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Spring 2013

October Current Thinking Column II

Saturday, October 31, 2015

The Art and Science of Governance: 6 Rules Applicable to Any Business Organization

by Burak Kocer, PhD

 

“If I was unsure about the timing, I would rather be wrong because of doing something too early than doing something too late.” 

I like how Joe Paul, our visionary leader in the family business field, had articulated this while discussing the development of a strong and functional board of directors with a chairman of a company. The question pertained to deciding on the appropriate governance structure for his individual businesses at different stages of development.

 This is a very legitimate and valid question. In fact, legally binding governance principles for public companies have produced inefficient results in many jurisdictions when they are regarded as a goal rather than a means to an end. This end is the desired outcome of a fair, transparent, accountable and responsible management system.

 The art of leadership is to develop the principles that would lead the company successfully under different circumstances. Yet, luckily enough, there is a set of rules that we can rely on. Here, I would like to set forth these rules that are applicable to any business organization regardless of its stage of development.

Rule #1: Rewards of inclusiveness outweigh perceived risks.

Not all lights in a house are as “important” and as “fancy” as the expensive luminaire in your living room. But a short circuit in one of the ordinary bulbs in the small storeroom will black the entire house out, including the living room. Just like wiring, the family business system consists of different elements, some more central than others, but the “right to be heard” goes for all of them. Participation in the communication process and decision-making are different roles that must be distinguished in the governance mechanisms.

 Rule #2: Each ship has only one captain.    

It is quite fair for shareholders to have different strategic preferences, risk appetites, or management styles. But these are all discussions at the ownership level and must be melted into a single voice that will set the direction for the business. Keeping this plurality at the executive level will turn into incompatible managerial actions that could potentially lead to a business disaster. The board of directors is where different alternatives are evaluated and the direction is set.  The head of execution holds the steer as the captain to lead the business in the manner designated by the board. Depending on the complexity of the business, the appropriate mechanism may change, but the need is same: You need to develop a process for evaluation of different alternatives in a way that all shareholders feel legitimized and heard, with a single voice to guide the entire organization, accordingly.

 Rule #3: No ship owner holds the steer of their own ship if they are not qualified for it.

This principle emphasizes that ownership and management are different roles associated with different rights and responsibilities. A business will produce excellent results under qualified leadership. Therefore, a sound governance system must be able to differentiate between what is expected from an owner and what is expected from a manager, including facilitating the appointment of a qualified manager. Of course, ownership and management roles can be combined under an owner/manager, but not when the person is qualified to be one and not the other.

Rule #4: If both questions and answers come from the same person, you cannot be sure about the accuracy of either one.

This rule relates to the principle of accountability. Referring to the analogy in rule #2 and #3, it is the ship owner’s responsibility to ask the right questions and the captain’s responsibility to provide the right answers. The depth of separation will depend on the complexity of the business, but any business requires some sort of borders between execution and control.

Rule #5: Trust is good. Informed trust is better.

According to Lenin, “Trust is good, but control is better.” In a family business environment, on the other hand, things are slightly different. Power, hierarchy, and social relationships are much more interlaced than a bureaucratic organization. Many family members refrain from controlling their relatives in business due to fear of creating the perception that they do not trust them. In a social setting of interlaced relationships, trust is more productive than any contract or mechanism to maintain a healthy relationship. Adequately informed about the state of the business, non-active owners will feel more comfortable with their relationships in the family business. Thus, carefully designed communication will support the level of trust, while helping the family to grow responsible business owners.

Rule #6: If there is no goal to achieve, there is no progress to be secured.

When the company is not operating in line with the pre-defined and approved goals, the performance of executive managers may be questionable. In a family business, the cost of this suspicion is usually higher. It is good practice to have a system in place that allows for setting goals objectively and agreeing upon them. Some families commit to the principle of reporting to a non-family manager or an executive from the other branch of the family to mitigate challenges of the performance management process.

The art of governance

In my view, the aforementioned six rules represent a fair summary of what a business organization needs to endure regardless of its development stage. These rules represent the “science” aspect of the process. The “art” is to decide its level of sophistication.  

 

October Current Thinking Column I

Sunday, October 25, 2015

Perpetuating a 125-Year Legacy

by Leslie Dashew

I recently gave a talk to families in business in Hawaii.  One of the questions I was asked was: "How do we get the younger generation interested in being part of the family business?" 

This story about The Columbian and the Campbell family illustrates one such example of successful engagement.  The Campbells have just started the process of family meetings with the younger generation.  In our meetings, they are exploring individual and collective dreams for the future. In so doing, the three young men have begun to see more clearly how they can be part of the business in different roles, each applying their individual talents.  They are also witnessing how they can help evolve the business into a more sustainable one for the future.  I thought you would enjoy seeing this article.

