Arming your firm against crises

Seven drills that will help you locate — and defuse — problems with money, power, and love before they explode in your business.

By Bonnie M. Brown

A business owner I met several years ago told me about a “fire drill” he holds at his company. Once a year this man walks into corporate headquarters and says to the first person he sees, “O.K., I’m dead.” Then he goes and sits in the corner and watches what happens.

It is the responsibility of the person who receives this news to contact this owner’s son, who runs one of the family’s six retail stores, and all of the non-family general managers. The managers have code phrases for announcing the drill to the rest of the staff: “We’ve just had horrible news. The owner had a heart attack early this morning. He didn’t survive.”

Soon after, the managers gather in the boardroom to go over a checklist of key outsiders who need to be informed, as well as key questions about what they need to do next. In the remainder of the drill, the group implements a contingency plan that the company has been refining over the years. One priority is to try to identify projects the owner has been working on and assign responsibility for them to others.

After the father told me this story at a seminar I was teaching, I turned to his son and asked him how he felt when he received that call. He said he always had the same two reactions. The first was a gut-wrenching pain, because he loves his father and can’t bear the idea that one of these days the call is going to be real. But, second, witnessing the efficiency with which his team of managers tackled the complexities that would follow his father’s death gave him a tremendous sense of confidence. He felt there would always be a safety net in place to help keep the business afloat while the family is grieving.

Death is not the only threat to the viability of a family company that should be treated as an emergency. In many companies, there are hidden time bombs, land mines, and sink holes that over time can destroy a successful business just as surely as the death of a key leader, unless they are detected early and defused. I have developed seven strategic drills that are helpful in managing long-range transitions in a family business. These drills identify classic conflicts in attitudes, values, personality, and management styles that tend to boil up, and, if left unattended, may explode during times of crisis.

The drills are particularly useful in times of wrenching change, when, for example, shifts in the company’s markets call for a new strategy, or when the family has to decide whether to accept an attractive offer to sell the company. In many cases, these kinds of shifts upset the natural order of the family’s world and lead to mini-deaths of a sort. Even when a new direction may be healthy for the business, the family may be overwhelmed by events and resist any change in the status quo.

Done with enough lead time, these seven drills teach individuals to build skills that help family management and ownership systems not only to survive major transitions, but thrive on the challenges that surface in the process.


DRILL ONE: Money Talks

Talking about money directly is taboo in many families. By talking indirectly about it—through stories and memories—they can learn much about conflicts over money that have important effects on the business. In this first drill, family members are asked to describe how they perceive the money attitudes and behavior of others in the family. Each person writes down one or two images, sayings, or recollections they associate with an individual in four generations in the family: a grandparent (living or deceased); a parent (living or deceased, adoptive or step-parent); a member of the same generation (sibling, cousin, or spouse); and a member of the next generation (if any).

Often people remember that a certain family member was fond of sayings such as, “A penny saved is a penny earned,” or, “Neither a borrower nor a lender be.” Sometimes they comment that a certain person’s behavior seems to blend assumptions about love and money. For example, young people frequently observe that a parent seems to believe that money and what it can buy—lifestyle, toys, security—can express the love the parent hasn’t had time to express personally because he or she has been too busy making the money.

Sometimes people comment on a pattern of behavior that reflects an attitude about money. In one family, a woman recalled that her grandmother was extremely frugal despite the wealth produced by the family business. The grandmother had arrived penniless in this country from Europe during the 1920s. She and her husband had struggled during the Depression just to feed their three children. Even in her old age, when she could afford a very comfortable lifestyle, she had a rule that she would never turn on the lights until after 6:00 in the evening. In the winter she would sit in a dark house rather than “waste” electricity by turning on the lights before 6 o’clock. She saw money as a scarce resource, while her grandchildren, who had never wanted for anything, thought “money grew on trees,” as their parents phrased it.

The grandmother was reluctant to sell her shares in the family business even though she derived no income from them and they would cause a significant estate tax problem for her heirs. After the grandfather’s death, some of the grandchildren were eager to sell the shares gifted to them by their grandfather because they were asset rich but cash poor. The grandmother objected to this, saying that her grandchildren had no regard for their heritage. The money they would get for the stock, she said, would be gone before they knew it, leaving them with no nest egg for the future. The parents were caught in the middle. No one in the family felt comfortable talking openly about money until they could step back and look at how their current attitudes were influenced by different generational experiences with scarcity and abundance. By appreciating the roots of their differences, the family members were able to avoid blaming them on personalities and aggravating the conflict.


