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is because such strategies—whether “Stage 1,” “Stage 2,” and/or “Stage 3” strategies— are too often informed by outdated assumptions that date centuries back to economists like Adam Smith and John Stuart Mill, who posited that individuals are “rational” and act on the basis of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

July 11, 2017: LMWF Attorneys Scott E. Friedman, Andrea HusVar and Eliza P. Friedman co-author article, “The Neuroscience of Start-ups: A Primer for Attorneys (and Other Professionals)” for the New York State Bar Association Journal’s July/August 2017 edition.

LMWF Attorneys Scott E. Friedman, Andrea HusVar and Eliza P. Friedman co-author article, “The Neuroscience of Start-ups: A Primer for Attorneys (and Other Professionals)” for the New York State Bar Association Journal’s July/August 2017 edition. Click here to view the full article

Reprinted with permission from: New York State Bar Association Journal, July/August 2017, Vol. 89, No. 6, One Elk Street, Albany, NY 12207

July 5, 2017: Professionalizing the Business: Critical Plans and Succession Planning

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

This week on the blog we discuss some additional “Stage Three” planning strategies that remain helpful for family businesses (and organizations generally): succession planning.

Succession planning is a formal process for selecting and developing new leaders to replace current leaders upon their retirement, disability, or death in order to help insure a smooth transition of leadership.[1] Without planning, family businesses can be put at great risk because of survivors competing to fill the resulting vacuum in leadership without sufficient support and/or capable successors. For that reason, perhaps no subject has received more attention in family business literature than succession planning. Notwithstanding all of this attention, succession planning remains imperfect and most families follow an informal process and rely on a senior family member’s judgment and intuition.[2]

Succession planning in a family business can be very difficult because of the variety of issues, concerns and complexities that are implicated. Unlike traditional (Stage 1) estate planning that focuses on considering to whom ownership should be transferred to, effective succession planning involves addressing such issues as:

  • What should the family do if no one in the family is interested in leading the business?
  • What happens if there is more than one family member who would like to lead the business?
  • What should the family do if no one in the family is capable of leading the business?
  • What, if anything, can be done if the current leader is unwilling to relinquish authority in spite of deteriorating health and age?
  • If continued ownership of business by the family doesn’t make sense, who should the business be sold to?
  • Who should be included in the planning process?

Creating an effective succession plan generally requires involving an appropriately wide team of participants to enhance the prospect that the results from the planning efforts are widely accepted. Without such acceptance, affected parties are more likely to reject the plan and its implementation, which is likely to lead to family feuding. Because working through issues such as those identified above can be complex and time consuming, succession planning is generally considered a “process,” not an “event,”[3] that ideally takes place over years and includes ongoing education, training, and development. As management consultant Peter Druckers notes, “[t]he final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company.”[4]

While there is no single “right way” to plan for succession, there are a number of helpful guidelines to consider, including:

  1. Establishing relevant and appropriate selection criteria in advance
  2. Communicating the criteria to the entire family well in advance of selecting a successor to help ensure process fairness
  3. Assessing the competence of potential successors against that criteria, and
  4. Using independent advisors to provide objectivity (as well as the appearance of objectivity).[5]

Perhaps as important as anything, families are generally well served by selecting a successor who not only has an appropriate level of education and relevant experience but the emotional intellect to handle the authority that is to be conferred with a sense of responsibility and graciousness that helps prevent the individual from succumbing to, and being corrupted by, power.

Stay tuned for next week’s post to learn about two more “Stage Three” guiding principles: compensation planning and capital allocation planning.

[1] Unlike estate planning, the principle concern of which is the allocation and distribution of wealth, succession planning is principally concerned with the transition of control. Succession planning must, therefore, not only integrate business, financial, tax, wealth (and liquidity) considerations, but family dynamics as well, in order to achieve an overall plan that is workable both for current operational needs, as well as for the long range planning goals of a family and its business. See generally, e.g., Craig E. Aranoff et al., Family Business Succession: The Final Test of Greatness 1 (2010); Edward F. Koren, Non-Tax Considerations in Family Business Succession Planning (2011), http://www.americanbar.org/content/dam/aba/events/taxation/taxiq-fall11-koren-non-tax-paper.authcheckdam.pdf.

[2] In spite of its importance, research suggests that only approximately sixteen percent of family firms have a discussed and documented succession plan in place. Key Findings, PwC, http://www.pwc.com/gx/en/services/family-business/family-business-survey/key-findings.html (last visited Mar. 31, 2017).

[3] See Wendy C. Handler, Succession in Family Business: A Review of the Research, Fam. Bus. Rev., Summer 1994, at 133, 134 (“Succession is not simply a single step of handing the baton; it is a multistaged process that exists over time, beginning before heirs even enter the business.”); see also Aranoff et al., supra note 64, at 3 (“[A] great succession is one hardly anybody notices. It is a non-event, an evolutionary process arising from careful planning and artful management of expectations over a period of years. By the time the baton is finally passed, the word around the business should be, ‘Oh, that’s what everybody expected.’”).

[4] Aranoff et al., supra note 64, at 3. Much work remains to be done to better understand how to motivate families with business interests to engage in succession planning. Some families are fortunate to have founder/successor CEOs that drive the succession process; other families may move forward as a result of being “pushed” by a potential successor; other families simply wait until a founder/CEO is unable to serve due to disability or death and, so, are forced to address this subject in “crisis” mode. See, e.g., Alexandra Burns, Succession Planning in Family-owned Businesses 10–12 (May 2014) (unpublished M.A. thesis, University of Southern Maine).

[5] Research suggests that “firms that are family-owned but not managed by family members [e.g., Wal-Mart] are typically well managed.” The London Sch. Econ. & Political Sci., Inherited Family Firms and Management Practices: The Case for Modernizing the UK’s Inheritance Tax 1, http://cep.lse.ac.uk/briefings/pa_inherited_family_firms.pdf (last visited Mar. 31, 2017). By contrast, families that also manage their business tend to experience more challenges as a result of (1) selecting a CEO from among the small pool of family members that has the effect of restricting access to the right talent and (2) letting family members know too early that they will get to run the business can lead them to work sub-optimally at school, safe in the knowledge of a guaranteed family job. Id. at 2. As a result, families might be well served by not only communicating relevant qualifications (e.g. a good education, good experience, the right temperament, etc.) but by advising family members that they aren’t “guaranteed” a leadership role. See Alex Stewart & Michael A. Hitt, Why Can’t a Family Business Be More Like a Nonfamily Business? Modes of Professionalization in Family Firms, 25 Fam. Bus. Rev. 58, 59 (2012) (finding that family-owned businesses should professionalize and function more like non-family businesses to succeed).

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