Characteristics

Most, but not all, family businesses are founded as Controlling Owner companies, in which ownership is controlled by one owner or, less typically, a married couple.¹⁰ It is tempting to label these companies “entrepreneurial” family businesses, because most founder businesses are of this form, but that would be somewhat inaccurate. Not all Controlling Owner family businesses are entrepreneurial (in the sense of being innovative or risk taking), and not all entrepreneurial businesses have one controlling owner.

Controlling Owner family businesses vary enormously in size. Although most remain modest in scale, some achieve revenues of many millions of dollars, sometimes even within the first generation. Family employees are most often limited to the nuclear family of the owner. The board of directors, especially in the first generation of an owner-manager family business, is typically a “paper board,” which exists only to meet incorporation requirements but performs no real advisory role, or a “rubber stamp board,” which meets only to endorse what the owner-manager has already decided to do. In both cases, these boards tend to be composed entirely or primarily of family members. Because of the owner-manager’s dominant position in the company and often in the family, board meetings are generally not forums for business or family debate.

Cragston Employment Services

A powerful illustration of the importance of ownership factors at the Controlling Owner stage is provided by Cragston, an impressive service business that has grown to over $100 million in sales in its first generation. In 1978 Arthur Cragston, the charismatic and visionary founder, bought a small firm that processed workers’ compensation claims. Arthur had just earned a degree from a local law school. Since he was already thirty-six, with a family to support, he was pessimistic about his chances to rise quickly enough in the hierarchy of a major law firm. When he learned that the father of a law school acquaintance was trying to sell a small company that processed workers’ compensation claims, he put together his modest savings and went to a local bank to borrow the rest of the purchase price. The bank turned him down, citing his lack of business experience. But Arthur was determined. He remortgaged his home and convinced the company’s seller to finance the rest of the purchase with a 10-year note. The office came with two full-time and two part-time employees. Arthur’s second wife, Carolyn, helped him run the office for a few years, then returned to her vocation as a novelist.

The firm was modestly successful for two years, until Arthur began to read about a new trend toward contract employees. Craig, a longtime friend who was a CPA, came to Arthur with an idea to transform Arthur’s company. They would serve medium-sized companies by “hiring” all their employees for them, handling all benefit and tax matters, and leasing the staff back to the employer. Craig proposed a partnership, but Arthur offered a generous salary and profit share instead. Craig contributed a small amount of investment capital from his savings in return for a 10 percent share of the stock, and the deal was made. Arthur and Craig put together a packet of sales materials and began to make the rounds of Arthur’s current workers’ compensation clients, pitching the new arrangement. Only two were interested, but it gave the new company, Cragston Employment Services, the experience it needed. Just after the first six months with these first two clients, two very favorable rulings came down from the IRS, in support of the employee leasing concept. Suddenly, demand exploded; Cragston was riding a huge new wave and began to grow rapidly.

To save on initial operating costs, Arthur continued to run Cragston out of the tiny office that he had used for his workers’ compensation employees. He hired new staff one by one as he needed them, stretching current staff near the breaking point with long hours and overtime until it was essential to add a new person. His personal style with each employee and his stories about the great company they were building worked amazingly well to motivate the staff.

One day, at a business lunch, Arthur met Frank Hampton, who was also developing an employee leasing program for a large employment services company. Arthur decided he needed Frank’s expertise at Cragston and offered him a 50 percent raise over his current salary and generous performance incentives to come to work for him. When Craig heard about the offer, he was furious. After a bitter and near-violent fight, Arthur fired Craig. Craig filed suit and, with Arthur refusing to settle out of court, the battle dragged on for almost three years, eventually costing the company thousands of dollars.

Frank took over management of the individual client plans, while Arthur handled marketing. The office was in constant turmoil because of the frantic level of activity in the cramped space. Arthur was a gifted salesman, and he was rapidly generating business. Frank often complained that he could not keep up without new staff, better computers, and more room. Arthur’s first response was always, “If the customers don’t see it, we can’t afford to spend money on it.” The real problem was that Arthur still insisted on knowing every part of each customer’s package. Each new proposal required Arthur’s approval at every step. Since he was also out in the field selling new accounts, paperwork piled up on his desk. Frank finally convinced Arthur to hire a new accountant to get the books in order and take a look at their cash flow. As a result of this work, it became clear that the business could afford higher rent and more staff out of current operating revenues, avoiding the kind of debt that Arthur feared. Following the move to a larger, better equipped office, things calmed down, and Arthur took a week’s vacation with his family—his first time away from the company in three years.

Key Challenges

Three key challenges characterize the Controlling Owner stage: securing adequate capital, dealing with the consequences of ownership concentration, and devising an ownership structure for continuity. Arthur Cragston succeeded because he responded well to the first of these challenges and survived his problems with the second one. However, as shown later, his avoidance of the continuity issue may mean that the business never moves beyond the Controlling Owner stage.