DRILL TWO: Entitlement Assumptions

This second drill focuses on identifying sources of discord and confusion over entitlements in a family business. I give everyone attending a family meeting two lists of contrasting assumptions about performance and entitlement in a family company (see Drill Three). Then I walk them through four scenarios that are calculated to expose potentially divisive differences in attitudes about those assumptions.

Now let’s take one of the scenarios and see how a family applies these assumptions to it:

“Your CEO said three years ago that he would retire in three years at age 72. Now he’s waffling. Some days he says the next generation isn’t ready. Other days he says the next generation can’t afford to buy him out, and he’s not giving up control until they do. Occasionally he admits that he wouldn’t know what he’d do with himself if he didn’t come to the office every day. As for members of the next generation, they feel ready to run the company but don’t want to push the aging CEO out. To stay competitive in the marketplace, the company really needs to expand its main plant, but the bank won’t give the company a loan for construction unless the current CEO guarantees the note.”

In this “what-if” drill, I ask family members to discuss which entitlement and/or empowerment assumptions are most relevant for them and their business. Are all of the entitlement assumptions necessarily “bad?” When is entitlement justified for family members in the business?

One family that went through the entitlements drill last year was led by a brother and sister in their 60s, members of the company’s second generation who were then approaching retirement. At a family meeting, members of the next generation objected to what they perceived as the seniors’ “unilateral decision-making” on issues relating to the growth of the company and the taking on of debt. They argued that as shareholders and future leaders, the burden of paying off the debt would fall on their shoulders, and they were therefore entitled to a voice in these decisions. The seniors were surprised by their adult children’s criticisms. They had never looked at the way they made decisions as an entitlement issue. The parents recognized that they needed to bring their offspring into all discussions about the future of the business.


DRILL THREE: Know Thyself

Family businesses are often plagued by a lack of full understanding on the part of the key players of their strengths and weaknesses. Even the most talented and successful among us has an Achilles heel of some sort. For example, a strong CEO who is used to making decisions and meeting deadlines may be the worst possible person to lead a family meeting; when asked to run a discussion on values, he or she may be too quick to push for closure on a discussion and may deal with differences of opinion too autocratically. By the same token, a grandmother who runs every holiday gathering with grace and charm but has never worked in the business may flounder if thrown into the role of chairperson after her husband dies.

Feedback and evaluation mechanisms are often informal and counterproductive in family firms, leading to gossip, hurt feelings, family soap operas, and eventually, conflict. So I ask each adult family member to complete a psychological assessment tool like the Myers-Briggs or Birkman profiles. These assessment instruments can help people recognize and learn to manage similarities and differences in behavior. My personal preference is the Birkman profile, which provides more depth in the analysis of how hidden needs, perceptions, and style influence behavior.

Another step in this drill is to make sure that the participants in the business get feedback on their skills, competencies, and work performance from their boss, peers, and direct reports. Each person in the group completes a self-assessment and also evaluates all other members of the group. All instruments are returned to my office in sealed envelopes for processing. I then meet individually with the participants to discuss their goals and stumbling blocks to their progress. We then compare the person’s self-assessment with others’ assessments of that individual. We look for areas in which there are extreme differences in the ratings as well as for those on which there is strong agreement. For the drill to be effective, the CEO, key nonfamily managers, and all family members working in the business have to participate.

In some family companies, the drill marks the first time that the CEO is evaluated by his or her nonfamily executives and adult offspring. As one of my clients remarked rather tongue-in-cheek when we started this process, “This is a major paradigm shift!” The drill usually causes alarm because of the fear that one individual (often the CEO) will somehow find out what another individual (usually one of the “kids”) has said, and that reprisals will result. To maintain confidentiality, it is best that these feedback instruments be administered and held by the outside professional. The instrument should be customized to the family business, and include the skills and competencies that fit the business and the individuals being evaluated.

When I went through this process with one family business, the managers decided to share their individual profiles with one another, after the initial private review. They had worked together closely for more than 15 years and assumed they knew one another very well. After one revealed that his profile said he liked to keep some physical distance from others when talking to them, the person who worked most closely with him laughed. “Oh,” he said, “so that’s why every time you and I have a conversation, I feel like I’m chasing you across the room, and you always end up with your back against some wall.”

