Divider
Divider

Lewis Schiff
Lewis Schiff
Risky Business

When the kids take over the family firm.

September 17, 2009
by Lewis Schiff

When a son or daughter steps in to take over the chief executive chair of a family business, timing is everything. At the time of transition, has the new executive gained sufficient business experience and maturity to manage people and an enterprise in which several family members may be nonworking stakeholders? Have the transition details been outlined in detail to account for the client-CEO's retirement, disability and death? The client, the business and family stakeholders are at potential financial risk after a transition, which places extraordinary demands on the inheritor — and typically involves several proofs of interpersonal politicking. Those anointed to the owner/manager role can be similar to infants trying to standup and walk — the sharp-edged realities of the world and their own blind eagerness conspire to topple them.

As part of the overall analysis and planning for clients who own businesses, advanced planning groups examine financial issues but just as importantly, they help create the outline for an orderly preparation and transition from generation-owner to the next — and prepare for the unexpected.  With the delicate balance of personal dynamics, practical demands, and power shifts found in any family business regardless of its size, successes can pop unexpectedly and surprisingly, while failures can simmer away for many years protected by enterprise senior management until they become visible to all.

Unprepared, Yet Successful

Sometimes circumstances bring an unexpected turn in top management — and an underprepared, untested new leader without a transition plan to follow. When her husband committed suicide at age 48, Katherine Graham took over The Washington Post Company, which her father had purchased 30 years earlier at a bankruptcy sale. Her father had never considered her to run the company, and Graham had never expected him to give her an important job at the newspaper. She had only held relatively low positions editing the letters to the editor at the Post and as a labor reporter in San Francisco — a career path that wouldn't normally lead to the CEO's office. She did, however, have a deep appreciation of news and the profession of journalism — and she knew the top journalists at the paper.

After grieving for a few weeks following her husband's death, she was elected president of the company by the board, but she didn't see herself as taking over or becoming the true head of the company, she stated in her autobiography, Personal History.  She saw her personal and career task at that moment as being a "silent partner," learning from the sidelines and acting as a bridge until her children could inherit the top positions. The year being 1963, she believed she had to support the "strong men" who managed the company and only learn what she needed in case some major corporate decisions required her participation as the holder of "A" shares in the company.

She quickly confronted that fact that she couldn't just sit in the audience. She was required to be onstage. "I naïvely thought the whole business would just go on as it had while I learned by listening. I didn't realize that nothing stands still — issues arise every day, big and small, and they start coming at you. I didn't understand the immensity of what lay before me, how frightened I would be by much of it, how tough it was going to be, and how many anxious hours and days I would spend for a long, long time. Nor did I realize how much I was eventually going to enjoy it all."

By all accounts, she learned to be a strategic, shrewd businessperson and important supporter of journalism. Warren E. Buffet observed Graham close-up as a major investor in the company and during his service as a director of the Washington Post Company during half of her 28 years of active management. He saw how she struggled with doubt about her ability and qualifications even after recording remarkable journalistic accomplishments and corporate courage, such as during the newspaper's coverage of the Pentagon Papers and Watergate. Her business success really impressed him — the Washington Post Company went public in 1971 at $6.50 per share. Twenty years later when she stepped down as CEO, shares had grown to $222. Nevertheless, Buffet observed, "this spectacular performance — which far outstripped those of her testosterone-laden peers — always left Kay amazed, almost disbelieving. She was never quite sure where debits and credits belonged and couldn't shake the feeling that the lack of an MBA degree destined her for business failure."

Four Tests of Anointed Leaders

Ivan Lansberg, senior partner at the New Haven, CT-based firm Lansberg, Gersick & Associates, identifies four kinds of tests that new anointed leaders in a family business typically confront:

  1. Qualifying tests. Before the child ascends to the executive throne, stakeholders expect achievements in education, career accomplishments outside of the family influence and other evidence of professional development. In short, the stakeholders seek to measure the anointed candidate against the high criteria they would expect from a non-family job seeker for the position.
  2. Self-imposed tests. To help define them in the leadership role, inheritors tend to construct tests of their own design, whether consciously or not, to publicly demonstrate their abilities. A revised business strategy, organizational restructuring, or acquiring another business are typical examples. It's an opportunity for stakeholders to elevate their perception of the new executive. On the other hand, grand plans come with the risk of failure.
  3. Circumstantial tests. Labor disputes, sudden death and other unexpected challenges all qualify. At such times, the successor must appear in control and able to manage to the crises. To the stakeholders, he or she must appear to lead the analysis of the problem and manage the solution in order to gain creditability.
  4. Political tests. Successfully maneuvering through internal political battles is another way new leaders demonstrate strength and shrewdness. Rivals who resent the inheritor's new position may sabotage plans and spread false information to undermine the new executive. New leaders need to refine their own instincts and personal sources of information and advice outside of the existing set of corporate or family colleagues whose allegiance may be conflicted.

Conclusion

As seen in the case of Katherine Graham, she and the company succeeded despite her lack of personal preparation for the role. She triumphed with her interpersonal skills, commitment and vision that meshed with what was best for the company. Fortunately, she thrived, as did the stakeholders. The suicide of her husband wasn't a total surprise — it followed several years of psychiatric care with periods when he wasn't able to run the company. Nevertheless, no transition plan was in place when Graham suddenly was drafted to take over.

Every family business and the family dynamics behind it are different, but detailed succession plans can help prepare, guide, and support the new company leaders — and protect the financial interests of the family stakeholders.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Lewis Schiff is the principal of Advanced Planning Group, a family office network for advisors. His latest book, The Middle-Class Millionaire, was published in January 2008. View complete details on how to receive a free report on The Highly Effective Habits of Successful Advisors by the authors of The Middle-Class-Millionaire.