Tougher Rules for Nepots

By Mark Fischetti

Some owners set strict requirements for relatives who want to join the firm. Others don't. But all of them have definite ideas about the level of education and experience that newcomers should possess.

Few family business owners are tougher on their own kind than the men who run Coors Brewing Co. in Golden, Colorado. Bill Coors, grandson of the founder, and his nephew Pete govern the hiring of family members with a traditional principle: Give them a job at the bottom and make them work their way up. "We've been taught a meaningful work ethic," Pete says, "and we won't tolerate any family member who doesn't have that. If they can't live within those rules, then we won't have any of them working here."

Determination has been a large factor in Coors' ascension from a regional brewery to the third largest in the United States; the parent firm, Adolph Coors Co., has sales of $2 billion. However, Bill, chairman of the parent company, and Pete, chairman of subsidiary Coors Brewing, say that specialized training is the key for any family member who wants to succeed. Pete and his brothers have engineering degrees, which Bill says is "the technical basis for holding down a job here." Pete has an MBA on top of that.

Family members with standard business degrees or other general educational backgrounds can expect to be asked to go back to school to get training in an appropriate specialty. Two years ago Pete suggested such a move to his niece Holly, the first of the fifth generation to work at the company. He told Holly, who had obtained a liberal arts degree, that if she wanted to bubble to the top of the marketing department she had better go back to obtain a graduate degree in the discipline. So she enrolled in the American Graduate School of International Marketing. This January she returned to Coors as its international marketing assistant.

In a first-generation business, it's usually Mom and Dad who decide what requirements, if any, should be set before the kids can join the company — and, when the children show up for work, what explanation, if any, is owing to the other employees. Customarily, those parents who want to make certain their children have minimal qualifications will insist that they get at least a college degree and perhaps some experience outside the business first.

In a fourth-generation company such as Coors, however, the matter of employing relatives becomes vastly more complicated. Two of Pete's brothers hold high positions, and there are other children of Holly's age coming along. The company has grown to the point where it has many skilled nonfamily employees. For older and larger companies, standards must be set to avoid the impression of unfairness and rampant nepotism. More specialized training is needed before family members can measure up to other employees. Generally, the family has grown, too. It may have several competing branches, with parents and their offspring, cousins, spouses, and inlaws all vying for the top positions.

Particularly in a recession, when jobs are few, more younger people are knocking at the door of the family business. The gatekeepers have to be objective and choose only the most qualified.

An informal Family Business survey shows that family businesses tend to develop formal guidelines for the hiring of relatives when they have grown to a certain size, which varies according to the industry and the number of family members aspiring to join the firm. Very large companies, however, tend to avoid separate rules for family members and insist that, like other job candidates, they go through standard application procedures.

Several factors influence the necessity of this approach. Separate standards send the wrong message to other employees — even if qualifications are tougher. Special handling also undermines the authority of hiring personnel. For example, at the JR Simplot Co., a food, fertilizer, and energy conglomerate in Boise, Idaho, family members aren't even encouraged to come aboard. Jack Simplot, owner of the $1.6 billion concern, which supplies McDonald's with its golden fries, says family members must run the personnel gauntlet like everyone else.

Of course, in some large companies that are still family controlled, the influence of family may simply be subtler and less visible. A spokesperson at the New York Times, where the Sulzberger family retains voting control, said that the company gives no special preference to family members; they must apply for a job through the personnel department. Older readers of that venerable newspaper, who have seen generations of bylines with such names as Hays, Ochs, and Sulzberger, may be skeptical. The paper's new publisher, Arthur Sulzberger Jr., who recently took over from his father, said he does not get involved with the hiring of family.

Family firms take varying approaches to the hiring of kin, depending on their stage of evolution. Some families write down specific requirements. Others establish a philosophy in a family charter. Many others still have no formal rules but continue to rely on gut appraisal of the candidates and their talents.

And yet there are several common themes that emerge from talking to a number of families. Many agree, for example, that young people graduating from college clearly benefit from working at another company before joining the family business, even those who are being groomed as successors from their early days.

"It establishes a feeling of self-worth," says Maynard Sauder, president and CEO of Sauder Woodworking, a $300 millon manufacturer of ready-to-assemble furniture in Archbold, Ohio. "It's critical that young people accomplish things at a company where their name doesn't carry any weight. It also enables them to make their first mistakes elsewhere. If they do that in the family firm, the mistakes tend to be remembered by family members for a long time."

That's the view at brewing giant Adolph Coors, too. Retired vice-chairman Joe Coors Sr., for example, spent six years working for DuPont and then Borden's before turning his attention to beer. "They were very valuable experiences," says his son Pete. "Particularly in this day and age, it is very good for a family member to find out what it is like to work in a company where their name isn't on the product."