 

September Current Thinking Column

Sunday, September 27, 2015

Steps to Setting up a Fiduciary Board

 by Leslie Dashew

Once again, I have seen the tremendous opportunities and benefits that accrue to a family business when a truly professional fiduciary board is put into place:  access to intellectual capital;  wisdom and objectivity; networks of business contacts;  and institutionalized leadership.   I have found repeatedly that through the implementation of a fiduciary board, we can access incredible talent that surprises most family leaders.  

An example: 

“Legacy Family Business” is a 70-year-old company that has been led by two second-generation brothers  in their late 70s. The non-family CEO is in his mid-60s and has been recently thinking of retirement. In one branch of the family business, two third-generation family members work, but neither are an appropriate candidate for succession. Moreover, the family has remained largely uninvolved in the business, always perceiving it as "dad's business." 

Their advisors had been encouraging the family leaders to complete succession planning, which included all three roles and estate planning.  The fiduciary board was one of the recommendations I made when I began working with the family. This was to ensure that the leadership talent would be in place during the time in which the three leaders were transitioning and the family was becoming educated about stewardship.  As the process began, the three leaders scratched their heads and wondered how they would attract anyone to serve on the board. 

The leaders were astounded by the results we had!  The brothers, who were the majority owners of the business, decided to have a majority of five independent directors and three family members along with the CEO.  From among a large pool of candidates who responded to our outreach, we selected:

  • a very bright CPA with amazing experience in mergers and acquisitions and oversight of public and private companies;
  • a wise elder in the industry who had vast experience using the company’s products;
  • an extraordinary marketing and strategic background who had worked in the industry and in other industries;
  • and a business leader who had formed a board for his own third-generation family business, served on several other family business boards and had become very knowledgeable about governance. 

One member of the former advisory board was selected to continue on the fiduciary board because of his extensive experience in banking, business and financial matters. They all shared the values of the family and were excited to serve the family and with each other.

Oftentimes, I have found that families and their business leaders are intimidated by what seems to be insurmountable obstacles to organizing and operating a board with independent directors.  The cost is well worth the outcomes.  As with finding other talent, it is important to be clear about your goals for these resources, the roles they will play and to effectively communicate the compelling reasons they would want to be part of your team.

Here is the process.

1.Clarify the purpose and goals for having a board.

For example:  Legacy Family Business is seeking to establish a Fiduciary Board of Directors to provide oversight and guidance to a  growing company during the transition from one generation of leaders to the next.  The family members who own this business are committed to see it led and governed by the most qualified business people available. This commitment is driving the family’s goal of developing a Board of Directors with a majority of independent outsiders who will bring a variety of talents, experience and perspective to help assure that the business continues to thrive in its third and fourth generation of ownership. The family shareholders will look to the board for guidance, education and objective perspectives. 

In some family businesses, one of the objectives of the board is to provide mentorship to up and coming younger generation leaders.  This can be specified in the board statement of purpose as well.  Board members often bring a wealth of experience in helping young people in their business lives (and personal lives) with objective perspective on what is needed to be effective leaders. 

2. Create a board matrix that identifies the competencies and perspectives desired for the board. Click here for an example.

3. Discuss the investment needed (fees, insurance, time)

Typical board fees are at a rate of $1-8,000/meeting (a formula often used is to divide the compensation of the CEO by 200 for the meeting fee for each director) plus travel expenses. It is important to look at what other closely-held businesses in the area are paying board members as well. D&O insurance may need to be increased depending on the nature of the business and the requirements of board members.  Much time is required to set up the board, go through these steps, and prepare for each meeting. 

4. Clarify indemnification and assure sufficient Directors & Officers insurance

The bylaws and/or articles of incorporation often specify how the company indemnifies its officers and directors.  This refers to willingness of the company to “hold harmless” those guiding the business if they act in the best interest of the company, and to cover the costs of defending themselves should the company, its officers and/or directors be sued.   Board members who are experienced will have specific expectations about the language of indemnification and the amount of D&O insurance required to protect them in the event of litigation.

5. Create a board prospectus that gives background about the board, the company and the owners, while specifying expectations of board members.

The prospectus typically includes the following topics:

Purpose of the board Background/history of the company

Current business (products, services, volume, customers)   

Ownership and leadership

Structure of board (independents, insiders, committees, responsibilities)

Specific goals and plans for the board (challenges or transitions to address, frequency of meetings)

Board member qualifications (competencies, experience or perspectives sought)

Compensation and D&O/indemnification provisions

Process of recruitment and selection (timeframe, where to send letter of interest and resume)

6. Develop a board manual that guides the operations of the board and committees, while providing ongoing information needed by directors

Company background

Company basic data                                                                                    

Company philosophy                                                                      

Purpose of board of directors                                                                   

    role of the board

    role of owners

Guidelines for board member                                                                   

      Operations of the board

      Board meeting location and scheduling                                                  

      Board member compensation, expense reports

      Appendices, e.g.

