It is often not hard to resolve an argument between two people when the choice is right versus wrong or good versus evil. But what happens when the choice is right versus right? When two “rights” converge, as often happens in family businesses, the dilemma can become a serious bone of contention and permanently harm the people and company involved.
Consider the case of Dick Lee and his son, Rick. In 1958 Dick founded a successful distribution business, Affiliated Steam Equipment Co., in Alsip, Illinois. Rick has two sisters, but as of 1993 he was the only active or interested sibling in the business. He had worked in the company for 15 years, and for all practical purposes had been running it for the last six. Rick, 44, was ready to take over full control and ownership, but Dick, at 81, wasn't ready to turn it over without some assurances.
The father named certain conditions connected with a sale, including some continuing income, financial performance criteria, and several perks he had enjoyed. He considered these minimal reward for 40 years of hard work, and would not sell to his son or anyone else without them. Dick also wanted to make sure that all three of his children would be treated equally in his estate plan, which might necessarily include transferring some stock to his daughters.
Rick, at his age, was not willing to continue building the business unless he had assurance of complete ownership. He could see the writing on the wall: He would dedicate his time and energy to building the business, only to pay twice by later having to buy out the shares held by his non-active siblings. He was not willing the pay his two sisters for what he alone had built, yet he also believed in fair treatment of everybody in his father's estate plan. As a buyer, he felt that a fair sale price was sufficient reward for the seller of any business, and that the proceeds would create the liquidity needed to support equal distribution of his father's estate.
Who was right? Most people would agree that Dick had every reason to expect a financially secure retirement, including some continued enjoyment of perks he had earned. His desire to treat his children equally in their inheritance was also reasonable. Likewise, Rick had every reason to claim the promise of ownership given by his father, for which he had demonstrated his ability. Most would consider it reasonable that Rick should not be forced to purchase his own sweat equity from his siblings.
Both father and son were “right,” and that is precisely what made resolving this situation so difficult. It is the choice between two rights, each of which is firmly rooted in values and principles that most would uphold as worthy and good. Unfortunately, what often takes place next are battles in the conference room and around the dinner table over whether to support the individual or the group, look long term or short term, insist on justice or mercy, and accept reality or defend loyalty.
Consider other right-versus-right dilemmas: Is it right, for example, to continue to employ a family executive who clings to his job as a lifeline yet is not performing because of personal problems caused by his child's suicide a year earlier? Or is it right to replace him because his area of responsibility languishes and threatens an entire division?
Is it right to expect that young family hires should work more than other employees for the same pay, in anticipation of their future ownership? Or is it right for family members to expect extra compensation for their extra work, as any other employee would?
Is it right for the current generation of owners to defend and protect loyal, long-term senior executives who helped build the business? Or is it right for successors to install their own team of managers, in whom they feel more confident and from whom they receive greater support?
How ethical dilemmas occur
At first glance, these alternatives may seem like simple differences of opinion or perspective—and they are—but they are also much more than that. They are ethical dilemmas grounded in deeply held beliefs and supported by shared family values. This is what makes such issues so difficult, so emotional—and each side so frequently combative.
Experienced business leaders know how to solve quantitative problems: Choose the data that is factual and discard the data that is not. They know how to solve moral questions: Declare one side right and the other side wrong based on the law, generally accepted values, and commonly held moral principles. However, most have trouble solving ethical dilemmas when the choice is right versus right.
Consequently, they tend to recast the ethical dilemma into a moral one. This happens because they know the rules there, and also because they fail to understand the distinction. An ethical dilemma is created by tension between two positions that are both based on core values that most people uphold as good, but which may be incompatible in certain situations, such as telling the truth about an incident and upholding loyalty to a person involved in it. A moral dilemma is created by tension between two positions, one of which is right and one of which is wrong, based on law or commonly accepted moral principles.
Once an ethical dilemma is improperly cast in the light of a moral question, the parties involved begin to paint each other with a tainted brush. Evidence is gathered and witnesses are asked to choose sides. As time passes the situation polarizes. What began as an ethical dilemma between two people—both of whom are right—becomes a battle that can only be resolved when one side wins. The outcome, all too often, is a deadlock, broken only when one person departs in disgust.
