August 2, 2017: The Limits of Stage 3 Planning: Part 2

By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman

Hello and welcome back to our discussion of “Stage 3” planning.

Last week we started on the topic of The Limits of Stage 3 Planning and looked at a variety of factors that contribute to the suboptimal results of contemporary family business planning.

This week we bring you the second (and final) installment of The Limits of Stage 3 Planning—beginning with new studies in the field of neuroscience.

“Stage 3” planning fails to take into account recent findings on the neuroscience of trust, purpose, engagement and happiness.[1] We believe that, over time, the failure to account for such considerations, combined with often naturally differing perspectives on (a) vision, mission, values, (b) who is capable and qualified to fill positions (and who is not),[2] (c) how to effectively reconcile disagreements or resolve disputes before they get out of hand,[3] or (d) simply how to compete in an increasingly competitive market, erodes intra-family trust as family members come to view each other as unreliable, insincere and incompetent.[4] In such circumstances, the collaboration required to work together successfully in business is virtually impossible and the resulting negative emotions and behaviors can lead to incivility in the workplace and, from there, to infighting. Research convincingly demonstrates that incivility and infighting, in turn, result in wasted time and resources, decreased productivity, and diminished bottom lines.[5] The combined impact of these challenges, highlighted in the below image, show the seemingly inexorable path to failure for too many family businesses.[6]

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We believe that families, assisted by their professional advisors, can—indeed must—thoughtfully consider how to apply new insights from these and other scientific disciplines[7] in order to inform and, when appropriate, create plans, policies, and structures that both help nurture inter-personal relationships while enhancing a business’s bottom line.[8] We refer to this approach as “Stage 4 Planning.” In combination with Stage 1, Stage 2 and Stage 3 Planning strategies, families in business have good reason to be optimistic that their members, and their business interests, can flourish over the generations.

Next week we’ll discuss how these emerging scientific studies can be applied to “Stage 4 Planning.”

[1] See, e.g., Paul J. Zak, The Neuroscience of Trust: Management Behaviors that Foster Employee Engagement, Harv. Bus. Rev., Jan.–Feb. 2017, at 86 (“In my research, I’ve found that building a culture of trust is what makes a meaningful difference. Employees in high-trust organizations are more productive, have more energy at work, collaborate better with their colleagues, and stay with their employers longer than people working at low-trust companies. They also suffer less chronic stress and are happier with their lives, and these factors fuel stronger performance.”). While beyond the scope of this article, insights from positive psychology hold great promise for lawyers, law firms, and the legal profession. See e.g., Anne Brafford, Building the Positive Law Firm: The Legal Profession at Its Best (Aug. 1, 2014) (unpublished M.A. thesis, University of Pennsylvania), http://repository.upenn.edu/cgi/viewcontent.cgi?article=1063&context=mapp_capstone) (suggesting that a positive psychology approach can help law firms and lawyers perform better and more profitably).

[2] In our experience, family members too often wind up working in a family business because it is “convenient,” “expected,” or “lucrative,”—not necessarily because it is a good “fit” based on interests, talents, passion, etc. See infra, notes 149–155, and accompanying text.

[3] See infra notes 151–56, and accompanying text.

[4] See Williams & Preisser, supra note 12, at 1 (most family business failures are attributable to mistrust and miscommunication, not to poor tax and financial planning).

[5] See, e.g., Christine Porath, The Hidden Toll of Workplace Incivility, McKinsey Q., Jan. 2017, at 12 http://www.mckinsey.com/business-functions/organizations/our-insights/the-hidden-toll-of-workplace-incivility (the costs of incivility include settling scores with offenders, decreasing time spent working, reduced interest in collaborating with colleagues, diminishing commitment to an employer, employee turnover, etc.); Susan Sorenson & Keri Garan, How to Tackle U.S. Employees’ Stagnating Engagement, Gallup (June 11, 2013), http://www.gallup.com/businessjournal/162953/tackle_employees_stagnating_engagement.aspx (finding that actively disengaged employees cost the U.S. up to $550 billion in lost productivity per year).

[6] Perhaps most importantly, although beyond the scope of this article, such negative emotions may have untold and attendant resulting personal costs, including depression, frustration and anger that, in turn, results in significant health risks, including high blood pressure, heart attacks and strokes.

