The Family Business: A Compassionate Monarcy

Just as the Internet is a decentralized, low barrier to entry information marketplace, family-owned businesses constitute a metaphorical Internet in the bricks and mortar economy. They exhibit the same complex, decentralized structure as the real Internet, and the same capacity for innovation, growth and (often rapid) decline.

The notion of the Internet as a metaphor for family businesses, however, breaks down over the issue of time. Internet time is variously described as fast, faster, and fastest. Time to the owner of a family owned business means at its most fundamental, the time to complete one’s life work, to raise children and to retire comfortably. While privately held firms are a vehicle for accumulating wealth, they are, fundamentally, an expression of the ambitions and skills of the their owner managers.

Family owned businesses are the predominant form of business ownership worldwide. In the United States, family owned businesses generate approximately one-half of the gross domestic product, and employ about one-half of the country’s workers.

In addition to providing a large proportion of economic activity in this country and a large proportion of its job base, innovation among family held businesses, both in the form of start ups and innovations within existing companies, plays a central role in sustaining growth and innovation generally. This occurs not only when a family owned business successfully develops a new business niche, but also as a prod to and source of ideas for larger non-family owned firms (sometimes to the dismay of the nimble, creative smaller firm which is overwhelmed by a better capitalized imitator).

Although family owned firms tend to be much smaller on average than publicly traded companies, smaller firms, by their sheer numbers, represent a healthy diffusion of wealth and market power.

Family owned firms are like publicly owned firms in many obvious ways, the foremost of which are, first, that they have to make money, and, second, that good management pays.

Family owned businesses are also always different in two primary respects.

First, if a publicly traded company can be viewed, by virtue of a more or less independent board and its accountability to public stockholders, as a kind of republican democracy, a family owned firm, by virtue of concentrated ownership and a tendency to favor family members in employment and dividend decisions, can be viewed as a kind of hereditary monarchy. There is much to be said in the realm of business, as much as in the real world of politics, for the republican democracy model. All the same, a family owned firm can, through a sophisticated understanding of its own strengths — longer horizons, nimble decision-making — turn a monarchical structure to its advantage.

The second distinction between family owned businesses and publicly traded businesses is the impact of family issues, and not just family members who are owner managers. Owner housewives, owner graduate students, owner cousins and owner aunts affect, for better or worse, the conduct of the family business.

The challenges likely to be posed by monarchical control, moreover, are lack of accountability (is management giving all stakeholders — passive owners, employees, customers — a fair share) and inflexibility (is management keeping up with changes in its market, is it looking at opportunities to improve operations) can be met with a conscious and sustained effort at consultation and feedback with competent outsiders.

The problem of the effect of family dynamics on the family businesses is more difficult for several reasons. It is more difficult because it is often not recognized as a problem. It is more difficult because, as varied as individuals and families are, it takes many forms. It is more difficult because even if a controlling owner thinks he or she has it licked, it changes over time, as business and family moves through their own transitions, — business growth, family growth and succession pressures that intensify as the owner’s adult children mature.

Like a garage tinkerer in the days before solid state circuitry, an owner inclined to tinker and to explore the distinctive dynamics of a family owned business can pull off the back panel of his or her business, pull out the parts and spread them over a lab table. Broken down into its constituent parts, a family-owned business will yield the outline of otherwise invisible processes.

Four moving parts define family business dynamics. The first moving part is operational control over the business (a complicated area in its own right); the second is family dynamics (in or outside the context of the family business); and the third is ownership (relatively simple in the early years, more complicated, as each generation matures). The fourth element, which introduces the greatest complexity, is the passage of time.

The ownership issue is simplest at the beginning of the life cycle of family business, and can grow extraordinarily complex as ownership passes to a second or a third generation, to family members of varying capabilities and uncertain personal ties to each other and varying interest in the business itself. The operation of the business, although complicated all the time, becomes more so in a successful business, as the firm evolves into a stable, established business, and as it faces challenges from new competitors and new products.

The choke points, the points of profound stress and danger to a family owned business, occur as the family and the business, independently but coincident in time, are asked to successfully navigate one or more of these transitional passages. One example would be when a growing company demands the expertise of a non-family member at the same time an adult child of the founding owner is pushing for more autonomy and managerial authority. Another example is a company in transition to new markets or new product lines at a time when the third generation in the family, with many more members than the founding or first succeeding generation, pressures the company management for increased dividend distributions.

The advantages and disadvantages of a family-owned business, as well as qualities that are distinctive but do not necessarily bestow either advantage or disadvantage, arise from the influence of the family owing the business. There is no textbook response to this influence, because there are no textbook families (from a business theory standpoint). What there is is a model for identifying the moving parts, the gears and levers of our garage tinker, and a model for formulating predictors for each of those parts — not just predictors as to how they function, but predictors as to how they interact. By shedding a light on function and interaction, we make it more likely that the business and the owning family continue to function over decades. The end product may change, but the gears grind on.

An economist studying the family-owned firm — the business monarchy — cannot build his or her analytical model around an entirely rational decision-maker because economically rational owners do not hold an executive spot open for a son or daughter just graduating from college. They do not declare a dividend because a shareholder has a vacation condominium under contract and needs the down payment. They do not sell or close down the business out of a personal desire to retire or slow down.

There is, on the other hand, a rational way — a rational procedure — for addressing executive recruitment among family members, dividend policy and management succession.

These rational procedures come into play at the overlap of otherwise distinctive realms, the hard-hearted world of business on the one hand, and the realm of family on the other. There is also a distinction between the norms, values and membership rules that apply to the business and those that apply to family owners who are not involved in the business, such as second and third generation brothers, sisters and cousins who come into ownership through inheritance, transfers and trusts or outright gifts.

This suggests a three overlapping circle model to understanding family businesses. The first circle is family, the second is ownership and the third is business. At the center, where all three circles intersect, are the family members with significant ownership stake in the company and who in fact manage the business. Non-family, non-owning employees are in the third, business circle, but not in any other circle. Family members who own no stock and who work outside the family business are in the family circle, but in no other. Outside stockholders with no managerial role occupy the ownership circle, and no other. Some family members may not work in the business, but own stock, and therefore would be included in both the family and ownership circle, and so forth.

This three overlapping circle model facilitates an understanding of problems that might otherwise frustrate and baffle family members and their advisors. Siblings with lifelong close personal relationships might find themselves at odds over distributions. Sibling A, who needs the money to finance her child’s education, might feel personally betrayed by her sister, an executive in the family business, who resists paying the dividend. Each sister is in a different place in the three overlapping circle models. By understanding that, the sisters can begin to understand the conflict as one involving the competing but legitimate needs of the family on the one hand and the family business on the other, thereby increasing the likelihood that the two sisters can discuss the issue with less emotion.

