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Spring 2013

December Current Thinking Column

Sunday, December 22, 2013

Musings from 35 Years

by William E. Roberts, CLU, ChFC    

Our company recently celebrated its 35th year in business.  We had a wonderful event at the Donald Seawell Center for the Performing Arts in downtown Denver.  Our guest performer from Australia, Van-Anh, mesmerized the audience with her marvelous renditions of classics from Chopin and Ennio Morricone, as well as her original works.  She also captivated us with her descriptions of her family’s history.  Her parents were boat people who escaped from Vietnam when the Communists overran Saigon.  They spent five days at sea before being picked up and deposited in a refugee camp where they spent several months before immigrating to Australia.  Both are professional musicians—he a concert guitarist and her mother a professional opera singer.

She shared stories of how her parents overcame the difficulties of starting over, raising their children in a new homeland, and beginning Van-Anh’s musical training on the piano at 13 months of age.  Her parents’ relentless desire to see her succeed was heartwarming and brought many of us to tears.

In many ways, it reminded us of the difficulties we have listened to clients describe as they tell us the stories of their entrepreneurial start and the challenges that kept them awake at night—wondering where they would get the capital to survive the start-up days, paying payroll on their credit cards, following up accounts receivable to collect checks to cover bills long overdue.  Her stories resonated because they mirrored similar difficult experiences others in the room had overcome.  It was an incredible evening.

Preparing for this event was a time of reflection.  We thought back on our beginnings, the lessons learned, the mentors who came alongside to lend a hand and teach us valuable lessons, the principles that governed us from the very beginning and the strategies that became foundational in the way we conduct our business provided a remarkable tapestry to view.  The power of this reflection for us was the humbling effect of knowing that so many good things had affected us and brought us to the celebration that wonderful evening.

In listening to families tell the stories of their beginnings, the pain of the start-up years, the courage to persist in the face of sometimes insurmountable difficulties attests to the power of the human spirit.  This indomitable drive to succeed—a relentless drive to overcome—seems to be characteristic of entrepreneurs who just never hear the word “quit.”  There were sleepless nights in our first years and voices of friends discouraging us of ever succeeding.  Somehow though, those of the partners who stayed simply pulled down their siege helmets and proceeded to prove the naysayers wrong.  

There was also a sense of fierce independence that permeated through the organization.  We see that same sense of independence in every client we encounter.  While beholden to a strong set of morals and values, there is a deep-seated desire to not be under the thumb of a company or “a boss” but instead serve their client with an unbiased view driven only by the client's values and objectives.  

We identified early in our business life the importance of the team we work with and the corporate culture permeating our office, one of teamwork and caring for each other.  We made a few hiring mistakes, but the corporate culture weeded them out when it became evident that despite talent, their self-interest was not a fit for us and they needed to be elsewhere.  We are far more cognizant of involving our team in the vetting process as we consider additional staff and it has limited our hiring mistakes.

As we begin our next 35 years, the lessons learned and the values and principles that are part of who we are will help guide our future direction and decisions.  We feel a real kinship with the families that have experienced their own travails and have come through better for the adversity they experienced.  We hope you can have your own “35th anniversary experience” as you enjoy reminiscing over your experiences and the wisdom gained from them.  It is a rewarding journey.


We wish you and your family a wonderful holiday season and a healthy and happy new year.




 

October Current Thinking Column

Wednesday, October 23, 2013

In this month’s column, Joe Paul takes a look at the different types of family business owners and how understanding the different sources of motivation that drive owners can impact the continued success and harmony of a family business.

TYPES OF FAMILY BUSINESS OWNERS

Frank was excited about the upside potential of acquiring one of their competitors. He had prepared a great presentation to share with his fellow board members about this opportunity. The two independent board members had arrived early but his sister Karen was, as usual, 45 minutes late already. He was managing his anger with her pretty well as she arrived and he could finally call the board meeting to order.

