On-Demand: Family Business Webinar Series | Family Business 101
- Jun 29, 2022
Join Natalie McVeigh as she uses case studies, humor and plenty of practical examples to assist business owners to understand the basics of running a healthy, productive family business.
Natalie McVeigh: Good afternoon, everyone. I'm really excited to be doing this webinar series with LMC. We've had a partnership with LMC for, gosh, over five years now.
Natalie McVeigh:And why this partnership really works out well is many of your companies in the lumber industry and forestry industry are family companies, right? You might not have set out to create a family company, but you were just so good at what you did and you started it and either your children joined or your spouse joined, and so you have this family business, and that's amazing. In fact, the research shows that family businesses are more innovative, more agile, and have more rates of trust than any other kinds of companies that exist there.
It also means they have some pretty predictable challenges, because you're working with family. You love them. Can't live with them, can't live without them, right? And so, today we're going to talk about the predictable challenge points of a family company, as well as the amazing opportunities that you have to really ensure that you can take this valuable asset of people you love and a company you're good at doing and propel them into the future instead of hitting the normal hiccups.
My background is very data oriented. I have an MBA, and I'm a professor and research in this field. We're going to talk about a lot of research, hopefully in a really accessible way. But I also want to answer your question. So right now, in this moment, which Q&A is anonymous. We do that intentionally. Only I will see the questions. I will not call you out, but if you have a question about your family or your family company right now, go ahead and chat about it. You're going to get the presentation, you may have already received it, so you'll have this deck as reference, but I really want this to be valuable for you.
You've probably the adage, "Shirt sleeves to shirt sleeves." In fact, that goes back as far as Shakespeare and further. It was originally called clogs to clog in Lancaster, England, because they used to wear clogs there. Not just the Dutch use clogs, a lot of the world had marshy bog land. It has an equivalent phrase in every language. In Italy where I grew up, it's Dalle stalle alle stelle e stalle, which means from stalls to stars to stalls . Rice patty to rice patty in some parts of Asia. And the list goes on.
There's hope in this, even though it sounds really negative. The hope is you have this generation that creates something incredible, gets to learn everything about something, and do the thing they're most passionate about. Most people start their companies because there was a gap in the marketplace. And then you have the second generation, usually that supports them, and they even surpassed the success of the first generation. And then what happens? In the third generation, if we're not paying attention, is because every parent's desire's to make their children's lives better, in some ways, when we continue to hold onto the information, we do something called authority. And authority creates atrophy.
That's this whole dynamic of these wealth transitions failing by the third generation. You're probably like, "Great, so we need financial literacy. We need some trusts. We need some boards. We need all these structures." Well, you'd be surprised to find out that's not true. Everything I just mentioned sits in this little red sliver, which is called tax and other. It's about 5% of the equation. 65% of the equation for failure in transitioning to the third generation is trust and communication. And that should change as the family changes, right? There's family life stages, adult life stages, so the way we communicate about what information needs to change. 20%, 25% is prepared errors. That's the people who are going to take over the company knowing, "Are we going to be owners? Are we going to be managers? Are we going to have investments? Are we going to have an outside CEO? What is it exactly I have to do?" And it's the generation who's been doing it finding a way to communicate that meaningfully and then bridging the gap where there's still training wheels.
There's always going to be, and we have a whole webinar on this, hopefully signed up already, succession, but people always talk about if succession will happen. Succession will happen. The thing is, is it planned, prepared for, or is it quite painful? We want to really close those gaps when you are around, we can learn from you. And then 10% is a family mission statement. This is that the family decides to do whatever they want to do together. I know there's a lot of consolidation going on right now in the lumber industry. That could even be you as a family deciding that this is the time to sell while it's high and take the assets and invest in land.
I don't know if that's the case for you. It could be that you actually want to be one of the people who are going to buy up one of the other firms that's out there and increase the size of your company, right? I've seen that with some of my clients as well, either end of the spectrum. The point is that people know what their options are and they agree to those options as a group. I see that there's some audio challenges for at least one person. All you have to do is reset, reload, and hopefully all the tech issues will go down.
Family tends to have these natural communication challenges even though we love each other, and it's because we love each other. Neurobiologically there's a condition called closeness communication bias. I grew up with you. I love you. And what I do to return that favor is I start ignoring you, right? Because I already know what you're going to say, you've been saying it my whole life, sometimes longer if you're my parent, right? You were saying these things since I was alive. There's also something else that happens, gentlemen in the room pay attention to this, you can use this with your wife when you go home, men in their forties actually start going tone death to the sound of women's voices. We call it wife deafness. So, when your wife nags you about ignoring her, say, "No, no, I learned from a neuroscientist today that I'm not ignoring you. My brain has just decided to shut you out." The opposite end of that is you actually should pay more attention.
These are the reasons why we don't communicate with our families as openly as we do in other places. I've seen this in my lumber clients, as well as other clients over the years where you have these competent, young adult professionals who blow the socks off their peers in YPO or their LMC programs or Vistage. In fact, they can knock the socks off the board. But the moment their mom or dad step in the room, they start behaving differently. They start doing that because they're used to being the children. They're afraid to disappoint their parents. We care so much that we communicate poorly.