Similarly, a founding parent faced with a choice of favoring one of two children aspiring to a control position is better equipped, bearing the framework in mind, to parse the personal from the professional issues. The three circle framework brings into focus how various stakeholders view a particular problem through a distinctive lens.

At a deeper level, the three circle model leads to insight into circumstances of greater complexity, as the passage of time and evolution of the family and business environment place stresses on the family and on the business. In the case of the founding owner faced with a choice between two offspring to succeed him or her as president, the first generation owner is likely also to have his or her own retirement in mind. In other words, as an investor, the task is not managerial succession, but preservation of capital. In this context, the possible wisdom of a sale or merger complicates the calculus. This model, therefore, takes into account the passage of time and changes in the personal and professional circumstances of the parties affected.

Within each circle, then, as circumstances change, values change, opportunities appear on the horizon and the actors have different and evolving strengths and weaknesses. It is possible to identify stages within each circle through which the actors in a family business — the family members, the business and the market in which it operates — change.

The simplest cycle is found in the ownership circle. Ownership starts with the controlling/founding owners. It then passes to the first generation offspring, typically siblings, although sometimes cousins, then to the third generation, a relatively more dispersed group of cousins. Note, ominously, that the model consisting of founding owner to direct offspring and then direct offspring to second generation model probably happens less often than either a sale, merger, termination or reversion back to centralized ownership. Only when family members self-consciously manage the ownership transition does this first to second to third generation transfer sequence occur.

The business itself typically evolves over time from start up, to consolidating success and professionalizing and then to maturity.

The circle representing the family’s relationship to the business evolves as the family grows. The most important watersheds after the first generation has established the business are second generation members entering the business, working out the roles of family participants and turning over control.

Each family business can, at a given point in time, be located at a point on each of the three time lines (ownership, business and family). Managing and exploiting important transitions along each of the three timelines requires owners to recognize when an important transition along any one of them is occurring. Indeed, within each time line, different transitions can be taking place for different people. Along the family time line, for instance, the founding generation can be addressing retirement and economic security issues, while siblings in the second generation are working out their own issues of cooperation and hierarchy.

Focusing on the ownership circle, it is important to avoid thinking about an intergenerational change in ownership as always being paired with a change in managerial control. In fact, control typically changes slowly and comes in many forms — different classes of stock, trusts and other structures. Indeed, variations in control, and in control transition are arguably likely to depend on where the family business is in its own business development time line rather than a function of managerial control. For example, the owner of a mature company might take advantage of the steady cash flow from such an enterprise to issue stock to family members for the purpose of distributing profits, but with no intention of relinquishing control. Consequently, while control tends to be an unitary condition involving one or perhaps two spouses or two siblings, ownership may be dispersed over the founding generation (which might have already given up management control), the generation with managerial control and their offspring. Ownership, therefore, tends towards dispersal through the generations.

Because the population count of family members who are owners is likely to be greater than the numbers of family members in control, it is also a challenge to the controlling members to balance the control they hold with a system for facilitating input from non-controlling family members who own stock. Indeed, this is the ground zero for conflict and a drain on time and financial resources. The cost of unhappy stakeholders, even those with no legal power, tends to be high and chronic. It presents a large opportunity for improvement when a useful analytical framework is imposed, because personal relationships count for so much in a family owned business.

This challenge, the need to be respectful of impute from non-controlling family stockholders, presents an opportunity for turning a necessity into a virtue. Owners of closely held businesses often get consumed in the details of the business, either acting, or positioning themselves to be, or to seem to be, indispensable to the smooth operation of the business. They may also be at the psychological center of the family. As the controlling owner or owners face decisions about bringing offspring into the business, a tradition of consultation over the years role facilitates that process.

During the period a company is controlled by the second generation, there is a tendency to be more pressured to have consultation with non-controlling stakeholders in the family business. Note that the second generation owners, while not confronted with the challenge of building a business from nothing, face stress both from succeeding the founding generation and in establishing their leadership among non-managerial family members in the same generation. This involves developing a role that non-employed family members can be comfortable with. In addition, the second generation owners must square whatever needs the company has for capital with a growing constituency of owners looking for distributions. The risk of factionalism is also high because of the different status among family branches vis a vis the family business.

Second generation control patterns range from essentially a reprise of the single owner parent generation ownership, that is, an anointed heir, through a “first among equals” model, where one sibling is the most influential, but does not overtly exercise parental-like authority, through a true partnership, where siblings are comfortable with collaboration and in bringing to bear their personal strengths. Not surprisingly, the distribution of ownership interest plays a part in how the control dynamic evolves.

When ownership is distributed to offspring, it also sets up competing interests between those in the business, who are concerned about status and the financial rewards flowing from successful stewardship, and non-employed owners, who tend to be interested in dividends. The employed owners’ desire for leadership, recognition and financial reward tends to bring more of a long term focus than is the case with non-employed owners, who do not have an intimate feel for where the business’ strengths and promises lie. In addition, within that group are siblings who might have expressed an interest in working for the family business, but were either excluded or lost out to siblings in promotions and so moved on to other careers.

The dynamics of family ownership become considerably more complex as ownership passes to the third, cousin generation, where there tends to be less solidarity arising from a common childhood, as well as a less intimate sense of the family businesses’ history. There also tends to be large groups not in the family business. Furthermore, within each group, interest and orientation diverge further by virtue of marriage, the greater variation in age between cousins and the fact that ownership now tends to be dispersed over two or more generations. Indeed, there may be stock owned by trusts, either created during the life of the guarantor or arising as a result of their death. The influence of a dominate founding owner, moreover, may, because of death or retirement, be a matter of history at this point.

Because of the complexity of the owning group, it is critical that management approach consultation and communication with non-managers in a systematic, self-conscious way. It would be a mistake to underestimate the interest that non-participating family owners and their spouses have in the family business. There is also always the possibility, moreover, that some of them might bring to bear insights of real value.

Note here that a family member’s sense of loyalty and proprietorship towards a company in the second and third generation tends to become more attenuated, and, certainly, less based, as it might have been in earlier years, on a sense of personal loyalty. Consequently, a formal consultative process becomes critical in cultivating a sense of loyalty and cohesiveness towards the family. There is, in a word, a political element to the process at this point. The challenge is to inculcate loyalty towards the family business, but not have ownership of stock in the family business as a centerpiece to a sense of membership in the family. There should be a sense of family identity disconnected from the family business.

