From Siblings to Cousins
Prospering in the Third Generation and Beyond
By Craig E. Aronoff, John L. Ward
Palgrave Macmillan Copyright © 2011 Family Business Consulting Group
All rights reserved.
Your Family's Last Major Business Transition
Q: What do the New York Times Company, Estée Lauder Companies, Inc., and Highlights for Children, Inc., have in common?
A: They are family businesses that have defied the death sentence promised in that old saying, "Shirtsleeves to shirtsleeves in three generations." They have all survived to become "third tier" businesses—that is, businesses run by the cousin generation. For most family businesses, that's the third generation, although for some businesses, like the New York Times Company, it's the fourth generation or beyond.
While statistics indeed show that most family businesses don't make it to the third generation, these companies and countless others have beaten the odds. Not without difficulty. Not without hard work and thoughtfulness and tough decision making. But they have succeeded at making the last major transition for business-owning families—going from siblings to cousins. It's a transformation your family business can make, too. This book will show you how.
You may wonder why going from siblings to cousins is your family's last major business transformation. Aren't there more transitions to come? Of course there are, but none so complicated as first going from a founder to siblings and then from siblings to cousins. Chapter 2 explains why going from siblings to cousins is so tricky. You will discover that just as the rules changed when your business went from its founder to the sibling generation, so must the rules change again when a cousin generation succeeds the siblings. You will also increase your understanding of what a healthy family business looks like before and after the transition to the cousins takes place.
Family members in businesses that are moving into the cousin stage or who are already in it will gain the most from this book. Family business advisors (attorneys, management consultants, estate planners) can also benefit, perhaps finding ways to assist their clients in making this difficult transition. Others who should find this book useful are family business board members as well as managers of family offices who are working with extended families.
This book is aimed at helping cousins organize themselves and their extended family for success as a group that owns and runs a business together. If you are in the cousin category, it will provide you with a conceptual map that shows you how to think about a cousin-owned business—because a cousin-stage business requires a completely different pattern of thought than a sibling-stage business. You will gain an appreciation for the challenges specific to a cousin business and will learn what it takes to meet those challenges. You will become knowledgeable about the key issues that cousins face, such as how to attract the most capable family members into the business leadership roles or how to develop agreement among owners who may be widely scattered in geography and opinions. You will also find guidelines to help you continue working together successfully—if that's what you choose to do.
From Siblings to Cousins is also addressed to the sibling generation. While the emphasis of this book is on cousins, we believe the more that siblings set the stage for their sons and daughters, the better. If you are a sibling owner, this book should help you create the circumstances to help your children become a successful team—if it's the family's goal to continue in business together.
This book anticipates that the cousin generation will contain five to fifteen or more members. But suppose you have only a small number of cousins in the cousin generation. Perhaps the founding parents had two children who in turn each had two children and now there are four cousins in the third generation. You will learn what to do if your family has only a limited number in the cousin generation.
We have written extensively about sibling partnerships and, in fact, an earlier book in the Family Business Leadership Series is devoted to them (Making Sibling Teams Work: The Next Generation). From Siblings to Cousins now turns its attention to what we like to refer to as the "Cousin Collaboration," an extension of the siblings' active cooperation that is necessary to a thriving family firm. You will learn more about what we mean by a Cousin Collaboration and how it functions in later chapters.
It is our hope that this book will serve as a valuable resource to family members in cousin-owned businesses or businesses that are about to be cousin owned. Our intent is that the ideas presented here and the questions we raise all become topics for discussion at cousin meetings and other family forums. That will enable the family as a whole to increase its understanding of the requirements for success in the cousin stage and subsequent generations.
By our estimates, about 16 percent of family businesses are cousin owned. But there is more knowledge available than ever before about how to make a successful transition to the cousin generation and how cousins themselves can work together effectively. We've packed as much of that knowledge into this book as we can. We believe that the more business-owning families know, the more they can dispel the old cliché that family firms wither away in the third generation.
A World of Difference
Cousins and the world in which they grow up are vastly different from siblings and the world that shaped them. These changing conditions have a profound impact on family dynamics and on how cousins can most effectively own and run a business together.
Consider a family we'll call the Harrisons, owners of Harrison Automotive, a very successful Midwest supplier to the auto industry. All in their late 50s and early 60s, the four Harrison siblings—Angela, Sarah, Thom, and Andy—remember vividly how their father, the founder of the family business, ruled it with an iron fist.