And then for parents, when I enter the room and I say, "Okay, it's time to start letting you know, junior, juniette start doing more our plan," just really are afraid. Being an owner of a company is incredibly difficult. It is a 24/7 job. And yes, young people now do not want 24/7 jobs. They like work-life balance. Those are all really important things to them. But most of you have more than one child, right? HBR just came out with an issue at the end of last week I believe, on co-leadership, co-CEOs, and how there are actually two important roles in that job that most of you did on your own when you were the leader. One is the organizational structural side, think of a COO. And then the other is the effect of people leadering side, which could be more considered a CEO. In fact, they say now that that's one role that can be played by two people that focus and collaborate.
Now, if you have a third kid, we'll talk about how we fit them in there too. But you can't throw them into leadership together unless they really trust each other, work with each other, understand each other.
And then the last piece is distance. A family company sometimes is like the sun, right. Everything orbits around the sun. That's how the solar system works. And if you get too close to the sun, you get burnt. If you're too far away from the sun, you're Pluto, nothing can live on you. In some years, you're a planet, some years you're not, and sometimes you're a planet as well. What keeps your family together is often the company because it provides the assets, the money, the time, the resources to gather, to continue to genuinely sustain the company.
One of the things that we like to talk about is the family company is the family's vehicle for wealth, but it is not the family's wealth. The family's wealth is each individual that makes up the asset. This is why families stop communicating or don't communicate as effectively with each other as they might with your employees or board or anyone that's not a family member. So we really want to make sure that your family starts practicing these skills that they have, that we've seen them use in other venues, but with you all. And we're going to talk about some tricks to do that today.
Now, we're going to talk about trust, right? The two first components were sincerity and trust. Interestingly, you might say you don't know what trust is. You know it when you see it, but you can't figure out how to design it. This research explains why and how we design trust. Trust is a hormone, a very specific hormone we're going to talk more about later, called oxytocin, often called the cuddle hormone. Now, I don't suggest you all start cuddling in your offices. I mean, I know sometimes spouses are married in the office, but we're going to still keep it professional. But there are ways in which you can talk to each other that simulate the same way that our brain creates this oxytocin.
Here are some basic components of trust. I want you, if you can, actually get a real piece of paper, a notepad, something to write down, and just jot S, R, and C. Think of the last time you decided you didn't trust someone in your organization or your family as we go through this. It's really helpful to use a real example, not this helping someone move example. I hope all of you are at least past the stage where we're helping our friends move, but we remember when that used to happen. A component of trust in your last disagreement with someone is there's a sincerity, someone genuinely wants to do it. You ask them to do things and they're not like, "Ugh, okay." But they're actually like, "Yeah, I got it. I'm on it."
Reliability is that they consistently do it over and over again. The first two are the easiest to get to, right? Half the time you call somebody and they don't want to do it, and you can tell. The second half the time is they say, "Yeah, of course, I'll get it done," but they can't. They show up half the time. They show up late. They don't show up at all. This last one is the competence. This is the one that a lot of times when we're talking about our next generation, even if they have it, we have a hard time seeing it. We have a hard time seeing it because there's something called associative regression in our brain. That's the imprint each person gives to us at a certain period of time. Our children imprint on us when they were very young, right? Because we had the best feeling hormones in our body flowing when our children were genuinely children.
We have this imprint model where we're not quite seeing their competency and/or maybe we don't have it yet because they don't know what they're supposed to do. So you're sincerely reliable, but you just cannot get it done. It falls apart. I want you to just take a minute, I'm going to be a little quiet, so hopefully you are jotting this down, and you can even think of two different times where you thought you've lost trust, and name the people. No one has to see this. You can throw this out after. But just find one of these three points where it fell apart. Because once trust is lost, it is very hard to rebuild.
What we tend to do when we talk about trust we make it generalizable. "I don't trust so-and-so. Period." And that's not true. It means that there are certain ways and certain times I cannot trust this person. And if I can communicate that to them effectively, they can become trustworthy, and I can also not write them off because our brain doesn't store fiction. There's literally no spot for fiction in my brain. Everything I say is fact.
I've actually had some clients that tell me, "My son is stupid," and I say, "Yes, he is." And they're like, "You haven't even met him." I was like, "Well, he's stupid now. You've said he's stupid." That's how your brain is going to start processing all the information, because our brain are fact-finding machines. We're going to keep filing in the cabinet for stupid of everything that they do. That's the lens that we're putting on. I'll bring this to life a little bit, because trust is multidimensional as well. It changes in each instance. I'll talk about my family because I'm hoping you're thinking about yours. I have a sister, we owned a house together that we fixed up. And so, thankfully, we still love each other, but again, a little tough there.
