Gambling with the family patrimony

How do parents nurture their children's entrepreneurial drive while teaching them the contingent costs of failure?

Léon Danco

I get upset when I hear a young potential successor, impatient to take over the family business, say, ÒGive me a shot at it.Ó To me, these words reveal a lack of risk-understanding. They also suggest entitlement, a belief that a successor has the right to gamble with the family patrimony

Risk is built into life. We take a risk when we get out of bed every morning, and we take a risk if we stay in bed all day as well. We can never be 100 percent sure of the outcome of our decisions, and accidents do happen. Both acting and the failure to actÑover-cautiousnessÑcan be equally risky.

Risk without proper preparation is a Òshot in the darkÓ which most family businesses cannot afford to take. It is true that a family business canÕt last, and support more and more shareholders, unless it continues to grow. But most businesses have to grow incrementally, not by quantum leaps. Potential successors with bold new ideas are to be encouraged. Of course! At the same time, however, they have to show evidence of understanding that the best idea in the world wonÕt work unless it is well thought out, thoroughly examined, and carefully planned. Tossing off ideas like so many bottle rocketsÑÒHey, why donÕt we try this?Ó or ÒLetÕs go into thatÓÑwill win no support.

One of the biggest mistakes newly promoted successors can make is to believe their anointment magically transforms them into smart risk-takers. Particularly in the second and later generations, successors have a lot to prove in the shadow of heroic founders. Impetuous actions by young captains who have just taken over the helm, however, have landed many a ship on the rocks.

I know only what I read in the papers about the plunge into bankruptcy of BarneyÕs, the third-generation New York clothier, for example. But it seems clear that the two brothers, who embarked on an Òexpansion bingeÓ (as The Wall Street Journal called it) with over $600 million in financing from a Japanese firm, bet a prosperous boutique business on a grandiose plan for installing BarneyÕs stores all over the worldÑwith ominous results.

New technologies have accelerated the pace of business life as well as the appeal of the Main Chance risk. To the young in our winner-take-all society, hitting the lotteryÑmaking big dealsÑseems the quickest and easiest road to success. The Donald Trumps and Michael Milkens of this world have left their mark on a new generation, as have the multi-millionaire performers and athletes. For the rest of humanity, the quick-and-easy, yellow-brick road leads mostly to OzÑa grand illusion.

General George S. Patton was sometimes accused of recklessness in his World War II campaigns. Nevertheless, ÒOld Blood and GutsÓ cautioned his son in a letter: ÒTake calculated risks. That is quite different from being rash.Ó

I believe in risk-taking that is well planned and managed, and subject to review by mutually respectful, risk-understanding peers. Businesses must act swiftly and boldly to take advantage of opportunities. But young leaders must fully understand the risksÑand the consequences of failureÑbefore plunging ahead. J.P. Morgan had it right when he was asked how his bank could take risks. ÒI never gamble,Ó he is said to have replied. ÒI invest only in what I understand completely.Ó

How do parents nurture the entrepreneurial drive, yet teach their children to appreciate the contingent costs of failure?

The correct, responsible balance between the two cannot be taught in the abstract, by intellectual argument. We learn to avoid fire only by getting burned. Potential successors must learn by watching how their elders make decisions, by working with risk-understanding mentors, by first getting jobs outside the family business that test their judgment and decision-making ability.

The older generation learned to understand risk empirically. They were entrepreneurs whose experiences in building a business from the ground up taught them prudence. Many rash or intrepid souls didnÕt make it. In contrast, todayÕs young people have been brought up in an age of affluence. Some donÕt appreciate that all actions have consequences. ÒIf I donÕt succeed at this,Ó they seem to feel, Òwell, I can just walk away and try something else.Ó If they play for high stakes and lose, however, many people are likely lose their jobs, and many lives will be shattered.

The Bill Gateses of this world are probably born not made, and they are rare. Most kids will have to learn to take calculated risks. After their 20s or 30s, though, the window of learning begins to close. Attitudes seem to harden and the zest to change the world declines. A 45-year-old who has never been asked to take a real riskÑor volunteered to take oneÑcanÕt be expected to know how to do it. It is usually too late.

To teach potential successors to take responsible risks, parents have to risk something themselves. They have to let their offspring make decisions on their own, with no safety net under them. Give them a sales territory, put them in charge of a new venture or the shop floor. Their mistakes will cost you something, but in the long run itÕs one of the best investments a family business can make.

I read recently that scientists are trying to isolate a gene that some people may have in common who are sensation-seekers inclined to take impetuous risks. Obviously, thatÕs not the kind of person you want running your business. Anyone who races a motorcycle down a road at 100 m.p.h. with his eyes shut is probably suicidal, but usually risks only his own life. The thrill-seeker who risks a successful business without knowing what heÕs doing takes a lot of other people on a joy ride with him.

 

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