During his presentation he could see the troubled look on the face of Jane, his other sister.
As he invited questions, Karen was checking e-mails and Jane was scowling at the agenda she had in hand. When Frank asked for his sisters’ thoughts about the opportunity Jane said, “All I know is that Dad would never have considered buying a competitor. He was a very wise business man and I don’t feel comfortable with doing something he never did.” Karen responded with a thumbs-up to Jane.

Frank kept his cool because he knew that he had the votes of the independent board members. But he was sick and tired of his sisters’ approach to being an owner and a member of the board. Their behavior was so consistent that he knew what they would say before they opened their mouth.


As we can see in this story, there are a number of ways to be in the role of a family business owner. In our story, Frank was in the role of “the Investor” while Karen was “the Grudge” and Jane was “the Keeper of the Shrine.”

The following list demonstrates how different the experience and motivations of family business ownership can be.


1. Operating Owner

This owner manages the family’s business. Day-to-day management issues and the requirements of the business are paramount to him or her. There may be tensions between this owner and passive owners who are more motivated by income from the business than by reinvestment in the business.


2. Governing Owner

Board member but not employed in the business. His or her interest is shareholder return on investment, supporting senior management and holding them accountable for performance.


3. Interested Owner

Actively interested, attentive and supportive but not employed in the company or as a board member.


4. The Steward

One who has a multi-generational perspective. He or she believes his or her responsibility is to enrich the most beloved assets and pass them on to the next generation. Long-term stability always trumps short-term return on investment. The purest example might be a trustee or a most trusted family advisor who has no personal ownership of equity but is dedicated to sustaining the legacy of the family.


5. Obedient Owner

Not particularly interested in the business. He or she votes as instructed by the parents or siblings who work in the business. He or she is often driven by the desire to create or maintain family harmony and often don’t really feel like an owner.


6. The Investor

Interested primarily in return on investment. The company is merely an asset that needs to be managed for profit. This owner has no emotional tie to the company.


7. The Grudge

Is an owner in name only. He or she doesn’t really feel empowered to act like an owner. He or she may frequently miss meetings and have to be reminded to sign documents, harbor ill will or have a grudge toward other family members, and may often express him or herself in a passive-aggressive manner.


8. Heritage Owner

This owner sees the company is a civic responsibility and feels a strong sense of responsibility to the community. The business is often seen as a memorial to the founder. This type of owner often resists change in the ways things are done.


9. Trustee/Owner

Has a fiduciary duty to manage the trust for the best interests of the beneficiaries. He or she must comply with the language of the trust document and be vigilant concerning the demanding ethical obligations.


11. The Chess Player

This owner’s attitude toward the company based on some injustice in the past. This owner uses ownership as leverage in the ongoing drama of the family. This owner is comfortable being in overt conflict with other owners and appears to take pleasure in being in contentious relationship within the family.


12. Hostage Owner

One who feels burdened by ownership and would sell if he or she were free to do so. This owner may have values that are not compatible with the nature of his or her business.


13. The Captive Partner

Siblings or cousins who would never have picked one another as business partners but have been made so by an elder’s estate plan.


14. Entitled Owner

Has expectations of others that is out of balance with their actual contributions. For instance, this type of owner might expect to be paid much more than they should be just because they are a second generation owner. They tend to have poor boundaries.


15. The Social Entrepreneur

This owner will say that he or she is in business in order to do good in the world and the business is a tool to do this.


16. The Status Seeker

This kind of owner uses business ownership to facilitate access to things like membership in exclusive clubs, serving on boards, being appointed to advisory positions or seeking public office.


17. The Keeper of the Shrine

For this owner, the business is a living memorial to the founder. They may be too attached to keeping everything just as it was when the founder was in charge. This resistance to change can create significant risk to the business.


18. The Padrone

This type of owner is often the founder and is like a village elder in the way he or she thinks about ownership. This type of owner may have done many things to help the employees of the company out of a sense of indebtedness to them and is often concerned about whether the successor can sustain these relationships and cope with the emotional demands of this way of ownership.


If you are an owner in a family business, you need to be clear about what type of owner you are. Many of your values and behaviors will be predicated on your type. This is especially true if you one of several partners.