My sister's a terrible driver. I'm on USAA Insurance. I'm in the family of veterans. USAA Insurance is the best insurance out there because it's a not-for-profit meant to work with service members. Well, Nicole can't be on USAA. She could not borrow my car even if I wanted her to, because I would lose my insurance. It's basically like gold. However, if I'm working late, there is no one else I would call besides my sister, Nicole, to pick up my son. You have something there called an inconsistent truth. You have a different place in which my sister is doing well. So she's sincere, right? She always means to drive well. She's reliable, no, not at driving, which we would call competence in this case, right? Her competence for driving is bearable, but she is reliable in the way that I can trust my son with her all the time. I hope and I guess that she actually drives with him really well because she hasn't had an accident yet. So Nicole's competency for driving is a challenge. So now that we know that, we can start talking to her about taking driving classes and being a little more careful. Let's move on.
There's also this complexity in all natural families. Why I say natural families is this doesn't cover adoption, although many of these things show up for adoption as well. But how families are created, two people fall in love, they have a little too much wine one night, and you've got a family. It's very easy to create a family. Some of you may read the parenting book, some of you don't. And those of you that do or don't still aren't looking at families that work together. There are some family business books now, but that's not what you read when your kids are growing up. You read about how they can feel nourished and flourish and so on and so forth.
All families want to belong. Everyone does. In fact, every human being wants to belong. We've learned from neuroscience that our desire to belong outweighs our desire for safety. This means that I will stay in relationships that are challenging because I want to belong. That's why domestic abuse happens... not the abuse side, but why people stay so long.
Also, we've studied this, where we most want to belong is our family. It's why sometimes even if you were the quiet kid growing up, even if you're outspoken at work, you might still be the quiet kid because you've been playing the role of being the quiet kid for so long. Each family has a culture. There's a language you speak. There's a shorthand that you have. Now, the funny thing is, each company also has a culture and a shorthand, and they might not be the same, right? So you have your children coming into a company that has a shorthand, a language, and they have a shorthand and a language for you, and you get a little bit of a culture clash.
Birth order, which also goes into favorites. Yes, you have a favorite child, we've proven this by science. It's either one most like you because you really like yourself or the one that's least like you because you really admire that they have strengths that might be your shortcomings. Stereotypes, I mentioned the quiet kid. They might be the quiet kid or the kid who used to be a cry baby and blah, blah, blah, we'll name all the stereotypes. When I talked about how you've imprinted on your children when they're young, your siblings and you have imprinted on each other at about the age of 18, at about the age that you've left the house. So even though you've changed and we know on paper you're much more competent and competent than we thought, it's hard for us not to see that.
Scapegoating's another extreme example of stereotyping where it's the one person who always makes everything go bad. The truth is that's not real. I had one client family where this one daughter kept bringing up all the questions, wanted dad to give more information sooner. They were in their fifties, so some of these transitions happen really late in life. And so, you can imagine a 50-year-old adult saying, "Hey, I want to know more. I'm an owner of the company. Tell me more. Tell me more." I heard in our private meetings with them that everyone was complaining about this woman like, "If she could just be quiet, we wouldn't have so many fights." Well, guess what? She stopped coming to the family meetings because she heard them complaining about her too. And you know what? The brother who was a little bit younger than her started actually doing that.
We elect people in our families to play certain roles, and they're filling a gap for us. We don't do it overtly. No one knew they had elected Stacy to do this and then Joe ended up doing it later. It just happens because families are a system that organize together. I'll send you a handout for the rest of these with about a paragraph definition behind them. But I want to explain why family companies are so challenging. I did the little joke about you have too much wine and you show up. And then there's a company that when you started... And I had my own company for 10 years before I sold it so I know how that goes. My company went exactly how I wanted it to go. Everyone did everything my way. Right, wrong, or indifferent was Natalie's way. I created the vision, the mission. Succeeding or not, it was all by my name, by my reputation.
Now, my family is very different. My marriage, my kid, all of those things are very different because there are other stakeholders there who weren't the one who owned it. And so, what family and business do isn't this pretty picture of going over together and overlapping. In fact, they tend to bump into each other. One tends to be bigger. One tends to be smaller. One tends to be the one we talk about more, because there are some families who when they're in the office say, "Can't you just be more trusting and generous?" which is kind of a family trait. And there are some family companies that when they're at home and someone's being too emotional say, "Hey, can't you act a little more professionally."
So we're trying to balance these two very different worlds. And these two very different worlds get more complex when you add in ownership, this third system that's about legal, that's about control, that's about continuity. We start creating more and more roles. So there's seven roles here. If you see the overlap, right, there's family, and then there are family owners and then you get into the box of ownership. And then there are owners who work in the company, and then you get to company members. And there are some members of the family who work in the company, right? Those are the three boxes and the little overlap. And that very center part is all of them. That's what most founders are in. You were doing all of these things at once and you forget when you started doing those things.
