HEALTHY WEALTH IN BUSINESS FAMILIES

Era Warp

The Modern Era began with the 17th Century Enlightenment and ended after WWII. Scientific advances, particularly in mathematics and physics, characterized the Modern Era by discoveries and inventions that created and expanded the Industrial Revolution. In Modern Era contemplation, the world was a clock. Successful enterprises were machines, conceived by engineers and monitored by accountants, for the ends of maximum industrial productivity at minimum cost. Individual workers were parts of the machine —fungible and interchangeable.

The hallmark of the Modern Era was quantification and metrics. War was frequently measured in "body counts"; and law and accounting in time sheets. Much of the law, as we know it, developed in the Modern Era, incorporating Modern Era assumptions, protecting Modern Era interests.

The Post-Modern world is not mechanical, but organic. Biology has eclipsed mathematics and physics. The Post-Modern world is not a clock, but a rain forest. Enterprises are no longer machines, but ecosystems whose fitness to survive is determined by their relationships to other organizational ecosystems in the rain forest world.

The Post-Modern enterprise is no longer industrial; it is knowledge-based. The most valuable corporate assets are no longer capital assets, inventory, work in progress and finished goods, but intellectual capital—knowledge carefully collected from and then redistributed among employees, who have become the company's most valuable assets. It has been said that the law of property is no more than a series of promises; that a Post-Modern corporation is no more than a series of conversations. ¹

Post-Modern emphasis is not so much on individual achievement, but one's contribution to the group, and one's role in the creation and utilization of valuable shared knowledge. Individualism has given way to important relationships; independence to interdependence; self-absorption and self-reliance to networking and connectedness. Ironically, that supreme quantifier—the computer—is making its supreme impact as biology supplants mathematics. Indeed, the computer's ultimate contribution may not be quantification but connectedness and communication offered through the Internet. ²

How will law and accounting operate in this rain forest world? How will our adversary system and accounting's professed "independence" fare in a commercial environment that demands collaboration? Does the spectacular rise of alternative dispute resolution point the way? How will Post-Modern law deal with the complexities and intangibles of the human family? Or more particularly with the business family? ³

Newspapers are replete with noisy bad news about a few high profile business families who go public with their bitter internal conflicts. Unfortunately, the quiet good news, about legions of business families who learn to manage their differences, goes largely unreported. Bad news sells; good news bores. The noisy bad news takes on a life of its own as the stories of family dysfunction are told and retold in professional circles with relish and embellishment by the worldly and sophisticated. The noisy bad news includes advisors' unsettling experiences with business family clients. Advisors may have been ambushed, bushwhacked, broadsided by highly emotional issues imbedded in family dynamics, issues the advisor doesn't understand, cannot control, and views as professionally threatening.

Lawyers and Accountants

The law deals deftly with fictional relationships of its own creation, such as corporations and partnerships, but clumsily with family relationships that don't fit a rational legal model. A "win-lose" radical individualism permeates the law's approach to all human relationships, whether commercial or personal. The adversary process assumes that all relationships will ultimately fail, whereupon every individual will need a lawyer to protect him from everyone else, even from family.

Well within legal ethics, a lawyer may represent a corporation, its board of directors, its stockholders, and its employees. But representing a potentially contentious family can be risky. Ethical rules—written by litigators—make it difficult to represent family relationships without running afoul of potential conflicts of interests, problems of confidentiality, etc. Who is the client? ⁴

Some advisors suggest that in lieu of agreement, litigation is a viable alternative. The past 13 years has provided me with a graphic refresher course on the destructive power of family litigation, even the threat of family litigation. Like divorce, family litigation is the brooding omnipresence that hovers over every potentially contentious business family. Families don't want to litigate and don't like litigators. They want to learn to cooperate, to collaborate, and to co-exist. ⁵

Officially, the accounting profession is loyal to the enterprise, rather than to the persons who own it or manage it. Accountancy's ethical rules emphasize the accountant's independence, detachment, and distance, rather than the law's hostility and adversity. Unofficially, the accountant is most often the family's most trusted business advisor, the one who prepares tax returns for the company and for each family member and who is often more often enmeshed in the family than detached.

