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

June 20, 2017: Professionalizing the Business: Vision and Mission Statements and Codes of Conduct

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

Welcome back to the blog. Our discussion of “Stage Three” planning strategies continues on the topic of Guiding Principles, which can help families in business together thoughtfully anticipate and address issues that inevitably arise.

Last week, we explored core principles and core values. Today, we turn our attention towards two more Guiding Principles, beginning with vision and mission statements and ending with codes of conduct.

A Vision and Mission Statement:

A vision statement is an articulation of what an ideal (realistically achievable) future for the family business looks like. A shared vision helps bond organizational members together through a common desired future, directing organizational energy in a positive manner that can help inspire an organization to improve performance, provide direction to strategic planning, and motivate employees.[1] Through the effort of clarifying and committing to a shared vision, families can achieve a clearer level of consensus that helps unite them in the pursuit of exciting future goals, thereby helping reduce the likelihood of debilitating conflict in the future.

A shared vision can be particularly important in a family business context, and studies have found having one to be an important factor in the determining the continued success of a family business from one generation to the next.[2] Interestingly, the study also found a strong correlation between positive work culture and the creation of a shared vision, concluding that family business owners “would be wise to spend as much time fostering a positive family climate . . . as they do on creating and executing a successful business strategy if their goal is to pass the business from one generation of family owners to the next.”[3] To help insure that a vision statement is realistic, it is often framed around what the business hopes to accomplish in increments of five to ten years.

Families also benefit from separately articulating their core purpose which is designed in order to help distinguish that which is important to focus on (“mission critical”) from that which is not and, in so doing, serve as another “decision-making compass.” Mission statements generally describe the business’ target customers, the products or services that will be offered, and in which markets, and what makes the company’s products or services unique.[4] Unlike core values, which are intended to be relatively fixed over time, missions are intended to change as new products and services are integrated into the business. As a result, family businesses are well served by reconsidering their mission, from time to time, to insure its continuing relevance.

A Code of Conduct:

A family code of conduct is intended to help insure civility, collegiality, and nurture relationships and to reinforce trust within the family and its business by setting standards and/or providing guidance on how family members treat one another, interact with company management, and conduct themselves publicly.[5] While families are well served by developing, together, their own code that is relevant and authentic, such codes often include provisions that restrict “bad mouthing” or “tattling” on each other to third parties, promote honesty and mutual respect, and provide guidance on what type of information should be kept confidential, discussed with family members only or disclosed to others.  In addition, a code of conduct can be helpful in encouraging family members to support and collaborate with one another, as well as provide guidance on how to respectfully and professionally handle disagreements with one another (e.g., behind “closed doors,” after a “cooling off” period, etc.).  Some families may also benefit from including provisions in their codes of conduct that clarify how media relations will be handled (e.g., agreeing who will be the “point person”), outline expected work habits, recommend appropriate dress code and provide parameters around inter-office romance.

Check back for next week’s post, where we’ll be discussing two more tenets of Guiding Principles: critical plans and succession planning.

[1] John E. Neff, Shared Vision Promotes Family Firm Performance, Frontiers in Psychol., May 2015, at 1, 5.

[2] For example, results from a quantitative study of 100 next-generation family firm leaders and 350 family and non-family leaders and employees found a positive correlation between the development of a shared vision and effective next-generation leaders, which, in turn, increased the “multigenerational survival rate” of family-owned businesses.  Stephen P. Miller, Next-Generation Leadership Development in Family Businesses: The Critical Roles of Shared Vision and Family Climate, Frontiers in Psychol., Dec. 2014, at 1, 10; see also UNC Kenan-Flagler Business School, The Importance of Shared Vision in a Family Business, YouTube (Sept. 10, 2015), https://youtu.be/ienfwTuKSv0

[3] Miller, supra , at 1.

[4] The mission statement should guide the actions of an organization, spell out its overall goal, and provide a strategic framework for the company. See generally, e.g., Jeffrey Abrahams, The Mission Statement Book: 301 Corporate Mission Statements from America’s Top Companies (1995); Linda C. McCLain, Family Constitutions and the (New) Constitution of the Family, 75 Fordham L.R. 833 (2006).

[5] Numerous authorities advocate the adoption of ethical and behavioral codes of conduct. See, e.g., Wendy Plant et al., Ethical Practices and Regulatory Context of Family Businesses, J. Acad. & Bus. Ethics, Oct. 2009, at 1, 2 (“There are good business and family reasons for codes of ethics . . . .”); see also Gwen Moran, How Sargento Foods Creates Principled Profit, Fam. Bus. Mag. (Oct. 1, 2015), https://www.familybusinessmagazine.com/sites/default/files/articles/2015/10/01/valuese3852.html.