For the Lees, the relationship between Dick and Rick deteriorated over 18 months. Emotions ran so high that no positive resolution seemed possible. Each set out to prove the other person wrong. As family members, their good relationship as father and son turned into distrust and avoidance. As managers, their business relationship turned from cooperation and partnership to antagonism and competition, causing employees anxiety over who was in charge. As owners, they came to a standoff, as Dick abruptly put his ownership transfer plan on hold and Rick seriously considered leaving the company. Both men were angry, frustrated, and deeply saddened at the loss of their relationship. They felt hopelessly trapped by a conflict that seemed unresolvable unless either father or son defeated the other, a solution neither of them sought nor wanted.
Family firms are especially vulnerable to ethical dilemmas because their basic nature juxtaposes three value systems—family, management, and ownership—which are not only different but, in some ways, incompatible. The importance and value of the individual versus the group—as well as short term versus long term, justice versus mercy, and truth versus loyalty—are viewed differently through the lenses of the three domains.
Knowing how to recognize and resolve right-versus-right dilemmas, therefore, is extremely important to family businesses. In one way or another, the vast majority of their difficulties can be attributed to such misalignment, moreso than to the faults and foibles of any individual.
The importance of finding ways to manage ethical dilemmas also grows geometrically as the family business moves into the sibling and cousin stages of development. The further the family evolves from the founding generation, the greater the diversity of values, principles, and priorities, and the more likely the growth of ethical dilemmas.
Preventing polarization
Defusing ethical dilemmas begins with recognizing that there are no clear-cut right answers. If our rules demand a wrong for every right and a loss for every win, we will also insist on treating ethical dilemmas like moral problems. What is needed, instead, is early recognition by both sides that the other person has a different but equally valid set of values and principles— that the other side is right, too.
Early on, if an outsider had asked Rick, “Do you think your father has a right to expect what he does?” Rick would most likely have said, “Yes, but I just don't think it's best for the business or me.” Likewise, if someone had asked Dick, “Do you think Rick has a right to expect what he does?” Dick would most likely have said, “Yes, but I just don't think it's fair to me.”
That's the way it is with ethical dilemmas. Indeed, in the early stages of a growing problem, it is the “yes, buts” that are the telltale sign that you're dealing with a true ethical dilemma: “Yes, you're right, but I'm right, too.”
At first, before there is a “problem,” each person knows at some level that the other is also right. But the desire to get one's own way pits each person against the other, and the need to win obscures the pain of acknowledging that each family member is making an enemy of the other, even though no adversarial relationship exists.
The first line of prevention against such growing polarization is to identify ethical dilemmas as early as possible—when there is still openness, flexibility, and a desire to find a mutually beneficial resolution. There is one method that has proven most effective: active listening. Each party is asked to repeat, in his or her own words, what he or she believes the other person is saying. Only after the two people agree on what was said can the second person give a response.
Active listening between Dick and Rick might have gone something like this:
Dick: “I can't understand how you can oppose my requests for continued income, and why you seem so upset about my desire to treat you and your sisters equally. I've worked hard all these years to provide for my family and that includes me. I have no reason to sell you this business and take less than I could get if I were to sell it to someone else. And as long as I'm financially dependent on the success of the company, I think I deserve some performance safeguards from you, just as I've always expected from myself.”
Rick: “I can't understand how you can be so unconcerned about the impact of your demands on the business. I do believe it's important that you treat us equally in your estate, but my efforts in building this company should benefit my ownership, not yours or my sisters'.”
Dick: “This isn't getting us anywhere. We both think we're right. Let me try to understand your position, Rick (an active listening response). You want to make sure the business can support my financial requirements without undue strain on you and the business. You don't think it's right for you to be generating your sisters' inheritance… that's up to me and them. Is that right?”
Rick: “Yes, it is.”
Dick: “Would you please try to put in your words what you hear from me.”
Rick: “Well, I guess you want to make sure that the lifestyle you've worked hard for doesn't go downhill just because you sell the business to me, and that the business doesn't go south once I'm in full control. I also know that you have to provide equally for all three of us, and I have no problem with that. In fact, that's how I want to treat my kids. Did I get it?”