          Contact information

          Bylaws                                                                            

          Shareholder agreement                                 

          Financials of last three years and some data             

          Types and amounts of insurance                       

          Types of compliance/agencies/frequencies  

           Conflict of interest form                                              

          Organization chart                                                  

 

7. Board Recruitment:  send out a letter with prospectus to everyone you know, advisors, industry associations, etc. about the board you are forming.  Create a time frame for review/interviews and selection

8. Board Selection:  use the matrix to evaluate candidates and compare them; interview the finalists; select those whom you feel have the competencies, values and chemistry to work with owners, families and each other

9. Orientation of new Board Members: develop a program of orientation to the business and the family

10. Setting the Schedule and Agenda:  set the schedule for a year of meetings and the areas you want to be covered in the first year

The process, if done systematically, will take time and attention, but will yield a highly functioning organization from the beginning.  Some of the benefits we saw right away with the client above:

A higher level sense of accountability than had existed in the officers before, and attention to detail and communication that had been missing; Education of all stakeholders about what is possible in the world outside of this industry and this business for best business practices; Opportunities to connect with publications that would create new marketing opportunities that had not existed; Beginning of a process of strategic analysis and planning that helped all leaders to begin to develop realistic and sound plans to continue growth and sustainability in an expected downturn in industry; Confidence within shareholders that there was a talented team of business people who would help them make the best decisions about the business now and in the future.

Aspen Family Business Partner, Joe Paul comments:  One of the valuable traits that a director can bring to the table is experience in their own or another family business.  That might extend into the willingness to address family issues that are complicating the governance process. It might be called the “Dutch Uncle” role where in this, the director would have the emotional license to speak to the issues of disruptive family dynamics, and  be willing to take a family member to "the wood shed" when necessary.

It would also be helpful to shine a light on the leaders’ personal sources of resistance to more rigorous governance such as:
Fear of becoming obsolete.
Fear of unintended consequences in the family relationships
Fear of not having stamina required
Fear of failure
Fear of loss of control
Fear of discovery of "skeletons in the closet"

I find that folks often cover up fear with another emotion, like anger, since the latter is a safer emotion to be in.  Helping them become more conscious of their camouflaged emotions helps, such as helping them identify certain emotions by the physical sensation they create like a tremble in their chest, or gritting their teeth.

A couple of quotes occur to me concerning fear: "A problem identified is a problem half solved." --Charles F. Kettering 

And regarding governance is: "It is not a question of whether you are governed or not:  It is a question of what are you governed by."--Joe Paul

 

August Current Thinking Column

Sunday, August 30, 2015

Know Your Advisor's Succession Plan

by William E. Roberts, CLU, ChFC

An often overlooked issue in family business succession planning is the succession plan concerning the advisors to the family.  It is a sensitive and sometimes delicate subject to broach with advisors who, oftentimes, have worked with the family for several years. That being said, it is a subject that should be a definitive aspect of the family’s agenda, as demonstrated by the following story.

We spend our lives with clients, assisting them in devising sometimes complex succession plans for their family businesses.  While doing so, we and the other advisors build a significant body of embedded information and history that is brought to mind at almost every review meeting.  Having the memory of or recorded documentation of why certain decisions have been made is an important element in keeping the family on track as they progress into their transition plan.  The availability of this information is often assumed as a "given."

That is, until one of the advisor collaborative teams is taken out of the planning circle by events beyond their control.  In an instant, all the wealth of their cumulative knowledge and experience with the family is lost. Trying to reconstruct this information is both difficult and time-consuming.  

We encountered such an occurrence with one of our most valued clients.  The business is currently passing to the third generation, and the family has spent significant time and resources in the succession planning from Generation-1 (G-1) to G-2, and now on to G-3.  They have done an amazing job of remaining consistent to their family values and principles, all of which are deeply embedded into their planning advisory team's memory. Two members of the advisory team have worked with the family for over 35 years, and in regards to the family’s planning, "know where all the bodies are buried,” to use a cliché.

All was proceeding normally until suddenly, the family attorney, one of the 35 years of service to the family advisors, announced in an estate planning update meeting that he had been diagnosed with stage 4 prostate cancer, and was anticipating significant radiation and chemotherapy treatments.  He asked to resign from the planning to focus on the difficult task of beating the cancer.  Unfortunately, his battle was not successful, and he passed a mere 9 months to the day from his resignation.

The problem this created quickly became apparent.  He had been a very successful estate planning attorney, but was a sole practitioner practicing out of a home office.  With no successor nominated or mentored by him, there was a vacuum in the knowledge and history of the complex legal work the family had accomplished through the years.  This essentially brought the important planning that neared completion to a halt.

