Along the way, he created a holding company that held the stock in the various business units.  When the time was right, he passed equal shares in the holding company to each of the children, reserving the “golden share” – the one that had complete control of the holding company – for himself.

When the time was right, Fred offered his daughter Helen the position of chairman of Sharpe Enterprises.  Helen held a degree in business and had gained experience outside the company, where she demonstrated great skill as a business leader and became CFO of the company where she worked.  It would be Helen’s job to “watch the money.”

As Helen settled into her position as chairman of the family business, Fred was fully aware of her efforts to use International Best Practices for Family Business.  International Best Practices include clear responsibility for positions and accountability for performance and outcomes, all measured as compared to pre-approved budgets and more.  In order for a company to be successful as it grows, such practices are necessary and professionally prudent.

Two of Helen’s siblings, Paul and Elaine, who headed up different divisions in the company, didn’t like answering to Helen or following the mandates of International Best Practices.  Fred and his wife, Alice, were losing sleep over the battle between Helen and her siblings.  It was a mess, both from a business operations point of view and for the family.  Fred was determined not to allow his children to pull apart the fine business he had given his heart and soul to create.

Finally, Fred had had enough.  He called a joint meeting of the Board of Directors and the family, including both husbands and wives.  It was a very tense moment when the meeting was called to order by Helen.  She announced that Fred was first on the agenda.

Fred began by reviewing the early challenges and how the family had pulled together to make Sharp Holdings an economic success and a force in the community.  He reminded the family of the fine life that the business had provided.

As Fred continued to speak, the tension mounted.  Then he dropped the “Golden Share” bomb.  “Either you all get in line with International Best Practices for Family Business or I am going to sell the entire enterprise!”  As he sat down, he reached over and held Alice’s hand, looked at her with great resolve and said nothing.

Helen declared a 30-minute recess and some of the people left the room.  No one doubted Fred’s resolve to sell for they all knew him to be a man of his word.  I was in the room when all of this happened.  It happened so fast that we didn’t observe who left the room together, but Elaine and Paul came back together.  In her role as chairman, Helen asked who would like to speak first and Paul stood up.  His voice was shaking as he reported that he and Elaine wished to apologize for opposing Helen’s “Best Practices” efforts.  He said that both he and Elaine knew Best Practices were the right thing to do but they felt they were being treated like children and even cited some childhood events that they all remembered, events where fairness and control were issues.  He acknowledged that neither he nor Elaine wanted to be responsible for their father’s decision to sell the family company.  Paul made it very clear that the sale of the company would lead to family members being estranged from one another and would be tantamount to the end of the Sharp family as they had known it.

I worked with the Sharpe family to help them work through these challenges.  After the “golden share” ultimatum, it took a series of meetings to heal the family riff.  They resolved to do whatever was necessary to make Sharp Citrus Products (the new name of the company) the leading business in their industry.  Working together and using International Best Practices, that’s just what happened!

If your family business isn’t using International Best Practices for Family Business, it should be.  A family-owned business is, first and foremost, a business.  If you want your business to be a success, it must be run the way any successful business is run.  As I wrote in The Little Red Book of Family Business, “Keep the focus on the business! Its success is what makes other things possible.  Don’t be distracted by family matters!”

It was a great time to purchase land in Florida, and Fred had received a great price for his Iowa farm.  After researching the culture of growing oranges, he bought as much land as he could afford and proceeded to plant it all in orange groves.  Twenty-five years passed and Sharp Enterprises grew extensively, for Fred had purchased every piece of farmland that came up for sale in the county.

Fred had an intense work ethic, which he passed along to his children, and one by one they all came into the business.  The children were well-educated and prepared to take responsible positions in the business.  Paul was the eldest and he loved growing things.  Over the years, he became a Master Grower of citrus fruit.  Helen, the second eldest, was a mathematical wiz;  she loved figures and easily gravitated to keeping the business accounts.  It was no surprise when she went for a degree in accounting and business.  She convinced her father that it would be best if she worked outside of the family business for a number of years to get broader experience.  Elaine was third born of the four children and her focus was on the processing of the fruit and on marketing.  Dan, the youngest, saw potential in taking the fruit that was produced and creating added value by converting it into jam, marmalade and other products.  He extracted oil from the peel of oranges and lemons and created soaps and a comprehensive line of citrus-scented cosmetic products.

Over time, Fred formed three distinct divisions that were separate but intertwined companies, all owned by the holding company.  He maintained regular contact with all of his children and helped them fine-tune each of the operations.  In the meantime, Helen had been recognized as a real business leader, a force with whom to be reckoned.  She gained valuable experience, including becoming Chief Financial Officer of the firm where she worked. Even though she worked elsewhere, she stayed in close communication with her father, with whom she always discussed the finances of the holding company.

Fred was very proud of what he had created, but after more than 40 years in the citrus business, he was a bit weary.  He had the idea that Helen could become the chairman of the holding company and oversee the three operating units.  Fred and Helen had the same mindset: “Watch the money!”

With watching the family money in mind, Fred convinced Helen to take the position as chairman.  Little did Fred realize that this appointment was going to be a problem for Paul and Elaine.  They both felt that they were operating their business unit and they were in charge.  They bristled at the notion that Helen was going to be chairman, looking over their shoulders and watching how they spent the money.  After all, they were autonomous and in charge!  It seems that Paul and Elaine forgot the fact that neither of them directly owned shares in the business unit they operated and that their own financial futures were intertwined with those of their siblings.

In her new chairman position, Helen added outside businesspersons to the holding company Board of Directors.  She began to operate as she knew best from her strong base of experience outside of the company.  She followed International Best Practices for Family Business, which delineates clear responsibility for positions and accountability for outcomes, all measured by performance compared to pre-approved budgets and more.

