Breaking the Cycle: Sins of our Fathers

Biblical Considerations

The historical concept of the “sins of the father” is complex in the Bible. For this discussion we are going to focus on Deuteronomy 5:9 where it describes God punishing the children and children’s children for the sins of their father to the third and fourth generations. 

Deuteronomy 5:9 is about multiple generations being punished due to the fact that the Israelites would lose their holy land by not following mosaic law. God isn't punishing the further generations "separately" (i.e., 24:16). It's that the future generations are punished by losing their rights given to them by God, including the rights to the Holy Lands. 

The same concept applies to founders. Founders are not directly punishing future generations with bad planning. Founders are punishing future generations by limiting future economic and professional opportunities as well as inhibiting or preventing momentum and compounding.

Founders need to stay focused on what can still be accomplished in lieu of starting to focus on what has been accomplished. Other than remembering lessons learned alone the way, a founder starting to focus on what has been accomplished should move to a mentoring or chairman type position where sharing historical wisdom has extreme value. A founder starting to focus on what has been accomplished will no longer be effective running the company day to day. The day-to-day focus should be on what is still left to be accomplished.

Opportunities that would have been maximized by timely planning, consistent execution, humility and leadership. 

There is a huge difference between a business that produces wealth for an individual couple and a business that produces generational wealth. 

Conscious Leadership

A leadership approach centered on self-awareness (mirror test), personal mastery (being good at a trade and the business of a trade), and integrity (How you do one thing is how you do everything). Conscious Leadership enables leaders to move beyond ego and reactivity to make decisions with mindfulness, compassion, and a deep sense of purpose (Return on Motivation). Conscious Leaders are attuned to their own internal states (mirror test) and the needs of others, leading to more effective, equitable, and sustainable outcomes for their teams, which includes family, and organizations.

Return on Motivation

As with many things when you are young, your perspective is not well developed. For years after learning the valuation formulas that determine the economic value of an enterprise my focus was on Return on Equity (ROE) and Return on Investment (ROI). 

Over time I realized that many construction companies are started for other non-financial reasons. Return on Motivation is a concept that captures non-financial reasons for starting a business. 

One reason often shared are better opportunities, both economic and professional, for someone’s family. If this is how you measure your Return on Motivation, one might well remember not to pass on your business sins. 

Another reason often shared is the drive to create a better place to work. Better can be defined as  economically, professionally or both. If this is how you measure your Return on Motivation, one might well embrace and master Conscious Leadership. 

This story below may be familiar to many of you in family construction businesses. It's about patterns that repeat across generations and the blind spots that can undermine succession plans.

Untimely Death 

I have always found the concept of untimely death interesting because it implies there is a timely death. I have seen deaths that are too soon, and deaths that would have been embraced much sooner. Not even sure assisted suicides are timely. Since all deaths are untimely, not planning for death within a business from day one should be considered a sin, especially in a family business. 

Untimely Succession 

Josh was twenty years old when his father passed, leaving him to run the family construction business. 

After his father’s passing, his mother owned just over half the company, while Josh and his siblings owned the rest. All of Josh’s siblings were doctors or lawyers. Josh didn’t go to college. To his siblings, Josh was an indulged party boy. 

Josh was an indulged party boy who stepped up when needed. 

Always remember the past does not determine the future. How many contractors played hard before it was time to step up?

His siblings questioned every decision. Henry, his father's right-hand man, continued to view and treat him like a spoiled kid who didn't belong on the job site. Josh had to prove himself daily while grieving his father and trying to hold together a business with little support and considerable expectations of failure.

But Josh didn't just survive, he thrived after some painful growing pains caused from trial by fire. He proved the doubters wrong, bought out his mother's interest, and eventually sold the company at full value to a larger competitor. Happy ending?

Everything that Glitters is not Gold

I have always wondered if Josh sold to a competitor because he was ready to sell, or because he was ready to get rid of his siblings as partners. The latter seems more probable. Only a few years after the sale did his siblings give him any credit for saving and growing their inheritance for them and their mother.

New Struggles

Every business owner should pay attention to what happened next. It happens way too often.

Josh wasn't prepared for what came after the sale. He had built a valuable company that made money. He hadn't learned how to preserve or grow wealth. He hadn’t learned how to make money work. 

The proceeds from the sale? Most of it was lost through poor investment decisions and lifestyle maintenance.

After about 7 years, Josh started over in a new state with a larger market. And to his credit, he rebuilt. He created a company even larger and stronger than his father's original business. The man knew how to execute his trade profitably.

An often Repeated Mistake

Josh has begun transferring ownership to his son. Josh is trying not to repeat his father’s lack of planning. Josh wants to do better by his son. Desire does not work in business. Consistent execution is what supports business. 

Recently, Josh wanted to buy a second vacation home. Instead of discussing it with his son or planning the transaction transparently, he simply transferred funds from the company to make the purchase. When his son discovered the transfer, he reacted negatively. Understandably so. A large transfer out of the company he partially owned was made without his knowledge or understanding.

The challenge. Josh had been telling his son the shares were transferred because "you earned it." Josh wanted his son to have a sense of ownership and reward his son who “has been running the company day to day for some time.” His son running the company day to day is what allows Josh the time to enjoy a second home!!!

When his son pushed back on the surprise use of company funds, Josh's message changed to "You're an ungrateful little shit and you should keep your mouth shut. It's still my company." Not exactly a conscious leader's response. 

Josh was wrong. He is still the majority owner, but he is no longer the sole owner of the company. It is their company now. 

His son should be treated with the same respect that a minority owner that is not his son. Especially a minority owner that is running the company day to day. 