"He expected us to do what he told us, and no disagreeing with him was allowed," recalled Angela.
"Even after we'd worked in the company 20 years," said Thom.
"Remember how furious he was when we told him that we just couldn't operate the business the way he did?" added Sarah. "He just didn't understand that we couldn't copy his management style and still function as a team."
"Thank goodness Mom was there to smooth things over all the time," Andy mused. "If it hadn't been for her, I'd have left the business."
"Me, too," said Sarah. "But our experiences with Dad did teach us that one generation can't run the business the same way the previous generation did. You can't even run the family the same way."
The Harrison siblings inherited equal shares of the family business. All still work in it—Andy is chief executive officer, Thom is corporate counsel, Sarah heads advertising and marketing, and Angela, about to retire, is vice president of human resources. They have worked well as a team over the years and, as a result, the company has grown and prospered. It now has 4500 employees.
Among them, the siblings have 14 children ranging in age from late teens to late 30s. Three of the older cousins have worked in the business a decade or more and have risen to responsible positions—president/chief operating officer, chief financial officer, and vice president of information systems. The two youngest cousins are still in college and haven't decided whether they want to join the business. (They know that if they want to work in the company, they have to meet the family's requirements for employment and jobs that match their talents have to be available.)
The remaining nine cousins are pursuing careers outside the family business in other industries. Seven of the cousins live in other parts of the country. Six of them are married and so far, the Harrison siblings have 12 grandchildren.
CHANGING CONDITIONS IN THE FAMILY
The Harrison family epitomizes what we mean when we say there is a world of difference between the sibling generation and the offspring cousins. Consider the following:
Siblings have more shared experiences than cousins do. Siblings generally grow up together in the same household and share the same set of parents. Cousins aren't subject to the kind of intimacy that brothers and sisters share. The cousins grow up in separate households and have different sets of parents.
Brothers and sisters are likely to experience that intense phenomenon known as "sibling rivalry." Patterns of behavior developed at an early age can haunt their adult relationships. As one man in business with his older brother complained, "I'm 40 and my brother is 44, but there are times when suddenly I'm 10 again and he's 14." Nevertheless, strong feelings of kinship exist between siblings and they look out for one another.
While there's less rivalry among cousins, there is also less of a sense that "we have to take care of each other." But cousins also have the opportunity to enjoy friendships with each other that are unencumbered by the shared and often "loaded" childhood experiences of siblings.
While siblings may stay geographically close, work in the business together, and share similar values, cousins become more diverse. Like half of the Harrison cousins, many leave home and settle in other communities. Values and points of view diverge, influenced by the spouses that the siblings brought into the family and ultimately by the cousins' own spouses. Some cousins may join the business, but most typically make different career choices. Not everyone in the cousin group feels the passionate commitment to the business that nearly everyone in the family had in the founder and sibling stages. Some cousins may not even wish to be owners of the family business.
Diversity and loosening family ties in the cousin generation pose two major challenges that we will be exploring further in the coming chapters: how to build shareholders' voluntary commitment to the family enterprise and how to hold the family together.
CHANGING CONDITIONS IN THE BUSINESS
The changes that take place in the family as it moves from siblings to cousins result in changes in the family's business as well. Here are some key examples:
In the sibling stage, most or all of the family members work in the business. But in the cousin generation, proportionately fewer family members are likely to be employed in the business. Many of the cousins may not have the skills needed by the business or may simply wish to pursue careers in other fields.
Family members usually hold the top family business leadership positions in the sibling generation. In the cousin stage, there's a higher probability that non-family executives will rise to CEO, chairman, or other key posts.
In the sibling generation, all or nearly all the family members serve on the board of directors. In the cousin generation, however, there are more family members than director slots, and in many instances, the family has moved to strengthen the board by adding talented, independent directors.
The family enterprise most likely began as one business. By the time the cousins arrive on the scene, it may well have evolved into a complicated portfolio of subsidiaries and independent businesses with interlocking ownership—different corporations or partnerships owned by various configurations of the family.
Equal treatment of family members is often a key to success in the sibling stage. Siblings may inherit equal shares of the business, have equal pay, and have an equal voice in decisions. By the cousin stage, treating everyone the same is typically no longer realistic or viable. Compensation is more likely to be based on market rates and merit. Additionally, some cousins may inherit larger ownership positions than others. While equality may help siblings to avoid conflict, forcing equality on cousins who bring different skills and talents to the family business can lead to the very conflict that equality was suppose to avoid.