[7] Famed Judge Learned Hand anticipated the need for new planning strategies based on science when he remarked: “How long we shall continue to blunder along without the aid of unpartisan and authoritative scientific assistance in the administration of justice, no one knows; but all fair persons not conventionalized by provincial legal habits of mind ought, I should think, unite to effect some such advance.” Parke-Davis & Co. v. H.K. Mulford Co., 189 F. 95, 115 (C.C.S.D.N.Y. 1911), aff’d in part, rev’d in part, 196 F. 496 (2d Cir. 1912).

[8] See generally Shawn Achor, The Happiness Advantage: The Seven Principles of Positive Psychology That Fuel Success and Performance at Work (2010).

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev.,  May, 2017

July 27, 2017: The Limits of Stage 3 Planning: Part 1

 By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman

Welcome back to the blog, where we hope to provide you with tools and resources that could benefit any family business.

Now that we’ve discussed the process of “Stage 3” planning and its component parts, it’s time to examine its limits, which we’ll do over the next two weeks.

We credit many of the family business consultants with having made important contributions to their clients—and the field—through “Stage 3” planning initiatives by seeking to focus on critical inter-personal issues, and providing important perspectives to those traditionally offered by lawyers, accountants, and financial advisors.

Notwithstanding these important contributions, many families in business together continue to struggle, and available data suggests such initiatives remain inadequate for the task(s) at hand.[1] There are undoubtedly a variety of factors that contribute to the suboptimal results of contemporary family business planning including, for example, the lack of strong commitment to the process because of the ongoing press of business, the unwillingness of some family members to engage in the process with a requisite level of enthusiasm, or, frankly, the lack of business acumen by some family members.

We believe the most important reason contemporary family business consulting strategies fail to accomplish their objectives, however, is because such strategies—whether “Stage 1,” “Stage 2,” and/or “Stage 3” strategies— are too often informed by outdated assumptions that date centuries back to economists like Adam Smith and John Stuart Mill, who posited that individuals are “rational” and act on the basis of complete knowledge and the desire to maximize economic returns and wealth.[2] Such planning fails to appreciate insights from new fields of study, such as neuro-economics[3] and behavioral economics[4] that, for example, are demonstrating our propensity to acquire rewards and avoid losses, the role of emotions in decision-making, strategic decisions and social decisions, etc.[5]

Consequently, traditional planning fails to address considerations such as family members (1) not being nearly as rational and unbiased as assumed,[6] (2) having imperfect memories[7] or (3) retaining a “fight or flight” response that, today, generates overreactions due to “fear based” thinking.[8]

Tune in next week for our second installment of the limits of “Stage 3” planning, where we’ll be discussing the causes of negative emotions and behaviors that can lead to incivility and infighting in the workplace.

[1] See supra notes 11–12 and accompanying text; see also, Wayne Rivers, Family-Owned Business Planning Done WRONG, Fam. Business Inst. (Nov. 4, 2015), https://www.familybusinessinstitute.com/family-owned-business-

[2] See, e.g., John Stuart Mill, Utilitarianism 2-3 (1901) (“All action is for the sake of some end, and rules of action, it seems natural to suppose, must take their whole character and color from the end to which they are subservient.”); Adam Smith, The Theory of Moral Sentiments 311-12 (New York, Augustus M. Kelley 1966) (1759) (“The prudent man always studies seriously and earnestly to understand whatever he professes to understand, and not merely to persuade other people that he understands it . . . He neither endeavours to impose upon you by the cunning devices of an artful impostor, nor by the arrogant airs of an assuming pedant, nor by the confident assertions of a superficial and imprudent pretender: he is not ostentatious even of the abilities which he really possesses. His conversation is simple and modest, and he is averse to all the quackish arts by which other people so frequently thrust themselves into public notice and reputation.”).

[3] See, e.g., Paul J. Zak, Neuroeconomics, 359 Phil. Transactions Royal Soc’y London B: Biological Sci. 1737, 1737 (2004) (“Neuroeconomics is an emerging transdisciplinary field that uses neuroscientific measurement techniques to identify the neural subtrates associated with economic decisions.”).

[4] See generally, e.g., Richard H. Thaler, Misbehaving: The Making of Behavioral Economics (2015) (describing how the study of human miscalculations reveals that we all succumb to biases and make decisions that deviate from the assumed standards of rationality, often resulting in serious consequences in our lives and businesses).