The family spent nearly a year acquiring recommendations of qualified attorneys and interviewing them extensively.  They were fortunate enough to find a very competent replacement with vast family succession experience and good rapport with the family.  However, even with his remarkable skill sets, it took months to retrieve the family's legal files from the home office of the deceased advisor and additional time to read through and understand the complex set of trusts and other structures.  Meanwhile, the estate planning projects previously mentioned were at a standstill.  Fortunately for our situation, nothing happened that adversely affected the family.

This experience was not lost on the rest of the planning team, as the CPA has brought a very accomplished cohort into our meetings, who is currently building her knowledge of past history, as well as contributing additional perspective and impetus from the accounting side.  I have brought my son into the family meetings because he will be a significant presence in my transition planning.  He is now working with G-3 on his estate and succession planning.

The moral of the story is in the title of this article: know your advisor’s succession plan.  Ask them the same tough questions that they have posed to you.  What or who is the successor who would step in should, God forbid, something happen to you?  What are you doing to bring them up to speed on past planning?   How are you mentoring them to improve their ability to be the good successor if the unthinkable happens?  When will they become part of the planning team and what role will they play?  You can create your own agenda of questions, but the important point is actually creating this agenda for discussion.

As the life insurance industry's legendary figure, Ben Feldman, stated many years ago, "No one has a lease on life.” That includes your advisor team.  Hard questions that motivate an actionable agenda by the advisors can save your family an enormous amount of angst and time-consuming difficulty.

 

July Current Thinking Column

Friday, July 31, 2015

Family Businesses and Cultural Evolution

by Joe Paul

The Engles’ family business enjoyed great success throughout its career in the marketplace. As they neared retirement, Charles and Virginia, parents and founders of Engles Imports, turned their attention to philanthropy. However, a unifying concept failed to govern their generosity, and their money mostly went to charitable requests. The Engles’ will stipulated that their four children could spearhead the family’s philanthropy, requiring the siblings to meet and discuss the charitable giving.

Upon gathering, the children struggled to determine not only a process to evaluate gifting, but also a specific field to channel their philanthropy. The youngest sibling, Jane, had an epiphany.  In going through the history of their parents' gifting, she began to see a pattern. More and more, her parents donated to two areas: medicine and design. The first because of their own aging, and the latter because Virginia never fulfilled her desire to pursue interior design. In a blinding flash, Jane realized they could offer scholarships to graduate students who developed innovative design solutions to medical challenges. 

Although the grant has only existed for 5 years, the competition is high. The grant has already funded the development of orthopedic implants and a new kind of apparatus for patients with sleep apnea. The four siblings managed to honor the desires of their parents’ philanthropy, yet still adapt to the demands of the social and cultural ecology.

"Cultural evolution is the idea that human cultural change––that is, changes in socially transmitted beliefs, knowledge, customs, skills, attitudes, languages, and so on––can be described as a Darwinian evolutionary process that is similar in key respects (but not identical) to biological/genetic evolution. More specifically, just as Darwin described biological/genetic evolution as comprising three key components––variation, competition (or selection), and inheritance––cultural change also comprises these same phenomena." –Dr. Alex Mesoudi, Cultural Evolution

The processes of succession and inheritance are replete with beliefs, knowledge, customs, etc., that organize this transfer and perpetuation of the tangible and intangible assets among the family business stakeholders.  Thus, when an elder begins to contemplate their estate plan, or an advisor begins to create such a plan for their client, they are acting (usually unconsciously) as an agent of cultural evolution.  In the estate planning process, western or civil rules allow that we can give an inheritance to anyone that we wish, be it a family member, an outsider, or even a pet. The civil law recognizes such desires and upholds these wishes despite depriving the natural heirs of, often, millions of dollars. It can be considered an injustice to the heirs, but they are helpless. Even when challenging the legitimacy of such wills, the civil courts tend to recognize and uphold these wills to be valid. In contrast, Sharia law, derived from the Quran, stipulates in great detail whom can inherit what. Here is a sample of Islamic estate planning taken from the Quran:

"Allah enjoins you concerning your children: the male shall have the equal of the portion of two females; if there are more than two females, they shall have two-thirds of what he has left, and if there is one, she shall have the half; and as for his parents, each of them shall have the sixth of what he has left if he has a child: but if he has no child and only his two parents inherit from him, then his mother shall have the third; but if he has brothers, his mother shall have the sixth after the payment of any bequest he may have bequeathed or a debt. You know not whether your parents or your children are nearest to you in benefit. These are settled portions ordained by Allah and Allah is All-Knowing, All-Wise” (4:11)

In contrast to western civil law, Sharia treats individual rights and women's rights as unnecessary threats to the collective. It is based on divine injunctions rather than legislation. Thus, Islamic rules of inheritance do not allow any variation from the very specific, pre-determined rules about whom gets what from the estate of the deceased. 

