As every family business shareholder knows, ownership is a mixed blessing. The issue of ownership is often fraught with ambiguities that can trigger battles between the generations.
Family members who have received shares in the business as gifts, for example, are expected to support the strategies and actions of the majority shareholders who made those gifts. Sometimes they also are expected to attend events they have no interest in or to publicly support policies they disagree with.
There are a number of underlying factors:
Control
During the last two years I’ve asked 40 older shareholders if they are glad they gave shares in the company to younger family members. Thirty-seven said “No.” These business owners’ gifts were motivated solely by a desire to avoid estate taxes. The elders used various devices—formal or informal—to ensure that the senior generation remained in control.
The use of two classes of stock (voting and non-voting) is a common formal control option. The “giftees” get the ownership but no say. An informal way of exerting control is by declining to provide access to detailed financials.
As one elderly estate planning professional put it (with a gleam in his eye), “The ultimate test of success is to own nothing and control everything.” The flip side is that the younger relatives become owners without a voice.
Many minority shareholders also are in this situation. The more legislators and the courts try to assert the rights of these minorities, the craftier the planners opposing them become.
For members of the next generation, gifts of assets like trusts, houses, non-voting stock and partnership interests are often accompanied by a list of angst-inducing constraints. There may be explicit or implicit restrictions on whom they can marry, where and how they’ll live, what names their children will receive, where they’ll attend school, etc. Compliance cannot be made mandatory, of course, but the cost of non-compliance is huge.
Many of the expensive, disruptive activities that occur in this arena are evil side effects of estate taxes. Others reflect generational differences or the centuries-old problems associated with greed, envy, lust or ancient hurts. The huge rise in divorces and blended families hasn’t helped.
Whether or not we can rid ourselves of estate taxes remains uncertain, but no matter what happens, it is healthy to adopt a policy that treats all adult family members like adults. If some of the kids want the money rather than the stock, or just want to be free of the inhibitions that go with ownership, they should be given that freedom.
The family’s accountants, attorneys, estate planners and financial advisers all can help to construct a decision that fits the situation. When persistently immature or disabled adult children are involved, consult a psychologist or an M.D.
Expectations
Assumptions that family members will (or won’t) work in the business become complicated if one also is an owner. Is working in the company a responsibility? Is it a right? If you don’t do it, does that make you a second-class family member? Are you free to not do it?
Many older family members brush aside such concerns. Very few people in their 20s have the maturity gained by earlier generations, who typically entered the workforce at younger ages and often had much larger responsibilities earlier in their working lives. Next-generation members should be coached and counseled by older family members, non-family employees or a third-party professional.
If the problems are ignored or avoided, they will fester. The result is an underperforming, disgruntled employee, who, as a family member, may be a discordant sacred cow on the premises. It’s better, if possible, to catch the signs of inappropriate attitudes, expectations or behaviors early and deal with them promptly.
One high school senior accompanied his parents and siblings on a vacation. He proposed that they hire a driver and limousine for their local touring rather than joining a tour bus group. His dad nixed that idea as too expensive. The son protested, “We can afford it. We’re rich.”
Dad corrected him: “Your mother and I are rich. You’re poor.” After the quick tough love to make his point, Dad started an education program for all the kids about money and how to handle it.
Status in the community
People who no longer own businesses tend to be viewed as lesser in status than those who still do. Former family business owners will still get points for their philanthropy and civic contributions of time and talent, and for being a nice family—if those things apply—but it won’t be the same. One community leader, referring to a family that had sold its business, said, “They used to be important here. Now they’re just people with money.”
Another business owner seriously considering selling his company asked me: “What will I be when I’ve sold it?”
I told him, “You’ll be a rich guy who has sold his company.”
“’m not ready for that yet,” he said. Then we discussed the mixed feelings involved.
Of course, i’s unwise to continue to own a company for status reasons only. When it makes sense to sell a company, the loss of status is one of those things that simply must be dealt with. If your family is unwilling to take risks or to invest the energy and resources necessary to pursue opportunities, the best thing for the company and its various constituencies (customers, employees, suppliers) may be for it to have new owners.
Community status often is more important and useful to younger family members than to the senior generation. They are recognized, catered to and quickly accepted because of their family affiliation. Young adults in a successful family business, like the princes of earlier centuries, bear the burden of demonstrating that they have the goods and are worthy of their special position. But they also learn that status brings envy, gossip and attempts to manipulate them. Some are very tired of this and regret being a part of it.
Effects on motivation
Business involves lots of activities that, while necessary, are tiring and boring and don’t add clearly to profits. Only those with high motivation continue to do them and understand the need.
Few young people who have received lots of money (or who have been assured that plenty of money will be available to them later) are motivated to work hard and effectively. Relatives at any stage can be unmotivated, but the problem is markedly present in the third and fourth generations.
Ownership ambiguity is a big problem in business families with several members who are not sufficiently motivated. If they were not owners, they’d be asked to leave. Having them remain reduces the value of the company. Getting them out may create major family problems. For guidelines on handling such situations, see my article entitled “A business approach to a family problem” (FB, Autumn 2005).
A philosophical approach
All organizations—whether they are family-owned businesses, public corporations, partnerships or quasi-government entities—must manage shareholders and other elite groups. Here are four suggestions for developing a workable philosophy.
1. Ambiguity is normal. It’s not a sin; there’s no need to feel guilty. There is also no reason not to discuss the situation—but be sure the discussions are kept private.
2. Release the prisoners. Unhappy shareholders must be given an opportunity to exit. The same is true of unhappy or unmotivated employees—even if they insist they don’t want to leave.
3. Decisions change. The correct or appropriate stance on an ownership issue at one point may not be viable a few years down the road. Circumstances change; people develop and age; health changes emerge. Revisit your old decisions from time to time.
4. Communication is good. Too many business families end up dealing daily with preventable problems rather than discussing them.
Dealing with people can be exhausting. But with a conscious approach that is communicated carefully and repeatedly, it can become much easier.
James E. Barrett (jebcmc99@comcast.net) heads the family business practice of Cresheim Inc. in Philadelphia.