[5] “The traditional view in economics is that individuals respond to incentives, but, absent strong incentives to the contrary, selfishness prevails. Moreover, this ‘greed is good’ approach is deemed ‘rational’ behavior.” Paul J. Zak, The Neuroeconomics of Trust, in Renaissance in Behavioral Economics: Essays in Honor of Harvey Leibstein 17 (Roger Frantz ed., 2007). Nevertheless, in daily interactions and in numerous laboratory studies, a high degree of cooperative behavior prevails—even among strangers. “A possible explanation for the substantial amount of ‘irrational’ behavior observed in markets (and elsewhere) is that humans are a highly social species, and to an extent value what other humans think of them.” Id. at 18.

[6] See, e.g., Gary Marcus, Kluge: The Haphazard Construction of the Human Mind 15 (2008) (“Mainstream evolutionary psychology tells us much about how natural selection has led to good solutions, but rather less about why the human mind is so consistently vulnerable to error.”); Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness 37 (2008) (“The picture that emerges is one of busy people trying to cope in a complex world in which they cannot afford to think deeply about every choice they have to make.”). As a result, for example, the failure to constitute a board of directors or an advisory board that includes non-family members can result in poor decisions by families without sufficient experience and expertise to make thoughtful judgments, as well as decisions that, fairly or not, are perceived as biased and favoring one family member, or branch of a family, over another. See Koren, supra note 64, at 36.

[7] As a result, the failure to reduce agreements on important subjects to writing can create diverging recollections as to what was agreed to. See Michael J. Conway et al., The Family Owned Business, Pepp. Univ: Graziado Bus. Rev. (2007), http://gbr.pepperdine.edu/2010/08/the-family-owned-business (noting the dangers for family businesses that fail to reduce agreements to writing). For a general discussion of memory issues, see generally Daniel L. Schacter, The Seven Sins of Memory: How the Mind Forgets and Remembers (2001).

[8] See infra note 109 and accompanying text. Failing to develop thoughtful and consistently applied principled policies and plans can lead to the perception, whether accurate or not, that decisions and actions are driven by bias and self-interest, diminishing intra-family trust and a shared commitment to the family’s success.

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev.,  May, 2017

July 18, 2017: The Family Constitution

By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman

Hello and welcome back to our Family Business Blog, where we’re starting to wrap up our discussion of effective “Stage 3 Planning” strategies. This week we’re taking a look at Family Constitutions and how they can help strengthen family bonds.

While attorneys and other advisors often prepare a buy-sell agreement as part of traditional “Stage 1” and “Stage 2 Planning,” for their family business clients, consultants who assist with “Stage 3 Planning” traditionally help their clients prepare a repository for its core principles, plans and policies, often referred to as a “Family Constitution.”[1]

Best-selling author Stephen R. Covey, who wrote The 7 Habits of Highly Effective Families, describes a family constitution as “the literal constitution of your family life,” which “can be the foundational document that will unify and hold your family together for decades—even generations—to come.”

The process of preparing a Family Constitution and its component parts (i.e. the Core Principles, Plans and Policies that make up “Stage 3 Planning”) can be a valuable experience that contributes to building shared understandings and family bonds.  Moreover, having access to key agreements in a single document that can be referenced as needed can help create and nurture a sense of fairness, and, in turn, harmony. While every family can decide for itself, most families who create family constitutions do not intend the document to have legal consequences; they are, however, intended to be “morally enforceable” and become a meaningful piece of a family’s culture.

One legal scholar, noting the increasing use of family constitutions as a “prescribed remedy for the high failure rate of family businesses,” observes that “[s]uccessful families are bound together more by strong values and purpose than by shared business ownership. Shared values [and mission] are the glue that keeps family businesses going across generations.” [2]

Next week we’re finishing our discussion of “Stage 3 planning” by discussing their limits, before moving on to “Stage 4 planning.”

[1] Stephen R. Covey, The 7 Habits of Highly Effective Families 102 (1997).  Referring to the family’s repository as a “constitution” as opposed to a mere “agreement” serves as an expression of the family’s commitment to certain fundamental values, from generation to generation. See Kelin E. Gersick & Neus Feliu, Governing the Family Enterprise: Practices, Performance and Research, in The SAGE Handbook of Family Business 211, 212 (Leif Melin et al. eds., 2014) (“The recent increase in interest in family constitutions may be in response to the maturation of a large cohort of entrepreneurial post-World War II nuclear families through sibling and multi-generational partnerships to complex, geographically-dispersed family networks.”).

[2] McClain, supra note 62, at 866. For more information, see generally Daniela Montemerlo & John L. Ward, The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your Business (2010).

 

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev.,  May, 2017