Learning to give and accept honest, compassionate feedback directly is a challenge because in a family business everyone has multiple roles. When a father criticizes a son at the office, is he speaking as a boss to an employee or as a father to a son? Even more difficult, if the son criticizes the father, is he reacting as a son or as an employee? Without consistent, accurate feedback, individuals often have an unrealistic sense of how they function. They are either overly optimistic or overly pessimistic about how they’re doing. Or perhaps their self-assessment is reasonably accurate, but others see them as cocky or egotistical. In addition, some skills that are strengths in the business may actually be weaknesses in the family system.


DRILL FOUR: Know Thy Business

This drill closely resembles that of the store owner who annually ran his company through their routines for responding to news of his death. I use the drill with next-generation teams whose members are in their 20s and early 30s, with a minimum of three years of full-time experience working in the business. Depending on the size of the group, I organize them into teams of two or three members and ask each team to decide what to do in the following situation: “Imagine that all the members of the senior generation are returning home from an industry association meeting and the plane crashes. There are no survivors. You are grieving and in shock. The day after the funeral, the loan officer calls and requests that you come into the bank to discuss the business’s line of credit. He says the loan committee is concerned because no one at the bank has any idea what you know about the business and doubts that any of you can run it. He gives you two days to prepare for the meeting.”

Each team works independently in crafting a response and then makes a presentation to the top managers and owners on what they would do in the situation. They have a project time frame and a presentation time limit, but are free to use whatever audio-visual supports they think will enhance their report’s validity and impact. Inside the organization they look at products or services, policies and procedures, facilities and use of human and financial resources. Externally, they analyze the market, the industry, government regulations and legislation, and their competition. Based on their findings, the whole group discusses ways to transform weaknesses into strengths and threats into opportunities.

In my experience, these conversations are often pivotal moments in the transition process. If the teams do well, the senior generation finds it easier to look at a specific timetable for transferring assets and responsibilities. If they don’t do so well, the senior generation may look at a sale far more seriously than ever before. This drill tests assumptions and clarifies options. More than one CEO has commented privately to me, “I had no idea those kids knew that much about this business!”


DRILL FIVE: The Final Test of Greatness

This drill is for CEOs who don’t want to destroy on the way down what they’ve created on the way up, who recognize there is life after retirement, and who want the business to be in the best possible hands in the future. The drill consists of five steps that encourage senior leaders to work on achieving economic and emotional independence from the business.

First, write a detailed job description and list of things the business depends on you to do. This is harder than it sounds. You can’t just say, “I’m the court of last resort,” or, “I’m responsible for everything from picking up trash in the parking lot to negotiating (and guaranteeing) our line of credit at the bank.” These statements won’t help you define what you do that is really vital to the company and what can be easily taken over by other qualified people. What often surfaces is that sometimes you waste your time doing, redoing, or undoing things you are paying someone else to do. Couldn’t you make better use of your time training people to take over your functions, or working on your estate plan and ways to diversify your personal assets so that you and your spouse aren’t financially dependent on the business in your retirement years? When you’ve completed that list, share it with your board or your top managers and ask them to help you revise it. Once it’s revised, go through it again, item by item, and indicate who else in the family or the business also does this or could learn to do it. Then revise your list a third time, adding a timeline for turning over those activities to others. (Include realistic training time in your estimate.)

Second, appoint (but don’t serve on) a task force charged with developing a profile of the skills and competencies the business will need from its CEO in five years. Include someone from each of the following groups: the family council, the shareholders, the board, top management, and at least one person from outside the company who knows the industry, your business, and, hopefully, your family. Ask the task force to suggest ways to find the new CEO and orient him or her in the culture of the family company, and then to report their findings to the board by a specified date.

Third, commit to specific and increasing periods of time away from the business to explore how you will spend all this free time you’re creating. Don’t just say you’ll travel and play golf. What will you do for the community? With your grandchildren? Your spouse? Your friends? If you find it hard to act on your plan, look for two or three role models—people you admire who have retired and appear to enjoy it. Take them to lunch and ask them what the hardest thing was to let go of and how they did it. What has been their most enjoyable surprise about retirement? Use these people as your retirement coaches. Commit to meeting with each of them once a month.