Western and Sharia legal systems have evolved over centuries. New concepts challenged old ones as both legal systems adapted to many variables.  We can see from the contrast of two cultures' rules of inheritance that the survival of new ideas depend on their fit in a given culture. Not so long ago Western cultures persecuted women and allowed slavery. While both legal systems have been changed by new liberal ideas, the pace of assimilation has differed.

When we delineate an estate plan, we are weaving the beliefs, knowledge, customs, skills, attitudes, languages, wisdom, etc. into an evolutionary package that will either sink or swim in the surrounding social ecology, which includes family dynamics. In this process, each estate plan becomes an experiment that may or may not give the family an evolutionary advantage. Family patterns of behavior and a business system’s accountability are also factors that may give a family/business advantages in the world. The fact that one decade's competitive advantage is the next decade's liability speaks to the evolutionary importance of the ability to change the allocation of assets in anticipation of fluctuations in the marketplace.  Families that are still wealthy benefactors into the 5th generation usually have the ability to change, yet remain the same. Or, as Victor Hugo said, "Change your leaves but keep your roots intact."

We live different lives when we know what those roots are.

 

 

June Current Thinking Column

Sunday, June 28, 2015

Balancing the Emotional Ledger: Axioms and Guidelines for Counseling Families in Business by Joe Paul is now available!

Why should you read the most recent publication of the Aspen Family Business Group?  Because whether you are in a family business, their service provider, or a professor, the book will provide you with insights and facilitation tools that will deepen your understanding of your clients.

Our colleague and author, Joe Paul, has distilled decades of experience and thoughtful reflection into pearls of wisdom in his new book. Readers can learn about the basis of your influence, your practice, your ability to facilitate change, and your skills in reducing anxiety and creating more trust among family members.

After many years of collaboration with Joe, I continue to draw upon his insights and perspective to inform my work, and often find myself pondering one of his profound statements long after we have visited. For instance, he encourages us to embrace other's resistance because it is usually based in a desire to protect something important in the individual, the family, or the business. This affirmation of each client's resistance as an attempt to help the family reframes the resistance and increases the willingness to trust.

The generation and transfer of knowledge among family members, especially during succession, is a crucial element in family business sustainability. Just so, each profession defines itself via its unique body of knowledge. I think you will find Balancing the Emotional Ledger: Axioms and Guidelines for Counseling Families in Business to be a significant contribution to the multidisciplinary profession of counseling families in business. -Leslie Dashew

 

In other AFBG news, Leslie Dashew is proud to announce the 20th Annual Women in Family Business Program for 2016. The four day event will take place on March 10-13 at the Miraval Resort and Spa in Tucson, Arizona. This upcoming year's topic, "Wise Women Revisited," will draw upon the various topics from the past two decades of the conference, while continuing the tradition of gathering, collaborating, and learning from each other. For more information about the program or how to register, click here.

 

 

May Current Thinking Column

Saturday, May 30, 2015

Leslie Dashew recently connected with longtime colleague, Tom Plaut of Deloitte Tax LLP, to discuss business legacy and its entrenchment with succession planning. See below for an excerpt from their conversation:

Tom Plaut: Leslie, you’ve written a lot about the seven dimensions of succession planning in a family business. I’d be interested in getting your commentary around what those seven dimensions are and specifically, which of those dimensions apply to legacy?

Leslie Dashew: Typically when people think about succession they think about succession of leadership or management — and, for estate planning purposes, transition of ownership. But what we found is that many times the succession that is successful has to address four other areas as well. One is succession of authority. In closely held businesses, we find that one of the challenges is the inability of an owner to let go of control. The challenge is that the owner thinks, “This is my baby! I know it better than anyone else,” and it’s hard to let go. So many times they’ll appoint somebody to be president and vice president with the anticipation that they will succeed them, but not let them make any significant decisions.

One of the reasons someone may not trust the next generation of leadership is because they don’t trust their values. A classic one that we see now is when a younger generation wants balance in life, but they’ve seen the older generation be workaholics. The older generation may say the young ones just don’t work hard enough to keep the business alive. The next dimension that contributes to this issue is a succession of knowledge. I often hear leaders say the next generation doesn’t know enough: “I’ve built the business, I’ve learned every aspect of the business, and they need to know all of that and if they haven’t created it they can’t know it well enough.” I also hear leaders say, “I have a number of key employees who have been like family to me; they’re really essential to this business, and I want to make sure they’re taken care of and that they’re retained.” Often the other side is a younger generation who say, “Dad has held on to people way too long.”

To see Leslie's full featured interview, click here

To learn more about Deloitte and their thoughts on business succession planning, click here

 

April Current Thinking Column

Thursday, April 30, 2015

Transition of Leadership: Where the Rubber Meets the Road in Succession

by Burak Kocer, PhD

A wise father posed three questions to the son selected as his successor:

  1. Are we in the right business?
  2. Are we able to find the right people to run this business?
  3. Do we have effective controls in place to monitor them?