This is critical in considering a second important issue arising as ownership of the family business among family members becomes more dispersed. Cousins not employed by the business may be comfortable with management, loyal to the family and delighted with the company’s dividend policy. They may, however, need the wealth represented by their ownership in the company to pursue unrelated professional goals, and so may wish to sell their ownership interest.

A well managed internal market among family for stock allows these family members to sell out without such an action being viewed as a disloyal act. An internal market also allows family members to retain control. Allowing for internal markets also tends to discourage factionalism based on family branches. For non-family members in key management positions, orderly communication and collaboration among cousins, and a functioning internal market allows non-family members in key management positions to feel more comfortable about the stability of the company, both from a standpoint of management focus and the risk of control changing hands.

Owners in a widely dispersed third generation and non-family member managers, however, need to recognize that when ownership reaches a point of wide dispersal, the likelihood of a coordinated group exercising control becomes less likely. This can lead either to control by management, whether family members or not, or it can lead to a change in control by virtue of a cumulative sale of stock to outsiders or a sale by the company of its assets.

Rules for the internal market in company stock should be established as early as possible, so that the rules are agreed to before conflict or politicking.

The second interlocking circle is the circle of family. In the context of a family’s impact on a family-owned business, the most interesting dynamic is the interplay of active family members personal and professional development as an adult with the demands at particular times of the business itself, whether for expertise, nimble decision making or additional capital. In other words, as families go through their own cycles, they interact with and affect profoundly the life cycle of the family business, sometimes for the good and sometimes otherwise.

The evolution of families as it relates to family businesses involve several stages. The earliest is when the family is young, and only the mother or father is involved in the business. The second stage is when an offspring has an interest in joining the family business. The third is when adults from different generations work together. The last is when managerial control passes from the elder generation.

For owners with young children, the interaction of family and business tends to center around the issue of balancing the demands of the business with the need and desire to spend time with family. Secondarily, there may be a challenge of interacting with extended family who own part of the family business, but do not participate as employees. Finally, and not least, are wives and husbands not active in the business.

The relationship with spouses is key at this point. Typical patterns include both a workaholic spouse partnered with a spouse totally committed to maintaining a household and raising the children, and marriages in which household and child rearing duties are shared, but each spouse is busy in the business. In the latter case, there is often a paid caretaker shouldering much of the child rearing burden.

Notice how one model will have a different effect on how the children view the family business. The dynamic will necessarily vary with the varied circumstances and individual personalities. Whichever model tends to describe a particular marriage compact, owner-parents tend to bring work and its attendant worries and issues home. Consequently, such an environment tends to cultivate a connection between those children and the work of the parents.

Under either a partnership or division of home and work labor, it is important that the spouses are comfortable with the type of relationship it entails. Where one spouse is not involved in the business and concentrates on the home and children, there is a tendency for the working spouse to be more senior in power and influence. Neither model is more desirable from the standpoint of the family’s relationship with the business. Rather, it is essential that the spouses in each situation be comfortable with the arrangement.

It is also worth bearing in mind that one spouse’s parents and other family members may also be involved in the business, while that spouse’s in-laws have no connection with it. This can lead to tensions over a perception that one family has absorbed the new family member, at the expense of that spouse’s family. The opposite can occur, that the business owning family does not like the new spouse, and the business is used as a means of erecting a barrier against the new member.

Decisions made about how a young couple will involve themselves in a business strongly determine the division of labor once children arrive. New parents are well advised to discuss the likely impact of child care duties on their respective roles in the business. Having children effects parents’ thinking about the family business in two respects. First, it creates a competing demand for time. Second, it tends to extend business planning beyond the parents’ own work life into the next generation. To the extent that the parent has an interest in facilitating a child’s participation as an adult in the family business, he or she must be conscious of the impression that the parent’s activities during the child’s childhood make on the child.

When the children of the family business owner begin their working life, the owner faces the challenge of both the transition in his or her children’s lives as well as the transition in his or her own working and personal life. Dealing with that professional transition effectively often entails successfully recruiting children into the family business. As a parent, however, the owner is also keenly interested in his or her children making good career decisions, so that recruitment entails both something a great deal less and a great more than salesmanship.

Although the owner may be in his or her forties or early fifties, there is a great deal at stake from the standpoint of continuity of the family business. There is both the practical question of whether the business will be passed on in the family, and the more subtle question that mid-life owners often ask, whether the effort to build the company was worthwhile if the owner sees that there is no interest on the part of the second generation to enter the business. The mid-life transition is often a time of self assessment. If the opportunity has in fact not passed, surely this is the last stage of an adult life where it is reasonable to consider choosing a different path. This process is, of course, bound up in the parents’ desire that their children start off on worthwhile paths.

If one or more members of the second generation decide to enter the business, the parent and child or children must work out an entirely different relationship, owing to the child’s desire for a sense of independence and self worth. A protective approach on the part of the parents is both a source of irritation to the child and an impediment to the child developing his or her business skills.

The process becomes considerably more complicated when more than one second generation sibling enters the business. Natural issues of competition, both for the approval of the parent and between the siblings, is inevitable.

Despite rivalry between siblings in the family business, entering the family business confers a status on those family members vis a vis the family members not entering the family business. There is the satisfaction of continued intimacy and interdependence in working together. Furthermore, the participants in the family business tend to be at the center of things for the family, insofar as the family business tends to command the family’s psychological center of gravity.

Statistical and psychological studies suggest that first born tend to identify more closely with the values and style of parents than do later born. Later born, whether second born or at the end of a long line of children, tend to establish other psychological niches in the family ecosystem. The different personality types that develop through childhood carry over into how those individuals function in the family business setting. If a business, twenty or thirty years after its founding, lends itself to a management style consistent with that of the founder, then that fact, together with a strong primogeniture impulse, favors the first born, particularly the first born male, for the dominate role in the family business. Often, however, the primogeniture tradition and the bias towards males in business clashes with what might best suit the company. A prototypical later born style — more flexible, or at the least more flexible than the founder, may suggest a leadership style more suitable to the current needs of the business.

If founding parents impose a competition on siblings, an all or nothing challenge, the siblings are less likely to develop a close working relationship with each other, and are less likely to develop collaborative, complimentary styles . The challenge of the retiring first generation is to recruit members of the second generation who are enthusiastic and suited for the family business, to empower them in a way appropriate to their strengths, and, most critically, to do so in a manner that enhances the siblings’ ability to collaborate fruitfully once the parents fade from the scene.

