As the sixth of seven children it may not surprise that the most common refrain heard in our household was ‘That’s not fair!’ As I think back, I can’t imagine how my poor mother managed our competing demands for her time and attention. And compete we did! If one of us felt we had suffered injustice she would listen to our concerns, weigh the evidence, and then take steps to restore the peace.
We did not always agree with mother’s decisions, but we all understood her rules, and how those rules worked. In other words when called upon to resolve sibling conflict she used what I would now refer to as ‘Fair Process’. She would have said she was just being our mother.
Now, managing the expectations of a house full of kids is complicated enough. But when there is a family business, or a significant wealth legacy to pass on, the opportunity for conflict and a recurring chorus of ‘That’s not fair!’ are multiplied.
This article will explore the importance of ‘Fair Process’ in the context of family business succession planning, noting that the concept is also applicable in the context of family wealth transfers. It will consider what I believe are the two key by-products of Fair Process:
- Creating a Mindset of Stewardship within the Family, and,
- Development of an Autonomous Sibling Team.
I will share insights gained over the past 20 years as a business succession advisor, and from a recent survey of business families who successfully transitioned ownership and control of the family business to the next generation, including companies such as Andrew Peller Limited, Flanagan Foodservice, Gerrie Electric, Longo Brothers, Mother Parkers Tea & Coffee, and Morrison Lamothe. It will consider how ‘Fair Process’ helped these families navigate the transition from the Owner-Parent generation (single leader and decision maker) into the hands of a Sibling Team (shared ownership and collaborative decision making). It will consider how ‘Fair Process’ helped enable and encourage siblings to develop into an autonomous team, distinct from their parents.
I will also share the story of Pigott Construction, a family owned business which ran continuously for over 100 years before closing its doors. It will consider our family’s experience in the context of ‘Fair Process’, and compare it with the experience of the companies surveyed.
About Fair Process
There are 3 elements to fair process, described as follows:
- Engagement: involving family in discussions on family issues, plans and decisions;
- Explanation: letting family members know the rationale for decisions made; and,
- Expectation: clarifying what is expected of family members in return for career & ownership opportunity, and playing a meaningful role in the family legacy.
While Fair Process sounds good in theory, my experience indicates that it is often the case that the Owner-parent does not get around to engaging with, or explaining, their decisions or actions to the next generation, particularly those who are not shareholders or senior employees. This practice poses a major impediment to the next generation because people will not be inclined to support that which they have not had a hand in creating.
The process of engaging with and explaining to the next generation will help improve family and business relationships, but will call for leadership and a willingness to explore topics that are difficult and often contentious. However, it is often a failure to manage expectations that leads to conflict rather than decision making or planning. Failing to discuss and manage expectations is a leading cause of misunderstandings. Such misunderstandings are the root cause of most failed business and wealth transitions. The origins of such breakdowns are within the family’s control.
The Transition Landscape
The statistics are telling: 50% of all Canadian family businesses are expected to change ownership by 2019, yet statistics indicate only 20% of these businesses have a documented succession plan. Meanwhile a 2012 study by Accenture suggests North America is in the early stages of a massive intergenerational wealth transfer, yet less than a 3rd of wealthy families have a comprehensive estate plan.
Consider also a landmark study of 3,250 wealthly U.S. families by the Williams Group which found that 70% of all wealth transfers ends in failure. For purposes of that study ‘wealth’ was defined as business assets, real property, financial assets and personal assets; while ‘failure’ was defined as situations where there was an involuntary removal of assets from the control of the beneficiary – whether due to incompetence, mismanagement, or family feud. Perhaps the most stunning revelation of the study was the conclusion that the origins of failure almost always came from within the family, with only 3% of all such failures attributable to external factors such as poor advice, disaster, or fraud.
What factors explain this pattern? What can families do to protect their legacy and safeguard against being among the 70% of botched wealth transfers? What factors will separate the winners from losers in this high stakes intergenerational passing of the torch?
While this article focuses on best practices in family business succession, the concepts explored are also applicable to families who are transitioning wealth in forms other than an operating business.
The Pigott Construction Story
Pigott Construction was founded by my great grandfather, Michael Pigott, in 1875. Then under the leadership of Joseph Pigott (‘JM’), my grandfather, and his five sons, it grew into one of the largest privately held construction companies in Canada. The company remained in business for 117 years.