It's also the most isolating role to have because the weight of the world is on your shoulders. You're genuinely at Atlas. The job in family companies is to try to differentiate these roles, because role conflict is the most challenging thing in a family company. So you might have a young owner, because I've seen some clients give ownership to their kids at six months. So you might have a young owner who's never worked in the company who wants to change the company, but he or she doesn't have the language or the knowledge to do that. So you'd want to bring them to some meetings. Maybe you put them on a board so they can help learn that. Maybe you invite them to certain executive sessions when it makes sense. Or you could just educate them on ownership. Owners only have seven rights, and none of them have to do with the day-to-day ownership. So there are different ways that you can slice and dice how this works as long as you know the landscape of what's happening. So let's talk through an example with a lumber company.
You're a family lumber company. You were started four generations ago in United States specifically, and you've started expanding into several different types of differentiated services. You used do mainly lumber, but now you're working into getting paper or you're also working and creating deck products, things like that. That's all the stuff that the people in the enterprise know. You have several owners, three who are your daughters who are 20, 27, 35. You also have a wife and your daughters, except for the youngest girl, are married. These are the people who are in the family. So you are the only one in the company who's an owner and a family member. Your children each year get some dividends. You've been very successful. Congratulations to you. But this year you can't pay dividends. You're expanding. You're acquiring that deck company, and so there's a legitimate reason why dividends aren't happening this year.
However, your three daughters and their husbands have come to rely on these dividends. They've been meaningful for their life. Doesn't mean they're huge, but it's been meaningful for their life. $10,000 a year, not huge but enough. What happens then? Now, the short answer is nothing, right? A dividend is something that you get when it makes sense that you get. The difference is, though, I'm at the effect of it. If I don't know it's coming, if I don't know the plan, if I don't know the process, I think it has something to do with me. Also, they're adults, young adults, but they're adults who are trying to plan for their lives, so it might impact whether they can go on vacation this year.
So this is why these roles and the clarification of these... And I do have a worksheet on this as well I will send later. This is a really great model. I encourage you to draw it as real for your family as it is today. I changed the sizes of each one of these circles based on which one you spend more time in and focus on the most. They don't look like this. In fact, many of the cases, the enterprise and ownership look like this. They look like one circle, but it's a big circle. And then the family is like this little right next to it, barely peeking out around the edge. So when you're thinking about differentiating, first let's name what's there.
The other way this model can be besides saying what's actually here is when you're deciding what'll happen in the future. If you're thinking about succession, putting in a board, selling, peeling off, acquiring something new, you can use this for what we call transformative scenario planning. In five years, how will this real model that has these real players look if I do X, if I transfer ownership in my estate planning, if I decide to bring another child in the business. If we put in a family employment policy, how does that look? When you talk about these policies and governance, we'll spend more time on later, if it's not planned and predictable, it feels personal.
So let's stick with this family with three daughters. The first two are already married. The third one decides to get married. Will you ask her to sign a prenup? You didn't ask the sisters when they got married because at the time they didn't have stock, but they did get it later, but she's the first one to have stock. What's going to feel like to her is that you just think her husband's a lush. And so, predictable process is very helpful because all of these things may be necessary, and how we manage the business and the ownership responsibility, which are very structured system with a family that's pretty unstructured can cause disastrous consequences.
I have a bias. You'll admit my bias. I believe that strong families create strong businesses. I have never seen a strong business create a strong family. So there's one way that it goes. But I have seen strong families be injured by business practices that were a little bit more erratic.
So I'm going to move on, I mentioned the brain. I just want to let you know that there's a stress chemical called cortisol, which stays in your brain at least 26 hours. So let's use that example of my client who I met who said, "My son's an idiot." And he, for some reason, says it to his son's face every day. I know that's not you. You're attending this webinar because you're an amazing human being, but I have had clients that do this. Every day he goes in, he tells his son he is an idiot and the mistakes he's made. That cortisol cuts off his prefrontal cortex in the front of your brain, the judgment and decision-making part of your brain. So when I am stressed, I cut off the part of my brain that most mature adults have. So you say that to your son and you're cutting off that part of his brain, because that's a stress response. So then he does actually make more errors, right? He's going to fumble more, be more challenged, and it's going to last for 26 hours. So a day is 24 hours, right, we all know that. So we have a meeting every day at nine and every day at nine, I say the same thing to my son.
He's already still has two hours of cortisol left. And then I throw in more cortisol. And then he goes home and he talks to his wife about it. He's upset, and he adds more cortisol. So the shelf life is at least 26 hours, but, really, sometimes we create too much conflict or tension in our family companies, we're creating an overload and a flood of cortisol. Fortunately, it's the second most powerful chemical in our brain. That oxytocin is the number one chemical. It's all about creating we. How do we solve this? How do we move through this? Literally, just using the word we is so beautiful to the brain that it lowers down our heart rate. And when you start bringing your adult children into working in the business, to understanding more, we tend to do it as parents. That was on that last slide. Some three slides ago, it was a list of words. There's something called transactional analysis. It's how we all behave. I act like a boss and a parent. Usually I wag this finger, but sometimes I wag another finger, not a very nice finger, can't do it on camera. That's my parent self.