Capitalization. In first-generation firms, where the owner-manager is the founder, the principal sources of capital are usually the savings and “sweat equity” invested by the majority owner, family, and friends. Unless the individual owner-manager has considerable investment capital, first-generation firms usually pool assets from family members. Although there may be important psychological strings attached, these are still the most unencumbered sources: the spouse (investing either his or her own funds or assets inherited from the in-law family), parents, siblings, or even children of the owner-manager. Relatives are more likely than outsiders to loan money to the founder with only the promise of dividends and asset appreciation if the business succeeds, and without any intention to help run the company. Sometimes there is a family norm of putting excess cash into relatives’ new ventures. Sometimes new spouses have savings, in the family business version of a modern dowry. Arthur Cragston was lucky in that he could buy an already operating business from the seller at favorable debt terms. He had just enough equity in his home and savings to make the purchase. It meant that he and his wife were risking all their assets, including the small fund they had started for their children’s college education, but they had no other family members who were in a position to help.

Nonfamily shareholding is rare in smaller family companies. True venture capital investors usually require significant control over the company, which makes them relatively unattractive to founders who are interested in controlling their creations. However, outside ownership sometimes happens at the start of the business, when the founder is helped financially by a partner (either active in the business or “silent”) with whom he or she has a personal relationship. In some cases, these partners are bought out by the end of the first generation or the beginning of the second. In other cases, ownership is passed down into the families of each founder, creating a multifamily business. These companies are a fascinating subset of family firms, which have the potential to remain stable for several generations. The forces for disentanglement, however, are very strong, and if the company survives, it is more typical for the families to split or sell the business and disengage in the second or third generation.

The most common nonfamily source of capital for Controlling Owner firms is banks. Banks may have relatively stringent credit requirements and be conservative in their assessment of risk, but they rarely seek to interfere in business operations once they have made a loan. Arthur Cragston tried the bank first, but to no avail. After his company got started, he did everything he could to avoid significant bank debt, even when it would have speeded up the growth of the business.

If family investors receive shares of stock in return for their investment, then the business begins to move away from the classic Controlling Owner form. This is one of those common hybrid situations, in which the line between Controlling Owner and Sibling Partnership companies is not always sharply drawn. When one individual acts like a controlling owner, with individual discretion to run the company as he or she sees fit, then we would call it a Controlling Owner company even if other family members have minority interests and some legal rights. To the degree that the owner takes into consideration the opinions of other family shareholders, the company begins to operate more like a Sibling Partnership.

Balancing Unitary Control with Input from Key Stakeholders. The second key challenge is to find the right balance between the controlling owner’s autonomous control of the business and responsiveness to input from constructive stakeholders. No business has authority more concentrated than one that is wholly owned and managed by one person. Controlling Owner businesses can exploit the advantages of clarity and efficiency that come from having a clearly identified single leader. Internal stakeholders (managers and employees) appreciate the lack of confusion about the owner’s directives, and there is less risk of missing an opportunity while disagreeing owners struggle for dominance. A single leader can also make life easier for the organizational environment (banks and other creditors, customers, suppliers, accountants, and attorneys), who prefer “looking into one pair of eyes” when they need a decision.

But there are also risks at this stage. Controlling Owner companies often succeed or fail on the competence, energy, versatility, and luck of a single individual. Many controlling owners feel they have to be present every moment and be part of every decision. The business can be paralyzed if the controlling owner experiences illness, depression, distractions, or fatigue. The owner of a ten-year-old printing company in California said, “I hadn’t taken a vacation in many years, so we took off to go skiing. I couldn’t stand it—I was getting ten phone messages a day—so we came home two days early.” The time demands are often extreme, but sometimes controlling owners, particularly founders, become trapped in a style of overintense involvement. They convince themselves of their indispensability. They may remain reluctant to seek the advice and assistance of family members and others for fear of losing their independence. This can become a serious problem if the company did rely on the owner for everything in achieving its initial success, but now rapid growth and development demand insights and skills that are beyond the leader’s capacity.

Arthur Cragston was a classic controlling owner who was at the center of every activity, significant or trivial, in his company. He was willing to hire some key managers, but he limited their autonomy. Every day began with a “coffee meeting” in his office, where he was brought up to date on everything that had happened the previous day while he was out selling new customers. Frank Hampton was the kind of manager who flourished under Arthur’s leadership; Frank loved being “number two.” The frustrations of a few of the other managers were muted because the company was growing so fast, salaries were kept high, and Arthur responded with personal encouragement (and sometimes gifts) if anyone’s feathers got too ruffled. Still, some of the staff could not tolerate being constantly secondguessed, and left. His handling of Craig cost Arthur a friend and the company a bundle of money. But when you left the company, like Craig had done, you left the planet as far as Arthur was concerned; he never looked back.

The good and bad aspects of leadership concentration can be reinforced in the family circle as well. Especially in the founder generation, controlling owners are often also a pivotal psychological force in their families. If the business succeeds and grows, the anticipated employment, wealth, and status opportunity it provides for the family can lead to great influence for the controlling owner. The controlling owner’s voice carries special weight in family discussions. His or her decisions regarding the business have great importance for the family, both for purely financial reasons and, in many cases, because the family’s identity or reputation is linked to the company. There is often substantial competition among offspring for the owner-manager’s attention, approval, and favor. Arthur’s family did not (yet) own shares in the company, but he was generous with his growing income. He settled an old dispute with his first wife over alimony and child support, and his relationship with his son from that marriage improved greatly. His two brothers and his sister began to look to him for occasional advice, particularly on financial matters. He was able to help his parents relocate to Arizona, and moved into the large family home where he had grown up. After that, it was only natural for Arthur to host the family Thanksgiving and Christmas dinners as his parents had done. Arthur became the clear leader in the Cragston family.