In 1903 Michael Pigott fell gravely ill. Informed by doctors that his father had mere months to live, the eldest son JM was told to quit school, learn the business and sort out his father’s affairs. He was 18 at the time. As it turned out my great grandfather recovered, returned to work, and lived for another 13 years. But rather than a feel good story, the relationship between father and son was conflicted, as reflected in a passage from JM’s diaries:
My father… was not easy to get along with. I know I was pretty cocky and inclined to lose my temper, with the result we had many rows and frequently I either quit or got fired. Mother was always a wonderful peacemaker and invariably things got patched up.
One notable clash saw Michael refuse to support his son’s winning bid on a project for Toronto Armouries, fearing that his son had bid the work too low. JM, confident the tender was allright, borrowed money from his mother, completed the project, made a handsome profit and repaid his debt. Conversation at Sunday family dinners around this time must have been quite interesting.
At one point JM’s younger brother Roy, a civil engineer, joined the business. It rankled JM that despite his years of front line responsibility, he was not treated on an equal basis with his less experienced, but better educated brother:
The deal was this: Roy was to have 60% of the profits – and I was to have 40%. This was not too important except in so far as it showed my father’s attitude towards me.
Clearly the strong personality traits of my great grandfather enabled him to overcome long odds and establish a successful business. But it seems these same traits served as an obstacle when it came time to hand the reins to his sons. I can only surmise that like many business founders Michael found it difficult to accept JM’s desire to change the way of doing business, and allow the next generation to stamp the business with their own unique style and skill set. Rather than engaging in what might be termed ‘Fair Process’ father and son tended to compete, leading to a conflicted relationship.
Following Michael’s death 1916, JM’s acumen, vision and drive led the company to considerable success, surviving the depression through force of will and then emerging post World War II as one of the largest private contractors in Canada. With such growth came career opportunity for all family members, and in time five of JM’s six sons joined the business and became sibling partners.
The oldest brother, and the first to join the business, was my father Bill. He stayed back during the war to work with JM who became a ‘Dollar a Year’ man under C.D. Howe, leading the Wartime Housing effort in Canada. As the oldest, and most experienced, Bill was the logical choice to take over the Presidency from JM in the mid 1950’s.
This was a critical time in the Company’s evolution. No doubt that each of the brothers entered into the arrangement with all good intention, and a deep and abiding obligation to their father and the business. However, it seems the stage was set for the succeeding generation to do one of two things:
- Arrive at an arrangement that maximized their respective contributions to the business, creating meaningful careers and building wealth for future generations; or,
- Enter a cage match, where family members compete for control, to the detriment of business and family relationships.
So what happened next? Well, clearly pressures were building in the sibling generation, as it seems the brothers began to compete rather than collaborate. Was this due to the lack of a shared vision for the future, or the absence of an agreed set of rules to govern relationships and decision making? Likely it was a combination of these factors. What is clear is that their father, JM, remained de facto leader, and was reluctant to truly step away. Consider the following passage from his diaries dated Dec. 9, 1957, when he was Chairman and eldest son Bill was President:
Real trouble. As long as I am head man, call me what you like, there will be no real takeover by Bill. Why then don’t I get out of the way? The real answer: I’m not sure but things may fall apart soon after I quit.
Perhaps JM, like his father Michael, was also finding it difficult to let go? In any case JM stayed on in the role of peacemaker and problem solver long after stepping down as company President. What seems clear is that his son’s were having difficulty establishing themselves as an autonomous and independent decision makers, one of the core tasks of successful sibling teams.
Following JM’s death in 1969 it was clear that the traditional hierarchy that had proved so successful during his tenure was no longer workable. Without JM’s stabilizing influence, and with ownership divided more or less equally among the brothers, the concept of ‘Fair Process’ took a back seat.
So, rather than acting in unison, and according to an agreed plan, family shareholders broke into two camps, and began to pursue different business strategies. There was no shared vision of the future, and no shared vision for what the family wanted to accomplish by being in business together. It eroded our ability to compete and it undermined family unity.
Pigott’s demise was not because it’s skills as engineers and builders became diminished, but rather as a result of an inability to establish ‘Fair Process’ as part of the broader family fabric years before JM’s passing. And as a business family about to enter the ‘cousin consortium’ stage, this would call for the establishment of more formal governance and communication structures such as a family council, and a board of directors that included credible and skilled independent members.