Nowadays some level of higher education is a common requirement in family companies. Gone are the days when the kids started at the office right out of high school. Additional schooling is now viewed as fundamental to making it in today's competitive world. "It doesn't guarantee your effectiveness," says James Gould, president of Challenge Machinery Co. in Grand Haven, Michigan. "But it's a necessary step for anyone who wants to distinguish himself as capable of management. And the education itself provides useful information. It gives you a range of perspectives from which to solve problems."

Specialized training is also fast becoming a key qualification, as families appreciate the value of professional management. More and more owners prefer to see children get degrees that are specific to the position they expect to shoot for once they join the firm. "When you need talent in a specific area, you've got to choose a person with a specific background," says John Borthwick, who manages Derma Sciences Inc., a $5 million pharmaceuticals manufacturer in Old Forge, Pennsylvania.

At Derma Sciences, all the top family employees have specialized training. "My mother, Mary Clark, is a biochemist," John says. "She had gotten the patent that our company is based on, but I had a marketing background and had run four businesses, and joined her to start the company. My brother was trained as an accountant; he's now CFO. My stepfather had a background in finance, and is now head of stockholder relations. And my stepbrother was a lieutenant colonel in the Air Force; he's now head of operations at one of our divisions."

For public firms or those with outside investors, specialization may be unavoidable. Mary Clark was president for the first two years of Derma Science's existence, but then, as John recalls, "Our investors told me I had better run the business. Mom now focuses on R&D, which is her strength."

There are not yet any formal hiring requirements for relatives at Derma Sciences, however. Written rules seem to evolve as companies get bigger and older. Family members interviewed for this article who run small operations said they tend to handle the hiring of relatives personally, relying on familiarity with newcomers' backgrounds and talents to decide if they are prepared. To avoid suggestions of nepotism, they will often discuss the newcomers' qualifications with nonfamily managers.

"Most family businesses start out making hiring decisions on a case-by-case basis," says Gerald Le Van, an attorney and president of the Family Business Foundation in Baton Rouge, Louisiana. "But it's never too soon to make rules. Most families just don't get around to it until they're confronted with a tough case."

At medium-size companies, family owners tend to have some kind of written requirements or statements of guidance. To ensure objectivity — or for the sake of appearance — they often leave the final decision to a board of directors, a family council, or a senior nonfamily manager.

Once drafted, the rules are presumed to apply to all relatives, whether direct descendants, distant cousins, or inlaws. Common among the requirements, says Le Van, are five or so years of experience outside the family firm, and a college education or better. An emerging trend for families who desire graduate education, particularly MBAs, Le Van says, is to have college grads work for several years and then go back for the advanced degree. It gives young men and women some practical experience against which to apply the lessons they learn at school.

Some family leaders are also beginning to place minimum age requirements on the incoming generation, refusing to hire children until they reach, say, their late 20s or early 30s. "These owners figure that people in their 20s have to throw themselves into something," Le Van says. "If they sit around in the family business they'll only get frustrated. They need the hazard of getting fired, of getting transfered. They have to confront a sense of risk, of failure, before they mature enough to do a good job. This risk just isn't as great in the family firm."

Though some themes are common, there are numerous variations. Below are the hiring requirements at a range of companies, with the reasoning behind them.

Computerware Inc.: It's all in the charter

For a decade, the family members who ran Computerware Inc., a $60 million firm in Bristol, Pennsylvania, made family hiring decisions on an ad hoc basis. But having confronted several difficult situations, and having grown to more than 200 employees, they found a need in 1990 to draft a formal family business charter. "All the family members signed it, including spouses," says John Kovalcik, president of the microcomputer sales and service company. "Of course it's not a legal document, but it sets the tone, and the family members agree the specific points are worth heeding."

One section of the charter, labeled "Participation," lays out the rules for hiring family members. It may serve as a model, and reads as follows:

"All family members are welcome to join the business.... It is required that before any future generation children join the business, they obtain the appropriate education requirements for the business and spend a minimum of 3-5 years working for another company before they join.

"All family members entering the business must be approved and ratified by the board of directors [John Kovalcik, his three brothers, their father, and one outsider]. Specifically, their salaries, job descriptions, and reporting senior must be reviewed.

"No family member can report to another family member without approval of the board. This is to be highly discouraged.

 

"Family members are not to be overpaid or underpaid for the position they hold.

 

"If a family member does not work out in a position, they will be treated just like any other Computerware professional — they will be reassigned to a less demanding position.

 

"All Computerware employees who are family members are required to set the highest standards of dress, demeanor and deportment, integrity, dedication, and hard work in keeping with the mission statement and goals and objectives of the company.

 

"All part-time positions should be of limited duration or of a consulting nature for part-time family employees.