Business families reject both the law's harsh assumptions about foredoomed relationships, and accounting's professed disinterest in the persons behind the entity. Contentious business families long to manage their differences, abjure adversity, desire peace. For most business families, their relationships are far more important than their rights.

The Business Family Market

Business families hold a huge share of the world's wealth. In the United States, family companies generate more than half of the gross domestic product. Some 160 of the Fortune 500 companies are family-controlled. Of the two million wealthiest Americans, only 10% inherited their wealth. Almost half of the wealthiest 1% in our population made it with active operating companies, most of these family-owned. Within the next five years, half of these business families will be faced with the ultimate transition question: succession or sale?

Business families hold a huge share of the world's wealth. In the United States, family companies generate more than half of the gross domestic product. Some 160 of the Fortune 500 companies are family-controlled. Of the two million wealthiest Americans, only 10% inherited their wealth. Almost half of the wealthiest 1% in our population made it with active operating companies, most of these family-owned. Within the next five years, half of these business families will be faced with the ultimate transition question: succession or sale?

The Family Agenda

Common family agendas include:

• Preserving, affirming, and enhancing family relationships.
• Nurturing family members and meeting family needs.
• Building family solidarity and cohesiveness.
• Encouraging a sense of heritage and belonging.
• Observing family discipline and family boundaries.
• Maintaining open communication.
• Honoring and respecting different viewpoints, especially respect for different levels of business sophistication and business judgment.
• Creating an environment of fairness and support.
• Expressing trust, love, and loyalty.
• Teaching healthy values and attitudes towards wealth and work.
• Promoting career achievement and job satisfaction.
• Separating and balancing work and family issues.

Were it not for some clients' objections or indifference, I would add to these family agenda items, the promotion of religion and the support of philanthropy.

Blended Agendas

Introduction of family ownership and management creates a mixed agenda of family concerns and business necessities which I term "blended". These blended agenda items define Family Work. For example:

• Shall we keep or sell our family company? If we choose to sell:
  
  • Is our company in fact salable?
  • What might we need to do or change to entice a buyer?
  • Will family relationships change?
  • Will we act responsibly with the money we receive?
  • How will we find fulfilling careers elsewhere?
  • How will sale affect our company, its products and services, our employees, its reputation?
• If we keep our company,
  
  • What are the future opportunities for family leadership and management?
  • How do we prepare and train the younger generation for succession?
  • How do we transfer to our successors, our roles, our responsibilities, our contacts, and employee loyalty?
  • How do we provide financial security for the senior generation?
  • How should shares be owned in the next generation?
  • What are acceptable alternatives to stock ownership, for family members, and for non-family key employees?
  • How shall we handle employment of family members their job descriptions and career paths?
  • their compensation
  • their job performance?
  • How shall we provide for fair distributions, dividends and perks from the company?
  • How can we keep "sweat equity and "blood equity" in balance?
  • How can we avoid attitudes of entitlement and dependence.

Family Work in Process

Family Work cannot be avoided, cannot be delegated, and demands from its participants more than ordinary everyday business skills. In some families, successful Family Work gets done informally without family meetings. More often the appropriate forum for Family Work is a series of intergenerational meetings that include not only those who own and manage the Family Business, but also potential inheritors and family managers, their spouses, and their mature children.

Whether advisors should also be present during Family Work is debatable. Advisors who honor the family agenda can play an important role. It is a fundamental mistake for advisors to confine their input to the agenda to the practice of their particular expertise. The advisor's role is to implement Family Work, not to appropriate it in the name of professional service.

Sooner or later, business families learn that Family Work requires more of them than customary business skills. The business leader who makes final decisions day-to-day learns to facilitate Family Work discussions rather than to end them by making the decision himself. A younger generation spouse learns to voice concerns long held dormant. A child with no career interest in the company can become a co-creator of the company's future. It is axiomatic that we support that which we help create.