MOVING TO A "COUSIN COLLABORATION"
All of the differences described above have implications for how the family is organized and for how the business is managed in the third stage. A Sibling Partnership was the center of the family organization and of business leadership and ownership in the sibling generation. Now that the family and the business are both larger and more complicated, the family must move toward a different form of teamwork and leadership. We call it the "Cousin Collaboration."
We like the word "collaboration" because it has such a positive connotation. The very definition of "collaborate" is "to work together." The key to a Cousin Collaboration is that it is voluntary. Each of the individuals involved is making a conscious commitment to work together with the others toward certain agreed-upon goals.
In a true Cousin Collaboration, the cousins come together because it's something they want to do. They aren't coerced by their parents to do it, and while they may be influenced by their history and the legacy that the business represents, they don't feel bound by their history and that legacy. They also know they have the freedom to opt out. By this time, the family has probably given deliberate attention to liquidity issues and drawn up guidelines whereby family members can sell shares.
A goal of the Cousin Collaboration is to make remaining an owner so satisfying that opting out is rare. Maintaining the commitment of shareholders is important because doing so helps to hold the family together and to retain financial and leadership resources for the business. It represents the next generation of the healthy family/healthy business paradigm necessary for family business success.
The chapters that follow illustrate how Cousin Collaborations work in the business and in the family and provide guidelines on what it takes to continue a family business into the third generation and beyond.
SIBLINGS CAN SET THE STAGE
The members of the sibling generation play a very powerful role in setting the stage for family and business success in the cousin generation. Most important is raising and educating children who are capable of meaningfully and thoughtfully considering all the issues that face a business-owning family.
When the siblings themselves work together effectively, they serve as a model for the next generation. They create the mechanisms that not only serve themselves well but that will also enable their children, the cousins, to function effectively as a group. This typically means that an active board is in place, including competent, outside directors. It means that the family is bound by a process of family meetings and decision making, usually based on a family mission statement. It means that the siblings have created functioning structures, processes, and policies that will enable their adult children to move forward together and make the decisions appropriate to their own generation. If the siblings have not accomplished these tasks, the sibling generation's work has not been completed, leaving their children the challenge and danger of tasks unfinished.
Like the Harrison siblings described at the beginning of this chapter, the siblings understand that just as they could not operate the way their parents did, a Cousin Collaboration cannot function the same way a Sibling Partnership does. The cousins must carry on in a manner that meets the present and future needs of the family and the business, not the needs of the past. Just as all the rules changed when the family business went from the founding generation to the siblings, so must the rules change when the cousins take over from the siblings.
Siblings who want to know more about Sibling Partnerships and how they can prepare a family and a business for the next generation will find it useful to refer to Making Sibling Teams Work: The Next Generation.
HOW COUSINS CAN PREPARE THEMSELVES
Of course, it's not just the siblings who have to do the work of preparing for the cousins to take over. Cousins have to prepare themselves as well.
There are two major ways in which cousins can do this:
1. Cousins should educate themselves to be effective owners of the company. There's a book on that topic, too, in the Family Business Leadership Series, Family Business Ownership: How to Be an Effective Shareholder. It will provide you with basic information about what it means to be a family business owner and what you need to know. Essentially, you will want to read all you can about business basics and how they pertain to the business you own. You will want to read everything the company distributes to its shareholders as well, so that you understand the company and the direction it's going.
If you are not working in the company, ideally you will be what we call an "active owner." An active owner takes a genuine interest in the family business and is concerned with all its issues. Hopefully you will not be a "passive owner" (simply collecting your dividends and making no conscious decision about staying an owner) or an "investor owner" (like a passive owner but makes a conscious decision to continue as an owner as long as returns are satisfactory).
Cousins show wisdom when they realize that the shares they hold in the family business are a major asset and need to be attended to responsibly.
2. Develop constructive relationships with one another. Get to know each other. Get together as a group and talk about your hopes for the family business under your watch and consider the kinds of issues that may arise and confront you as a group. You'll need to begin discussing questions such as: How do we organize the family? How will people have appropriate opportunities for input? How do we make decisions in a larger group? How do we secure commitment as shareholders? (Continues...)
Excerpted from From Siblings to Cousins by Craig E. Aronoff, John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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