So if you're thinking of finger wagging, that's your parent self. And then there's our adult self. Right now if you all were having a dialogue with me, we'd be having an adult conversation. You're competent, I'm competent, I'm sharing some things. I'm looking forward to your questions for you to share your things. And then there's our child self. We all have this. We do it sometimes when we're employees for those entrepreneurs out here, you might not remember that, but it's when you feel nervous, when you feel timid, when you feel small. In fact, I've seen some people in meetings actually physically move themselves to the back of the room slowly in their chairs.
Parents and children get stuck in that parent child dynamic. They have a hard time leveling into this equal adult conversation, and that "we" really helps it. So what should we do? How should we approach this? Help me do blah. And I can send you a sheet on this to create a new sheet.
I just wanted to highlight the different capitals in a family company, right? Financial and structural, which is that governance we talked about, these are the ones most people spend the most time on, but they're only two of seven capitals. So for you to go and take an inventory of where you spend your time, just spend some time looking at this. I have a sheet for this too, just remind me to send it out, that ask the question of which capital you're spending your time on to show which area you might need to spend more time on. The research shows, in most cases, the intellectual, spiritual, social, and human capital are the areas your adult children most need to be developed in. Even if you're saying they make impulsive decisions, okay, so what does that mean?
Is it that they're too risk-taking? Do they not understand the risk? I have a lot of clients who step back, and in the lumber manufacturing, where they already did succession, and we hit some crazy times we haven't seen in the last two years. And now the economy's also escalated. Well, very smart adult children have been around when we've had the best market in the world. So there's a phenomenon happening now in family businesses called reverse succession where we're actually inviting those senior leaders who've had down times that know how to deal with that back into companies, and we want to do it in a way that doesn't create atrophy. We want to do it in a way where they can be the senior advisor, be there meaningfully, but to distill their information.
It takes 10 years, if you and I went to the same school, knew the same things, for me to tell you everything I know, which is either called heuristic knowledge or passive knowledge. So the best time to start this planning and communication is 10 years ago. The next best time is today.
And then I just want to talk to you about your adult children a little bit as well and for your adult children who are in the room now too, who are saying, "Hey, my parents are asking so much of me right now and I can't right now." It's true. When you're between 25 and 35, you're in what's called a young adulthood. Your main goal is figuring out how to stand on your own two feet, how you individuate. And when I use that solar system example early on, it's important because the family company actually is a thing that keeps me coming to the table. Maybe you put on golden handcuffs to me. Maybe I don't know what else to do yet. So it keeps pulling me in and pulling me in, so I need to push back a little bit.
That usually ends around 35. And then you have 35 to 45 where I'm really invested in my own family. I'm really invested in my marriage, the things that I'm doing to really prove that I can do it on my own, not just be individuated. So you have this span of 25 to about 45, which are young adulthood and adulthood, where your children may be saying to you, "Not now." or "Not fully." They might be working in your company and they've got a side hustle too. That is a normal developmental thing. It's new for the economy now because there's a lot of the gig economy. You might think they're less dedicated. You might think they're less devoted. The answer is, "Not now." I've seen too many of my clients during this period of time decide to make some pretty permanent choices, like to write in that their children will never lead in a shareholder agreement, or sell the company right out from under them.
So I think understanding your stage, your mature stage as a founder, in most cases, where you're saying you're generative, you see the community, you want to impact that that you're speaking a different language. They're just not there with you. It doesn't mean that they don't have competency, that they don't have capacity to get there. It just means right now, literally from this adult developmental research, one stage away is like Greek to me, and in this example, none of us speak Greek. So to find a way to translate that into the things they're looking for, look at their existential questions.
Oh, I love this comment that just came in. I want to share it. This person said, "I think this is reminding me of how blessed I am to have an open dialogue with children. For generations, been in our business for 10 to 12 years and have trustworthy decision-making today." Yes, I'm so happy for you. Hopefully, I don't sound like a fatal. Actually going to share now the research of how these families are successful. I have seen more successful families than not successful families. I have literally never watched Succession, and I never will because I'm tired of perpetrating the myth that family companies are a mistake or they cannot do this. I started by talking about the Edelman research, family companies comprise 80% of companies over the globe. They are the most trusted, the most agile, and they've done the most unique things I've ever seen because they're small enough to change on a dime.
In fact, there's tons of research by several different organizations I can get to you after this with our resources we'll send out to you, that talked about how well most family companies did in the pandemic. The same thing in 2008. Many of them did not lay off people or salary cut people. So this isn't to say that your family definitely is going to have these challenges, no. But because you're family, we hurt the people we're closest to accidentally. There's this fable we like to talk about called Schopenhauer's Porcupine. Porcupines dig holes, that's how they live. They also wash themselves in dirt. That's not really relevant to the story, but they dig holes to be fine during the winter. The challenge is if they didn't get their work done and dig their hole in the winter and they're out in the cold, they keep getting close to each other for warmth. But because they have these spines, they prick each other and then they have to separate. And at the end, it doesn't end well, right? Keep pricking each other or they're separated and then there's not enough heat to work.
