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Releasing the Prisoners - Part III

By Léon A. Danco Ph.D.
September 1, 2001
Leon Danco wraps up this three-part series on family businesses.

Of course, there's the simple solution of throwing the so-called deadwood out on the street with severance pay for conscience money. But most founders and most successors are moral people with a sense of honor and gratitude. It goes against their basic grain to reward loyalty with disloyalty. But instead of seeking a practical solution, too often the answer that's accepted is to do nothing and wait for the old guard to decrease by attrition (a euphemism for waiting for them to die on their feet).

In justice, these people deserve some sensitive handling and consideration. Long experience, however, has proven that neither the business nor the people get much benefit from maintenance of the status quo. Maintaining the inadequate employee - unchanged, in a position of responsibility - slowly destroys whatever confidence and ability the employee may have, while it gives the wrong example to other employees and tends to erode everyone's productivity.

Readjusting or removing the prisoner-managers is probably one of the most difficult jobs the owner-managers must face, whether they're the founder or the successor. But it can, and must, be done. It requires some frank, but sensitive, discussion with the employee and then some active help, either finding an appropriate level within the company or a job that fits the employee's abilities elsewhere. Often this is not as difficult a project as it may seem.

After all, mangers in their 50s tend to have career objectives that are greatly different from employees in their 30s. Many of the older managers would probably be more interested first in their job security, even if it means a decrease in pay, and second in their ability to support their children in college and the lifestyle they've come to depend upon. They would probably also be anxious to relieve some of the intense pressures they're suffering in their present jobs.

Every case is different, of course. People vary. Situations are unique. But solutions can be found if they are sought with the right attitude.

The same goes for the other prisoners. For example, the dowered children can be assured an adequate living standard in many ways that are much better than the employment of their spouses. Employment in any business, particularly a family-owned business, should never be based on anything other than competence and a desire to work.

A business is not a cornucopia for wealthy kids. It's a fragile golden goose that responds poorly to any prolonged drain on its resource. Children can be given outright gifts or other property to manage - real estate, trusts, investments - for a salary. Either way, the distinction between the gift and compensation for performance should be carefully drawn. If this maxim were followed as a rule of thumb in any employment/compensation situation involving family members, many of the problems I see every day would be cleared up.

Minority Owners

Minority blocks of stock for those not involved in the management of the business tend more to be sources of frustration than of wealth. Depending upon who is involved and why they have the stock, in many cases, these shares can be retired through negotiation - for cash, preferred stock or whatever is acceptable to all parties. But this process usually takes a great deal of diplomacy and tact on the part of the owner-manager - who, in these situations, is almost invariably a successor. There is something magic about having an equity position. Shareholding in growing enterprises is so firmly entrenched in our way of life that there seems to be something un-American about suggesting that minority ownership in a closely held business may not be all that it seems to be.

But it is a fact that for the uninvolved minority owner there are many, many more effective and practical places to hold equity. A major part of releasing these prisoners from a cell they may not want to leave depends on, first, gaining their trust and, second, convincing them of the fact that their ownership is doing - and will do - them little good because of the nature of the closely held business.

Involved Spouses

The situation of the prisoner-wife is probably the most uncomfortable of the lot because she is intimately involved with the source of many of the problems. Her husband. But because of that involvement, her situation is often one of the easiest to solve.

Wives should be active partners, if not in the running of the business, at least in the philosophy, the thought and the concerns. They can be saved from the widow's prison through careful understanding of estate planning.

But in so many cases, business owners come to me almost adamant that their wives don't need to know anything that we're talking about. Since they have to tell their wives something, they tell them not to worry, everything has been taken care of.

These men seem to assume that estate planning is a male activity and their wives don't realize, until tragedy strikes, how essential it is for them to be involved, informed and prepared. The same essential point applies to the daughter-in-law, only in her case it's not preparation for tragedy but preparation for success that's important. If she is going to share her husband's life in a way that makes her feel contributory as a person instead of an ornament that's kept, she must feel that she is sharing. She must really understand the business and her husband's activities. She must help him through his problems and concerns if he is going to continue to share them with her. If this doesn't happen, the business and the problems will eventually become too complex to explain to someone old. Then it can be too late, and without an idea of what is really happening, she can instead become a prisoner to the fantasies of her own capable imagination.

Captive Children

Finally, there are the children who joined the business for all the wrong reasons. These prisoners are much easier to release before they join the business than after they're in it.

Heirs should be encouraged to join the business, but only if they are given a full knowledge of what it entails and, if possible, with some career experience elsewhere to give them the ability to objectively compare a career in the family business with other options. Outside experience has the further benefits of increasing the heir's credibility with the non-family employees, as well as giving them some qualifications for other jobs in the event employment in the family business doesn't work out.

Ownership of a successful, growing family business can be one of the most fulfilling and enjoyable ways of life possible. Working for a successful family company can have many significant advantages over the less personal, more bureaucratized public company. But all of these benefits depend upon the willingness and commitment of the people involved, qualities very seldom found among a population of prisoners.

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Léon A. Danco, Ph.D. is the founder and CEO of the Center for Family Business, Cleveland. He regularly contributes articles to The Driller.

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