In Part I and Part 2 of this series originally appearing in the Harvard Business Review, Louis B. Barnes and Simon A. Hershon discussed different models for transfer of power in family business. In Part 3, they look at another, sometimes challenging model, “The Single Transition.”
The Single Transition
Even though most of the companies we studied changed top management and growth stages together, other companies showed one transitional change at a time. A stagnant company can get that way when the older generation gives way to the younger without any company transition. The Quinn Company was one of these.
In the Quinn family business harmony had been difficult to achieve. The founder, Josiah Quinn, established his industrial supply company in 1911. He began the business with a partner, and it grew steadily. As business improved, the partner took a less active role, and Quinn soon began to resent the partner’s equal salary and taking of the profits.
When his wife suddenly died, Quinn impulsively sold the business to his partner and took his five children West. After several years there, he returned home and began a new business, remarried, and had two children by his second wife.
Eventually, Quinn’s oldest children joined the firm. They worked well together, and the company prospered. When his second set of children also joined the company, however, jealousy and resentment increased. Conflict began to disrupt operations daily. The problems flowed over into family life, where his wife took the side of “her” children against “his.” Finally, Quinn decided to set up a separate company for his wife’s children. He founded it under another name, brought customers from the other company, and enjoyed helping it get started.
When World War II broke out, Quinn’s most capable son in the first company was drafted. He was sent out West, married, and eventually set up his own company in San Francisco. This left the first company without a really capable successor, though the departed son’s brothers and brothers-in-law worked to keep the company going. Again, dissension increased. While the company continued to operate after Quinn died, its performance levels never rose over the next 30 years.
The Quinn Company’s transition from first to second generation was influenced by a major split within the family, by the loss of its key young successor, and the divisive role taken by Quinn’s second wife. The family conflicts seemed to keep Quinn and his heirs from dealing with company transition problems, since all their energies were spent on inside the-family problems. The result was a family transition without a simultaneous company transition. Such single transitions were even harder for those inside the family and the company than when the two transitions occurred together. Today the Quinn Company is heading painfully into another transition, its second generation having apparently suffered much, but having learned little from the first one. The older family managers find it hard to let go as the 66-year-old president steps aside uneasily, only to be replaced by a 68-year-old in-law whose sons wait impatiently and sometimes irresponsibly for their turn. Meanwhile, the company suffers.
Another type of single transition occurs when a company moves from one growth stage to the next within one management generation. Such growth occurs rarely, it seems, in the first generation, partly because entrepreneurs tend not to be reorganizers, and growth requires reorganization along with a shift in management styles. We found these company transitions without a family transition to occur more often during the second generation. Whereas first generation entrepreneurs had trouble shifting to high growth strategies and more collaborative styles; the sons were more flexible, possibly because the shift from a second to a third stage growth pattern involves letting go of less personal ties or possibly because they had more help in making the shift. Here is an example of such a transition:
When Wells Thomas died, his hardware supply business passed on to his two sons, Paul and Bing. Paul handled production, and Bing worked in sales. The two brothers built the family firm into a major hardware supply house. Paul became chief executive officer, and he and Bing eventually diversified the business into retail hardware stores, medium equipment companies, an electrical manufacturing company, and several unrelated businesses. Along the way, they brought in six third-generation members of their own and their sister’s families. But these younger family members never quite made the grade. Paul, with Bing’s approval, fired five of the six and handed the presidency of the corporation over to a man who had been president of one of the acquired companies.
His justification for discharging his sons, nephews, and sons-in-law was the good of the family business, and therefore in the long run the interests of all family members. Nevertheless, he had created a split in the family that never healed. Meanwhile, the new company president admitted that Paul had become like a father to him, and it was apparent that the father-son parallel was very strong for both of them. There was still one nephew in the company, and although he had an important position, it was clear that he had no inside track on succession plans.
Thomas Enterprises moved faster than most companies do in its growth cycle, possibly because Paul Thomas was willing to sacrifice family harmony for what seemed to be business efficiency. Ironically, though, the fired family members each went on to successful careers in outside jobs, most of them pleased in retrospect to get out from under Paul’s reign. Whether any one of them could have taken over the sprawling company is hard to judge at this stage. What is clear is that Paul found another “son” who became heir apparent. In an artificial way, the “succession” transition actually came along only slightly behind the company transition.
The three patterns shown in the Krisch, Quinn, and Thomas cases suggest some overall advantages of family and business transitions occurring at the same time. The Quinn and Thomas cases also show what happens when family managers, relatives, employees, and outsiders cannot form a power coalition to protect either the family or the business transition, whichever is jeopardized by family conflicts. In the Quinn case, the family managers withdrew in the face of destructive family pressures typified by Quinn’s second wife. She not only divided the family but had a strong hand in dividing the company into two separate enterprises, each also competing with the other. In effect, the microcosm of family conflict became replicated in the macrocosm of the two companies. Without capable second generation managers, the original Quinn business never got beyond the first growth stage.
In the Thomas case, the opposite occurred. The relatives retreated “for the good of the family business” as Paul Thomas put it. They helped to destroy the family by abdicating in favor of the dominant older family managers, Paul and Bing Thomas. In the process, some competent family managers were lost. However, the point is not whether Paul and Bing were right or wrong, it is only that they made sure that they were never really tested or questioned by the intimidated relatives. Neither employees nor outsiders found a way to help either.
Under the distorted dominance of either family managers or relatives, not only crippled transitions but regression can set in. Consider one more case:
In the Brindle Company, a father had handed the business over to a son-in-law, did not like the results, and reclaimed the company, even though the son-in-law had done an impressive job of managing the company in terms of growth and expansion. Several years later, with the son-in-law out of the business, but still with a small ownership stake, Mr. Brindle sold the company at a fraction of the price that the same buyer had offered while the son-in-law was running the business. The business’ growth had stalled and declined. The company had gone from second generation back to first generation, and the family was shattered to the extent that the two youngest grandchildren born to the son-in-law and his wife had never been permitted to meet their grandparents.