That's the risk for family companies. Because we are so close, we have the inability, even with the best intentions, to inadvertently trigger and hook people by the hooks that we have just walking around. Each one of us has a hook laying around. Just think for a minute the things that make you sensitive. No one's laying up at night in your family, I hope, trying to make you miserable, but they know you well enough that sometimes their little finger just sticks in that hole, that sensitive piece. And it hurts even more coming from someone you care about.
Now here's the hundred year-study of over 100 families that have been successful for over 100 years. So yes, 70% of family companies by the third generation have gone, but that 30% are incredibly successful. So not only do we study what made the families fail... And so the person who shared this comment's family is clearly not going to fail because they're four generations. The hundred year-studies is five generations, and the researcher showed that almost every family who's made it to five generations does succeed. They've gotten through all their growing pains. And this is what they do. You can read this, it's a little bit confusing.
I've got one question, so let me answer the question before we get into the research. "What happens when the owner-father is an absent owner? This has caused a rift in the family where the son and father don't talk to each other anymore." It's a great question. There's some wonderful research by John Ward... You all have my email address now, so remind me to send this out to you if you ask the specific question. I've counted seven things that I said I'd send you, but I'm not going to remember them all... that talks about the seven types of ownership. And one of the types of ownership is passive ownership. Some people do just collect dividends, and that's okay, because they're only really seven things owners do. They vote for stock for M&A sale. They hire and fire the CEO. They're entitled to understanding the financial return that exists, whether they get it or don't get it, and anything that really affects the company's culture.
So in some ways, owners don't have to be in the business. In many lumber companies, and many of my family companies they are, because I started my business, I'm the owner and the executive officer, the CEO. So depending on how absent the father is and depending on what he's demanding, like maybe he's demanding a huge distribution and he's not pulling his weight, okay, then we need to figure that out. But in some cases, it's actually good to have passive owners. There are other owners too. There's active owners, informed owners, proud owners. I'll send you the document of it. The first things first is, what type of ownership do you have? What's the agreement for the owners and how they want to show up? And third, for every right you have this responsibility. So for the financial return, you also have to understand what's going on in the business so that you don't have unrealistic expectations.
We do have an ownership workshop that we can add to the series. We can do one more webinar that's just on family business ownership, because it's often conflated with family business management, and they are not the same. So it's really helpful for us to separate those so that people don't feel upset. But one of the things people will say is, "I should get the dividends because I'm working in the company." Well, you should get a really fair salary for being the manager in the company, but dividends are entitled to everyone who's an owner. So that may be some of it, like maybe dad is taking a salary and not in the company. That's not really an ownership issue, that's a management issue. So we need to make sure if he's going to be a manager, he does his role. And that's where a family employment policy is helpful.
So this gold bar, which is hard to see because a lot aren't doing this, is generation two. In generation two, some people have a non-family CEO, about 25%. Some people have an independent board. Same thing, about 22%. Many have a family council, about 63%. Many have a family... not many, some. Some have a family constitution, about 22%. Some educate the next generation, less than 20%. Almost none of them have an exit policy. If you want people to join either as an employee or a shareholder, you need to plan the exit as much as you plan the entrance. By generation three, you've got people from 40% for the bottom three, you've got people into 60%, the two next to the top, and you've got non-family CEOs still staying at about 25%. By the third generation, fourth generation, these numbers drastically increase. They go up to 60% for almost all of these.
By the full fourth generation, you've got 60 to 80% of most of these. By the fifth generation you have a full 100% on every single one of these things. I personally find the idea of professionalizing the family business offensive, because if you are in the company, you are professional. The question becomes, how do you set up structures that are predictable, profitable, process-oriented that if someone wants to opt in they can? So that you can step away and still have it happen. This really just becomes the structures you want to put in place. Don't go out and buy these documents. There's some places that document farms and you can just buy these and say, "Oh, we're done." Because the most important part of this is having the competency and capacity to use these documents when things get tough.
Like this example of an absent owner, what's the recourse? Do you know the ownership rights which would fall into the next generation education and independent board would help you with that? And do we know what managers need to do? Do we have the family employment policy that says, "If you haven't shown up 80% of the time, you're no longer an employee."? Have your dividend, but you don't get a salary anymore because we actually need that for an executive who can help us continue this organization to go on. I know it's not that simple, and it wouldn't happen overnight, but those are the kinds of conversations that these things reveal.
These are the other themes of these very successful families, which sound like the comment I heard at the beginning. They're intentional, resilient, transparent, collaborative. Transparent about everything. Believe it or not, our brain responds better to bad news than a lack of clarity. So the more you say, "I don't know," when you actually know, and the answer is yes, you're going to have a salary cut or no, you are not ready to be the successor, the more challenging you're making it for someone's brain work. Because there's these beta brainwaves. These are the ones where we're thinking about an act problem. I'm thinking about what I'm going to talk to you next. But there are these theta brainwaves in the back of your head that occupying your time with everything that's not closed. In fact, those are the ones that make you brilliant in the shower. You have those Eureka moments because your theta brain has been processing something.
