Not Everything Remains in the Family

Written by accountant Alon Broida, CEO of Think Ahead Ltd. and Author of One Thought Forward in Regard to People Families and Businesses.

When dealing with family businesses, there comes a time in which the owners son enters a management position in the company. The son enters with an abundance of self esteem and a total lack of experience. Inevitably this situation brings about a volatile encounter between the son and the acting manager. This conflict will produce no winner; if one or both individuals do not suffer in one way or another, then the business will.

Several months ago a manager in his late 50's turned to Mr Alon Braude. He was the manager of one of the largest holding companies in Israel, a company owned by a prominent family. He stated that he is one of the most highly paid executives in the industry and that his managerial performance in the company is completely appreciated both within the company and by outsiders. He remarked that results of his outstanding work can be seen in the company balance sheets and that in return he receives financial benefits that could not be matched elsewhere. Despite all this, he came to talk about his desire to quit his position.

As the conversation ensued, it became clear to Mr. Braude that the company owner’s son had recently entered the business. The young man was twenty five years of age, ambitious, and boastful of his Master Degree in Business Management. Despite his degrees, the son possessed absolutely no practical experience in the field, a factor that did not prevent him from distributing orders to everyone, including the active CEO.

The Kicking Baby

According to Alon Braude a leading consultant to many family owned businesses, this is not an uncommon circumstance. He names this scenario "The Baby in Diapers Picture". In such a situation, the veteran manager who has stood beside the owner for many years, while bearing witness to the birth and development of the owner's child, now finds himself threatened by that very same child who wishes to affirm his status within the company's governing positions.

An individual who manages a family business despite not being a member of that family is forced to deal with a number of unique problems that may arise as a result of his position. The "Baby in Diapers" scenario is the most common problem in which the veteran manager suddenly finds himself worried and apprehensive about the prospect of losing his job to the owners son. The veteran manager shifts positions from one of confidence and security, to the complete opposite. Despite all the resources that are at his disposal he finds himself afraid to take action .

To what extent does such a situation affect the proper function of the company?

This situation can have a dramatic, negative effect on the company's productivity. The veteran manager will want to resign from his position, leaving the company to suffer the consequences of his absence. This resignation is driven by emotion, as the veteran manager is torn between his feelings of appreciation toward the owner, and his total lack of respect for his child whom he is not capable of taking orders from.

In the worst case scenario, the veteran manager may remain in his position while manipulatively attempting to deliberately foil the son's operations, later convincing the father of his son's incompetence. In such a case, the veteran manager may delegate a large project to the son without supplying him with the proper resources, and wait patiently for the child's failure.

What is the owner's problem?

The owner of the company now faces a predicament. He does not understand what the problem is, nor does he know what the manager would like him to do. He is not aware of the events that have transpired as a result of his son's entry into the business, and cannot figure out what more the veteran manger could possibly desire, as he enjoys good conditions and a lucrative salary.

How can the veteran manager's resignation be avoided?

The owner must become aware of the emotional difficulties that the manager may be experiencing, and reinforce his position in relativity to the family. By doing so he may make it difficult for other family members to relieve him of his position. This endeavor may boost the veteran manager’s self confidence, while clarifying his position within the company to the family members. Obviously such a procedure must not be performed secretly, but as a clear upfront effort.

Is there a difference between a veteran manager and one who has recently entered the confines of the business?

The answer to this question is yes. A manager who is not related to the family, and has helped establish the company from the beginning will be viewed as weaker than one who joins the company in a later, more advanced period of development; this despite the fact that the new manager shares no relation to the family either. Family businesses that run into difficulties finding relatives to take over the management of the company seek to hire a professional external manager that possesses an adequate, extensive record. Such a manager will receive better conditions and will be awarded with greater power and authority before the family.

There is a clear reason for the fact that a manager that joins a family owned company at a later period enjoys more authority and better conditions. Such a manager is usually boastful of a long and impressive list of achievements, and will not allow the family members personal inheritance wars to damage his record. The most notorious of such incidents occurred in the Israel Corporation; The owner Mr Isenberg hired Meir Shani from the Elite Company in order to manage the Israel Corp. On the evening of Shani’s entry into the company, Isenberg requested that his son be second in command to Shani. It is rumored that Shani replied by stating that "he is here to produce results and not to baby-sit".

A powerful manager that arrives with an extensive record demands independence from the family, and will not be disposed to relinquish his sovereignty for any sum. 90% of executive CEO's would not agree to manage a family owned company in which the owner's son is second in command. The reason for this is quite simple: They cannot move the son from his position, and are not willing to take the risk that his potential failures will sabotage their work.

Is it permissible to fire the son? And how do we deal with the situation?

I tend to ask the owner of a business a simple question that usually leaves him quite perplexed and uncomfortable says Alon Braude - are you willing to give your manager the power to fire your son? If you are not willing to allow your manager such power then you will be sacrificing the quality of the manager you receive. Fathers that insist on integrating their children into the business must be aware of this. The desire to incorporate family and business can mean having to settle with a less competent manager.

Managing a family company while not being related to the family can produce additional problems. This situation intrinsically encloses a problem that is derived from customary employment contracts. Such contracts usually guarantee a salary and bonuses for increase in profits. As a result, a manager who is not related to the family will object to the distribution of dividends that decrease the company’s profit margin. At this early point we bear witness to a common conflict of interests between the family members and the manager.

The solution can be found through a contract that guarantees that the size of the manager’s bonus is not calculated solely by the range of profit, rather based additionally on the distribution of dividends. Most contracts today do not include this clause.

If you are contemplating any of these or other questions, I would be delighted to learn of your insights and comments to this article.

Good luck,

Alon Braude
C.P.A. M.B.A
CEO of Think Ahead Ltd.

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