Once the stage is set for one or more children to enter the family business, the two generations must develop a working relationship that both enriches the business and facilitates professional development on the part of the entering generation. If the family business is successful at this point, there will be a call on company resources to finance the parent’s full or semi-retirement opportunities for expansion and innovation that attend a business with a track record, good cash flow and an established presence in the market. As a result, this period is likely to be perhaps the most difficult transition for an established business. The founding generation wants to slow down but enjoy a high standard of living. The company is likely to be in its own transition. The founding owners, after a lifetime of control, feel pressured to share control. The second generation is making the transition from children to autonomous responsible executives. Siblings are competing for opportunities in the company, but need to develop a collaborative working relationship.

Because these issues are situational and vary from business to business, it is important that family members are aggressive about finding a procedure for working through these conflicts. The keystone to such a procedure is a system of communication. Family members must find an ongoing forum in which they can be honest and open and deal systematically and in a timely manner with important issues as they arise. It is a particular challenge for the older generation to provide feedback on performance and to mediate disagreements.

Leadership in establishing an enduring, fruitful procedure is difficult and not obvious, but essential. It is hard for some parents to include their children in frank discussions about finances. Children, on the other hand, might be reluctant to weigh in on subjects which had always been perceived as a private realm of their parents.

Issues of communication, intergenerational and cross generational relationships are resolved in different ways by different families. This arises not only from varying sensibilities, but often has its roots in the family’s style of interaction over the preceding decades. A family whose children have “grown up” in the family business, both by working after school in the teenage years and participating in discussion around the dinner table, will be comfortable with a different approach than would be the case where the family and business realm had historically been kept separate.

In-laws and spouses of the working family member may become well informed about the emotional life of the working member, but not have all the information about the business to put it in context. It is therefore worthwhile considering whether in-laws should be provided with relevant information about the business directly, so that they do not develop an incomplete or possibly negative impression about either the family business or about siblings of their family member spouse. In all events, there is likely to be a greater degree of periodic tension and conflict as ownership and control evolve from a hierarchical structure to multiple second generation units. Personalities differ, family members are pulled in the direction by their spouses and individual financial and emotional needs of each family branch diverge.

It is important to recognize the difference between the need for working through conflict to reach a resolution, such as selecting a successor president, and working through conflict in a way that makes its participants feel that their status, within the company and within the family, is recognized and respected. Hard feelings on the part of a non-family executive who comes in “second” in the race for president are more likely to become history than hard feelings on the part of the brother or sister who came in second. That lingering resentment can weaken a company and distract management for years. It is therefore both a business necessity and a parental duty to insure that the process of succession is a considered, self-conscious process.

It is difficult for the senior generation to disengage. First, there is a sense that the founding owners know the business best, and that letting go of control puts the company at risk. There is also the sense that the senior generation will lose its status as the center of the family, as well as the sense of power, status and specialness that that entails. Even a succeeding generation can feed into this reluctance to let go. There is a fear of being seen as greedy, the fear that the first generation’s withdrawal will open fissures among second generation siblings and the symbolic effect of that withdrawal as a kind of rehearsal for the loss of the parents, a metaphor for their death or senescence.

Despite the profound importance for both the family and the family business of a thoughtful psychologically satisfying process of succession, the actual process is often triggered by an unexpected event, either a business reversal or something happening to the founding owner, such as a heart attack.

Families need to find a psychological framework for starting the succession process. A founding owner with a sense of being a pioneering leader might rather consider his or her role as the creator of a legacy, the steward of an institution. This validates a sense of the heroic, but also requires that the pioneer, in order to fulfill his or her role fully, facilitates a smooth succession.

Sometimes an impediment to shifting the thinking is inherent in the status of the business itself. The business might be on the threshold of a new level of success, or face a particular challenge that the founding generation feels the need to address personally. This is perhaps fed by a need to prove to the world that the founding owner is indeed as valuable as his or her self image, and somehow irreplaceable. A resolution to this issue is found to some extent in non-business settings. The family can honor the founding generation through a family system and in symbolic events, such as having regular family gatherings on the parents’ territory.

The business too has a natural cycle. The sign posts along that cycle must be identified, and their significance understood in the context of developments occurring within the family circle. Fundamental, however, all businesses tend have at their core a cycle of startup, expansion and then, hopefully, a period of mature stability. The other transitions in this cycle occur in relation to transitions occurring in the evolution of the owning family. The interaction affects how these transitions are handled and exploited.

Step one is to recognize how and why organizations change over time. They change in response to external social and economic forces, such as competition and the structure of markets, and they change because of internal developmental forces, typically understood as a process of maturation. The role of owners in responding to external forces is largely reactive. The response of owners to these internal forces depend largely on their ability to recognize them as they occur. The fact is, however, that there is no clear model, given the complex interaction of family dynamics and internal business dynamics.

The touchstone of organizational development is growth. This is in a certain sense quantifiable, measured in sales volume, employees, market share and the like. Measuring growth, however, doesn’t lead necessarily to an understanding of how to respond to the challenges of different developmental stages of a family-owned business. Data masks rather than brings into focus the notion of complexity. Complexity clearly increases as a company grows. But complexity, as such, presents both challenges and opportunities.

Focusing on complexity tends to lead one to questions of structure, rather than simply size or volume. The structure of both production and of management change dramatically as complexity increases. Changes in complexity can be dramatic — a sudden shift in the market for example — or, more typically, they can be gradual, and difficult to recognize. Complexity may arise in one part of a company — management, as younger family members enter management — but not in others.

In the startup business, the challenges of complexity tend to relate to external forces. In other words, the company is attempting to survive, to gain a toehold in the market, and establish a sustainable capital structure. Perhaps the one area of complexity posing the greatest risk to a startup is to have unrealistic expectations or hopes about the likelihood of success. Goals can be disproportionate to either the financial or managerial capacity of the entrepreneur.

Ironically, second generation owners might be driven by a need to prove their pioneering abilities, and to replicate the success of their parents. This would clash with the needs of some companies, which are established and require a different style of management. Thus, in both the founding generation and the successor generation, it is important to consciously avoid allowing dreams and other realistic ambitions to crowd business judgment.

As a business expands and becomes more routinized in its procedures, the need for professional, as opposed to entrepreneurial managers increases. There is a premium at this stage on strategic planning and establishing organizational systems. In a sense, striving for systems and routines amounts to a striving for less complexity as quantifiable growth occurs. Hidden in this challenge of handling growth and complexity is the need to enter this more stable stage of development in a way that insures the long term viability of the company.

This typically entails an attempt on the part of the founding owners to allow the company to function without their intimate involvement over every aspect of its operation.

Owners often confront at this time concerns about whether they either have achieved or are on the road to success. Success, of course, can be measured simply by the fact that the business supports the family. In the case of many owners, however, even those whose initial goal is to simple provide a living for themselves and their family, success is instead measured by the next mountain, or a competitor’s success, or the owner’s professional self image.