But everything that is still outstanding, "When will I become an owner? When will I have a chance to be in leadership? When do I get my bonus?" all of those questions are clogging up the theta brainwaves of your brilliant children. And they're probably clogging yours up too, because I told you that, A, that very middle of those three circles is the most lonely job. You built this. 70% of owners regret the sale of their company but not the purchase price. It's always the values, the legacy, the thing they built. We call it the third child. In the United States where you have 2.5 kids, that business is your third child, right? So not only is it keeping your kids awake because they want to prove themselves to you, it's keeping you awake because you've also grown, nurtured, and cared about this one thing, and you want to know what's going to happen to it next.
And then that you're learning families and that you learn collaboratively. It's very important at some point in time to have a facilitator or a mediator even for just one family meeting, because that parent-child dynamic, you're going to tend to take it over. And even if your adult child tends to leave it, they'll tend to vacillate between assertiveness and aggressiveness because they don't yet know how to deal with their own leadership. So it's just helpful to have some of these conversations when they get tricky with someone else in the room even if it's a one-off. You don't have to hire someone forever.
I want you to see that it's not black and white. Families that are too rigid with what they do lose people. Families that are too chaotic lose people. Because I don't know if we're having a meeting, I don't know if we're doing vacation time. I don't know what my hours are. Families that are too enmeshed , who never do anything without each other run into problems. Families who never do anything together run into problems. And same thing, you have communication where you can say whatever's off the top of your head, that can upset someone because you're being insensitive. And they're families who don't communicate at all. They seem nice. They hang out. But they literally just talk about the weather. I've had some clients like that that they don't actually feel close to each other despite how much time they spend to each other.
So what you want to do with this, and you can do it yourself, is I'd print this page out and just ask everyone where they think they are on the scale of this and where we'd like to be. And then we adjust. And maybe you want to be right in the center, but maybe some of you have always enjoyed the flexibility but now that we've got young families, we want to be slightly more rigid. Not all the way to the edge of rigid, but if my kids have camp, I can't just do whatever whenever.
This is really what we're looking for. How do you know your kids are cooked? Well, if they're over 18, they're cooked. The question is, are they cooked as the entree that you're hoping that they're going to be? It's purpose, that the work has their purpose, the thing they care about, their passion, their values. Why almost everyone who talks about family business says, "Let's work on values," they're competence, the skills to execute it. That they're confident in it. Now, if you have confidence without competence, that's a challenge, and sometimes it shows up that way. So you really want to demonstrate that confidence again while you're around.
Reciprocity in relationships, that means with time, that means with effort. It may not mean with money. You may always have more than your children because you were the founder and it's split between other people. And that they understand their gifts, this purpose and passion, that's what we call the purpose and passion and talent mix, also shows us most of the time what executives who are non-family succeed at, those first and last one. The three in the middle are just added in for family leaders.
And then I just want to spend, we don't have that long, and it's its own thing, which we will talk about later, is governance. I am not a fan of governance for governance's sake. Wait till you have a critical mass of people. If it's you and your four kids, don't worry about it. Even if it's you and your four kids and their spouses and their three kids, we're not there yet. But the more people you have, the more distant they are from having grown up in the same family. Even if two siblings raise the kids, talking about cousins, the more different their belief systems are. They just do things differently.
So you tend to create groups where everyone can come, the family assembly, even children as young as 14 can come and learn at a high level about everything. And you have the shareholder group who actually have the right to vote. And there's usually officers and management that help lead the enterprise. And then you tend to, because there's so many people, some are 50, 30, 100, get smaller groups elected to support that group. So the family council is the group that's supposed to collect the information from the larger family assembly. And maybe there's 50 people in your family assembly and there's three family council members who are really working on representing and educating them. Even owners council, same thing. Maybe they're 15 owners, and you've got three to five owners' council members who are really voting the shares on behalf of people and educating the full shareholders on what their rights are.
And then you have a board, a board of directors that really helps take the information from the shareholders and the owners' council to the company so that we can really make sure the culture, the things that the owners wants are happening in the organization, but that we don't have everyone just calling on every manager that exists. Again, don't hear this as a prescription. Don't hear that it's happening now. Just like we're having a reverse succession when until two years ago we used to talk about succession to get out, we're talking about how we can have succession and keep the knowledge now, same thing. 10 years ago, everyone was like, "Build your governance model today. Get it done, get it done fast." There's something called self-governance. This person who made this comment about how blessed they are to have a fourth generation family with people in there for 10 to 12 years working together side by side, something's working, don't mess with it.
And I think that's the piece. Why we partner with LMC and the way we approach our work is very much learning from the family. You are the author of your success. You know more about your family and your company than anyone ever will. So keep what's good and try to minimize what's painful or problematic without it being at a cost. There are times, even though I've said, authority creates atrophy. There's a time sometimes to just come in there and make a rash decision. We're going to talk about in our conflict seminar there are five ways to conflict, and one is competing. That's where I come in the room and I say, "Shut up. I don't care what you want to say, I'm going to make this decision now."