 

"Evaluations of owners in the business should be conducted annually at the spring board meeting. Each board member shall evaluate the particular owner in the position using the standard Computerware evaluation sheet...."

 

The charter resulted in part from values the family had agreed upon during a difficult period in the 1980s, when changes were necessary at the top of the organization due to rapid growth. First, the two brothers who had formed Computerware made their older brother, John Jr., president, because of his outside experience and four years of management work at the company. Then the three brothers decided that they needed seasoned financial oversight, and asked their father to join as CFO.

The charter will now help guide more tough decisions, which continue to stem from the company's growth and the need to strengthen top management with people who have specialized, expert backgrounds.

One brother, for example, is stepping aside as director of sales to make way for a professional manager who has experience none of the brothers has. The move, in turn, will enable the brother to focus more attention on developing a new market. And Dad is about to retire, so a new CFO will be needed as well. "We have some heated discussions," John says, "but what's reflected in the charter is our most basic understanding: that we are more concerned with the wealth of the company than with our egos. So if someone else can do a better job, then he should be the one to do it."

Sauder Woodworking: Three fundamentals

Family members are always welcome at Sauder Woodworking, but CEO Maynard Sauder says the firm sets three basic conditions for hiring them:

1. Academic preparation. Typically, an undergraduate business degree is required, though the degree can vary according to the type of job the person is interested in. "The education should be business related, and must be beyond the high school level," says Maynard. 'We don't require an MBA You could get a two-year technical degree, if you wanted to work in production. That would limit you to mid- management in the long run, though."

2. Work experience. Candidates must have worked somewhere else, though no time minimum is specified. Many of the Sauder kids have worked summers at the plant. Maynard practically grew up there, he says. "And that's all fine. But you shouldn't come here right out of college for a permanent job. You've got to succeed on your own merits, without any questions in your own mind or the minds of others."

3. Job openings. No person will be hired until there is a real job that fits his or her qualifications, according to Maynard. "There's no point in being brought on as an 'Assistant to Someone for Nothing,' " he says. Because Sauder Woodworking has gotten so big (2,400 employees), most family members don't need to wait long before an appropriate job comes along.

Maynard says family businesses should adopt these rules as the minimum, and be patient in applying them. "A lot of parents encourage kids to come into the business as quickly as possible," he says. "We see a lot of negatives to that: The child never knows how well he could have done, doesn't gain a feeling of self-confidence, and is not as well respected by other employees if he has no experience."

Maynard's views are shared by his brother Myrl, vice-president of engineering, and his son Kevin, who has been with the company for four years and is now director of marketing. Yet they wonder why other family businesses don't follow the same route. "We've been to many family business seminars, given by consultants such as John Ward and Ivan Lansberg," Maynard says, "and they all preach these same rules. Yet the rules seem to be ignored by a lot of people."

Granite Rock Company: Climb Someone Else's Ladder

Bruce Woolpert, co-president with his brother Steve of Granite Rock Co., a supplier of crushed stone and concrete, has one hard employment rule: "When you get out of college, you should work for another company for at least five years." Granite Rock, which employs 400 in Watsonville, California, is fully owned by the Woolpert family. Dad and Mom, who used to alternate as president and CEO, are no longer involved on a daily basis.

Bruce is quick to point out that this rule is as much for the good of the young person's own career as it is for Granite Rock. A family member should pick a company he would genuinely like to work for, Bruce says. "He should admire the people, so he will learn from them. It should be a company where he could stay his entire career if he should choose to. Because who knows, he might just find that's exactly what he'd like to do."

Bruce says children new to the workforce should spend as much time at another company as is necessary for them to generate self-confidence. They should also work their way up through at least one level of supervision, and should have a chance to manage some people. "If you're working at General Motors, you should reach the line-manager level. If you're at a hotel, you should become an assistant manager." This will typically take five to seven years, he says. "Young people think they know how to manage, but they don't until they have to do it."

Bruce adds that part of growing up professionally is to make mistakes and to be taken aside by a boss and told "Don't you ever do that again or else." This doesn't happen enough in family businesses, he says. 'There are always critical times in a young person's career when he or she needs correction," he says. "It's hard for a family or a nonfamily employee to tell a 22-year-old family member, 'Hey, we're thinking of firing you.'"

The risk of such a long apprenticeship is that the person will end up staying with the outside employer and will not sign up with the family company. But if that happens, Bruce says, philosophically, "Then they probably belong there." Both he and Steve have young daughters, so they haven't yet confronted this possibility.

This does not, however, absolve children from their responsibilities as part-owners or eventual heirs to the family business. "Even if children only own stock and have no other connection, they should be placed on the board of directors when they are 16 to 18 years old," Bruce says. "That's their job as an owner. Even if they just sit there for years and don't say a word — as I did — they have to learn what's important to the business and the family."