Intergenerational Estate Planning

I favor intergenerational estate planning for most families—candid conversations between the givers and the intended receivers about the transition of family wealth. Estate planning in secret is obsolete. ⁶

For business families preparing to transmit ownership in active operating companies, intergenerational estate planning is indispensable. The ultimate estate plan may ask some family members to invest their working lives in the company, and ask others to have their inheritance managed by their relatives indefinitely. The younger generation is infinitely better served if consulted in advance and not taken for granted or by surprise. Estate planning is a critical part of their Family Work.

All the above assumes that the business family has the capacity to hold productive conversations. Imagine a traffic light that reflects a given business family's capacity to do its Family Work. Our anecdotal research reflects that 40% of business families have "green light" capacity, 20% have "red light" capacity, and the remaining 40% are in the "yellow light" zone.

Business families in the green light zone can manage their Family Work largely on their own. They are part of the quiet good news. But even green light families can become distracted, procrastinate, need prompting or encouragement, have an encounter with a difficult family member that has unfortunate results, or share a general apprehension about the transition process. The green light zone is not necessarily a forever status. Circumstances such as births, deaths, marriages, divorces, and even genetics can interfere.

Business families in the red light zone cannot possibly do their Family Work without significant professional intervention. They have not found ways to communicate productively and are dangerously close to becoming part of the noisy bad news. Some red light families cleverly manipulate their public image to conceal their distress. Red light is not necessarily terminal and some red light families can and do rise above their conflict.

Business families in the yellow light zone manage to tolerate substandard business practices and unsatisfactory family relationships for the sake of holding things together. Although some yellow light families do passable Family Work on their own, they may unwittingly perpetuate their marginal family and business environment. Other yellow light families require professional intervention. Yellow light status is usually temporary: it gets better or worse. ⁷

Family Relationships as Company Assets or Liabilities?

Not long ago the stock market told us that the total value of the outstanding Microsoft shares (market capitalization) was about $85 billion. But Microsoft's financial records said that the total value of Microsoft (book value) was only $7 billion. What does the market know that the accountants don't? The market values Microsoft's intangible enormous potential to continue its domination of the computer software industry while accountants struggle with Microsoft's tangible value and historical costs.

Family ownership coupled with family management is a powerful but intangible business asset or a business liability. For green light families their relationship is usually a business asset. Indeed, families who leverage their strong relationships become the most formidable business competitors in the market place because of family involvement. These valuable leveraged relationships cannot be acquired outside the family or transferred outside a family.

For red light families their relationship is a definite business and competitive liability even though their companies may be profitable in spite of family involvement. For yellow light families, the relationship may be both asset and liability. On the liability side, some family employees may be drifting and coasting while receiving excessive compensation even though they underproduce and there may be poor communication between such family employees and family shareholders. The family's capacity for Family Work is unknown or untried. On the asset side, other family employees may be doing excellent work, receive appropriate compensation for their productive contributions and there may be good communication between this group of family employees and non-family employees and shareholders.

I empathize with CPAs whose generally accepted accounting principles provide no place to report these assets or liabilities in the financial statements of their clients. I am unimpressed with CPAs who weakly suggest that the quality of a family's relationships is already reflected in the bottom line.

If a balance sheet could be generated to reflect the quality of the business family's interpersonal relationship, the following questions would seem appropriate:

• Is the company itself an asset or a liability of the family's relationship?
• Does the company reinforce or disrupt the family relationship?
• Does the company both reinforce and disrupt the family relationship?

From Technician to Counselor

The time is coming if it is not already here when clients involved in a Family Business will expect their advisors to counsel on the impact of estate and financial planning on their relationships with other family members.

The time is coming if it is not already here when families owning operating companies will expect their advisors to outline agendas and action plans for Family Work and to facilitate intergenerational estate planning discussions between potential givers and receivers. The family's experience with business transition could result in the advisor's being retained or discharged. Deserved or not, advisors will get at least some of the credit for smooth transitions and all the blame for stormy ones.