 

This founder of a very successful 50-year-old business had long ago discovered that the knowledge required to answer these three questions was critical to his success.  He was convinced that his successor must also have the relevant knowledge to answer these questions in order for his business to thrive beyond the succession process.

The continuity of a family business refers to its ability to survive across generations. Succession is perceived as complete when the ownership and authority to make the ultimate decisions have been passed to the members of the next generation.  However, transfer of leadership, the final stage in succession, requires more than a mere transfer of shares or leaving board seats and/or executive positions to the successors. Indeed, answers to the father’s three questions, especially the first two, require strong leadership qualities, including intuitive decision-making ability.

Succession as a Mutual Role Adjustment Process

While discussing succession planning, in most cases the focus is on a leader’s willingness to pass on the business or the successor’s readiness to take over the business. It is thought that in the event that any or both of these factors are missing, the ability for a family business to overcome the challenge of succession is limited. While this perception points out two major impediments of effective succession planning, it fails to concentrate on the interrelatedness of the two. Indeed, Wendy Handler defines the succession process as a mutual role adjustment between predecessor and next-generation family members.* This approach aptly shows the parallel stages that face both the leader and successor. The leader moves from sole operator to monarch (having preeminent power over others) to overseer-delegator, from where they finally transition to consultant (who is disengaged from the organization). At the same time, the next-generation family member progresses from no role to helper (to the monarch), manager (under the monitoring of the overseer-delegator) and finally, leader/chief decision-maker (when the owner is disengaged). Thus, in a carefully planned succession process, both the leader and successor advance through these stages simultaneously to maintain a healthy climate that promotes trust and personal development.

Aside from focusing on the interactivity of the processes that the leader and successor embark upon, Handler’s approach places the leadership role at the final stage of the succession, which I find particularly powerful and accurate. This is also where the rubber meets the road. Continuity of many family businesses often unravels. This is not due to a lack of developed shareowners or managers from the members of the next generation, but rather a lack of leaders among them. 

           Inevitable Leadership Tasks Awaiting the Successor

Following disengagement of the former leader, the next generation family member needs to capitalize on value drivers (i.e., factors that provide competitive advantages to the company) and reinventing the most appropriate governance structure to ensure preservation within the organization. Indeed the father’s first question—are we in the right business?–was implicitly pointing out the value drivers. Products or services that the company offers may not necessarily be the appropriate business case for the family in the future. Puzzling over the right business avenue while taking the value drivers into account helps the next generation family member fulfill their leadership responsibility of creating wealth. Limiting the new leader to a “wealth user role” might put the continuity of the family business at risk.

Similarly, as the business evolves, the roles of the family members evolve, too.  A family member’s current position may not be the most efficient role anymore considering various factors such as size of the business, diversity of initiatives or the next generation’s past operational involvement. This refers to the father’s second and third questions—finding the right people and putting effective controls in place. Overcoming these critical tasks requires a well-prepared leader, who knows what to maintain and what to change. Differentiating between these requires a type of knowledge, which is only developed by effective leaders. Thusly, this is why leadership development is the most critical and often overseen element in a well-prepared succession planning. Preparing heirs for the top of the organization through a career path in lower levels does not usually address this need on its own. While this planning approach trains the successor in learning the rules to run the business, it fails to help them develop the wisdom, which is most needed to identify when to apply rules and when to change them.

Therefore, a carefully planned leadership development program with internal and external elements should be the integral part of an effective succession planning. Internal elements can involve periodic strategic discussions led by the successor with a specific agenda and method to unleash the tacit knowledge possessed by the leader and key executives. External elements of leadership development can be established by creating advisory groups, where successors meet regularly with their counterparts, who develop themselves from each other’s experiences.

Concluding Remarks

To ensure that the rubber meets the road safely, the succession process must be managed as a two-dimensional process, the phases of which are to be adapted according to the other. The merit-based promotion as a career path may allow successors to become well-trained managers, yet this will not be sufficient to develop strong leaders. Additional platforms must be created where successors--beyond their formal managerial role definition--regularly meet with the leader, key executives, as well as their counterparts in other organizations. The knowledge and intuitive decision-making ability accumulated throughout this process will present its next leader to the family business.

*Handler, W.C. "Succession in Family Business: A Mutual Role Adjustment Between Entrepreuner and Next-Generation Family Members" Entrepreneurship: Theory and Practice, 1990, 15 (1), 37-51.

 

March Current Thinking Column

Tuesday, March 31, 2015

The Importance of Knowledge Transition In The Family Business

by Leslie Dashew

 
Most often, if one applies for a job, the people hiring know what skills, knowledge or competence is needed for that role and can evaluate the candidates for it accordingly. And, if I am a candidate for that position, I may already know what it takes to be successful at that job and prepared beforehand.