Integrating second generation family members into the business is integral to the process of professionalizing a maturing family business. Pressure often builds to delegate authority as pressure builds on production capacity, information controls and cash flow. As this is a choke point in an evolution of the family business, the owner should be self-conscious about whether casting about for help from an inexperienced family member rather than from a more experienced outsider is a wise response. This is also the point where there are opportunities for reformulating strategy, such as focus on cost versus quality, speciality markets versus a broad market and the like. These are decisional challenges in which emerging adult offspring can play a role, and yet typically also require imput from more experienced outsiders.

As the business matures, there is more time and resources (including money) to focus on managerial and market strategy and to facilitate new initiatives. There is also more time to integrate second and third generation family members into that process.

The managerial restructuring as the business enters a mature stage is more suited than earlier in the business’s life cycle to use family members as an instrumentality of that change. This might include restructuring the business into divisions, one or more of which would be headed by a family member, or attempting new product lines or market expansion, and using a family member to lead such efforts. This opportunity arises from the luxury of time, more stable cash flow and relatively well established managerial routines.

The opportunity to integrate family members into management and exploit market opportunities results in the family business regenerating itself and starting the cycle over in at least some portion of the company, either as a branch or a spin-off. Looking at it another way, even mature stable businesses are at risk as technology and market structure evolves. Mature companies addressing this challenge have the luxury of resources and experience. To that they may add an intangible asset, family cohesiveness. The existence of that asset, however, depends on how skillfully the senior generation has cultivated an interest and passion in the family business, and how the junior generation has been encouraged to work together.

Family circle dynamics, therefore, loom large in how and if at all the mature family business will continue to prosper as its strategic focus evolves. The need for periodic refocus sets up an opportunity for skills development and the chance to establish a niche within the family business. Indeed, as product cycles shorten, the pattern of allowing a family member to build skills and establish a niche might occur several times in the working life of one family member. In other words, business problems and family succession problems can be reenacted again and again with the same family members.

It is important to coordinate issues of ownership with stages in both family evolution and business cycles. It is not desirable to have all ownership interests held by the founding generation as these processes unfold. Nor is it desirable to limit ownership to family members moving into management. Systematic communication between generations, and between employed and non-employed family members is an essential component to keeping the interests and desires of ownership aligned with those of management and of avoiding or at least minimizing distracting politicking among family members.

The components of communication include financial reporting, a vision of career development and the company’s strategic planning. Each is vital to both the retiring generation, interested as they are in insuring financial resources for a comfortable retirement, and to non-employed family members, whose interest likely lies in dividends. The need to allow expansion and innovation, both to sustain the company and allow employed family members room to operation autonomously, are part of the same puzzle.

Family owned businesses develop through these cycles at different speeds and with different hidden and explicit agendas. They evolve in response to external market forces and new technologies. They also evolve at a pace determined in part in response to changes in family ownership (or the lack thereof). For instance, a reluctance to admit either a minority or majority outside investor is likely to limit the company’s sources of capital. The retiring first generation might not want to undertake new ventures, knowing that they will not be present long enough to see them through. The retiring first generation might, in addition, be reluctant to cede control without a promise for conservative stewardship in the second generation, so as to protect the retiring owners’ income.

A startup company becomes a family business once family members other than the controlling owner begin to participate, and the controlling owner begins to frame his or her vision for the future around involvement of those family members. This trend also effects how the controlling/founding owners interact with their children. A family business owner who brings family business home to the dinner table will essentially be introducing his or her children to the business. Transfers of the even token ownership interest in the business also kindle interest in a sense of having a stake in the parent’s efforts. The flip side of that is the long hours demanded of a founding owner of a startup business and the stresses it creates on parent-child interactions.

Complicating the evolution of a startup business into a family business model is the variegated involvement of non-family members. The value to the business of these non-family members depends in part on the management style of the founder. A more collaborative founder would attract and retain more experienced outside executives. At this stage, arrangements with these outsiders tends to be ad hoc, with deals for each of them based on the dynamics of the moment, not based on a system or policy. The management structure tends to be hub and spoke, with the controlling owner at the center of the wheel, rather than a team-oriented approach. This is likely to be a well adapted approach for businesses which depend less on an existing system of production and customer network than the ability to be cost efficient and flexible in decision making. A personal style also helps in creating a loyal base of customers.

As the business expands, reliance on the owner in both the context of management and of sales becomes a disadvantage. The way companies respond to these weaknesses establishes a company culture and family mythology. Thus, a founding owner should be conscious of the cultural norms he or she is impressing, be it laissez faire, participatory, dictatorial or professional. The interaction in the early years between the company, its employees and customers resonate through time.

The next stage in the trajectory of family, ownership and business generally occurs after the company has moved beyond the entrepreneurial phase. Ownership and, to varying degrees, management, has shifted downward into the second generation. This stage involves completing the shift in ownership to the second generation, the process of training and testing second generation owners for management and restructuring the business to consolidate its success and position it for either stable growth or exploiting new opportunities.

In family owned businesses navigating this stage, a stage that probably a majority of privately held companies do not reach, the company has typically reached a size and complexity where, with the participation of the second generation, the business becomes a central part of the family identity and supplies, or echoes and validates many of its important values.

This is the most challenging choke point in the evolutionary arc of a family owned business. Complexity multiplies both within the business and within the family, so that family managers are struggling with two sets of interdependent concerns. There is a premium on seeking out a natural level of cooperation and trust among second generation siblings. There plainly is no formula for dealing with the manifold operational, managerial and family relation issues that arise. The executive family member must plan, execute and communicate with a high degree of self-consciousness and skill.

Along the ownership track, ownership tends to follow the resolution of issues relating to the expansion and maturation of the business, and relate to how the middle, managing generation interacts with non-employed family members. Second generation managers face the same challenge of integrating the business culture with family needs that were faced by the founding generation. They also face, however, non-employed family members who are their peers, both personally and as co-owners, and face these challenges, moreover, with a less firm foundation of authority than the founding owners.

As second generation owner managers gain experience and strength in their grasp of the operation of the family business, the presumed equality of early years between second generation siblings tends to be replaced by a more hierarchical structure. All the same, ownership has much less of a tendency, if at all, to evolve in this manner, so a mismatch develops between the control flowing from ownership on the one hand and the internal command structure of the business. This leads to tension between siblings. The tension resolves itself either in one of the siblings leaving the business or in continued friction and impairment of the company moral.