Some advisors will come up with new practice opportunities in complex business family situations. Instead of being ambushed, bushwhacked, and broadsided by soft issues, the soft issues will become both intrinsic and highly profitable. I believe these Post-Modern counselors will be much in demand.

Post-Modern Counselors

Although I am a recovering trust and estates lawyer who hasn't drafted a will or trust since 1990, my legal credentials still hang on my office wall. My certificate of admission to the Bar declared that I "was well and sufficiently qualified to practice as Attorney and Counselor at Law."

By counselor in the context of service to business families, I mean to describe the Post-Modern practitioner who is engaged in more than tax avoidance, more than malpractice avoidance, more than fee generation and more than technical advice.

The Post-Modern Counselor is a personal advisor to business families, a coordinator of family wealth's interrelationship with family dynamics, one who is focused on lives in process and attentive to relationships as well as rights. The Post-Modern Counselor is a very competent generalist, a person who is career-satisfied, and very highly compensated.

Some practitioners claim that clients won't pay today's hourly rates for counseling that produces no visible work product of quantifiable value. I strongly disagree. In fact, the opposite is true. Highly desirable clients complain to me that today's advisors aren't helping them make important business decisions they only offer technical alternatives from which the client has to choose. Such practitioners have abdicated their counselor role. Clients are willing to pay handsomely for sound counseling, especially for borrowing the advisor's judgment as an aid in making critical business decisions. ⁸

Of course I don't advocate the unauthorized practice of psychology by hard side advisors. Nor do I suggest that every advisor to business families will be motivated or comfortable with an enhanced soft side role. For those who would become Post-Modern counselors to business families, I suggest three points of exploration and potential entry:

• Replace touchy-feely with emotional intelligence.
• Grasp the importance of relationships, especially family systems.
• Cultivate a first rate psychotherapist as a colleague.

Emotional Intelligence

I wince when I hear touchy-feely uttered, as though that phrase expresses the totality of the speaker's psychological insights. I would scrap the phrase touchy-feely from professional vocabularies. In lieu of touchy-feely I suggest emotional intelligence, which concept, Daniel Goleman, long-time psychological editor of The New York Times, has used in his seminal work in this area. ⁹

As my psychologist colleague David E. Lange, explains emotional intelligence:

Emotions are important forces in our lives. If we were automobiles, emotions would be an important part of our drive train—engine, transmission and differential.

Emotions aren't optional. Our emotions are always in gear; our emotional engines are always running.

If we fear, or distrust, devalue, or misunderstand emotions, we drive with one foot on the intellectual brake and the other on the emotional accelerator. That stresses good automobiles, good people, good families, and good organizations. Emotional intelligence connects and coordinates our emotions and our intellects. Emotional intelligence is like a steering wheel that helps us guide the driving force of our emotions along the road our intellects need to travel.

Emotional intelligence unlocks the emotional energies your people want to put to work for you. Emotional ignorance wastes resources, sours attitudes, drains enthusiasm, blunts commitment, and assures failure. Emotional neutrality is not an option.

In Emotional Intelligence, Goleman surveys and summarizes current scientific understanding of the relationship between intellect and emotions. And a later work by Goleman, Emotional Intelligence in the Workplace ¹⁰ is also a useful guide for business families and their advisors.

Relationships and Family Systems

Modern psychology confirms the Post-Modern view that the most important parts of our lives are our relationships. Modern psychology rejects the American folk myth of rugged individualism though as suggested earlier, American law is still mired in mythical individualism. Advisors attuned to this dichotomy will better understand why, for most business families, relationships are more important than rights.

Although Freud understood that our families deeply affect the family members' emotional health, there was little systematic research about family relationships until 1955 when Dr. Murray Bowen advanced the "family systems" theory that provides the most sophisticated and comprehensive understanding of how families work ¹¹ . Family systems thinking view families not as clusters of individuals but as a very complex system of relationships.