Choosing an Ownership Structure for the Next Generation. As a controlling owner anticipates the end of his or her tenure, if he or she decides to keep the business in the family, then a decision must be made about whether to continue to invest ownership control in one individual or to divide it among a group of heirs. (The complexities of this decision process are discussed more fully in chapter 7.) In forming an estate plan, the controlling owner has to weigh many financial considerations regarding ownership shares: tax minimization, financial needs for retirement, responsibilities to provide for the spouse and other dependents, indebtedness, and so forth. Some estate planning instruments, particularly trusts, which are established for tax reasons, can also strongly influence the development of the family firm. Trusts may require decisions that restrict options on the distribution or liquidation of ownership shares for many years.¹¹ Although they have undeniable tax benefits, they also may have the effect (intended or unintended) of perpetuating the controlling owner’s control indefinitely—even after death.

The controlling owner’s core decision about ownership structure rests on a value judgment about what form makes the most sense for the business and the family. There are many influences on these judgments.¹² Cultural traditions, reflected in inheritance laws, social norms, and religious doctrine, may play a part.¹³ For example, some controlling owners fear that anything short of an equal distribution of shares will stir up jealousies and encourage rival offspring to vie for power. Interestingly, equal distributions rarely quell longstanding rivalries, but the desire to contain family conflict often motivates parents to hold on tight to strict equality and not consider other alternatives.¹⁴

Eight years after the founding of Cragston Employment Services, the company had grown to annual sales of $20 million. Arthur decided to pass some of his shares down to his son, who worked as a salesman for Cragston, and to his daughter, whose husband also had joined the company after completing an MBA. Arthur’s plan was to eventually give ownership control to his son, preserving the Controlling Owner form. But Arthur is vague whenever he is asked about the timetable for the transition, and his relationship with his son has always been strained and low on mutual trust. Ownership had been Arthur’s chief lever in being able to control his company and family and to design a life that kept him in the center. It is unlikely that he will relinquish ownership control of the company until he dies, and equally unlikely that his son will still be involved in the company when that happens.

When families have a tradition of identifying one business leader in each generation, most members of the younger generation know from an early age that their careers will lie outside the business. If the current controlling owner is most concerned about autonomy and clarity in the business circle, and believes that smooth business operation requires one unencumbered leader, then he or she may seek out a new controlling owner. If, on the other hand, the current leader values equity, family harmony, and fair asset distribution as more fundamentally important to the future of the family, then the likelihood increases that he or she will prefer a Sibling Partnership form. This introduces the next stage of ownership development.

Characteristics

Because nearly all Sibling Partnerships are in their second or later family generation, they have, on average, survived longer and grown larger than firms in the Controlling Owner stage. Ownership control at the Sibling Partnership stage is shared by two or more brothers and sisters, who may or may not be active in the business. There may be additional owners, either from the parents’ generation or among the sibling’s children, but they do not exercise significant ownership influence in the Sibling Partnership. If the parent does retain an active role but the ownership control has passed to the sibling group, then the firm is a hybrid of the two stages (Controlling Owner and Sibling Partnership). The more the parent is still seen as the ultimate authority, the more the company will behave like a Controlling Owner firm.

Fashion Imports

Fashion Imports, founded in 1962. by Maria and Joseph Giulanni, imports infants’ and childrens’ knitwear. In the early years, the focus was on Italian and French designs for the middle market of small retailers and specialty shops. Gradually the percentage of imports from Taiwan, Korea, and most recently Indonesia grew, and now the primary customers are large discount chains and department stores. Maria and Joseph ran the company together in the early years. Joseph was the buyer, making several trips each year to Europe to find suppliers who were not well known in the American market. Maria was in charge of sales. As the company grew, they were very comfortable bringing on professional managers, beginning with a warehouse supervisor and later including a growing and more complex sales and marketing operation. By 1990 annual sales had reached $22 million.

The Giulannis had five children—three sons, followed by two daughters. All five children worked in the company off and on during their school years, but only the two oldest sons and the youngest daughter considered the business a career. The oldest, Joseph Jr., was a natural leader. He came to work full time right out of college. Over the years that followed, Joe Jr. was moved around through all the divisions of the company, gaining experience and a very good reputation among the managers and employees. In 1991, at the age of thirty-eight, he was vice president of sales. His younger brother and youngest sister were also working in the company at the time. Franco was a buyer, who spent much of his time in Asia. Sophie was a designer. Their other brother operated a small restaurant in town, and their other sister was an attorney in a local law firm.

Prompted by a mild heart attack in 1991, Joseph Sr. began some long-delayed work on his and Maria’s wills and estate plans. Joseph worked for a few months with their attorney and accountant to fashion a plan that would give the bulk of the company stock to Joe Jr., with smaller shareholdings for Franco and Sophie, and other assets going to the other siblings. Joseph Sr. felt strongly that the business needed a strong leader who had ownership control and that family harmony would be served by making that clear in advance.

When Maria saw the draft of the plan, she turned to her husband and said, “This is not possible.” She was adamant in her belief that all five children should inherit equal portions of the company and benefit equally as coowners, even if only some of them worked in the company. “We have spent our whole lives building this company for one reason—to have something of substance to leave to all of our children. They have been wonderful together all of their lives. I will not separate them out now and give some more than others.” She was absolutely unmovable in her beliefs.

