By Philip Perry

David Finn never thought his children would want to go into the business he started in 1948 with his childhood friend, Bill Ruder. What's more, the 68-year-old executive always believed that nepotism would undermine sound management. Then, in the late Seventies, three of his four children took temporary positions with his Manhattan-based public relations firm, Ruder Finn. They did well. They wanted in.

New York consultant Peter G. Scotese, a friend and an occasional business confidant of David's, had warned that bringing the family into the firm would cause "several years of convulsions." But both he and David were astonished by the upheaval that ensued in 1986 after David's son, Peter, was promoted to chairman of the finance committee and oldest daughter, Kathy Bloomgarden, was given the title of executive vice-president.

Three senior managers and 11 other employees walked out the door, taking the firm's biggest accounts with them. A front-page Wall Street Journal article in July 1986 titled "Family Affair" described rampant nepotism and turmoil at the firm. Many clients were jittery over the negative publicity; the firm lost one third of its business in six months. Morale was at an all-time low.

That was almost four years ago. Now three Finn children are ensconced in leadership positions: Peter, 35, is chief financial officer and chairman of the executive committee. Daughter Kathy, 40, is president of the firm, and daughter Amy Binder, 34, is president of the New York office. A third daughter, Dena Merriam, 37, is a writer in the research division.

The firm's 1988 fee income was $15.8 million, the highest in its history, and this year David, the chairman and chief executive officer, expects to top that with more than $20 million in billings. And Ruder Finn now appears to be a happier place. "Morale is pretty terrific at this point," says Ellen Schaplowsky, an executive vice-president who joined the firm in 1987.

The transformation seems almost magical. How did they do it? The turnaround at Ruder Finn holds some important lessons for passing the mantle of leadership to a second generation.

In the Fifties, Ruder Finn was the fastest growing firm in the PR field. In the Sixties, Fortune listed it as the largest in the business. Its fees ran about $5 million. Now ranked 14th in billings, Ruder Finn stayed private in the Eighties while competitors were being acquired and growing by leaps and bounds.

In a way, the firm, which now has 310 employees in five offices across the country, had always been a family company. Bill Ruder was married to David's sister. When Ruder, the more business-minded partner, divorced his wife and left the firm in 1980, David, the creative half of the partnership, was left in charge. Without Ruder's steady hand, the firm began to founder, losing a few major clients.

David's children seemed to be going their own way after college. Kathy had a doctorate in political science, Peter and Dena had masters in English, and Amy was, like her father, a gifted photographer. Until Peter and two of his sisters drifted into the business, David says he "had never addressed the question of whether this would be a family company or not. I always assumed it would not be." So had the senior managers, particularly Norman Weissman, a 31-year veteran and a Ruder Finn vice-chairman. Weissman led the walkout in 1986.

David had started thinking seriously of family leadership in 1981 when he turned 60 and realized Ruder Finn didn't have younger executives in place who could guide the future of the firm. His original idea had been to put his three children in charge of subsidiaries, to prevent senior managers from feeling threatened. After the walkout, he decided to turn Ruder Finn into a full-fledged family firm.

For help in managing the transition, he hired his friend Scotese, the consultant. "The family members were not as seasoned as we would have wished, but I felt they had the potential to do the job," Scotese recalls.

Seeking to contain the damage from the walkout, the board of directors, consisting of Finn, Peter, Kathy, Amy, Bill Ruder, and vice-chairman Charles Lipton, decided that improved communication with staff was essential. Staff meetings were held more often, and management invited employees to drop in for informal chats during business hours. "We had lots of parties," Amy says. 'The baseball team became active again."

In interviews with job applicants, Peter Finn patiently explained Ruder Finn's side of The Wall Street Journal story: The reporter had talked only to former employees and clients, painting an overly bleak picture.

Management trumpeted a profit-incentive program, introduced several years before, that gives nonfamily members opportunities to move into positions of responsibility. Under the program, different company divisions, such as high-tech products or health care, are divided into stand-alone units with their own budgets and financial accountability. Each profit center manager operates virtually as an independent entrepreneur, and reports to a member of the executive committee. (The company has added several centers each year; there are now 20.)

To allow more room for upwardly mobile young executives, the firm this year created a new layer of management called executive vice-president. All eight in that group are nonfamily. In addition, Peter instituted a flexible compensation package tied to performance. "There are over a dozen people at the firm making more than the Finns," David claims.

Over the past 12 months Ruder Finn has added 21 senior people. Its success in competitive presentations has improved, Finn says, because of the quality and enthusiasm of the younger recruits. The firm has landed several new accounts, including Polaroid and Bristol-Myers. It opened a London office.

Much of the credit for the firm's renewal goes to the bright, aggressive new generation of leadership. "It's a different company now, thanks to them," says Rosalind Safrin, director of corporate administration and a 20-year Ruder Finn veteran. "There's a spirit here. There's sharing and giving."

From Scotese's viewpoint, companies can avoid the problems encountered at Ruder Finn by informing the staff far in advance about the possibility of a second generation of family management. "You need time to smooth the transition," Scotese says.

David is thrilled by his progenys' accomplishments he sees the succession as a partnership of Peter, Kathy, and Amy. Still, he insists it is not a good idea to decide too soon about bringing members of the next generation into the business. They may not be good at it. "There was a time," he now recalls, "when we didn't tell people we were related because we thought it might be off-putting; now we are proud of it, our clients say it's one of our strengths. Family ownership represents our commitment to the firm's long-term health and independence."