Dick: “Yes, you did. Can we agree that both of us are right? That you don't want to do me or your sisters in, and I don't want to make it impossible for you to have what you deserve? That we both want what's right for both our family and our business?”
Rick: “I can buy into that.”
Active listening, supported by an attitude of respect and mutual concern, forms the foundation for breaking ethical dilemmas. Such a conversation, however, becomes increasingly difficult as time passes. Have it as early as possible.
Four principles
Recognizing that each person in an ethical dilemma has a valid point of view is necessary to preventing polarization and an eventual deadlock. It preserves a willingness to cooperate. But it doesn't necessarily provide a solution to the puzzle. Our ancestors came up with three principles that can guide us, even today, in resolving general ethical dilemmas. We have added a fourth, specific to family businesses. By applying one of these four principles, the dilemma can usually be solved.
Principle 1: What is best for the most people involved? This requires us to do what Steven Covey advises in “Seven Habits of Highly Effective People”—to “Begin with the end in mind.” It pushes us to look at what the consequences would be if our position or intentions were fully achieved. If Dick, because of his demands, jeopardizes the health of the business, what would that achieve? If Rick, because of his counter-demands, winds up losing his chance to grow the business, what would that achieve?
Principle 2: Would you want your action to become the standard for everyone else in the family and company? Suppose you keep your distressed, non-performing child in a key position because she needs the income and, even more importantly, a place to go to work every day to keep from sitting at home and getting more depressed. Is that the standard by which every employee should be evaluated? If you refuse to sign the buy-sell agreement because you want freedom to do whatever you wish with your one-third ownership, is that the standard by which you want all shareholders to be governed?
Principle 3: Do unto others as you would have them do unto you. Are you dealing with others the way you would want them to deal with you, if the situation were reversed?
Principle 4: If you view ownership of your family business primarily as the responsibility of stewardship, are you being a good steward? Stewardship means that what you own belongs to you for safe keeping and responsible development, but must then be vouchsafed to others who are capable of carrying it into the future. Parents who seek to “own” their children end up destroying their relationship with them. Owners who seek to use the business and family solely for their own purposes end up destroying their relationship with both. Being a responsible steward means putting what is entrusted to you first, and yourself second.
Fortunately, before Dick and Rick completely destroyed their relationship and the business they sought some outside help. After some discussions with them, we concluded that they were locked in a right-versus-right vicious circle. We explained to them the nature of ethical dilemmas. We engaged them in active listening. We then helped them apply the principles to their situation. They went back to the drawing board and resolved their differences.
Once father and son recognized the true nature of their situation, and after some planning with outside advisers, they agreed that Rick would purchase a majority interest in the company from his father. He financed the purchase by borrowing money from a bank.
Becoming majority owner solved Rick's ownership and managerial control issue. It also addressed his father's liquidity concerns; the proceeds of the sale allowed Dick to fund his retirement and provide for his two daughters.
The only negative aspect of the plans were some adverse tax implications from the bank financing. The Lees' accountants warned them of this financial blow, but they chose to absorb it because it was more important for them to satisy everyone's desires and preserve the family peace. They also considered the tax hit a small price to pay compared with the potentially very positive long-term financial results Rick could achieve with Affiliated Steam.
Father and son also created a position for Dick as a part-time CFO, a role he could fulfill while still spending six months of each year in Florida. This provided for Dick's continuing but more limited and focused contribution to the business he built. It also allowed Rick the benefit of his father's experience and wisdom, without the competition and control problems they'd had in the past.
The relationships Rick and his father had with nonfamily managers were stabilized, and the company's major supplier was pleased with the new arrangement. On the family side, Rick's two sisters were grateful that their father and brother resolved their conflicts and that all the familial relationships were back on solid ground.
Under Rick's leadership, the business has grown from $18 million to $25 million. Rick's own son and daughter are beginning to work in the company. Dick has permanently retired to Florida. Perhaps most important, Dick and Rick have succeeded in restoring the positive father-son relationship they wanted. At a recent meeting of family business owners, Rick patted his father on the back and said, “The best thing is, I got my Dad back!”
Edwin A. Hoover and Colette Lombard Hoover are principals of LSi Resource for Family Business Management in Oakbrook Terrace, Illinois.