You might consider an ownership exercise. In a shareholders meeting, present the following list to your co-owners. First, have each individual owner decide which one or two types best describes his or her way of ownership. Then, have everyone write down the types of owners they think their partners are and share the conclusions with the group.

Any group of owners may have differing motivations. If you know what motivates your partner(s), you can collaborate with them more effectively. And with this kind of insight about yourself and others, you can predict ahead of time where decision-making processes may get derailed because of some fundamental differences in each owners’ motivations.


Take-aways:

  • Seek to understand your partner’s motivations before you try to satisfy your own.
  • Never assume that your partner’s motivations are just like yours. 
  • Your assumptions about your partner’s motivations may not be accurate.
  • Don’t assume that your partner is necessarily fully aware of his or her own motivations. 
  • Keep in mind that you may not be totally aware of all your own motivations.
  • Your partner (or you) may harbor conflicting motivations in your own mind about an issue. 
  • If you both have similar mixed motivations about an issue (i.e. you both feel like being a Steward and an Investor), you will tend to take a side with one of your motivations and artificially polarize with one another and take a stronger position than you actually feel.

 

September 2013 Column

Sunday, September 29, 2013

Seven Dimensions of Succession Planning in Family Business

When leaders of family businesses think about succession planning, typically they are thinking of who will replace the President or CEO. Some go further to think about who will own the business when the current owners are gone: succession of ownership. But we have found that transitions from one generation to another require succession in seven areas, not just those two. Any program for succession must encompass the following considerations:

1. Succession of Leadership

Organizations need leadership and effective organizations have a plan for both a thoughtful, step-by-step transition to a new leader as well as an emergency plan for an unanticipated transition.

When we think about leadership for a family business, it may be take a different form than other types of organizations. Leadership includes defining a vision for the future of the organization, developing a plan to get there and enrolling followers in collaborating to achieve the vision. In family businesses, the functions of leadership may be shared among owners and/or family members who run the business (these may or may not be the same people). Thus, transitions in leadership can be complex in that it may not be one leader passing the baton to a single successor.

The establishment of a board to help plan the transition of leadership (particularly when it is a situation where leadership will be shared) is an important tool. Often, the Board of Directors and the CEO share the leadership function. The Board, representing owners, may help to create the vision for the future of the business. The CEO is typically responsible for leading the charge.

2. Succession of Management

Leadership determines where the ship is going. Management assures that the proper steps are taken to get the ship to its destination. In small family businesses, the same person may serve as leader and manager of many functions. But oftentimes, he or she fails to step back and work on the business (i.e. leadership) vs. work in the business (i.e. management). Assuring that there is clarity of direction as well as the management to achieve it requires that succession planning be completed for all functions.

3. Succession of Authority

One of the challenges of closely held business, particularly entrepreneurial ventures, is the inability of a leader to let go of control. The leader may recognize the need to have a successor; that he won’t live forever. However, identifying a successor and letting him or her have the power and authority to take the business in new and different directions is another matter! We have found that there are two sides to letting go: first, the leader who is stepping down must have a compelling activity or project to move on to...He or she has to have roles or projects that take attention from the business he or she has led. Second, there must be a trusted successor whose knowledge, competence and values give the departing leader the confidence that his/her “baby” (the business) will be well cared for. Then—and only then—will authority be transferred. The presence of a trusted board of directors who will also be overseeing the successor helps as well.

4. Succession of Values

As alluded to above, for leadership succession to occur, a successor must demonstrate that his or her values are congruent with that of the predecessor. For example, if I have taken good care of my employees and they have been loyal to me and helped me build my business, I want to be sure that my successor places the same importance on caring for employees. I will not turn over the control of the business otherwise. If I believe that my success was due to micro-management of customer relationships, I will expect my successor to have that value as well.

One of the challenges we see between founding generation leaders and their successors (especially when the successor is an offspring) is a difference in value placed on “balance of life.” Entrepreneurs are known to be workaholics; their offspring often resent the absence of parent(s) because of the business. When they have their own families, they strive to have family time as well as business time. We often hear founders complain that their kids will ruin the business because they don’t work hard enough. Having a thorough dialogue about the values that will guide the business going forward and having the opportunity to observe some non-core values change and not destroy the business is essential to successful succession.

