When their 45-year old father, Frank, founded his tool and die business he had hoped only for enough business to be able to provide for himself, his wife and their two boys, Roger and Alex. Roger, the eldest, began working with his dad first and his high energy and natural sales skills helped grow the business beyond its humble entrepreneurial roots. As the spitting image of his father, Roger believed that he was the only choice to succeed his father, the founder, as the rightful leader of the company. Alex, in turn, added engineering talent and organisational skills around the shop floor and creative new product ideas that allowed the company to develop new 'end user' products, gradually converting the company from a small tool maker to a value-added engineer and manufacturer of essential components for the aerospace, building and elevator and escalator markets.
When Frank passed on with no formally appointed successor, the sons managed to work together, each assuming that they could lead the company. Neither was very concerned about the formality of the paperwork until it became clear that a 60% controlling interest in the primary operating entity had apparently been granted to Roger, the eldest, shortly before their father's death.
In the mid-1990s while Roger, now 67, suffered a sudden and debilitating illness that left him incapable of fully managing his duties on an every day basis. Alex assumed the daily leadership role as the third generation took on the more important functional management roles. Alex served as CEO but had wanted to scale back his involvement having been shaken by the unforeseen and sudden deterioration in his brother's health. Alex wished to turn over the reins to a consortium of his two children, Alex Jr and Katherine his older sister, and Roger's two children, Jeff the head of Sales and Stephanie the Director of Purchasing, who were also active in the business. Jeff and Stephanie had been told by their father, Roger, that their branch would control the company "as my father intended by the granting of the additional shares of ownership to me".
At an informal meeting, Jeff proposed that all the family members cut back their salaries and perks in order to help weather the current cyclical downturn. Alex Jr argued that Jeff would not suffer at all under those cutbacks as the others would, since he was paid commissions as well as salary and had a host of so called business development expenses (car, travel and entertainment budget, etc) enhancing his compensation package. Furthermore, Katherine added "the culture of our family has been equal opportunity for all members. But, the current ownership does not reflect that, especially the fact that Alex Jr and I have been here the longest and our father led the company by himself when Roger was unable to work".
Alex Jr felt that he was better equipped by formal educational training and management style to lead the company. If it weren't for the fact that his uncle Roger, in Alex Jr's opinion, had negotiated a larger share of the company, at a time when his grandfather was sick, his branch of the family would be the most influential. After all "we have three of the most experienced managers in the business as opposed to only two from our cousins' branch. For these reasons he thought the equity in some of the key operating and real estate companies should be equalised.
What would you recommend to this family?
The first question is whether the third generation, consisting of Alex Jr, Katherine, Jeff and Stephanie, can agree that equalisation of the ownership of the business is desirable. If they agree they could create a new partnership with a good chance of succeeding – as long as they are each truly committed to being equal shareholders. Most often, equal partnerships work best when there is a strong desire to make it work, an informed and educated owner's group, and a highly effective governance process.
However, it is unlikely that the controlling branch will be willing to concede its controlling interest and form an equal partnership. If Jeff and Stephanie cannot agree to give up control, all four should develop a strong governance structure that includes an owner's council and an outside board of directors.
The owner's council, consisting of the four cousins, should provide an equal voice for all owners. The council would need to develop a shared vision and an experienced family business consultant, not related to the family, should act as facilitator.
The board of directors should be a legal board including independent non-family executives who care about the family and the success of the business. The structure could include all four third-generation family members and three outsiders – but ultimate power always resides with the owners. The board's role would be to direct management to achieve the goals set by the owners. Similarly, management would need to develop strategic and operational plans to attain the desired results of the owners.
If the four owners cannot resolve their differences regarding ownership and business management control, one option might be a buyout – one family branch of the other. Another option would be to position the company to attain maximum value and exit together as a family group. It is important that whatever the decision, Alex Jr, Katherine, Jeff, and Stephanie should have well-defined exit plans and buy-sell agreements in place.
The four cousins should set aside the decisions made by their grandfather and their fathers and start with a clean slate. Once the question, "Is it in everyone's best interest to make this an equal family branch partnership with a strong governance process?", is answered, the cousins can go to the next step of setting up an owners' council and an outside board of directors.
Clemens Ast is CEO and founder of Legasus Group, LC in Wichita, Kansas which provides fee-based family business consulting.
This case illustrates an example of what happens when fairness issues are allowed to fester. It sounds as if Alex Sr is allowing his son and daughter to fight the battles that he should have fought with his brother, Roger, after their father's death. If Alex Sr believes that the 60/40 division was unfair, he had time to work on resolving the issues rather than letting them seep into the next generation.
My recommendations to this family include starting with Alex Sr. Even though he cut back on his work commitment, he should be encouraged to fulfill his senior leadership commitment to the family and the business. However, this suggestion needs to be framed in a solution-focused approach – not a 'guilt trip' approach. A solution-focused approach starts with the premise that people have the strengths and resources to solve their own problems. As consultants, our job is to ask the right questions to elicit these strengths and resources.
I would ask Alex Sr, "What do you think is the best solution to the problem?" This sets the stage in empowering him to become an active participant in resolving the issues. If he is unable to come up with any ideas, then suggestions could be made about what other family businesses have tried.
A renegotiated percentage commonly occurs as a business enters another generation. One possible example would be a 50/50 split with Jeff and Stephanie splitting their 50% in two, and Katherine, Alex Jr, and Alex Sr splitting their 50% in thirds.
If renegotiation is impossible, then perhaps Alex Jr could run the company with salary compensation to offset the 60%. This might be framed to Jeff and Stephanie as: Running the company will derail the valuable sales and purchasing talents that you now contribute to the business.
Selecting an operating committee of non-family members until the family works through this transition is another option. Otherwise, family tensions will erode the business success.
Alex Sr should be encouraged to start talking to his brother about possible options. Perhaps if the sibling team begins working toward a solution, the cousin team can activate their own strengths and resources in taking this business into the third generation instead of playing out old agendas from the second generation.
Patricia M Cole is an associate professor of family therapy and family business and founding director of the Institute for Family Business at Nova Southeastern University, Ft Lauderdale, Florida.