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University of Massachusetts Amherst

Family Business Center

To Rule or Govern?

by Shel Horowitz

Family businesses contend with a map of three overlapping circles, says family business consultant Ivan Lansberg, speaking at the Family Business centers March meeting at the Log Cabin.

One circle is ownership, one is management of the business, and one is family.

" Depending on where you stand on that map, the issues can be predicted. The challenge is learning to manage the diversity of people, as more and more of the territories become populated. We're very used to thinking about how businesses work, but very few people stop to think that families are every bit as important and complicated."

In the early days of a business, understanding the map is easy. One owner, or perhaps two spouses, stand in the narrow area where all three circles overlap: they are the family, the business owner, and the management team rolled into one. But that's not sustainable as the business grows, and entrepreneurs who try to run the whole show are " You're like Steve Jobs, you get booted out of your own company. Working in a structure that checks and balances your authority does not come naturally to entrepreneurs." And as the business gets passed down a couple of generations, the field is much more complex.

The usual pattern is for the founders children to run the business in the second generation, and their children—cousins—to take the reins beyond that. Of course, there are exceptions. A one-child family or a buyout can let a company "recycle the single ownership," as did the inheritance laws and customers of past cultures, where the eldest son typically inherited everything, and his siblings might have found careers as soldiers or clergy.

Still, by the third generation, most businesses have evolved into "cousin consortiums" and fragmented ownership. "You're into the world of coalitions, politics, branches—complex structures that allow the cousins to collaborate.

For instance, someone might have an ownership interest in the business as a family member, but not be involved in actually running the enterprise; "you rely on other people to manage the money you'll have to pay estate taxes on. It's a difficult role. We work with systems with 400 cousins in the 7th generation, and only 3 are in management."

The change can be quite disruptive, he says: a "discontinous change" that shifts not only the players, but the rules. Dipping into sports analogies, Lansberg says, " You're going from solo tennis to basketball, and then to the cousin generation, to a soccer club. During transition, you have a tennis superstar coaching a basketball team, and you have trouble. There's very little in that individual's success to influence success in the next stage.

"Human beings get imprisoned in our present. The entrepreneur says, 'let me look among my kids for the one most like me.' That won't work." The skills and needs—and the players' backgrounds—are too different, he says:

"It's a very different proposition to have four siblings, who grew up in the same house, with a five-year age spread, to get along than 30 cousins 30 years apart, who grew up in different houses."

But businesses can anticipate this, and learn and plan by watching those businesses that are a generation ahead—so solo entrepreneurs should study sibling partnerships, and sibling partners should study and talk to cousin-operated businesses, some of which can be quite large.

How large?

"Cargil is a cousin consortium, 60+ cousins, probably the largest privately held company in the world. The New York Times Company is over 70 cousins, publicly held but controlled by a family. The Bancroft family was a cousin consortium that just sold the Wall Street Journal."

As these enterprises get large, more complex, and more distant form their founders, there will be natural tendencies toward entropy. Apathy and a desire for quick profit can crowd out the values of stewardship and the business culture. Yet, when the family's values are strong enough, these obstacles will be overcome. "Ithe sibling who went off to Wyoming to be a poet has been inculcated with the family culture, and she's the watching the trout and gets an e-mail on her laptop, she gets on a plane and goes to the family meeting, because someone put that degree of caring in her soul. They know and feel their family legacy."

Some of the building blocks of long-term community, each of which Lansberg said really needs its own four-hour workshop:

    • Shared Vision
    • Structure
    • Process
    • Education
    • Leadership

But none of these attributes exist in a vacuum. Leaders, even charismatic ones, die, are replaced, or lose the trust of those they lead.

"Structures are also not magical, they have an underbelly. You talk to a 6th-generation family business with a family council, portfolio manager, lots of meetings per year. Before you know it, you've got a lot of cousins burned out on meetings. So over time, the structures themselves are quite taxing; they take energy and time. If you don't have a population of new cousins who can come into the structure, the structure begins to wane. There's a dialectic: every force has a counterforce. So does leadership. There's no silver bullet, either way, you have to manage the down-side. Invest both in developing leaders and in developing structures. They create the means for their own demise.

"Sibling partnerships et into trouble when there's a mechanism to hide your responsibilty, Anything you can do to bring transparency to what I and you are responsible for, builds trust. Trust is the North Star. I keep coming back to you have to gauge the importance the siblings put on managing a business together. If they don't want to invest in managing right, ultimately they end up in a bad place, and that's not sustainable.

"Every solution in family enterprise is a temporary equilibrium. It's really a gardening project. One day you say wow, and the next day you see it needs weeding and pruning."

 

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