Family Business: The Founders Dilemma
As the Pigott story demonstrates, there are few challenges that demand more of a family leader than transitioning a business or family wealth on to the next generation. In this context I have often learned of parents who, with all good intention, divide ownership of the business equally in an effort to be fair, but who fail to engage family members in the decision process leading up. This is often done for fear of the conflict it could cause or perhaps out of worry that expectations of wealth would sap the next generation’s ambition. What is clear is that the very best laid succession plan will rarely succeed if there has not been an equal investment in preparing and conditioning the heirs for what lies ahead.
So what is it that differentiates those families who are able to successfully transition to the next generation with wealth and relationships intact? Well, the companies who participated in my survey offered a few crumbs of advice from their succession journey. I am pleased to share a few.
Making the Sibling TeamWork: Lessons on Fair Process
The companies participating in the survey were a highly diverse group, ranging from 50 employees to nearly 1000, representing construction, packaging, hospitality, wines and spirits, industrial distribution, food processing, and food distribution.
Each business family and sibling partnership were very different in terms of their culture and style, while at the same time exhibiting key similarities with regard to teamwork, and embracing a shared vision and goals. To use a golf analogy, if you follow the PGA Tour you are likely familiar with the swings of Ernie Els and Jim Furyk. Els swing is a masterpiece of balance and tempo; whereas Furyks action has been compared to ‘…an octopus falling out of a tree.’ Each brings a very distinct method. Yet, at that critical moment, when clubhead meets ball, they both get to exactly the same place. Similarly, the business families I surveyed were very diverse in their approaches to governance, leadership and decision making. Yet when it came time to take critical decisions they were able to get to the right place as a family. These families were committed to transparencey and openness – which came about as a result adopting Fair Process.
It is important to emphasize that Fair Process did not get sprinkled on these families like fairy dust at a princess party, setting them on a clear, carefree path for ever more. These families worked long and hard to build their sibling team, and they continue to work dilgently as the family evolves. No doubt cries of ‘That’s Not Fair!’ still ring out from time to time, but they have developed the capacity to deal with their differences fairly and objectively.
This now leads me to briefly speak to what I believe are the two key by-products that spring from Fair Process: A Mindset of Stewardship; and, The Autonomous Sibling Team.
By-product #1: A Mindset of Stewardship
Stewardship: noun ˈstü-ərd-ˌship: the careful and responsible management of something entrusted to one’s care – Merriam Webster
Families that take time to define their core values will often cite things such as honesty, integrity, respect, hard work and accountability. Less frequently cited is the value of stewardship.
Stewardship is a value and a mindset that drives behaviour – that provides a moral compass both in the business and the family. It dictates how decisions get made, and disputes resolved. I believe that the lynchpin of any successful sibling partnership is a mindset of stewardship, with stewardship being perhaps the first byproduct of Fair Process.The stewardship mindset characterizes families who have focused at least as much on preparation of heirs, as they have on the technical elements of the succession planning process (tax, legal, financial etc.).
John Pigott, 3rd generation shareholder and President of family firm Morrison Lamothe described how early on in his career at the business he got a visit from his grandfather, the founder of the business, and its profound impact on him:
My grandfather was in his late 80’s and lived nearby. He would often shuffle over late at night to ask how things were going. One night he came over and handed me a letter. I knew he was on his last legs. I expected the letter to be an epistle, a roadmap for the future. But the letter had only one sentence whch read: “John I want you to be a contributor.” I was confused and disappointed. “Grandpa what does that mean” I asked. He said “A contributor is someone who leaves something in better shape than they found it.” And that is what has driven me for 30 years.
John went on to say “Owning and running a family business is made much simpler when you manage by values.” In other words, a family’s shared values exert powerful moral suasion on a family members individual choices and behavior. A stewardship mindset provides one of the core values that will act to inform how the family deals with stress and complexity whether relating to ageing parents, an operating business, the family cottage, or settling an estate.
By-product #2: The Autonomous Sibling Team
“The greatest challenge was getting our family unit to evolve. Similar to a business, family must learn and evolve as a team.”
– John E. Peller, President & CEO, Andrew Peller Limited
Family power structures will often leave certain members of the family feeling they have nothing to contribute, often falling into the trap of giving in to pressure and accomodating what they may not agree with. When a voice is lost in this way, the family loses out because, in the words of one family leader: “Sometimes you find the best perspectives will come from places you never expected.”