There actually is a place for competing decision in families. It's usually in urgent situations and prices. Now, I'm not saying go have a competing style. Ideally, you want to be collaborative, but that takes a long time. You might hear people telling you the best practice. I'd encourage you think about your family, because for every best practice, we can find at least one or two examples that went against that, and it was much more successful. And why governance gets really helpful is because the more things happen, the more chance there is for risk. In my experience with most family companies, they're incredibly understated, incredibly understated. They do amazing good, not just in the work in the local community where you live, where your lumber manufacturing corporation is, where your products are sold, but in general. You tend to do a lot of things without talking about it.
This is the list of governance agreements. Some are for the family, some are for the company. We'll talk about maybe one or two, but we won't go into tons of detail because that's for later. But the one I've seen the most be problematic today is a social media agreement. I have a lot of very understated clients who are doing amazing things, and this generation likes to post everything. And so, there was a big family fallout because a young man posted the most recent wing in a museum that was named after them. It's a relatively common name, so it wasn't clear that it was this family doing this. There was a really big challenge for them because it was against their values, but they had never explicitly stated their values. They just assumed that everyone knew.
The other one I think is really helpful is an employment policy, because it helps your family members know how they can get in the company, how they can get out of the company, and what happens if they're not performing well. I think one of the biggest problems with family coming into companies is even if there is no favoritism and you might be harder on them than anyone else, the non-family managers who work over them feel like they're caught in a rock and the hard place. They're not sure how much feedback they can give. Even if they believe and trust you, in my experience, they always give less or they feel precarious because they know one day this person will be their boss.
We're almost at time. I wanted to see now that we've gone through the main content any questions you have. I can talk endlessly about this. I love it. There's a reason we have four-part webinars that we're going to do. And honestly, all of you have tons of experience with this. So any thoughts or questions in the about six minutes we have? If not, I can find more things to add in.
While I'm waiting for the questions to come in we can talk about a couple more of these. A shared use agreement is great if you do have a small family cabin or something like that, because this is very much like the company too. That A role, that genesis, mom and dad are like the glue or the lighthouse of the family. Can I send an example of an employment agreement? I can send three. I tend to send three of all of these governance documents. I send one that's really rigid, one that's really loose-goosey, and something in the middle.
What I would like you to do, and you do this on your own if you don't want a facilitator, and a lot of this you don't need a facilitator for, but what I'd encourage you to do if you get three copies of any document is make sure, unless it's one sentence you love, that there's no copy and pasting and that you have a collaborative discussion with the people it will impact on of how you're going to do it. Now, you can still have strong feelings. I have one company say that they didn't want any degree requirements. I've got a second on that. They want three different types of agreements. I had one client who said that they thought making anyone graduate from college was an unrealistic requirement. And that may be true, but I do know that they did a majority rules vote and said they at least had to be graduated high school. And education is changing. That may change in the future for them, but why they wanted at least the high school education was because they were committed to at least something for four years. And that was the reason why they put it in.
So even if you're having a collaborative discussion with your family about how to do this, it doesn't mean that at the end you might disagree with one thing someone else wants and then that gets codified. But the more buy-in and more creation your family does, one, it increases the oxytocin. They're co-creating this with you. And two, now that we've all put our hands on it, figuratively or literally, sometimes I make the next generation be described so they're actually writing it, so they're paying attention, then you're going to be able to enforce it. It really is your contract that you've built together.
And that's really the good thing. Same thing with the distribution policy. That is sometimes the first thing that helps people understand that they're owners, and you put it together. I have some examples for that as well where you talk about net cash flow and paying off CapEx as well as debt. And so, they're now learning through creating distribution policy as much as they're saying, "Oh, I want money," they're also understanding that one of the main rights of shareholders is guaranteeing the debt of the company. They're not just getting. They're also giving and borrowing, et cetera.
"Is it better to keep stock closely held by those family members working in the company versus allowing family members that do not work in the company to have some?" This is a 50/50 split. I'll admit my bias on this. The smaller the shareholder group is, there becomes a concentration issue. There becomes an issue with one person acting erroneously, nefariously, or just wanting to have too much say. And when you have that much stock with those many people, in my experience, sale happens more frequently. So you get less stockholders involved in this, and then it usually stops. I do a lot of work in Europe as well, and some of the family companies in Europe are six, seven generations and 100 different people being stockholders. It's whatever is best for your family. But if you do have non-voting shareholders, which happens a lot for non-working shareholders who don't understand things, then it is eminent that you do shareholder education. Eminent that you do shareholder education.
Because what an uninformed shareholder might do is call your CEO and say, "I want this or that and the other." I've been hired by outside family executives because uninformed shareholders have run them off. But a non-employee shareholder can be a powerful, powerful... So the short answer is it's what's right for your family. I have seen more often than not, though, shares being more distributed work out better than them being concentrated. And now we're at time. So thank you all. You have my email. We've got a few more webinars to come join, let's continue the conversation.
Transcribed by Rev.com
What's on Your Mind?
Natalie M. McVeigh
Natalie McVeigh is a Managing Director in the Center for Individual and Organizational Performance and the Center for Family Business Excellence Group within the Private Client Services Group and has more than 10 years of experience as a consultant and coach.
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