Business families are even more complex because their family system overlaps both a management and an ownership system. Consider the following impression of a business family system:

Imagine a nest of several porcupines snuggling down for the night. If you are a porcupine in nest of other porcupines, three things can happen, and two of them are bad. You can be warmed by other porcupines, or chilled if they aren't close enough. Get too close and you get pricked. A family system is like a nest of porcupines, constantly adjusting to each other. When two porcupines fight, one dies, another brings a new mate to the nest, or leaves, a new one is born--all these occasions call for porcupines to readjust their distances from other porcupines to maintain maximum warmth without pricking. A family is a system of relatives constantly adjusting to each other as circumstances change.

Although Thomas Wolfe wrote You Can't Go Home Again ¹² , we never really leave home. Our family of origin is always with us, even if they are dead, or we don't speak, or rarely see each other. So, continuing the analogy, what is a business family but a nest of porcupines out foraging together!

Psychotherapist as Colleague

A working relationship with a skilled psychotherapist can contribute much to understanding the soft side of business families. Such a colleague may be a psychiatrist who is medically trained, a clinical psychologist, a social worker, or other mental health care professional. I strongly suggest that she be knowledgeable about family systems and experienced in family therapy. A search to initiate that relationship could begin with client therapists, a personal therapist, or therapists who have functioned as experts. It is unlikely that the therapist selected will be very familiar, much less sophisticated, about business matters. Indeed, their training promotes a taboo about being knowledgeable with respect to business, money, and property that most of them carry into practice. Learn how the therapist was taught, about the values and attitudes of her profession, and what she does during a typical working day. Share the same information about your professional self. You will be astounded about how little you know about each other's professional life and how inaccurately each profession views the other. Invite the therapist to your professional study group, and attend hers. Establish a hot line. Talk with her about business families that puzzle you. Invite the therapist to call you about legal, accounting, or wealth issues that puzzle her. In selected cases, you might suggest that a client invite the therapist to attend Family Business meetings with you. Make it clear you are not suggesting the clients are crazy or sick or necessarily need therapy. The family may limit the therapist's role to advice about relationships, interpersonal dynamics, and understanding the impact of one's behavior on others. It's best to have a clear understanding that the therapist will not engage in therapy with your business family or necessarily accept any family member as a therapy client.

Healthy Wealth: Vertical and Horizontal

My own definition of "wealthy" is the ability to maintain a relatively high standard of living indefinitely, without paid employment, and with minimal risk. A retired person with adequate benefits is wealthy according to my definition. This is horizontal wealth, which provides day-to-day financial security over a person's life expectancy. According to my definition, a person can be wealthy regardless of net worth.

Net worth wealth is vertical, expressed on a balance sheet at a point of time. Net worth wealth may or may not provide the lifetime security required by my definition. One pays transfer taxes on vertical wealth. One lives life on horizontal wealth.

Modern advisors seem fixated on vertical net worth wealth. Minimization of transfer taxes is the polar star. Reducing valuation at death or other date of transfer is the first (and sometimes only) order of business. Mathematics rules. Ultimately these efforts produce a visible work product of quantifiable value. Currently, the favored entity for vertical wealth is the family limited partnership. My concern is that family limited partnerships are presented (perhaps unintentionally) as though the advisor has thereby done the Family Work. The limited partners don't realize they are a nascent business family, and aren't prepared for the relational stresses their partnership will ultimately create.

Post-Modern counselors have no less responsibility to minimize transfer taxes and to maximize net worth. They, too, must do the mathematics and wrestle with valuation issues. They, too, may favor the family limited partnership as the vehicle both for valuation and management. But Post-Modern counselors are vitally concerned about how their clients will live with their wealth—about promoting healthy wealth. Post-Modern counselors will alert their clients to the relationship issues they may encounter. They will suggest Family Work, perhaps as a part of intergenerational estate planning, while all generations of the new partners remain alive and healthy. Once begun, family discussions may range far beyond the effects of the partnership, to broad issues of healthy wealth in all generations. Regardless of the form of assets a business family may hold, this horizontal Post-Modern approach and the family discussions it generates should promote healthy wealth. Most of these client families will become part of the quiet good news.