In my discussions with the participating companies it was clear that each family combined their unique culture and values with the notion of Fair Process when making decisions about who would lead, how decisions were made, policies set, and how disputes and disagreements were handled. Using Fair Process to arrive at mutually agreed family policies and decision making processes acted as the linchpin for sibling unity.
Where families are brought together to run a business, or to manage a financial legacy, individuals need to find a place where they fit to be effective. The most successful families are those that commit to up their skill sets in order to move forward. This could be with respect to their career skills, business governance, conflict resolution or leadership.
It is a well worn adage that you don’t support what you don’t create. As such it is at their peril when the Owner/parent continues to act in the role of arbiter and peacemaker for the sibling generation, as demonstrated in the case of Pigott Construction. A very clear takeaway from my survey of the business families was the pivotal role played by the Owner/parent in signalling his or her permission to the sibling generation to rewrite the family rule book and establish a new model of business and family governance. But often the impetus for change needs to come from the sibling generation who must demonstrate their ability (and desire) to lead the business forward, and to resolve conflict in order to win confidence and approval from the parental generation.
What the Families Said
On Leadership, Decision Making& Conflict Resolution
Clearly, replacing the previous generations skills and abilities is a tall order. Successful sibling teams realize that it is collaboration and teamwork that will lead to sustained success going forward.
Among the companies participating in my survey, sibling teams ranged in size from 2 to 6, featuring a diversity of leadership structures. Together they figured out what kind of leadership would work best for their situation. Six of the sibling teams had appointed a single leader. One of these companies explained the logic of their choice as follows:
We always had a clear leader in each generation. Knowing who was in charge helped avoid disputes. Still we used a collaborative approach, though key decision making was ultimately with the leader.
Two companies defied conventional wisdom and appointed Co-Presidents. Elaine and Heather Gerrie, Co-CEO’s of Gerrie Electric explain:
Over our entire career we have had many people say there needs to be a single leader. We disagree! We have succeeded because we truly believe we are equals and work hard to act in unison. Our people understand and accept this.
In terms of choosing the next leader, one company explained how the father had influenced their decision:
Father consulted each of us so he could understand what our desires and interests were before making a decision….He determined what was the right move at the time, but left open the possibility that anything could happen after that.
Leaving possibilities open until more is known about the skills and abilities is a very wise strategy. I have seen situations where parents have made representations to their children such as: “One day this will all be yours…” only to find that this person was not the right fit to lead the business. Returning to Fair Process for a moment, if there is engagement and explanation, it is much easier to manage expectation. Taking time to weigh alternatives and getting independent advice is wise before making major commitments that will later prove difficult to undo.
Finally, in terms of resolving conflict, difficult decisions are sometimes required. Family members may choose not to embrace Fair Process, particularly if it might require them to share something they already control, or if they place personal interests ahead of family interests. One family member interviewed regretted not being more forceful in their demands to be sold shares, despite spending years building value in the business controlled by a sibling:
Get it worked out earlier so you don’t find yourself back peddling to get what you want. People’s personalities change. Set measurable objectives, and don’t leave it to discretion where there is too much power in that person’s hands.
And finally, not everyone will want to play according to Fair Process, and so:
As a family you need to be prepared to kick people off the island if you have to. You need to deal with it. You have to be able to make the tough decisions.
“Not fair”, you say? I doubt my mother would agree.
Conclusion: Engage & Explain
Whether it is ownership in the business, or the family’s wealth legacy, managing the expectations of stakeholders through Fair Process is the lynchpin for successful inter-generational transitions. At the same time Fair Process is not a panacea. But what seems clear is that when Fair Process is embraced by the family it will ultimately lead to an environment conducive to the development of trust, communication, shared values and ultimately good governance.
Fair Process calls for a willingness of parents and children to tackle the difficult issues together. It requires there be acceptance that conflict is inescapable in the quest for understanding and personal growth. Families who accept the challenges inherent in Fair Process will reap a collective outcome that is greater than the sum of the individual needs or wants of family, while building a rock solid foundation for family relationships in current and future generations. In the words of one survey participant:
We learned to accept solutions that would never be exactly what we wanted individually…but that were best for the family to move towards its long term vision.
Co-Author of Purchase & Sale of Privately-Held Businesses