Unsure what to do, Joseph called in a family business consultant for assistance. After a series of meetings and interviews, the second generation began to meet as a group without the parents present. In a relatively short time, three principles were agreed on: (1) that all the siblings had confidence in Joe Jr. as the future leader of the business; (2) that each of them wanted to remain as an owner of the company, to honor their connection to the family; and (3) that they would find other ways, through salary and other benefits, to reward siblings, who work in the company, for their efforts. With Joseph Sr.’s and Maria’s blessing, they began to address the creation of a board of directors and the drafting of policies to guide participation and compensation.

Key Challenges

Developing a Process for Shared Control among Owners. The Sibling Partnership stage includes a range of structures, reflecting different distributions of shares and control among the sibling group. The first key challenge is to design a Sibling Partnership that fits the individuals in a particular family. In one form, one of the siblings adopts the role of quasi-parental leader. This form, which most closely resembles the Controlling Owner stage, is more likely when that sibling has been given ownership control (more than 50 percent of the voting stock). It is also more common when one or both parents have died at relatively young ages, or when there is a significant age gap between oldest and younger siblings. In theory, when one individual has ownership control, an alliance among the sibling shareholders will not be required to make strategic decisions for the company. That individual has the legal right to have the final word, and all the other siblings know it. This can liberate the new owner-manager from needing to reach consensus with brothers and sisters and help streamline decision making. However, even in the most harmonious situations, the controlling sibling is naive if he or she feels that the deciding 1 percent majority allows the same unquestioned autonomy as was exercised by the sole owner. Without the support of the sibling minority shareholders, life can be miserable for the quasi-parental sibling—and all of the brothers and sisters know that.¹⁵

The quasi-parental form of Sibling Partnership usually occurs when there is a history of a very close relationship between the parents (or at least the surviving parent) and the selected offspring, which began long before the leadership transition. If that sibling has always been the informal leader of his or her generation in the family, the gradual adoption of quasi-parental responsibility for brothers and sisters can be a natural outcome. Sometimes he or she adopts some of the symbolic representations of the parental role, such as living in the family home or hosting family celebrations. It may be understood that this individual will gradually consolidate ownership and buy out the minority siblings over time, to avoid conflict in the next generation. If the new leader is competent and responsibly consultative with minority shareholders, and the other siblings believe the distribution is fair, this solution may be workable. However, this form can become unstable as the other siblings get older and begin to challenge the legitimacy of the identified sibling’s paternalism. Even in the best cases, it is hard to sustain this form for many years, because the rising cousin generation is even less likely to feel comfortable with such a disparity in power among the various subfamilies. There is a Greek myth about a revolt on Mount Olympus in which Zeus led a group of his siblings in overthrowing their father, Cronos, as chief of the gods. After the rebellion, Zeus was accepted as the leader of the sibling group, but when he started adopting the “quasi-parent” role—demanding, for example, that they address him as “Father Zeus”—they tied him up in a hundred knots to teach him a lesson in humility.¹⁶

A more contemporary story of such a revolt, although it did not occur during the quasi-parent’s lifetime, involves Steinberg, Inc., one of Canada’s largest conglomerates. Sam Steinberg, the most dynamic of four brothers in the second generation, dominated the business for many years. Sam was clearly the entrepreneurial genius behind the growth of Steinberg, Inc., from a small grocery store founded by their mother into a multimilliondollar supermarket and real estate empire. He was also one of the best examples of the risks of abuse of power by a lead sibling. As described in the book Steinberg: The Breakup of a Family Empire, Sam far surpassed his brothers in talent and business acumen and, according to his daughter Mitzi, dictated their every move. (“When he said sit, they sat down; lie down, they lay down.”) In the end, this quasi-parental system was ill equipped for continuity. Family resentment over Sam’s dictatorial style no doubt contributed to the downfall and sale of a very successful enterprise at Sam’s death.¹⁷

A second form of Sibling Partnership is the “first among equals.”¹⁸ In this case, one individual acts as the lead sibling but stops short of the quasi-parental role. This form is more likely when minority shareholders intend to exercise some rights but do not want the responsibility of equal involvement. The first-among-equals role is a delicate one to manage. Too much leadership, and the siblings will revolt against the parental presumptions of the leader; too little, and the system can break down in bickering and factionalism. When the leader is skilled and the family has a good history of collaboration, however, this system can effectively balance the sibling owners’ desire for respect and involvement with good ownership decision making.

The success of the first-among-equals arrangement depends quite a bit on how the leader was chosen. In the best cases, the leader has well-established credentials as the strongest visionary for the company, coupled with a style that conveys respect and openness to the other siblings. A parental designation as the “first among equals” is usually helpful, but so is voluntary endorsement by all the brothers and sisters. This was the fortunate situation in the Giulanni family. Joseph had envisioned a quasi-parental arrangement, but Maria insisted on equal division of ownership and a more collaborative system. They had all the ingredients for a first-among-equals solution: the right leader, the right family environment, and the right sibling relationships. Even so, they have considerable work ahead of them in forging the specific arrangements of authority, input, and rewards that all the siblings will continue to regard as fair.