5. Succession of Knowledge

One reason leaders can’t let go is that they feel the successor doesn’t know enough. How can the successor be trusted to care for the business if he or she has not developed the knowledge and skills the founder had acquired while building the business? Frequently, the out-going leader is wonderful at building a business, but often not great at the “maintenance functions” such as planning and teaching. The next generation may have learned a lot over time, and have gotten formal education that helped, but the transition of knowledge and wisdom from elders may have been spotty.

It is critical that the succession planning process include an assessment of what competence and knowledge a leader will need to take the company where it is going rather than where it has been. Further, documenting what knowledge the elder feels is critical and developing a curriculum to assure the knowledge is transferred must occur. Finally, the younger generation must have clearly defined benchmarks that demonstrate the acquisition of required knowledge and skills to earn the trust of the prior generation of leadership.

6. Succession of Relationships

The transition also requires that key relationships be turned over to successors. Customers, suppliers, employees, owners and advisors must all see that the successor is truly in charge and leading the charge. If he or she is “President” in name only, the relationships will stay with the predecessor and the transition will fail.

The transition is a gradual process that requires effort both on the part of the departing leader as well as the successor. The successor will have to earn the trust of all of these stakeholders, which will be facilitated if the prior leader fully supports him/her. When a supplier makes a call to the founder, he or she must say, “Jane is now President and is handling the decision making in that area,” rather than falling into the habitual behavior of making the decision.

There is a loss experienced by those letting go of power, identity and relationships as one steps out of a leadership role. That is why it is so important to have the next stage of life designed to be interesting and engaging.

7. Succession of Ownership

Finally, succession of ownership is another component of transition from one generation to another. If this transition has not been considered many years prior to a transition happening, tax consequences may make the other transitions very difficult. Family relationships are often impacted by “who gets what.” If the business represents the largest asset of the current owners, there is often in inclination to share ownership with the next generation in the business as well as those who are not in the business. This can lead to sibling power struggles and frustration for all.

If the ownership transition is not structured well, the outgoing leader may not have sufficient capital to sustain his or her lifestyle, or the successor may not have a business sufficiently capitalized to continue successfully. There are many considerations and strategies that can lead to successful succession of ownership, which accountants, attorneys and financial planners address as they organize the business and plan for these transitions.

Planning Succession

These seven dimensions of succession planning should be addressed in a process that begins with a vision: what is the future that family envisions for itself and its assets. When the family considers this future together (rather than just the family leader), it increases the odds that the transition to the next generation will be successful. Having an open dialogue that includes the individual and collective dreams and goals of family members helps everyone consider how they can support each other in achieving individual dreams and how the family assets play into this future.

The open dialogue should be continued in exploring what talents and perspectives are needed in all roles in order to achieve a shared vision for the family and the business. Quite often, family members lack a clear understanding of the skills and dispositions required to successfully lead a business, particularly a family business. A careful assessment of talents needed and then discussion of this with the stakeholders will lead to greater probably of success in the business and harmony in the family.


Leslie will be presenting these concepts on a panel at the Arizona Community Foundation on October 2 and at the Hawaii Tax Institute on October 29.



 

August 2013 Column

Wednesday, August 07, 2013

Welcome to the New Aspen Family Business Group Website

Both our work and team have evolved and after 25 years it was time for us to refresh our image and update our website. We hope that you will find it easier to access us as well as our knowledge and that you will enjoy exploring our library of ideas. 

Among the changes is a new column entitled, “The Aspen Current Thinking Column.” Here, the AFBG partners and guests will periodically share new ideas and reflections with you. If you sign up for the column, we will let you know when we have posted a new paper!

We are also expanding our reach by collaborating with select colleagues around the world. Our newest associate, Burak Kocer, PhD, will work with us from his base in Istanbul, Turkey, to provide services in the Balkans, the Middle East and Central Asia. Burak has an impressive background in governance, as a professor, an independent director on several boards and as a consultant. Burak is using his prodigious linguistic abilities to help us develop new books in Turkish and English. He is also translating our existing books and newsletters into Turkish.