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

June 7, 2017: Professionalizing Family Governance: Establishing a Family Council

Last week we discussed the importance of family businesses establishing a board of directors comprised of independent (i.e., non-family) members—a pillar of the “Stage Three” planning process. Still, many families are wary of this idea out of fear of losing control and/or a fear of exposing family problems. Out of this notion comes another common “Stage Three” planning strategy: professionalizing governance of the family by establishing a family council.

Family councils are formal bodies that meet on a regular basis and represent different branches or generations of the family, and thus may prevent or at least help to resolve various family-related conflicts. This structure ensures that the entire family is integrated, to some extent, in the business.[1]

There are several purposes of a family council:

  1. To provide family members with a forum to communicate, including to learn about the business and to ask questions.
  2. To facilitate the flow of information – among family members, and from the family to leaders of their business, and, in so doing, helping forge a shared consensus.
  3. To educate new generations about the business, while serving as a lifelong learning forum for more senior family members who are less active or inactive in business operations.
  4. To provide a forum to decide on family philanthropy.
  5. To organize “family fun” to help nurture high quality relationships and counteract the natural tendency for family bonds to diminish as families grow and the sheer quantity of social contacts among family members decrease.[2]

There are two additional functions of a family council that deserve particular attention. One is to help mediate family disagreements constructively before they become destructive conflicts that could negatively affect the business. Another critical function a family council can serve is to help confirm that there is sufficient “common ground” among family members by discussing, clarifying, and confirming in writing their shared values, vision, and mission, and through that process and those guiding principles reach further agreement on plans and policies that are particularly important to the family.[3]

A family council, whether formal or informal, can be particularly helpful as the number of family members grows and relationships become more distant, and/or when some family members relocate to new homes away from company headquarters and, as a result, are at risk of losing contact.

Just as corporations establish by-laws to ratify operating procedures, families that form councils should consider establishing something similar that will help organize how it will function,[4] including eligibility requirements for membership,[5] operating rules,[6] policies and rules,[7] and how to coordinate with the family’s business.[8] The council, however, is not intended to micro manage the family’s business.

Family councils are “great in theory,” but, in our experience, can be helpful or unhelpful “in practice.” The difference is typically a function of how the agenda is structured and how participants communicate: whether, for example, more time is spent “solving problems” (something that often leads to finger pointing, assessing blame, defensiveness and, in turn, infighting) or, by contrast, “possibility seeking” and appreciative inquiry (an approach that can energize participants, while building cohesion and understanding). The subject of constructive conversations and appreciative inquiry will be considered in future blog posts when we turn to “Stage 4 Strategies.”

In next week’s blog post, we’ll discuss another effective “Stage Three” strategy: clarifying and embracing guiding principles.

1. See Marta M. Berent-Braun & Lorraine M. Uhlaner, Family Governance Practices and Teambuilding: Paradox of the Enterprising Family, 38 Small Bus. Econ. 103, 107–08 (2012).  Family councils focus on family and ownership matters, the same way that the board of directors focuses on business matters. While the structure and operation of every family council is unique, it is quite commonplace for councils to focus on three sets of plans: (1) plans for individuals that are designed to support each member’s personal and/or professional goals; (2) plans for the family that clarify and establish overall goals of the family—and the resources needed to achieve those objectives; and (3) plans that guide how family members relate to the business, addressing such issues as ownership, management control, family involvement in the business, and long-term strategic direction of the business. See generally, e.g., Craig E. Aronoff & John L. Ward, Family Meetings: How to Build a Stronger Family and a Stronger Business (1992).

2. A growing number of scholars emphasize the importance of family councils in family business governance. See, e.g., Berent-Braun & Uhlaner, supra note 39, at 107–08; Julia Suess, Family Governance—Literature Review and the Development of a Conceptual Model, 5 J. Fam. Bus. Strategy 138, 142–43 (2014).

3. Kelin E. Gersick & Neus Feliu, Governing the Family Enterprise: Practices, Performance and Research, Langsberg Gersick & Associates, http://www.lgassoc.com/governing-family-enterprise-practices-performance-research (last visited Mar. 30, 2017) (“[F]amily meetings can help families achieve consensus regarding family mission, family values, and the raison d’être for the sustainability of the family business over generations.”) (internal citations omitted).