If the less successful sibling leaves and negotiates a redemption of his or her interest, this of course puts pressure on the capital of the business. Either an exit or continuing forward with unresolved frustrations works against the interest of the company and, of course, family relations. Often this tension plays itself out in the context of the founding generation’s estate planning. Ideally, the parents could offer the disaffected employed family member’s assets outside the business. Conflicts of this nature, moreover, tend to make the founding generation reluctant to part with ownership shares, increasing intergenerational tension. Good communications are at a premium in this setting, including a disclosure and discussion of estate planning choices.

Note that this transitional phase in the family business often corresponds to a complex transition in the family arc as well. The founding generation is formulating an approach to retirement, and to ceding and control and ownership, while the second generation is working its way out of the shadow the first generation, and, perhaps, operating under the burden of tension with other members of that generation. Furthermore, the third generation is emerging as adults and facing career choices likely to effect the continuity of the business as a family enterprise.

In the post World War II era, where social norms have evolved rapidly, the Eisenhower 50’s to the Vietnam era 60’s to the Saturday Night fever 70’s to the Gordon Geko 80’s to the Bill Clinton 90’s, there is often an element of cultural battles between the generations based on a different set of social norms. Interestingly, all of the other dynamics which tend to create tension are a function of the particular developmental stage of the individual or the business, and thus can be viewed as temporary. When clashes are grounded in differing social norms, the problem has a deeper, permanent source. In that case, the effected parties may elect to make different choices than might otherwise be indicated. On the other hand, since differing social norms are often superficial, particularly among different generations of the same family, they may mask structural problems that may be understood as situational, and more subject to resolution by patient effort.

The decision of whether or not to enter the family business carries the usual challenge of making a career choice. It is complicated by the fact that there is pressure to following in the parents’ footsteps. Although any given career decision might work out poorly even absent parental pressure, if the choice, made under pressure from the parents, proves a poor one, unhappiness is likely be deeper and directed at the family members. This of course has the potential of having a disruptive effect not only on family relations but on the business as well.

As second generation siblings mature into managers, and, hopefully, the business grows, the siblings must formalize both their role as managers, and must be self-conscious about structuring a system of interacting with each other and with non-employed family members. A hub and spoke approach is less likely to work than in the founding generation, both in the context of the business and of the business owning family.

Although it might offend the sensibility of a family if identity centers around the family business, the contribution of outside management is likely to fill out the skillsets required to run the business. Ideally, outsiders will also provide ballast and advice for employed family members in dealing with non-employed family members.

In addition to the demands for greater sophistication in information technology and other management systems attendant upon the expansion and sophistication of any growing business, family owned businesses need to focus on human resource policies. It is important both that family members entering the business be subject to normal lines of communications and authority which are transparent to non-family member employees. Non-family member employees must view the human resource system as fair and predictable, despite bias towards family members at the management level. Announcing an ideal human resource policy, however, is meaningless if younger family members perceive that opportunity based on power relationships in the management suite rather than based on performance.

Ironically, as companies grow in sophistication and market penetration, the challenge of the market place increases, in that companies tend as they grow to find themselves competing with larger, more sophisticated competitors. These include competitors with better access to capital, more sophisticated marketing and product offerings and superior strategic planning. This challenge can be turned to advantage in a family business, where family members are casting about for a comfortable division of labor. It is also an avenue for young members to undertake challenges and prove their mettle.

With the sustained, artfully coordinated effort of senior family member executives, the family-owned business can sometimes reach a level of sophistication and stability so that ownership and managerial control passes to a third or even later generation. The issues of governance and communication, however, are far more complex. This arises from the far greater number of family members, together with the fact that cousins as a group do not have the same intense shared life experiences. It is also arises from a diffusion of ownership, lending itself to a style of management able to conciliate the diverse desires of many family members.

To survive as a family business for so long most likely reflects the success during the stewardship of the second generation. It bespeaks an effort at communication and company governance which is very different from the typically more heroic, dictatorial model of the first generation. Second generation owners may, wittingly or not, reinforce the family myth of the company as an extension of the founder’s ego or vision. Such an essentially backward looking approach is a poor foundation in which to build a legacy for third and later generations.

Another important factor effecting the successful transition to third and later generation is the complexity of the business in relation to the complexity of the family. An over populated family interested in a relatively moderately sized business will generate keen competition for desirable management positions, thus putting a premium on good human resource systems.

Family members’ direct contact with each other and with the business tends to lessen over the generations. As cousins and in-laws multiply, the sense of family solidarity is increasingly put at risk. Managing owners can either allow this just to occur willy nilly, attempt to prune ownership, if practical, or sponsor gatherings and other systems of communication outside the natural functioning of the business to cultivate a continuing sense of community and common interest.

Inevitably, the views of various family branches diverge, and the role in politics increases. There is often at least one family branch which becomes critical of management, deepening the politicalization of the ownership group. Efforts to address this politicalization often run counter to the best interest of the business. For instance, managers may recruit other board members or employees by family group, rather than by merit.

Families tend to grow faster than attractive career paths grow in the family business. The lifestyle tastes of individual family members, moreover, tend to become more expensive at a rate greater than the capacity of the family business to support them. Consequently, the natural tendency towards politicalization of the ownership group is aggravated by the deepening conflict between the company’s need for funds and the family’s desire for consumption.

Good leadership on this issue generally requires the managing owners to encourage family members not to view the company as the sole or even primary source of income. Disgruntled owners would tend, with all things being equal, to entertain the possibility of selling out. Creating an internal market for family shares provides a safety valve for the tendency. It does, unfortunately, require a company to devote financial resources to non-productive expenditures. Just as outside managers and directors can play a central role in piloting a company through the transition from startup to maturity, outsiders on the board provide a basis for mediating these conflicts that occur at this later stage.

A sound succession process of necessity centers around the overlap of the ownership and management control circles. In founding generations, ownership tends to be concentrated. For example, directors, if they function at all, function as advisors to management, rather than as proxies for shareholders. As share ownership disburses, a well designed governance structure involves a shift in the director’s role towards giving a voice to non-employed shareholders.

Shareholder meetings also provide a forum for non-employed family members’ involvement. Indeed, even if non-employed family members have little substantive to contribute, such meetings have a considerable symbolic value to the shareholders, both in their capacity as owners and as members of the owning family. Among the practical advantages to most meetings is blunting alienation and suspicion and keeping family members up on how others are interacting with the company and how they are handling their ownership stakes (such as estate planning).

Shareholder meetings, however, are not the best place for either debating business strategy or resolving non-business issues that might be on one or more family’s personal agenda. Business policies should be determined a higher level, in a well constituted board and with private communication with more sophisticated non-employed family members. Non-business matters should be taken up at family meetings designed to address such issues, rather than at a stockholders’ meeting.