Fourth, find someone to help you create and manage an overall leadership development program, including a leadership development team for each member of the next generation who is likely one day to play a leadership role in the family, the shareholders’ group, or the business. Commit the resources of the firm to get this program up and running within three to six months.

Fifth and finally, give yourself and your team plenty of positive reinforcement. Even little changes in well-established patterns take time, courage, and lots of repetition.


DRILL SIX: A Taking-Charge Test

Every family business brings together people with many different personalities, beliefs, and operating styles—as well as emotional ties that can often produce heated arguments. Potential successors must therefore be highly adept at establishing boundaries and managing conflict between others. Without these skills, the next-generation leader may constantly step on land mines.

This drill is designed for successors who want to assess their own ability to resolve conflicts among different constituencies and target those areas where they need to improve. Start this drill by getting to know yourself better, for example, by going through the self-assessment in the “Know Thyself” drill. (A profile such as the Birkman will help you identify contradictions in your own approach to conflict resolution.) Then, write detailed answers to the following questions:

In general, how do you handle differences of opinion among stakeholders about ethical, legal, and work-family lifestyle issues? Young leaders tend to use different approaches depending on the circumstances. For example, you may withdraw from the discussion; serve as peacemaker without expressing your own views; do research before taking a position; debate the issue without attacking personalities; fight to win no matter what the consequences; or work to build consensus.

• What can you do to improve both the flexibility and the effectiveness of your communication style when differences of opinion either block conflict resolution or impede progress on important projects?

• What do you know about the patterns of decision-making and conflict resolution of the other key stakeholders in your company? Use the above-mentioned options, adding others if necessary.

• What do you and other members of your generation need to learn about working well together as a team to manage and implement strategic decision-making?

• What can you do to facilitate the adoption of a code of conduct for meetings of the family council, the top management team, the board of directors, and the shareholders’ group?

I started working on this drill about 10 years ago after I taught a seminar on succession in northern California. One family company in the audience had three generations represented. During the morning break the president approached me. He described the impact that his frustration and sense of powerlessness with his father had on his self-image, his relationship with his wife, and the image of inadequacy he projected to his children. What I saw was a 60-year-old only child who was waiting for his father to die, and watching himself, his marriage, and the business die in the process. He said he thought about quitting every day, but was too old to start over; he had worked for his father his whole life, and couldn’t imagine getting a glowing reference from his 80-year-old parent after abandoning a sinking ship. And in spite of everything, he loved his father and didn’t want to give up on the relationship.

I don’t know how this story ends. The president asked me to consult with his family about the problems they were facing. I told him that I could do that only if the father agreed to work with me. When I talked with the father, he too was frustrated, but refused to consider working with any outsider. He said he was sure they would work things out, and that he thought maybe the best way to get his son’s attention was to cut his salary!

If the president had had an opportunity to go through the taking charge drill early in his career, he might have recognized the potential for power struggles with his father before he had invested most of his adult life in the family business. The drill might have helped the president to see the handwriting on the wall and make a career move while his skills were still marketable.

On the other hand, he and his father might have both realized early on in their working relationship the importance of separating their family and business roles. They might also have appreciated the value of codes of conduct, policies to guide decision-making, and the counsel of an outside board to preserving both the business and their family relationships.


DRILL SEVEN: Pot Holes in the Shareholders’ Agreement

Shareholders’ agreements embody all of the pitfalls of the family business—a Bermuda triangle of money, power, and love. They are the source of painful family feuds and litigation if handled poorly. Too often, the agreements get drafted and signed without any input from many of the key stakeholders. This drill is designed to help the family leaders identify potential oversights or problems in the agreement before they precipitate a crisis. I ask the leaders to review their shareholders’ agreement with a qualified estate tax attorney and discuss whether it covers adequately the following points:

• What happens to the shares in the event of the death, divorce, disability, or departure (voluntary or otherwise) of any shareholder from the ownership group?

• If the family wants the business to stay in the family for several generations, what happens to the shares if a current owner dies while his or her children are minors?

• If the shares are repurchased by the business, or bought by another shareholder, how will the purchase be funded?

• When an owner sells shares back to the business, should there be a pay-out period of several years so that the business isn’t placed under undue hardship? If so, how long and under what terms?

• Who can own shares—just family, only family members active in the business, in-laws, key nonfamily managers, outside investors?

