into that dialogue, creates fertile ground for this kind of problem.

In adolescence, kids confront a gap between their parents’ public versus private values. And although parents—including myself—don’t like to deal with them, the children’s reactions can be helpful in maintaining the integrity of a family enterprise. If you really want to have an ethical business, you have to encourage a diversity of perspectives and create a forum where those perspectives can be discussed, even though it may be uncomfortable.

When such a forum doesn’t exist, the younger generation can get sucked into the parents’ value system. Instead of becoming a force that revises and strengthens the family’s values, the children suspend their own judgment and accept the bad along with the good. It’s hard enough to be a whistle-blower in a business that’s not family owned; in a family business, you risk not only your job but your family relationships. The more differentiated the family members are—the more fully developed their individual beliefs and values—the more likely they will be to blow the whistle on behavior that is inconsistent with those values and possibly destructive to the group. But that requires a pretty high level of maturity.

Family Business Consultant

David Bork, Founder, Bork Institute for Family Business, Aspen, CO.

Some years ago I did a one-day seminar for the Leonard family, but did not end up taking them on as clients. At the time, the family was fond of saying their business was a reflection of their values. What an irony.

I have a list of 10 qualities that enable families to stay connected. Among the most critical are shared values about people, work, and money. The work ethic is very strong in the Leonard family. But seeing Stew Sr. go to jail for this crime conveys to me that his attitude about people is that they can be duped, and he can get away with it. His notion about money is also out of whack. Groceries run on very narrow margins of 3 percent or less. But 3 percent of $200 million is $6 million. How much do you need?

Another of the 10 qualities is tradition. Families that stay connected have traditions that are kept alive by retelling the family stories. There were stories in Stew Leonard’s family that were not just retold in the family but in public forums. It seems there were also unspeakable stories.

When relatively undistorted information is available in a company, horizontally and vertically, that is the mark of a good management system. In Stew Sr.’s case there was a distorted system of communication, in which there was a public face and a private face. It’s no different from any kind of abuse in a family. When all or some family members are restrained from speaking the unspeakable, the family lives in co-dependency. It is like a family in which the children keep the secret of a parent’s alcoholism and are unable to function at a higher level. They believe, “If I would be a better boy, Dad wouldn’t drink so much. I’ll keep the secret, be a good boy, and Dad will improve.” Of course, that doesn’t work.

To prevent this requires discussion of guiding principles that govern the way the family functions. A good example is found in a very wealthy family with 17 members that I helped develop a family charter. It said:

“We are a family committed to our members and descendants being responsible, productive, well-educated citizens who practice the work ethic and make constructive contributions to the local community and the world at large. Each family member is encouraged to develop and use self-supporting, marketable skills that contribute to the enhancement of their own self-esteem and independence.

“We urge the continuation of the orientation toward prudent, careful investing with a long-term view of outcomes, so all descendants may enjoy the benefit of the foundation the grandparents built.

“We believe clear, constructive communications are at the core of our long-term success as a family. We encourage all effort to further harmony, develop humor and perspective on life, balance long-term concerns while enjoying the present, and to enhance caring and amicable relationships among family members.”

This charter is simple but reflects a lot of important values. It places tremendous stress on what constitutes responsible behavior, on the work ethic, on the moral obligation to “give back.” The family is saying that despite their wealth, the members have to be able to take care of themselves. Family members have hung copies of this mission statement, done in fancy calligraphy, in their kitchens. The kids read it and talk about it.

Of course, a family credo is no guarantee against ethical lapses. But when a member strays from principle, the credo provides a framework for correction. In fact, the family who adopted this charter had a daughter who was flagrantly promiscuous and taking drugs. The credo kept the family focused enough so that the members did not slip into an “enabler” role or lower their standards with regard to the daughter.

When parents are the ones who are “cutting corners,” however, it creates an ethical dilemma for kids. Many years ago, for example, four siblings came to me because their father had been “skimming” from the business. The four siblings agreed that they could not continue their father’s practice. They were concerned, however, that if they stopped the skimming when they took control of the company, revenues would rise so dramatically that various regulatory agencies would be alerted.

