When Founders Play With Fire

By Prof. Enrique Soriano

When parent owners, especially the founder, profess their parental love by transferring his entire wealth to the children despite his tacit admission that his action may cause a deathblow to the business, he is risking everything and his action may only come from a combination of the following issues:

• The desire to win over the offspring to his side and even attempting to cajole them into the business, often enticing them with promises of money, power, and prestige;
• The founder’s abject feelings of guilt for being an absentee parent for a long time;
• Referencing and highlighting what the prior generation leaders have taught him; or
• The ill-advised wealth transfer, which may just plainly stem from poor tax planning after consorting with inexperienced consultants.

When a founder looks at inheritance and tax savings as more important variables than preserving wealth by employing the concept of share vesting, there is real danger in the ownership structure. When founders enthusiastically hammer deals without let up rather than show commitment in preparing the next generation set of leaders by way of investing in the children’s intellectual assets, it is courting disaster. When founders ignore the elephant in the room, deliberately setting aside governance and dismissing attempts to harmonize family relationships so they can continue to wield power, he is tempting fate. When founders refuse to champion change in the business culture nor inspire the organization to embrace transformation, either by continuously blocking attempts to bring in non-family executives or holding dearly to the thought that they have done it their way for years and it’s still working, they are playing with fire.

In an article titled “Fighting the Family Feuds,” penned by Dr. Bernard Kliska and Christopher Eckrich, the authors enumerated some specific challenges that can be expected when two worlds (family and business) collide:

• Business owners may promote relatives or children based on family consideration (emotion) rather than merit.
• An owner may be faced with keeping a child on the payroll to avoid breaking up a relationship in the family, though such nepotism can inhibit the company’s ability to retain or develop non-family employees and managers.
• Family business leaders may have an open-door policy that invites all relatives to work in the business. This may seem like an act of love, but having more family employees than the company needs or can support can result in a shrinking piece of the financial pie for each family member.
• A founder’s children may be compensated according to their personal needs rather than their job performance. Non-family employees equate this system with an allowance from mommy and daddy, and it often drives competent non-family managers to seek employment elsewhere.
• The family value of treating children equally may result in equal rewards to children regardless of their ­commitment, ability, or contribution to the business’ success. This socialistic practice can be seen in some of the staunchest capitalistic family enterprises.
• Childhood sibling rivalry can continue through the years. It can become a full-blown warfare in a business setting, leaving other employees distracted from the business’ goals.
• Parent owners often pursue equality in their estate plans but do not invest in training the sibling or cousin group on being a team. Sometimes they don’t even communicate the plan. (“After all, we’re your parents—just trust us!”) This results in an ineffective ownership group taking over the business.

Founders who refuse to pursue governance are not just playing with fire but are living dangerously. What was presented above are some of the most pervasive and pathetic actions of founders and key business leaders who refuse to heed the call for governance. When you sense these dangers in your family business, do something now! These are worrying signs that the business may be heading towards a turbulent phase, and all it takes is a triggering event like death, incapacity, and misconduct.