Let me present an example of what a family can learn from reviewing its shareholder agreement. A CEO with three sons hired me to help them work through some power struggles among the sons. During the assessment, I asked them to review their shareholders’ agreement. They had a boilerplate deal that the business would buy the shares of any owner who died. Each of the sons had a small insurance policy on his life—just enough to buy back the shares—and the business paid the premiums. The father was currently gifting the business equally to his three sons, with the balance to be divided equally among them at his death. His sons were in their 30s, and all had young children. When I asked how he had figured the value of the business, he responded, “We low-balled the valuation. I don’t want my boys to pay a dime to Uncle Sam when I die!”

I asked the father to imagine this scenario: “One of your sons gets hit by a truck while you are still living. The business buys the son’s shares from his estate at the established value. There is no additional insurance. The widow doesn’t work outside the home. She is forced to sell their home because she can’t afford the mortgage. She and her children move to the other side of the country to live with her parents. In a heated argument before leaving, she tells you that your family has cut her off at the knees, and that she’ll make sure her kids grow up knowing that.”

After hearing this story, the father was shaken. He hadn’t considered any consequences of the valuation except the estate tax issue. He loved his son’s family, and didn’t want them to suffer unnecessarily. So we added the shareholders’ agreement to the agenda for the upcoming family meeting. The father also agreed to schedule a meeting with his estate tax attorney and his accountant about revising the valuation.

It took a few months to get the new agreement ready, but when it was done we invited the sons and their spouses to a family meeting with the attorney. He walked through each section of the agreement and answered questions. The questions centered primarily on how the insurance to pay the estate taxes was funded and how the shares would be redeemed. The father told the story I had used to get his attention. In the telling, tears welled up in his eyes and he stopped for a moment to compose himself. Then he asked each of the couples to take a week to think things over, and to submit any suggestions for changes in writing. There were some minor changes that were easily made (much to the father’s surprise), and after the agreement was signed the father took everyone to his favorite steak house to celebrate.

Many shareholder issues spark heated debates. I often recommend that the family council appoint a task force to study them from as many perspectives as possible. In my opinion, the task force should include a senior family member who is an owner, someone from the next generation who is active in managing the business, and at least one in-law. Task force members should poll all concerned parties to get as many perspectives as possible before drafting recommended guidelines. The guidelines should be presented to the family council and the shareholders’ group before an attorney redrafts the agreement.

By giving all stakeholders the opportunity to consider the agreement’s impact on their lives, you are giving them the opportunity to voice concerns and, hopefully, to reach consensus about the terms before the paperwork is signed. In effect, working on the shareholders’ agreement gives you and your loved ones an opportunity to practice dying until you get it right.

These seven strategic drills promote self-reflection, a willingness to discuss potentially sensitive topics honestly and with compassion, and a recognition that successfully managing change requires time to plan and opportunities to learn. By actively encouraging changes in perspective and behavior, they give family members a chance to let go of the past more easily and move into the future more confidently—to thrive in the many transitions that await them.


Bonnie M. Brown is president of Transition Dynamics Inc., a management consulting firm in Eugene, Oregon, that specializes in family business transitions. This article is adapted from a book in progress, “Practice Dying Until You Get It Right: Seven Strategic Drills for Managing Money, Power, and Love.” Copyright © 1997, Transition Dynamics Inc.

Empowerment vs. Entitlement

Common Entitlement AssumptionsCommon Empowerment Assumptions
Birthright: This is my family’s business, so I deserve special treatment when it comes to jobs, compensation, and perks. Family members are assured lifetime employment.Merit: As a family member, I abide by the same employment, compensation, and benefits policies and procedures as everyone else.
Birth order: I am the oldest son so I should be president.Needs: Leadership succession for the family, ownership, and management is defined by what each of these constituencies needs from its leaders.
Gender: Men are more capable than women and thus get preferential treatment.Assessment: My performance is evaluated regularly based on written criteria, including job description, personal and company goals, feedback from my boss, peers, and direct reports, and overall performance of my team and the business.
Age: I am the senior person in this family and business, so my word is law.
Tenure: I have worked here longer than anyone else in my generation, so I should be president and own the biggest portion of the stock.Accountability: As CEO (for example) I am accountable to the board, the shareholders, employees, and my family. I understand that the bottom line is not the only criterion by which I am evaluated.

- B.B.