Telling someone that is running your company day to day to shut up is a low Return of Motivation activity. Yes, I understand that Josh built the company. What I have never understood is why a successful founder would want to continue activities or decisions that negatively affect what they built. It has always sounded to me that a founder wants to destroy or hinder what they built. A sentiment that seems unlikely. What seems more likely is the founder is simply not self aware and cannot take an honest look at the person in the mirror each day. 

Any minority owner would rightfully expect the same distribution as reflected by their ownership percentage. Something I doubt Josh considered or would want to do. 

Josh’s plan was to put the money back into the company once the second house had been financed. A little planning and discussion could have kept feelings from being hurt. 

The sad part of Josh’s response is he destroyed all the good will he had created by transferring some ownership to his son. Now Josh has to deal with a minority owner without any of the goodwill that should have come with the minority ownership position. Josh’s son will likely never believe the ownership position is “his”. And why should he? 

Josh might fix this breach of trust over time by admitting his mistake, and embracing conscious leadership concepts. The challenge is Josh still feels it is his company when he looks in the mirror each day. Until Josh becomes self aware about the challenges he created, he will be unable to fix the breach of trust.

The heartburn from this event will be felt for some time. 

This is a pattern that is repeated over and over in succession plans. Owners want and expect the financial benefits of a succession plan, but do not want to make any personal changes to management or historical habits. 

Owners cannot maintain the trust necessary for a successfully executed succession plan without making personal operational adjustments that conflict with “the way they have always conducted business” as the sole owner. 

From clogs to clogs in three generations

A familiar English proverb suggests that family companies seldom survive more than three generations (“from clogs to clogs in three generations”). A glance at corporate actuarial tables suggests that the three-generation rule is generous: The typical life expectancy of any company, family or non-family, is only a couple of decades, and is falling. What explains the longevity of the best European family businesses?

Five principles necessary for long-term success per Adrian Wooldridge of Bloomberg in “Europe’s Best Family Firms Have a Secret Weapon Money Can’t Buy”. 

• Put the family business first. | This may mean sidelining individual family members for the sake of the business. Long-lived family businesses are skilful at “pruning the family tree” (encouraging less committed or talented family members to choose private life). Paradoxically, it may also mean exiting the founder’s business for something more profitable: The Italian Falck family exited the steel industry, hitherto their core business, for renewables in the 1990s.

• Put the family business first. | This may mean sidelining individual family members for the sake of the business. Long-lived family businesses are skillful at “pruning the family tree”. Paradoxically, it may also mean exiting the founder’s business for something more profitable: The Italian Flack family exited the stell industry, hitherto their core business, for renewables in the 1990s.

• Celebrate tradition. | Tradition is a unique resource which newer firms cannot match regardless of how much money they have: Thousands of companies produce wine, for example, but only the Frescobaldis in Tuscany can boast that their ancestor, Dino, rescued the first seven Cantos of Dante’s Divine Comedy from destruction. Tradition provides impossible to quantify corporate benefits: pride in collective achievements; the self-confidence to make difficult decisions (including the self-confidence to exit the family’s ancestral business); and, perhaps most important of all, a sense of perspective (family companies are much better than public companies at resisting the pressure of quarterly results for long-term results). One of the biggest problems with families is that they multiply over the generations. Successful family businesses counter that by making a conscious effort to keep tradition alive. Some live close to each other (though fans of Dallas or Dynasty will recognize that this is not always a formula for harmony). Most use less drastic methods: holding regular family meetings, informal as much as formal, going on holiday together, telling stories of family achievements, visiting family archives, founding corporate museums.

• Secure a pipeline of talent. | The greatest curse of the family business is the incompetent son and heir. Successful family businesses secure a reliable supply of family members by encouraging lots of members of the family to go into the business and then subjecting them to a succession of tests. John Elkann, the chosen heir of his maternal grandfather Gianni Agnelli, had to prove himself by working incognito in several different family-related businesses.

• Focus on justice. | The other great curse of family businesses is hurt feelings — and there is no greater source of hurt feelings in a family (particularly when money is involved) than a sense of injustice. All ten of the long-lived family companies in the Bocconi study have developed scrupulously fair internal markets for shares which allow family members who want to exit from the company to sell their shares at a fair price and allow those who want to increase their involvement to buy them.

• Provide safety valves. | The ideal complement to a sense of justice is a system of safety valves. The best was to cope with family members who will not make it to the top is to provide them with alternative employment in family foundations. The best way to cope with impatient high-flyers is to give them opportunities to create subsidiaries or set up their own companies. Most successful families have a behind-the-scenes “leadership orchestrator,” or godfather, who plays the role of preventing quarrels, suggesting opportunities and guiding future leaders.

For a more in depth explanation and study of the longevity of the best European business read:

• The IMD Business School in Switzerland’s 25 principals necessary for long term success. They have even developed a business model, the Family Business Secrets of Success Model

• Bocconi University in Italy teamed up with the search firm Russell Reynolds Associates to identify ten principles.

Future Options

Josh expects that a competitor will buy him out again. He has been preparing for a post sale life. Preparation that is much easier at traditional retirement age than it was with 3 kids at home or in college.

The construction business is paying rent to Josh and his wife for the facility. The facility is not specific to the construction industry in case a new owner of the construction business relocates the business. The facility was purchased pre-covid and has greatly appreciated in value post covid.

Josh is also okay with his son buying him out over time. Josh and his wife are living off dividends from the company in lieu of salaries. A step toward a tradition post retirement income stream.

Generally, Josh is doing a better job planning for his exit. He just needs to realize he is no longer the sole owner of the business, and act accordingly. 

I believe that Josh would benefit from an outside consultant, but he is still in the “I built the company mindset.” If you cannot be honest with the person in the mirror, the next best options is finding someone that will be honest with you, and that you will be open to their knowledge.