Even if the individuals involved are substantially the same at the board level and the shareholder level, managers should still separate the functions, which allows the family and the business to grow. Doing so facilitates structuring the board around business expertise. That, in turn, empowers non-family member directors and facilitates an exclusive focus on business issues and decision making grounded in sound business considerations. At the other end of the spectrum, non-employed cousins and young adult family members are kept at a distance from issues about which they are likely to have little to contribute.

A board of directors of a successful company should be constituted of members most likely to contribute to the company’s welfare, rather than reflect either management’s patronage choices or reflect no effort at all to exploit the opportunity for insight from a capable board. A substantial company is well advised to have a majority of outside directors. The directors should ideally include executives from other companies that are at a more sophisticated stage of development.

Sometimes it is desirable to have a board member familiar with the industry in which the company functions, although that sometimes is not practical. One or more board members should also have some familiarity with the issues that arise in the family business. The board might also include one or two representatives of non-employed family members. A board with voting control vested in sophisticated non-family members facilitates some of the systems that are necessary to deal with succession issues. This includes human resource and training policies, salary policies, executive appointments and dividend policy. Other considerations that affect the vitality of good procedures include fixed terms and a framework for setting the board’s agenda. The framework should include an expectation that the board address on a systematic basis core concerns of the company, such as a strategic plan, development of management and contingency planning.

Family businesses controlled by families with many non-employed family members should establish a family counsel that meets to discuss issues of interest to the family members as family members, rather than as owners. The discussion of issues relating to either stock ownership or the family business may take up most of the council’s attention. Family members may consider having such meetings chaired by a non-family member. Although the family business’ board may have the final say on the issue of dividend policy and management succession, a board is likely to be influenced by a consensses on one or more of these issues reached at a family counsel meeting.

An entrenched, well run system of family council meetings enriches family members by creating a sense of solidarity, sustaining a coherent vision of the family. It also serves as a recruiting tool for ambitious family members and a setting likely to facilitate an internal market in shares in the family business. A family that allows those things to happen, and encourages them through regular procedure, rules and customs that all family members buy into reduces the likelihood of politicking. A well functioning family counsel system may at best seem to be its own reward, but its real value is in preventing disruptive behavior and making the most of each family member’s ability to contribute to the enterprise.

Perhaps the most difficult task facing a family dealing with management succession is devising a system for selecting family executives when there are many likely candidates. Ideally, family owned companies should establish a management development process, and a management development team. The team should, naturally enough, include family members, perhaps for more than one generation. It should, however, also include non-family members, such as non-family directors.

The group should be identified as having a specific responsibility to plan for management succession. It should articulate a strategic vision for the company and identify the qualities that are most highly valued to carry out that strategy. It should identify employed family members who either are or have the potential to participate in management, and project a timetable for various steps in management evolution and the learning path for advancement.

A family business organized around wise human resource and management track systems, a balanced, knowledgeable board and regular family counsel meetings accomplishes several essential functions: (i) management oversight dealing with the overlap of family and business dynamics and (ii) communication to all family members and (iii) a feeling of belonging and a lesser propensity for politicking.

Starting the process of systematizing these processes involves first of all identifying where in each of the family business and ownership cycle the various parties are, and how they overlap. Getting started often entails, unfortunately, repairing relationships battered by distrust and resentment. A well managed family business allows family members to understand and respect each other, communicate, feel comfortable with various decision making processes and feel secure about their financial stake in the family business.

Regarding shareholder and family relations, it takes some getting used to the fact that financial information is to be shared outside the management group. Whatever system is instituted, if it is seen as procedure based and information is presented in a quantity and quality reflecting an intent to inform and educate, it will tend to draw the family together and blunt family critics. Any such disclosure structure is likely to function better, however, outside the board of directors.

As business owning families expand into the third generation, the emotional connection to the company and its history and mythological role in the family history dissipates. An aggressive and well managed system of two way communications provides a substitute community around which sentiments towards the family business can take shape. It deflects, to one extent or another, the shift in the relationship to the business interest among family members from a psychological nourishment to a more inward centered interest on the financial benefits of such a status. Paradoxically, it may also facilitate an affirmation of membership independent of financial calculus.

Significantly, institutionalized communications is also a means of cultivating an image of leadership around family members who are running the family business. Family members can, with some skill, take advantage of that status to both cultivate harmony and shape the evolution of family members attitude about the family in concert with the business’ capacity for issuing dividends and need for investing in the future. Certainly a family business is above all a business, and is subject to the vicissitudes of the market utterly irrespective of personal and financial needs of the family members. A company perceived as thriving by family members will tend to received an enhanced level of support and enthusiasm.

From the standpoint of the business, putting competent people in key position is paramount to staying competitive and sustaining value. Good leadership builds loyalty, and good leadership means competent leadership. Note the opportunity here to make choices about management and ownership in tandem, so that the commitment to family involvement can be separated from issues of managerial succession. In other words, create a strong tradition of communication and consultation at the ownership level, and cultivate, parallel to that, a tradition of hardnosed decision-making about promotions and hiring. Doing so does not preclude recruiting family members to enter the business and prepare for upper management. A well articulated set of systems, and a well articulated boundary between the two, ownership and management, will tend to set the bar higher for family members entering the business, knowing as they do that their advancement is essentially a function of business judgment on the part of their seniors.

The real world is rarely so well managed, and there is a tendency to accumulate mediocre performers among family members employed in the family business. There is no a stock solution for this problem. Recognizing that it is so, however, is better done sooner than when a crisis arises.

Even a businesses owned by a third generation and in a mature stage of its own development does not go on forever with the same ownership and same capital structure. Even among the rare businesses, one in twenty or less, which survive through the third generation, many thereafter either go out of business or sell out. Those that sustain family membership often require additional capital, leading to a modified third generation ownership involving either minority or majority public shareholders, or a group of private investors. A sentimental attachment to explicit family control in the face of needs for substantial additional capital obviously conflicts with the interest of the business.

Another area where family sentiment clashes with the needs of the business arises with respect to the original core business. This line of business might be many decades old, and not a substantial contributor to profits or return on equity. A family controlled business with a culture of business-based decision making will find it much easier than an less well organized management team to sell off or close the founding business lines.

It is perhaps useful to bring the three circle model into focus by considering a business facing a transition simultaneously in all three circles, management, ownership and the family. This is certainly from an emotional point of view a most difficult transition. The actual shape that the transition takes depends on the quality of the management systems in place in advance, the relative prosperity of the company (that is, adequacy of working capital and the safety of the retiring generation’s retirement income) and the relationship of the retiring generation to the rising, succeeding generation. Success breeds success, and a successful transition, almost irrespective of the cost in family discord, if effectively carried out, allows family ownership to continue. In other words, it will live so cousins can live to fight another day.