In some families it does not go so smoothly. The other siblings, whether they work in the business or are nonemployed shareholders, may not appreciate this arrangement. They may feel the parent has made the wrong choice, or that the controlling sibling should be more constrained by majority rule. As in the quasi-parental form, disaffected relatives who are minority shareholders may not be able to steer the company, but they can still stir up family and business trouble for the new boss (as the explosion of minority shareholder lawsuits demonstrates).

Finally, some sibling partnerships operate as truly egalitarian arrangements. This is, of course, most common when ownership is very evenly divided. In the absence of strong individual leadership, ownership authority is exercised through the sibling team, often via their roles on the board of directors. These companies find creative ways for each of the partners to share the power and the glory. For example, Jerry Scolari and his brother Louis, who are equal owners of Scolari’s Warehouse Markets, a chain of grocery stores based in Sparks, Nevada, rotate the presidency every May when their fiscal year begins. Jerry Scolari says the shared presidency has mainly symbolic importance, emphasizing to employees and store managers that the brothers “make our business decisions together.”¹⁹ The Houghton family of the Corning Company decided some time ago on an entirely different approach. Mrs. Houghton decided that both of her sons should have an opportunity to lead the company for a number of years. By prearrangement, Amory Houghton, Jr., the oldest son, served as CEO for twenty years, then resigned and pursued a career in Congress after turning over the top position to his younger brother, Jaime.²⁰ Other families have experimented with cochairs or with having one of the nonfamily members of the board fill the chair role.

Once again, egalitarian Sibling Partnerships are a delicate dance. As with the other two forms, the key is the fit between the overall family style and sibling history and the ownership structure that is chosen. If the siblings have always operated as a leaderless group or have rotated leadership according to different tasks and special skills, the egalitarian team can be very satisfying and productive. (This is one of those cases where classic organization theory fails in the face of family business. Lansberg likens this to the scientists who determined that, according to the laws of physics, the bumblebee cannot fly.²¹ Most experts on organizational governance would argue against shared ownership power. And yet, in some family businesses it works.)

Defining the Role of Nonemployed Owners. A second key challenge in the Sibling Partnership stage is creating a workable relationship between those sibling owners who work in the company and those who do not. Parents worry a great deal about the impact of shared ownership on the relationships among their adult children. Some controlling owners try to minimize conflict by leaving company shares only to those offspring who work in the business, reflecting a family value that those who earn the profits should benefit from them. It also usually means that there are other assets that allow the parents to provide for all offspring while limiting stock to those who work in the company. For families fortunate enough to be in this situation, passing ownership only to employed offspring can simplify fairness issues, but it is unlikely to resolve them completely. There are often disparities in the degree to which siblings felt invited to join the firm and thereby to benefit from its financial rewards and future growth.

Other families distribute ownership to all offspring. This reflects a family value that the business is a legacy asset, created by the parents for the benefit of all their children. In these cases, finding a process that responds to the needs of both the employed and the nonemployed siblings is probably the most difficult challenge of the Sibling Partnership stage of ownership. We have found that employed owners are most concerned with achieving their career goals and receiving the status and financial rewards that they feel they deserve for their service to the family company. They vary in their awareness of their obligations to nonemployed siblings, although most are comfortable with the general idea of sharing the proceeds of a successful company in return for their siblings’ support, both emotional and financial. The nonemployed siblings are typically seeking a way to have responsible input. Some prefer to be completely passive and actively resist any expectations of participation of any kind. Others want to be heard. Successful Sibling Partnerships pay attention to these dynamics and do the work necessary to learn and try to respond to the varying needs of individuals. They use a variety of techniques to meet this challenge: internal markets and opportunities for selling shares, good communication, family councils, and well-constructed governance structures, including boards of directors. As difficult as this issue can be, the rewards can also be great. Those Sibling Partnerships that resolve communication and role issues between employed and nonemployed sibling owners are among the most satisfying and impressive business families that we have seen.

Retaining Capital. A third key challenge of the Sibling Partnership stage is attracting and retaining capital. Older companies tend to be more reliable debtors for banks and other lending institutions. Sibling Partnerships in our experience tend to have an easier time funding growth through debt than do first-generation Controlling Owner companies. However, because the Sibling Partnership stage usually brings an increase in the number of people who are owners but not employees, the balance of priorities between reinvestment and dividends may shift. In their quest to continue to live comfortably (which sometimes becomes competitive, or at least comparative, in the sibling group), or to fund outside business ventures, siblings may exert pressure for significant dividends. The employed siblings may feel obligated to respond to the needs of their siblings who are not employed in the company, especially if some of the outsiders were excluded from the opportunity to make a career in the business. Sometimes this leads Sibling Partnerships to draw excessive funds out of the company, unwittingly dampening its growth prospects. When banks see such behavior, they are less likely to extend their own funds. Educating all the stakeholders about the company’s capital needs is one of the most important responsibilities of the leaders of the Sibling Partnership.