However, in family businesses, we often end up with roles or responsibilities for which we have had no preparation or understanding of success factors—we may have inherited the role or responsibility. For example, a leader who has developed a business may have done estate planning, yet his offspring who have inherited the business, may not have been prepared to be owners or operators of said business. The heirs may not feel equipped to guide the business, while the elders may not trust the competence of the heir, either.

This is sometimes true of those who have gained a position in the family business because of his or her role in the family, not necessarily because of training, experience and/or competence. So how do we have trust in family members who get the job to run the family business when this occurs?

Further, entrepreneurial ventures and family businesses are sometimes operated by people who may be creative, but lack skills in managing or mentoring. Oftentimes, these people learned the business as they built it, and lack the formal conceptual training others may have in business. Thus, it is difficult for them to transition knowledge about the business/role to others. In these situations, others may end up with additional responsibility in helping successors or employees learn their roles in the business.

With the improvement in the economy, family business executives are among those who are now struggling with how to fill “the skill gap” that resulted from downsizing during the past 7 or 8 years. Developing capable employees is now an even greater challenge.

For all of these reasons, transition of knowledge is particularly important and challenging in the family business. Knowledge management and transfer happens from two directions: the delivering end and the receiving end. This is illustrated by the two voices in the following poem.

Sometimes I feel like I don’t know “nothin”
And sometimes I really don’t!
Other times it seems that the answers are right there
And I don’t know where they came from
I think I am just lucky when I learn through osmosis
Yet then I don’t feel confident that I know where to get more knowledge

How do I share what I know
when I just learned by doing?
I don’t have a book or a curriculum, I just figured it out
Over the years the business grew, so did I
I learned by trial and error
Making mistakes I don’t want to repeat…
and I don’t want them to repeat them either!

I created the wheel
Now I don’t want it reinvented
So I have to figure out how to share that process
With patience, persistence and clarity
But I am no teacher, I am a do-er

I am not the creator
I am a learner
Who may be able to add to
But I have to understand the basics first
So surround me with lessons and compassion
With tools and talk

Let’s learn together
Grow through our process
Enrich our souls through the collaboration
That our family transitions provide for us.
The reality is, that each day I am both a learner and a teacher
And I have to succeed at both.

-Leslie Dashew


Developing a system to assure that knowledge is transitioned requires attention to three important dimensions: role, content and method. Click here for an explanatory graphic.

Each role in the family business requires a different set of competencies and knowledge. Depending on the individual and his/her life stage and access to learning opportunities, the method may be different.

In future posts, we will share more about the tools that help the transition of knowledge. Meanwhile, there are several assumptions I hold about the importance of knowledge transition: 

1. Without growing our knowledge, we lose our competitive edge as a business;
2. All stakeholders need to develop their capabilities so that the family business as a complex system (3 roles;/2 subsystems) will benefit no matter who is involved;
3. We need to take responsibilities for our own education: no one knows what we want to do or our needs better than us. We can’t assume anyone else will lead this charge! 
     

 

February Current Thinking Column

Saturday, February 28, 2015

ESTATE PLANNING: IS IT FOR THE YOUNG?

 Additional Thinking

by William E. Roberts, CLU, ChFC

In August, we wrote about basic issues that are compelling reasons for NexGens to have an estate plan in place.  Should both parents pass, guardianship for children is one of the primary concerns for parents of young children.  Devising thoughtful distribution patterns for both income and principal to their children at appropriate ages/amounts while identifying areas where additional funding with appropriate guidance would be allowed is a strong motivating factor toward creating wills and trust documents. Incentive trust provisions is a strategy that many employ to inject their family core values into their documents.

Values-based planning has become somewhat cliché and is often more a marketing ploy than a well-thought-out process of clarifying deeply-held core values intrinsic to a multi-generational family legacy. Clearly identifying these values early on is an important step before agreeing to an appointment with an attorney.  Often, our experience is that parents do not completely agree on their values. A discussion of these differences and negotiation to resolve them is better done before incurring expensive hourly fees.  Our firm uses a questionnaire developed by Scott and Todd Fithian of the Legacy Group to form a foundation for husband and wife to have substantive discussions of the legacy they want to leave to their children. This can lead to research into strategies that might assist in resolving the differences in values between husband and wife.

In family business situations, it is informative to have a clear understanding of the family's core values—particularly regarding ownership of company stock.  Family-agreed-upon restrictions, as to who can own company stock, could have significance in the planning for young families.   For example, we have worked with numerous families whose value system dictates that only bloodline can own or inherit stock.  They usually have restrictive agreements governing who stock can be passed to and what rights they may have.  Knowing that these restrictions exist and providing copies to the planning team will be important to creating documents consistent with family estate values.  It is also important in knowing what economic resources are available to provide ongoing survivorship income to spouse and children.