The master gear of multi-circle success is ownership. Even a founding owner who has passed the reins of management to his or her offspring but who retains control of the corporation has not truly effectuated a proper succession of either ownership, management or family leadership. This is an intergenerational transition that is therefore likely to inflict some emotional and financial hardship. Ideally, succession should be approached first as an idea, a planning task, so that the issue can be talked out and, perhaps, a consensus reached. It can then be implemented in a collaborative environment that takes account of both the retiring generation’s retirement needs and the needs of the succeeding generation for autonomy and control.

Note the difference between a succession plan which simply continues the system in place, that is, the same level of dispersion of ownership and control, and a succession plan which alters fundamentally how the business is owned and managed.

In the first case, the past is prelude, and is a rich source of insight and inspiration for approaching tasks in the future.

In the second case, the management and ownership dynamic are changing in a fundamental way, from concentrated ownership to dispersed ownership, for example, from a hierarchical management to more of a partnership. The participants must understand that they are operating in an unprecedented environment. It requires more self-consciousness, more creativity and a readiness to adapt to novel challenges.

Perhaps the most obvious change that requires fresh thinking is a shift from an identity between management and ownership in one generation to a situation where management may remain concentrated, but ownership is more dispersed. Certainly the leadership style, and demands in terms of communication and consultation on management, shift dramatically. Both a choice to continue concentrated ownership in one or a few family members and dispersing ownership but insisting on a concentration of managerial control in one or few family members can create discord in the family.

The retiring generation should take great care to explain their reasoning and to encourage all family members to be accepting. Reasons related to the welfare of the business are likely to be perceived as more acceptable than considerations arising from family dynamics, such as primogenitor.

Succession does not simply mean selecting a new group of managers, or handing over the stock. It involves, as discussed above, a process of education. More fundamentally, it involves a process of evaluation and focus on business and family factors for the years preceding the choice. Even after the change takes place, the retiring owners or managers may stay involved to reaffirm the validity of the choice and mediate between members of the younger generation when criticism or misunderstanding arises. Once in the role as manager of the family business, the new executive must develop confidence in his or her position, and the active support of the older generation is likely to be of great value. This should not be read as an endorsement of backseat driving or Monday morning quarterbacking. The older generation needs to consistently support its successors in public and limit its disagreements to only the rarest, most essential of matters, and always do so in private.

Often parents treat multiple offspring equally in terms of both ownership and management responsibilities. On reflection, it would be intuitively plain that the likelihood of two or three siblings finding as a matter of course a way of cooperating and enriching the family business without any discord is small. While communication and consultation is a vital prerequisite to effective succession planning, it should not be approached as a pro forma undertaking. Rather, it should be used to sell to the owner’s offspring the decisions that he or she has made about who is best suited for management and how ownership should be structured. Even in the case of a well considered plan to vest equal ownership and managerial responsibility into adult children, the retiring owner should insist upon a personal commitment to address disagreements as business, rather than family issues.

The likelihood that the offspring will be emotionally and professionally capable of keeping such a commitment is in part a function of how well trained each is in business skills, a legacy, for better or worse, of the preceding generation. One retiring founding owner decided to guaranty that his two sons kept their promise to him by putting a single, tie-breaking vote in trust, to be voted by an independent trustee in the event that the brothers deadlocked on a major issue.

For businesses passing through a third generation, in addition to the considerable difficulty in group dynamics arising from dispersion of ownership, there is additional internal pressure on the families arising from different sizes in the third generation families. A family branch with one offspring who might end up with one third of the company stock can find him or herself resented or distrusted by cousins who had to split their share of the company into three, four or five parts. This could be viewed as anomalous result, that is, not one arising from a considered decision, and can adversely affect family politics.

The issue of evaluating the offspring of a brother or cousin, as younger generations still enter the business, is another source of stress among third and later generation family owned businesses. Such businesses should be well served by human resource practices that are viewed as professional, transparent and fair.

Epilouge
In Shakespeare’s The Tragedy of King Lear, our hero, the king of Briton, decides to relinquish his crown and apportion his kingdom among his three daughters. Craving a public demonstration of what he assumes is their measureless love for him, he foolishly proposes to his courtiers that the actual distribution of the kingdom will depend upon each daughter’s public declaration of that sentiment. As with so many owners who think that they know it all, events proved that he had hardly a clue.

Daughter number one, Goneril, and daughter number two, Regan, make lavish but obviously insincere protestations of devotion to him. Daughter number three, Cordelia, (never any fun when the three were growing up anyway) is put off by her older sisters’ false, manipulative public remonstrations, and limits her presentation to an austere statement of affection. Foolish King Lear feels snubbed and made the fool before his court. He disinherits the astringent Cordelia and divides the kingdom equally between the two elder, bootlicking offspring.

All sorts of betrayals and sinister goings on ensue thereafter in remote castles and on foggy heaths. In the end, the two elder sisters plot young Cordelia’s death, as well as, rather ungratefully, that of their father. With a romantic touch not unfamiliar to a modern Hollywood script writer, they also fight over the same hunky Earl. That ends with one killing the other and then committing suicide herself, but not too late to set in motion the train of events which result in the death of the foolish father and of Cordelia, his single sensible offspring.

Towards the end of Act Five, the last act, one of the surviving good guys, the Duke of Somethingorothershire, says “All friends shall taste the wages of their virtue, and all foes the cup of their deservings.”

But actually that’s not true. Lear mindlessly conflated the business of owning and ruling a kingdom with the needs of his ego. He foolishly used political power as a weapon in a family dispute. There were no “wages of virtue,” and each family member proved, in the end, to be a “foe” to each other.

Modern business owners need not be as foolish as Lear to end up turning family members into foes and to impair the capacity of the family business to generate wages of virtue for the next generation. They need merely forget that orderly succession planning never happens on its own.

Credits
If imitation is the sincerest form of flattery, then J. Davis, K. Gersick, I. Lansberg, and M.M. Hampton should feel flattered indeed. They are the authors of Generation to Generation: Life Cycles of the Family Business, a Harvard business school publication which, together with some earlier writings by some of the co-authors, originated the three circle idea for analyzing family business dynamics. The three circle idea has been copied so many times, almost always unattributed, that the authors would no doubt appreciate a bit less flattery and a bit more credit for their insights. I will opt for both flattery — the three circle idea is an uncommonly useful analytic tool — and attribution: much of the middle part of this essay is a distillation of these authors’ work.

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