Controlling the Factional Orientation of Family Branches. Finally, as the Sibling Partnership ages and the next generation approaches adulthood, a new challenge arises. While sibling coowners are acting primarily as brothers and sisters (and concurrently as sons and daughters), they may be held together by their common history and their close personal ties. As their children grow, however, they also begin to interact as mothers and fathers themselves, and as heads of family branches. Siblings may begin to act as if their responsibility is to represent their own family branch, as opposed to the company or the shareholder group as a whole. This constituent orientation can distract shareholders and board members from the needs of the business and foster competitiveness and mistrust. Siblings who have senior management roles in the company may want to protect special access to careers in the business for their children. Those who are more junior or who do not work in the business may want to level the playing field and guarantee equal opportunity for their children. Even sibling partners who have been collaborative and generous with each other over the years feel the pressure to protect the interests of their own children as those offspring approach adulthood. These parental concerns can suddenly and significantly increase conflict in the sibling group, although the cause often goes unrecognized because the arguments may occur around routine business or shareholder issues.

In-laws bring their own strengths and issues to the family and can serve to either strengthen or weaken the shareholder group. Because in-laws do not naturally perceive family dynamics through the lens of the family’s history, they can import objectivity and a spirit of cooperation into a sibling culture. On the other hand, because in-laws tend to focus on their own spouse and children, and because they have their own needs and styles, they can contribute to a factional approach to the business. Although they rarely sit on boards, the behavior of in-laws is an important factor influencing whether sibling shareholder groups will be effective and reasonably harmonious.

All of these challenges continue right up until the time when the Sibling Partnership readies itself for the next generational transition. As the sibling leaders approach retirement, the ownership group must decide what the structure will be in the future. Occasionally a Sibling Partnership resolves itself by returning to the Controlling Owner stage, either through misfortune (the death of other siblings in small families) or buyout. Somewhat more often, a new Sibling Partnership will be formed in the next generation by concentrating ownership in only one branch of the family. However, the most common transition is for offspring in more than one branch to receive ownership, creating the most complex ownership stage: the Cousin Consortium.

Characteristics

At this stage, ownership control is exercised by many cousins from different sibling branches; no single branch has enough voting shares to control decisions. Again, there are mixed models. Cousin ownership groups in small families with only a limited number of shareholders share some of the characteristics of Sibling Partnerships. However, the classic business family at this stage in our model includes at least ten or more owners (we have seen Cousin Consortiums with several hundred family shareholders). It usually takes at least three generations for a company to reach this ownership stage; hence, Cousin Consortiums tend to be larger and more complex businesses than the other two types. Still, we see a wide variety of sizes and shapes of Cousin Consortium family companies.

Holiday Hotels, Inc.

Members of the third and fourth generations of the Sanderson family currently own 70 percent of this diversified recreational facility corporation. The remainder is divided between an Employee Stock Ownership Plan (ESOP) and a few outside investors. The company owns and manages six hotels and vacation resorts in the Caribbean and along the U.S. Gulf Coast, as well as a vacation planning service and tour packaging company. It was founded by August Sanderson, a professional gambler who parlayed a lucky streak into ownership of a small residential hotel in Miami Beach in the 1940s. August died in 1969. Through the seventies and eighties, the company was owned by five members of the second generation—four of August’s children and a niece. August’s second son, the designated successor, died in a boating accident the following year. His widow, who inherited his shares in the growing company, remarried a real estate developer, Mike Ransomme. Because none of the other siblings was very committed to business operations, Mike gradually took over management control of Holiday Hotels. Mike was an aggressive deal maker and heavily leveraged the company to acquire more hotels and expand services. When he died in 1987, the company had tripled in size to $80 million in annual revenues, but it was still carrying significant debt and was vulnerable to a downturn in the tourist economy.

At that time there were twenty-eight individual shareholders in the Sanderson family, as well as a number of trusts. The Ransomme family and another sibling branch sold out their interests after Mike’s death. The battle over valuation of the shares was a difficult one, fueled by old family resentments stemming from August’s tendency to encourage competition among his children “to see who’s the champ in the litter.” The chair of the board at that time was the oldest sibling, Sam Sanderson, but the company was actually in the hands of a nonfamily manager who had been COO under Mike for many years. When the dust settled in 1992, the 70 percent family holdings were divided approximately equally among the remaining three family branches: Sam and his three children, a younger sister (Elizabeth) and their five children, and their cousin (Susan Connelly) and her four children from two marriages. The sibling generation had never recovered from their childhood conflicts; they were not close and talked mainly through their attorneys. The nonfamily COO had developed a good cadre of professional managers, but he was sixty-three years old, and no succession plan was in place. Three of the cousins, one from each branch, worked in the company, although there had never been much talk about career planning or the ultimate role of the family in senior management.

In 1993 Susan Connelly died, and her shares were divided among her four children. Her second husband had been a very wealthy businessman, and her family was well recognized among the elite of Alabama, where they lived. During her lifetime she had always kept her distance from Holiday Hotels, although her oldest daughter had come to work for the company as a chef after completing her degree at the Culinary Institute. Her children wondered what to do with their significant ownership in this company.

Key Challenges

Most of the distinctive characteristics of the Cousin Consortium stem from the complexity of these amazing business enterprises. This complexity is most evident in two ways: (1) the increasing complexity of the family, as it grows through marriages and childbirth to a network of siblings, spouses, and children; and (2) the complexity of ownership, as the estate plans of different siblings and branches create a range of shareholder situations.