Often we encounter questions about the probate process.  What is it?  How complicated is the process?  How expensive is probate?  How can I avoid the probate process?  Probate is the process of closing the estate after a death, paying liabilities, taxes, transferring title to assets consistent with the will arrangement and filing any necessary tax returns.  In states with the Uniform Probate Code, the process is generally very simple and straightforward. Consequently, it is not considered an expensive process in those states.  To determine if your state of residency is subject to the Uniform Probate Code (UPC) you can search the website http://www.law.cornell.ed/uniform/probate.   For those states that have not adopted the UPC, the process can be complicated and somewhat expensive.  California is often mentioned as having a relatively expensive probate process.  Your legal advisor should be very familiar with the probate law of his or her state and consequently inform you of the complexity and expense of the process.

This leads to a question of whether it is necessary to have a "Living Trust," also known as a "Revocable Living Trust," as part of the estate plan.  Some attorneys are strong advocates for having a living trust, while others are less so.  In states where the probate process is complicated, cumbersome, lengthy and expensive, a living trust is almost always recommended for the following reason.  If a living trust is created and assets are actually transferred into the trust (an essential part of the planning process), the assets in the trust are no longer subject to the probate process. Instead passing under the provisions of the trust document, the living trust avoids the expense and complication of probate.  It also avoids publicity since trust-owned assets are not subject to public disclosure.   This confidentiality has motivated many in states where probate is not an issue to create the living trust as part of their plan.

An additional reason for having a revocable trust might be to have an orderly method to provide ongoing oversight if a traumatic event causes a loss of ability to manage assets.  Clear direction and orderly succession are part of the thought-process in creating the revocable trust document.  The trust is revocable--meaning if one wants to change it, they can at any time. Banks and financial institutions are familiar with this arrangement and remain untroubled by assets being titled in the name of the trust.  Clients have had to produce the document to prove its existence and the power to sell or transfer assets.  However, for a relatively minor inconvenience, clarity can be created, cumbersome administration avoided and an unnecessary expense bypassed—making this trust worthy of your consideration.

Another motivating factor for a few young families to complete their estate plan is the possibility of the federal or state estate tax placed on their estate. As of 2015, everyone has a federal estate tax lifetime exemption of $5,430, 000. If married, both spouses have this exemption and therefore can pass $10,860,000 to the next generation estate tax-free.  Many formerly taxable estates may pass tax-free to heirs now.  Some of the complexity of planning has been simplified by a recently passed "Portability Provision.”  In simple terms, it allows any unused exemption in the estate of the first-to-pass spouse to be applied upon the demise of the second spouse.  Your legal advisor can explain in more detail than intended in this article, but for our purposes it means that until an estate exceeds the lifetime exemption amount (an amount which is adjusted annually for cost of living increases), there is no estate tax.

However, for those living in states that have enacted a state estate tax or inheritance tax, the exemptions often do not align with the federal exemption, and are often quite a bit lower.  This can lead to surprising tax bills if not carefully considered.  For a list of the 24 states that have their own estate tax (18) or inheritance tax (6) law you can google http://www.retirementliving.com/taxes-by-state.  If you live in one of those states, it would be prudent to discuss with your advisor the details of the exemption amounts and plan accordingly.

For those who, at a young age, already have the asset base that exceeds the federal or state exemption amounts, the planning may become somewhat more extensive and complicated. The tax on the amount above the exemption is 40% (and can be as high as 50% in states that have their own estate or inheritance tax). Most entrepreneurs do not keep 40%-50% of their estate in assets that can be readily turned to cash.  The tax is due 9 months from the date of death, which adds a time constraint to an already difficult situation.  We recently worked with a 30-year-old with a considerable estate, who had been advised by counsel to apply for life insurance in excess of $50 million.  A rare situation indeed, but when the planning team evaluated his base of assets and forecasted a conservative rate of growth, it became clear that the need for liquidity in his estate could become severe. The recommendation was made to obtain life insurance while he is young and healthy and at premiums that are relatively inexpensive. Life insurance is but one strategy for consideration and a good estate planner will be familiar with other strategies that may be used in conjunction with life insurance to address the liquidity issue.

In a following newsletter, we will discuss some of these strategies and provide examples of applications we have seen in client situations. Whether the needs are relatively simple  or more complex, the importance of having an orderly plan of disposition reflecting your family values cannot be overstated.  In a time when grief wears resiliency thin, having a clear plan that is communicated and understood, with a cadre of professionals who are clear about their roles, can make a significant difference.  Ignoring the issue or procrastinating is no excuse—all of us are "too busy.”  If you make this project a priority, I promise you will have a deep sense of satisfaction when it is completed.



 

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