I agreed to help on one condition: that they tell me what they did with the money. They took me to a bank and pulled out three safe-deposit drawers full of $100 bills. I helped the four sort out what they wanted to do, and found a person with financial skill to guide them in putting the money back into the system. It took several years, and they did not end up being investigated for Dad’s sins. They were certainly culpable for taking Dad’s “dirty” money. But only when they were older and more mature were they able to take him on directly and “go straight.”

Business Anthropologist

Kathy Wiseman, Founder, Working Systems, Washington, D.C., advisors on family business missions, values, and strategic planning.

I would never put people in categories of good or bad. People have the capacity to do good and to do bad. When someone does bad, the question is: What were the circumstances?

To find out what happened in the case of Stew Sr., we’d have to look back a couple of generations at the family process. The problem didn’t start with him.

I’d want to know how some of the key people in his life functioned. How did they work, how did they deal with increasing responsibility? How did his father take care of his family, emotionally and financially? What would his maternal grandmother have thought about the good he’s done and his recent dilemma? Which side of the family would understand his behavior, which would not? How would they interpret it?

We don’t know how many family members were aware of the scheme, but it would be helpful to find out what the pressures on the family were at the time. Were their cash demands great? Were there individual problems? I believe that people act from a set of values or beliefs, and that the majority of the time they are honest and upright. When a problem arises, however, they can make bad judgments. The death of a parent, the illness of a spouse, a child’s drug addiction, a change in the business environment—all can overload the brain’s circuits and prevent a person from thinking clearly.

Another factor may have been too much family togetherness, which makes it difficult for members to act as individuals, with their own life course and opinions. There is a point at which togetherness becomes too intense. The conflict between the need to ally oneself with others versus the need to be oneself leads to anxiety. Some family members may then act out, or at least go along with aberrant behavior.

In such circumstances, at least one family member must have a strong enough sense of self to set himself or herself apart and declare: “I can’t participate in this; it’s illegal.” Such individuals will initially be seen as disloyal, but if they stick to their guns, the system will change to meet their needs, and the family will be pulled back from disaster.

The Aftermath: Deep Regrets and Ironies

Just before his sentencing, Stew Leonard Sr. stood up in the courtroom, leaning on a crutch he needed as a result of recent hip-replacement surgery, and addressed the judge. He expressed deep regret for having hurt his family and his customers. “I have learned more through this failure than I have learned through all the successes I have had,” he said. Unmoved, the judge gave him close to the maximum sentence, saying that because Stew Sr. had offered no explanation for his deeds, the court could only conclude that he had acted out of “avarice” and “greed.”

Stew Leonard Sr. has fallen far—and hard. For years he was hailed in the business press as a brilliant marketer who had achieved spectacular growth through smart customer relations. His original store in Norwalk, CT, and a second in Danbury, became tourist attractions. He even offered courses on the company’s marketing techniques to other people in business. Stories about how Stew Sr. and his family ran their stores became staples of the lecture circuit.

Tom Peters wrote glowingly of Stew Sr. in three of his best-selling books. In Thriving on Chaos, Peters noted: “His customer orientation, through people, is matchless—but he was also one of the first grocers, small or large, to do daily computer analysis of the profitability of every item he sold. Leonard was a decade ahead of Safeway on systems that are just now becoming commonplace in the industry.”

There is irony in this passage, since it was Stew Sr.’s sophisticated use of technology that later helped him carry out the tax fraud scheme. Stew Sr. and his brothers-in-law created a software program called Equity that altered receipts. They packed cash in bags which they slid down a tunnel hidden in the store. After the money was counted, it was shipped to Stew Sr.’s Caribbean home. The daily computer tapes of actual gross receipts were shredded, along with bank deposit slips from the bags of diverted money.

Barely a month after Stew Sr.’s first indictment, the store became the subject of another investigation, this one by the state Department of Consumer Protection, which accused the company of mislabeling food weights—indicating that packages contained more food than they actually did. Stew Leonard Jr. disputed the charges, still being sorted out. All the unfavorable publicity does not seem to have affected sales, however. The parking lots, store aisles, and petting zoo at Stew Leonard’s in Norwalk remain full, at least according to Stew Jr., who told Supermarket Business magazine that his father’s case “probably had a positive impact, because there’s been a lot of sympathy for him.” - J. P.