4. See Scott E. Friedman, Creative Uses of LLCs for Family Owned Businesses, N.Y. State B. Ass’n J., Dec. 1996, at 20, 20–21 (explaining that incorporating rules for a family council in an operating agreement can be helpful when forming an LLC).

5. For example, some families limit membership to adults over eighteen years old. Others may limit membership to “blood relatives” (i.e., excluding in-laws). The purpose of a council, however, is generally best served by favoring inclusiveness of responsible family members, whether they are blood relatives or not, and whether they are active in the business or not. But see Carolyn M. Brown, 7 Rules for Avoiding Conflicts of Interest in a Family Business, Inc. (Feb. 18, 2011), http://www.inc.com/guides/201102/7-rules-of-conduct-for-family-businesses.html (cautioning that the more dysfunctional a family is, the more helpful it might be to start with a smaller group, expanding membership to include other family members as relationships improve).

6. For example, every council should decide how often to meet (with some benefiting from monthly meetings, others from quarterly or annually) who sets the agenda, who “chairs” the meeting, etc. See id.

7. For example, family councils might consider establishing liquidity policies if certain family members do not want to participate in the business, conflict resolution policies, etc. See, e.g., Int’l Fin. Corp., supra note 2, at 23–28 (noting the importance of establishing policies in a family businesses).

8. See Gersick et al., supra note 32, at 250 (recommending that family councils consider how to collaborate with the company’s board of directors). Families without a history of meeting together might be well served by getting going with comparatively “non-controversial” agenda items such as, for example, meeting to discuss and agree upon philanthropic priorities.

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

May 30, 2017: Professionalizing Business Governance: Establishing a Board of Directors (or Advisors)

A number of traditional (“Stage 3”) planning strategies are consistent with those strategies informed by social neuroscience and positive psychology and, so, continue to remain critical in 21st Century family business planning initiatives. In this post, we highlight one of our favorite “stage 3 planning”™ strategies:  “professionalizing” the family’s business governance by constituting a board of directors that includes thoughtful, experienced, and independent (i.e. non-family) members.

According to PricewaterhouseCoopers, “an independent board is one of the main pillars of good corporate governance,” such that “nearly two-thirds (64%) of [companies surveyed] now have nonfamily members on their boards.”(fn 1)  Outside board members can be extremely vital in providing objective input, particularly when family board members are emotionally invested in decisions and strategies.

We believe that including non-family participants on the board of directors can be helpful in (1) attracting and retaining high quality employees, who may be concerned with whether their employer is likely to remain viable over time, (2) providing additional informed perspective on material decisions facing the business, (3) helping to mediate disputes between family members by providing objectivity, and (4) helping manage the succession process, including selecting and mentoring a successor who is capable of leading the business while maintaining and nurturing the family’s trust and confidence. For example, decisions made by (or with the endorsement of) respected independent board members can alleviate concerns that a child was selected as a business’ next leader by a biased and impartial parent, whether or not the child was well qualified to assume that role.

Unfortunately, many families have been reluctant to add non-family members to the company’s board of directors out of a fear of losing control and/or a fear of exposing family problems. In such cases, some families find it useful to form an informal “advisory board” rather than a formal board of directors.  Because advisory boards serve at the pleasure of management, they are becoming increasingly “. . . popular at family-held companies, where a ‘guidance but not governance’ role is well suited to dealing with family owners.”(fn 2) Practically functioning much like boards of directors, advisory boards are often comprised of three to five independent (i.e. non-family) members who are trusted because of their business-savviness, relevant expertise, a willingness to challenge management’s ideas and, as importantly as anything, interpersonal skills that mesh well with family members and company employees. An advisory board “ . . . can provide the CEO and management the benefits of experience, expert knowledge, contacts and credibility . . .” but without compromising an owner’s desire to maintain control over the business.(fn 3)


(1) Professionalize to Optimize: US Family Firms Are No Longer Winging it, PwC 24, www.pwc.com/gx/en/pwc-family-business-survey/index.jhtml (last visited Mar. 29, 2017).

(2) Ralph Ward, The Fundamentals of a Family-Business Advisory Board, Inc. (July 1, 2000), http://www.inc.com/articles/2000/07/19779.html.

(3) André Morkel & Barry Posner, Investigating the Effectiveness of Corporate Advisory Boards, 2 Corp. Governance, no 3., 2002, at 4, 4–9

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