DIFFERENTIATION:

Are your family relationships the biggest liability that you are facing in your family business?

“The lower the level of differentiation, the more likely the family, when stressed, will regress to selfish, aggressive, and avoidance behaviors; [and] cohesiveness, altruism, and cooperativeness will break down.”  

-  Murray Bowen

In our annual AFBG Spring meetings, we invite a small group of colleagues to share new ideas and expand our thinking. In this year’s Spring meeting, we explored the topic of differentiation. The term “differentiation” describes the complex interaction of two forces in life: centrifugal force and gravitational force. Centrifugal force pushes things apart, while gravity holds things together.

Human behavior, emotions and thought processes emerge from the interaction of these two forces along a continuum that spans from enmeshed group thinking to rigid emotional cut off from those around you. Enmeshed families, where the gravitational pull is too great, have trouble allowing space in relationships and restrict independent action. Disengaged families are pushed apart by the centrifugal force and have little interaction among members. This is manifested in lack of communication, trust and collaboration.

Differentiation is also a very useful concept when applied to the study of subsystems in family businesses. We look at the family business both as a group of individuals striving for self-definition, and as a larger system composed of sub-systems (e.g. the Board of Directors, the shareholders, the successor generation, the in-laws, the employees, the management team, etc).

Differentiation relies on boundaries. An individual or sub-system that is well-differentiated is one with healthy boundaries. While functional boundaries may be permeable (i.e. allow for input from others), they are not so open that they are overwhelmed by the opinions, personalities or anxieties of others.

You are a well-differentiated individual if you:

  • Have a clear sense of purpose

  • Can separate your ideas from your emotions 

  • Do not have an excessive need for approval

  • Are able to manage your emotional state, i.e. be responsive, not emotionally reactive

  • Can stay calm and think clearly during a crisis

  • Have well-defined values and principles, which are consistently maintained in word and deed

  • Are a reflective decision-maker; thoughtful in consideration of others without caving to relationship pressures

  • Have the ability to maintain objectivity 

  • Can stay connected and civil even in disagreement 

  • Can make autonomous decisions and accept accountability for results 

  • Balance the rights and responsibilities of self and others

  • Possess the courage to make unpopular decisions for the sake of the greater good of the family and business

A well-differentiated system (or sub-system) is characterized by:

  • Clarity of boundaries, agreements (e.g. shareholder agreements), consequences, roles, authorities, goals, mission/vision and ownership of assets

  • Maintaining boundaries flexible enough to allow for the inflow of information, ideas, skills, etc.

  • The ability to be independent and stay connected to the rest of the system (communication processes, clarity of information flow)

  • High trust/low anxiety/open communication and sharing of knowledge, creativity and appropriate level of risk

  • An awareness of and adaptation to the environment (e.g. anticipating marketplace/outside forces) 

  • The ability to incorporate increasing complexity and internal specialization in response to organizational growth

The process of development of individuals progresses from undifferentiated to differentiated. As we mature, we move from being part of our mothers, to dependent upon our mothers and families, to being able to be more independent and ultimately, interdependent. Given adequate support, individuals can become better “differentiated.”

Similarly, business systems typically emerge from the mind of a creator (think entrepreneur) and as it grows, it can become more differentiated with effective structure, clearer organizational boundaries, job descriptions, etc. We see these kinds of processes in families, businesses, trusts and partnerships. Understanding the concept of differentiation helps us grasp the complexity of family businesses and provides a foundation for facilitating their growth.

The work of the Aspen Family Business Group is about helping families to learn how to become better differentiated through:

  • Clarification of individual, family and business purpose

  • Identification of core values

  • Creation of organizational structures, boundaries and processes

  • Facilitation of communication and constructive conflict resolution

In future columns, we will show you more about how to make your families an asset rather than a liability.

Welcome to the newly defined and designed Aspen Family Business Group Website!

 

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