Jean Duval had mixed feelings as he left the family meeting and drove back home. Once again he was very pleased with the outstanding results of the family business, Duval Food, which the management had presented to the family at the meeting. For the fifth time in a row, both sales and profits had risen significantly.
Jean was also highly satisfied with the excellent understanding which prevailed among his four children during the meeting.
Jean Duval had inherited Duval Food from his father in 1972. He had always worked in the family business, which went on to flourish under his skilful management. When he turned 70 in 1996, Jean turned over the day-to-day management of Duval Food to William Peters, a brilliant manager who was not part of the family. At that time Jean became chairman of the Board of Directors.
Of Jean Duval's four children, only his eldest daughter Ann (49) was active in Duval Food as assistant marketing director. Frederic (47) had built up a career at a major law firm, and Alexandra (45) had followed her husband, who taught art history at the University of Mexico. The youngest son, Jean Jr (43), had earned an MBA at a top university and was now vice president of strategy at a large multinational, Star Inc.
In 1996 Jean also took a number of important steps with respect to his succession. He transferred ownership of the shares of Duval Food to his four children, who also received the dividends. However, he retained a majority of the voting rights – even though, in reality, no votes were ever held. Three times a year the Duval family came together in a family meeting where everyone received detailed information about how the business was going at Duval Food, and where family members unanimously adopted the decisions for which the family was competent. They genuinely listened to one another at the meetings, which were always characterised by a constructive and pleasant atmosphere. It gave Jean a good feeling to see so much harmony within the family.
Yet there had been a darker side to the family meeting which had just ended. For the first time in years, a certain tension developed when the general management of Duval Food was discussed. Although William Peters performed very well and had built up a great deal of credit among his staff, Jean had one problem with him: he wasn't a Duval. Several times already Jean had spoken with his youngest son Jean Jr about a career within Duval Food. Jean Jr however had always responded evasively that he felt comfortable at Star Inc and could still acquire a lot of experience there. Perhaps he would think about joining Duval Food later. His father wasn't happy with that, and had long reflected on a solution for this problem.
Jean had carefully weighed his words before addressing the issue at today's meeting: "Dear family, I'm no longer as young as I once was, and I've been very satisfied with the work done by William Peters and his team for Duval Food. But I believe that in family businesses it is best to have the general management headed by a member of the family. Regrettably I find that, except for Ann, no one in our family forms part of the management of Duval Food. Perhaps this is due to the fact that family members can earn more outside of Duval Food. I therefore propose that family members who work in Duval Food should be entitled to an extra compensation. Concretely, I'm proposing that they be attributed on top of their salary a bonus equal to one-half of their normal annual compensation. This would give family members an incentive to join Duval Food".
For the first time in years at a family meeting, Jean's intervention was followed by an icy silence.
Frederic finally broke the silence by saying: "Father, I fully understand that you would like to see a Duval at the helm of our family business, but I have serious doubts about your proposal. A manager of a family business is entitled to compensation for the work he does. However, this compensation has to be in line with the market, and nothing justifies the kind of bonus you're proposing. Moreover, family members are already compensated as shareholders through their dividends."
Ann said they all had to think this through carefully once again. Alexandra always approved of everything her father proposed. Jean Jr remained shrouded in silence.
The family meeting decided to return to the issue at a future meeting and Jean Duval decided to seek the opinion of a family business consultant.
Jean has inadvertently thrown a 'bomb' into a family business system that appears to be fairly stable. Although I wouldn't have advised him to do it this way, his intervention may have a positive impact on the family's future ownership of Duval Foods if he plays his cards right.
It is fairly clear why Jean's suggestion is problematic:
- If anything were to happen to Jean in the short term, leaving his proposal on the table will cause additional tension between his four children.
- If any of his family did choose to implement his salary structure, future family relationships could be at risk.
- His proposal is clearly unwise from a business point of view – not least in terms of the risk of demotivating potentially good quality external management.
Jean must remember that a family business system that looks stable should never be mistaken for a healthy one. This family needs to openly discuss its future ownership; otherwise problems may affect both family harmony and business success. Through his intervention, Jean has begun to bring up important issues which may have been left under the proverbial carpet. He has beaten the first challenge for family businesses looking for some preventative maintenance – turning unspoken issues into spoken ones, and potentially into a discussion.
I advise Jean to use this opportunity to launch a proper family business review. Individual family members need to be consulted individually on their true wishes. The family then needs to work together to create its own framework, setting out how the distinction between ownership and management should be handled. A safe process to achieve this needs to be agreed by all, quickly, including William Peters. Although this is overdue, the participation of Jean whilst he is still chairman and actively involved can only be positive for the outcome.
Tony Bogod is chief executive of the BDO Centre for Family Business, UK.
Duval Food has managed to set up a proper governance system but at the same time the key players in the family are unhappy with the whole situation. Jean Duval has passed on the shares to the children and stepped down as CEO. The family meeting is a good idea but there are questions that need answering.
Why did Jean Duval become chairman of the board? It could have been an excellent opportunity for for Frederic or Jean Jr to take on some responsibility while also working on their own careers.
How do the children feel about the future of the business? It seems that they have very much followed father's initiative. Are the children loyal to their father or to continuing the family business?
And what is the role of mother? Does she have any influence?
A final question would be what William Peters thinks of the tensions arising among the family – and the compensation proposal?
In my opinion Duval Food is still very much Jean's business. Although he stepped down as CEO he still is in charge as chairman of the board and as the patriarch. He has very strong opinions about how to continue the family business.
The next generation should answer the following key questions in order to find a solution to the problem within the Duval family:
- How do you see the future of Duval Food as a family business?
- What's best for the business and what's best for the family?
- Do you have interests beyond that of being shareholders?
- Would you be interested in governance roles, eg board member of even chairman?
- What can the family do to retain William Peters as a good CEO?
Providing Jean with clear answers will help him complete the succession process. It would have been better if they had started with the vision for the future and the commitment of the next generation. Luckily enough the Duval family still has time to work on this.
Albert Jan Thomassen is director of the Family Business Centre at Tias Business School, Tilburg University