Managing the Complexity of the Family and the Shareholder Group. In Cousin Consortiums, there is often a broad range of ages, family relationships, wealth, and places of residence. Shareholders may be a mix of first cousins, aunts and uncles, second cousins, and even more distant relatives, some of whom may never have met. The personal connections that have been so powerful in the first two ownership stages are almost certainly diluted here. In fact, one of the most troublesome aspects of the transition between the Sibling Partnership and Cousin Consortium is siblings’ difficulty realizing that the familial bond among their children cannot be the same as it has been in their sibling group. Regardless of how closely knit an extended family has been, cousins do not share the same parents or the same childhood. In addition, cousins are usually at least one generation further removed from the founding of a company. In many cases this is the first generation that includes shareholders who did not know the founder personally and did not witness the early years of the company. Family stories and legends can substitute in part, but not completely. Thus loyalty to the company cannot rest as firmly on personal loyalty to its founders and their vision.

As a result of these two dynamics, cousin relationships tend to be less intense and more politically motivated than those among siblings. Although we have seen Cousin Consortiums demonstrate high levels of commitment to the company across the whole cousin group, this tends to be a difficult state to achieve. Typically, different career paths in the sibling generation have led to a concentration of cousin managers from one branch. As that branch becomes dominant in the management of the business in the second generation, the other branches begin to withdraw from involvement in the company. If some siblings and their families now live far away, many cousins’ attachment to the original family home, and the status that the company holds in its home city, are diminished. Furthermore, previous family conflicts can be transmitted to current generations of cousins, polarizing them into camps. It is not surprising, then, that many cousin shareholder groups act as if they have little in common besides their financial interests in the enterprise.

Families who manage this complexity best are those that clarify the distinction between membership in the ownership group and membership in the family. They work to create a shared family identity outside of the business, through activities and communication that emphasize family, not business. Successful cousin companies do not require family members to hold onto their stock if they would rather sell and use the money for other purposes. (The issue of creating a market for family shares in the firm will be discussed below.) Family members who choose not to be owners are not restricted from “first-class” status, even leadership, in the family.

In the Sanderson family, it was Susan Connelly’s death in 1993, followed closely by Sam’s death in 1994, that caused the cousin group to take stock of the family’s current status and relationship to the company. At that time, ownership control was clearly in the cousin generation, with only one member of the sibling group still alive. The family gathered only at funerals. Although the cousins had been raised in close proximity as young children, most never saw each other as adults. Sam’s oldest son, who was a vice president of the company, suggested that the cousin shareholders get together for a weekend at one of the properties to discuss their plans for the future. He expected a lukewarm response, but to his surprise all but three of the cousins decided to attend, and most wanted to bring their spouses and families. That was the first of what has become an annual family retreat.

Since the family is bigger at this stage, the percentage of adult family members who have made their careers in the firm is generally much lower in the cousin generation. It is rare to see more than a few of the cousins active in the business. The political dynamics that emerged in the Sibling Partnership stage became magnified in the Cousin Consortium. Even in the best of situations, the needs and interests of cousin owners who work in the company and those who do not tend to diverge over time. Employed owners feel that their entire work lives, and their egos as well, are tied up in the company; nonemployed owners see the company as only one commitment among many, all of which must compete for their attention and investment. Employed owners receive their financial returns from the company in many ways, including salary, benefits, “perks,” and access to facilities and services. Even if the nonemployee cousins support those rewards as completely justified, they sometimes resent the lifestyle that they see the employed cousins enjoying if the company is also giving the message that profits do not warrant significant distributions. Nonemployed owners tend to focus on dividends, on which they may depend. They often feel “paper rich and cash poor” and question the value of their continued investment in the company. Employed owners feel that they should have control of decisions about risk and strategy, because they both have the knowledge and are more vulnerable to the consequences. Nonemployed owners may worry that the “insiders” are too ready to take risks with family investments, and that they suffer from self-protecting tunnel vision about the company’s operations and its future. Finally, employed owners know that they have much information that their nonemployed cousins do not, but they cannot take the time to educate everyone fully. Nonemployed owners usually feel handicapped or shut out of the decision-making process and feel they are being asked to give blank-check endorsements of the judgment and fairness of those involved.

One arena where these differences can be played out is the board of directors. Active boards are rare in family businesses of any size, but they are more common in Cousin Consortiums—although they are still likely to be heavily dominated by family members. Most Cousin Consortium boards are constituent in nature, with some formula for representation of family branches. Although family constituent boards can be quite professional and effective, they tend to focus too much on the personal interests of branches, rather than confronting tough strategic issues facing the company. Often they can become stalemated and ineffective at resolving decisions about the direction, future leadership, and financing of the company. Their membership structure can be solely determined by rules about equalized family representation, without regard for qualifications or potential contribution. One key challenge facing Cousin Consortium families is to reach agreement on the requirements of responsible ownership. Those requirements most often include a public posture of loyalty and support, a willingness to think broadly about the common financial needs of the enterprise along with individual needs, and a willingness to contribute in some appropriate way one’s talent, effort, and opinions.