Challenge Machinery: Hands-on experience

There are two general requirements at Challenge Machinery, a $28 million maker of graphics arts equipment such as paper drills and collators. The first is a bachelor's degree, and the second is the intention to get a master's. Though president Jim Gould would not require family newcomers to already have an advanced degree, he says they should "be prepared to get one," preferably an MBA or master's in management. The value, he says, is gained largely from one's classmates. "In modern programs, many of the students are older and have had work experience. They become good contacts, and offer different perspectives on how to solve case studies and other problems."

The second requirement is a minimum of five years spent working for another company — again, to give young employees some outside perspective. But not just any company will do. Jim says it is much more appropriate for the person to get experience at a company in the same industry as the family firm. Because of increased competition and industrial specialization, he says, "The 1990s CEOs will be technically grounded in their industries. They will not be money managers or takeover artists, as they were in the 1980s."

Like other owners, Jim Gould strongly recommends setting up a family business council to handle the hiring of relatives, among other tasks. And it is the council that should establish the hiring rules. That's how it's done at Challenge Machinery; the council is run by the four active family members — Jim, his sister Sara, their aunt Sally, and cousin Ed Martin.

Gerald Le Van of the Family Business Foundation concurs. "A family council, or a special committee, should be responsible for drafting hiring rules," he says. "Then no family member should come on board unless they are hired by the group." It is the best way to set impartial rules, to judge an applicant's background, and to maintain fairness, he says.

All the rules in the world cannot mask the fact that hiring, at some point, becomes a subjective decision. There are many pluses to having family members on the corporate team — they are often more committed than nonfamily employees to helping the business succeed, they bring a certain cachet to customers who like to deal with "the people in charge," and they harbor a long-term view which often results in better decisions and more stable progress.

Still, rules help demystify the hiring process and protect the family firm from being besieged with unqualified relatives who only bring unnecessary tension. Better to have the family live by the rules, than have the family rule your life.

Mark Fischetti, former managing editor of Family Business, writes about business from Lenox, Massachusetts.

Don't call us, we'll call you

The six kin who own the Pond Branch Telephone Company have a simple policy on the hiring of family members: Don't.

The company is one of the 2,000 tiny, private utilities that link the remote villages of rural America. Martha and Everette Kneece, with Martha's father, literally built the company, putting wires down the backroads and then across the fields of western South Carolina, connecting 8,800 customers in the region. The Kneeces' four children are now all vice-presidents of the $6 million concern.

The problem with hiring family is that it would lead to bad relations in Pond Branch, location of company headquarters. It's a small community, Very small. "We don't even have a post office," says Ann Amick, one of the Kneece children. The nearest town proper is Gilbert, population 300. Because Pond Branch is so isolated, Ann says, the six family members not only work together, they essentially live together and socialize together. The family and their 54 employees dominate the community. "In order for any of us in Pond Branch to maintain any kind of normal relationships," Ann says, "we have to set limits. The six of us mutually agreed we could not hire any spouses or relatives, It's in our personnel policy. No, relatives of employees are allowed either."

In family relationships, close is nice, but too close is dangerous, Ann says. "All of us kids grew up with the company. We slept in the back of vehicles on the road. We slept in the office. We get along well because of the closeness we feel, But we've seen the problems that working together in a small community can cause at home, and the problems domestic situations can cause at work. There's no way our company can go on unless we see to it that not too many relatives get involved. We need a diversity of employees."

If the Kneeces, want to keep the company in the family they'll have to change the policy some day. But that won't happen for quite a spell; the, oldest child in the next generation is Ann's daughter, who is 9. If welcomed, the kids will be ready. "My daughter's been coming to work with me since she was three weeks old," Ann says. "So has my sister's daughter. They'll know the business, all right. Sometimes they think they're already management."   — M.F.

To hire or not to hire family?

Establishing rules or guidelines by which to hire family members creates a common understanding for everyone. But before you even draft rules, you'd be smart to consider whether you actually want any other family members in the business, advises W. Gibb Dyer Jr., associate professor of organizational behavior at Brigham Young University, and an expert on family business. In his new book, The Entrepreneurial Experience, Dyer suggests family members ask themselves the following questions before jumping to step two:

1. Do I trust other members of my family?

2. Do other members of my family generally share the same goals?

3. Is my family able to handle disagreements and conflicts?

4. Do family members share their feelings and concerns rather than keeping them to themselves?

5. Can I make decisions with (rather than for) family members?

6. Do family members have knowledge, skills, or experience that will help the business?

If you answer no to one or more of these questions, Dyer says, you had better develop a strategy to overcome the weakness. Otherwise, choose not to employ family members. — M.F.

 

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Summer 1992

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