Managing the Two Transitions
If, as in the Brindle case, a single dominant power force tends to cause lopsided transitions or regression, how can a constructive pattern be built for creating and managing both transitions? The answer seems to lie in a power balancing setup that prevents polarized conflict. Only in the Krisch case, of those described earlier, was this power balancing done effectively. Yet it also happened in at least some of the other companies we studied. It may help to look at some of the assumptions and mechanisms that were used to encourage and manage the two transitions.
The Company Will Live, But I Won’t
The key assumption for growth was an almost explicit decision by senior managers that “the company will live, but I won’t.” This assumption, so often avoided by older family managers, is almost built into the forced retirement programs of established companies. But an entrepreneur or even his sons, as they get older, must somehow consciously face and make the decision that, even though they will die, the company will live. Often, that decision occurs not because they are pushed into it, or out of the company by the younger family managers, but because of the intervention of relatives, noncompeting employees, or trusted outsiders, who may find a way of helping to pull the old family manager into a new set of activities.
At some point, a critical network of family managers, employees, relatives, and outsiders must begin to focus upon the duality of both family and business transitions. Such talks should, in our opinion, begin at least 7 to 8 years before the president is supposed to retire. Even though the specific plans may change, the important assumptions behind those plans will not.
Mediation vs. Confrontation
Time after time we saw cases in which an entrepreneur’s wife played an important role in bridging the growing gap between father and sons, as happened in the Krisch case. It also happened that an entrepreneur’s widow would step in as a peacemaker for the younger generation. But when it came to helping make both transitions occur, the wife was more important than the widow. As in the Krisch case, she would help or persuade her husband to look toward the (children’s) future instead of his own past. In effect, she provided a relative’s outside-the-business perspective. Such outside perspectives turned out to be crucial in transition management, because they helped to heal and avoid the wounds of family conflict.
In some management circles over recent years, a cult of confrontation has been built. Confrontation is regarded as calling a spade a spade, not in anger, but as a way to move beyond conflict toward problem solving. The approach is reasonable and works in many business situations.
As we pointed out earlier, though, families and their businesses are not necessarily reasonable. The primary emotions tend to be close to the surface, so that conflicts erupt almost without reason. Attempts at confrontation by one party often fail, because they are seen as open or continuing attacks by the other.
When such nerve ends are raw, partly because of family jealousies and partly because of historical sensitivities, a third party or outside perspective can provide mediation and help to soften hardened positions. Relatives, outside directors, friends, and key employees all take this role in family companies. But they do something else that is equally important. They can help to begin a practice of open dialogue that cuts not only across age levels, but across the different perspectives of family managers, relatives, employees, and outsiders. The dialogues can aid in manpower planning and in managing the transitions. The question is how to develop such dialogues so as to include all the relevant perspectives.
Mechanisms for Dialogue
None of the dialogue mechanisms we observed or heard of is a cure-all. But each brought different important combinations of people together. One company management had periodic family meetings for family managers and relatives. Another combined family managers and employees into project teams and task forces. Outside boards of directors, executive committees, and nonfamily stock ownership (to be sold back to the company at the owner’s death or departure) brought together family managers, employees, and outsider consultants on major policy problems in a number of companies. One family company had in-company management development programs, but invited outside participants and also gave periodic progress reports to the financial and civic community for comment and review. At one extreme, family managers and key employees did set up a series of confrontation sessions, but only after detailed planning. The ground rules were carefully worked out and over the years both family and company transitions made good progress. At the other extreme, companies would hold various lunches or social events where the open dialogue opportunities were limited but sometimes possible in an informal setting.
Future Role Building
Unwillingness to face the future stalls both family and business transitions, since in one sense the future can only mean death for an older family manager. But in a more limited sense it implies new but separate lives for the manager and his company. If some of the above assumptions and mechanisms begin to take hold, they will lead to the building of new roles. The older managers learn how to advise and teach rather than to control and dominate. The younger managers learn how to use their new power potential as bosses. Family managers take steps to learn new roles outside the business as directors, office holders, and advisers. Employees learn new functional management skills as well as new general management skills. Relatives learn how to take third party roles to provide an outside perspective.
Beginning Near the End
We have been describing one of the most difficult and deep-rooted problems faced by human organizations. Family owned and managed concerns include some of the largest as well as most of the smallest companies in the United States and possibly the world. It seems pointless to talk about separating families from their businesses, at least in our society. Families are in business to stay.
However, as one management generation comes near its end, the life of the business is also jeopardized. Meanwhile, critics, scholars, and managers like to pretend that the “real” business problems lie outside of the family’s involvement. This may be true in some cases, but it can also lead to and perpetuate four sets of tunnel vision. Family managers, relatives, employees, and outsiders adopt separate perspectives and separate paths.
Our studies, however, suggest that the healthiest transitions are those old-versus-young struggles in which both the family managers and the business change patterns. For this to happen, “the old man” must face the decision of helping the company live even though he must die. If he can do this, the management of transitions can begin. In effect, a successful family transition can mean a new beginning for the company.
Writers like to think that their work and words will have a lasting impact upon the reader. However, the history of the topic we are discussing provides little cause for such optimism. In fact, a truly lasting solution may come only from experience such as that described by an entrepreneur, who said:
“I left my own father’s company and swore I’d never subject my own children to what I had to face. Now my son is getting good experience in another company in our industry before coming in to take over this one. Within five years of the day he walks in that door, I walk out. And everyone knows it — even me.”