In the Sanderson family, the main agenda at the first cousins’ retreat was talking about a board of directors. The discussion probably would have degenerated into the bickering that characterized most interaction in the prior generation, were it not for the inspired leadership of the nonfamily COO, who had been invited to make a presentation on the company and its needs for the future. He had prepared a compelling discussion of new management initiatives and the advantages that would come from a restructured board that included strong nonfamily directors. As a result of his guidance, a system was designed that included both outside and family representation, chosen not only by branch but also according to preparation and willingness to remain informed about company operations. Over two years, a new board, with four outside directors, was built. The board and the COO were able to implement a procedure for family employment and promotion, which was in place in time for the COO to retire at age sixty-six in 1996. Sam’s son Albert remained as chair, and a new nonfamily manager was recruited to head the company as president.

It is easy to understand why so few companies, especially in the United States, thrive under family control into the Cousin Consortium stage. There are many forces that chip away at the connections integrating all the parts of the family business system: interpersonal conflict; distance and lack of common experiences; normal family disruptions caused by death and divorce; and the increasing variability among family members in the financial costs and benefits of staying involved. Stronger family traditions and limited competing career opportunities have made Europe and Latin America a more fertile ground for Cousin Consortium companies. In the United States, with its strong emphasis on entrepreneurship, independence, mobility, and focus on the nuclear rather than the extended family, the bulk of family firms that survive past the first generation are more likely to subdivide and recycle to Controlling Owner and Sibling Partnership stages.

Creating a Family Business Capital Market. What happens when some members of the Cousin Consortium want out? Unplanned demands to be cashed out can be costly to the owner-management of a family company. Family companies have been sold out from under family management because some shareholders did not feel respectfully treated. But captive cousin owners are not the answer either. Owners who want to withdraw their investment for other purposes but cannot, or who do not agree with the actions of management but do not have enough shares to influence policy, can lead to very high costs in management time and family conflict and, ultimately, legal fees. Therefore the third key challenge of the Cousin Consortium stage is the creation of a workable internal market for family shareholders, so that family members have options to sell their interests, but the process is managed to minimize negative consequences for the company.

The keys to successfully creating the internal market are objectivity and fairness in the valuation of shareholdings, as well as patience. It is almost always necessary to use outside professionals to help value the holdings of individuals and branches. Sometimes more than one expert is needed, to increase the family’s confidence in the result by confirmation, and to take into account all of the tax and legal ramifications of the valuation process. In addition, patience is required so that transactions can be accomplished without serious negative impact on the company’s cash flow and viability. In this arena, as in most policies for Cousin Consortium enterprises, it is important and ultimately easier to create the rules before they are needed, so that policies are generated in an atmosphere of the general best interest instead of in response to the particular immediate needs of one sector of the family.

A related issue, which is not limited to the Cousin Consortium stage but arises most frequently in these later-generation family businesses, is the option of going public and opening the company to nonfamily investors. In some cases, the company’s capital needs at the Cousin Consortium stage go beyond what can be generated by retained earnings and debt. Then a sale or some form of limited or public offering is considered.²² Family companies that are large enough, with strong enough growth prospects to attract outside investors, need to weigh the attractiveness of new capital sources against the costs involved in giving up closely held ownership. In companies that lean toward public offering, ownership control is often extremely diluted, so that some family members may feel remote from the business and less interested in the family’s maintaining its control. A professional board with a strong contingent of outsiders may direct the company, and the business may be in an industry or a point in its life cycle where a large influx of cash is required. The ones who resist are motivated primarily by their appreciation of a private company’s ability to operate more secretively with respect to its competition, to flexibly compensate management without oversight by a public board, to make decisions more quickly, and ultimately, to control the direction, culture, and systems of the organization. (James Cargill, senior member of the board of Cargill, Inc., says: “When you go public you get two things, money and trouble, and Cargill has enough of both, thank you.”²³) In the end, fewer than 2 percent of all U.S. corporations ever sell their shares on the public market. When they do, most will sell just 20 to 40 percent of their shares, becoming a publicly traded but still family-controlled business.

The aftermath of public offerings is mixed. Some family businesses are delighted with the move, and others are disappointed. Those that are delighted generally cite the benefits of having more capital for growth, the excitement of being able to compete more aggressively, the increased professionalism demanded by the public market, and the greater career opportunities for talented managers. The disappointments include loss of decision-making privacy, the time and money costs of greater public reporting requirements, and the pressure to meet short-term (quarterly) financial goals, which can distract a company from meaningful long-term objectives. In fact, there are family companies, like Levi Strauss, that have gone to considerable lengths to buy back publicly held shares to regain the benefits of being privately held.

Finally, there comes a point in the Cousin Consortium stage when it becomes financially and politically difficult to reverse the developmental progression and return to a simpler form. Once ownership has become extremely diluted, no individual or branch has much ownership power, and the business comes to resemble a publicly held structure with many shareholders of roughly equal strength. Unless one branch of the family, through marriage or outside business interests, is able to generate sizable capital reserves, it is unlikely that any of the sibling groups or individuals will be able to buy out all the others and reconsolidate ownership. At this end state, further development is most often stimulated by changes in the family and business dimensions. Portions of the Cousin Consortium will withdraw investment or use other capital to create new ventures and entrepreneurial opportunities. If the original firm is still viable and the return on the investment to the cousins remains competitive generation after generation, the confederation may continue indefinitely as the “parent” in a network of enterprises. If these conditions are not met, then the Cousin Consortium business may dissolve and its resources become scattered into many new ventures, which begin their own cycles.