It was not long before both Paul and Elaine began to exhibit passive-aggressive behavior toward Helen. They refused to have the budgets for their divisions reviewed by the Holding Board.  They made material financial commitments without advance approval of the Holding Board.  They refused to show up for family events if Helen and her family were going to be present.

Paul and Elaine spoke directly with members of the Holding Board, co-opting Helen and attempting to neutralize her efforts to function in a professional manner.  When the efforts to influence Holding Board members did not produce the results they sought, they lobbied Fred and their mother, Alice.  It was a mess, both from a business operations point of view and for the family.

Be sure to look for my next post to find out what happened next!

The four Stockton brothers – Charlie, John, Kevin and Dean – are members of the “Lucky Sperm and Egg Club.”  Their grandfather founded a successful, heavy construction company that has been passed to generation three (G-3), their generation.  Soon the brothers will make a similar transfer to G-4, their children.  For this article, I’ll refer to the company as “Stockton Construction, Inc.”  All names are fictional to protect the identity of the individuals.  The brothers range in age from 34 to 46.  All are graduate civil engineers, two have MBAs and all work in the business.

Stockton Construction builds bridges across vast bodies of water and drills tunnels for subways in major cities.  Last year, company profits exceeded $100 million dollars.  They handle their money very effectively.

Stockton Construction has been successfully transferred from the founder to the second generation, and then from the second to the third.  When the founder died, he was a wealthy man, as are all members of the second and third generations.  However interpersonal issues in the family have complicated matters, in addition to a financial decision that lingers from the past.

The third generation, which now controls the company, is made up of four brothers.

About Dean:  Being the youngest, Dean accumulated substantial funds in his account while he was in high school and college.  He worked in the business for a couple of years following college graduation, then got his MBA, worked for a financial institution for three years and then returned to work at Stockton.  He had the option to choose where he would live.  Being a savvy businessman, he selected Texas, a state with no personal income tax.  He has 2½ children.

About Charlie:  As the oldest, Charlie was the first brother to work in the business.  He moved as necessary with the company’s various construction projects and was working in California when he fell in love and married a “California girl.”  The only place a “California girl” is really happy is in California, and that is where they live.  California ranks number three in terms of the highest tax rate on personal income in the U.S.  Charlie, father of three daughters, is a very affable man, but has not had the best record of success in the business.  A few years ago, he elected to get into the real estate market, just at the wrong time.  After taking a substantial loss, he is back in the mainstream of the company, serving in an important business development role.

About John:  John is second oldest, a classic, driven, Type “A,” person.  He is a fine man and has the potential to be a “take no prisoners” type leader.  A great deal of the current success of the company can be attributed to him.  He harbors some resentment about Dean’s accumulation of money and has said, “I was working in this business for 15 years before Dean came to work.”  John’s path was similar to Charlie, for he too found a “California girl” and California is where he lives… same high tax rate.  Like Charlie, he has three children, two daughters and a son.  He is co-president with Kevin.

About Kevin:  Kevin received an MBA in Paris.  When he came back to the U.S., his father conscripted him to return to the sleepy mid-western town where the company is based, where he would grow into his current role of co-president.  He has a keen eye about the present and benefits from being pushed to focus on optimum opportunities in the future.  He found his bride in that sleepy town and now they have four children.

As co-presidents, Kevin and John receive very substantial bonuses in addition to their industry-appropriate salaries.

Now comes the rub.  When Dad was running the company, he would direct funds from Dean’s accumulation account to Charlie and John, so they would not feel the heavy “bite” from the California tax.  He called it “equalization” but I have never been able to establish what was equal.  Technically, the accumulation account was Dean’s personal property and dad was giving money from that account to the brothers who lived in California.  After age 21, Dean had a legal right to direct those funds for his personal use.  Dad took the “all in the family” point of view, which he could do when he had absolute control.

Now we have four men, brothers, with different views and different wives.  Of course the California residents want the practice to continue while the Texas residents, who pay no personal income tax, want the “equalization” practice to stop.

As if this were not complex enough, in 18 months the brothers will make the transfer of Stockton shares to their children.  That means that 8 of the shareholders, Charlie, Mike and their children, will live in California, which begs the question: “Will the equalization continue when G-4 are owners?”

Dean advocates that when G-4 become owners, the practice must stop.  After much debate, even heated disagreement, the decision was made to end the practice when the stock transfer from G-3 to G-4 takes place.  Dean was very eloquent when he wrote the following to his brothers:

“We all should have some heartburn with family business. It shows that we are learning to give and not always thinking about negotiating the best deal for ourselves.  I have had a lot of heartburn for a long time, but one of the greatest things I learned from Bork is that life depends on how you frame it in your mind.  If you truly believe that you get more from giving than receiving, it changes the way you view the world.  Regardless of how much money I receive in compensation and distributions, the most important thing to me is that when you, my brothers, are working with me or playing golf with me or even just when we are having a glass of wine together, that you are glad I am your brother and partner in business.”

Throughout my career, I have worked with many Turkish families in business.  In Turkish families, it is not uncommon to have the practice of “One Pocket” when it comes to money.  Family members spend out of  a family account.  In some ways, that was the way the father of the Stockton brothers was operating when he was “equalizing.”  He just called the practice by a different name.

The “One Pocket” practice in Turkey may soon be a thing of the past.  There are families where some adult children live “the good life” as if there is no limit to the resources.  It seems to be approved by the elders, but when the elders are gone, those brothers and sisters who are “living large” will likely have to deal with siblings who have different, and perhaps more conservative, views on how money is to be used.

What transpired with the Stocktons is that the brothers became accustomed to receiving special treatment and being rewarded accordingly.  They lost the mindset that “we are in this together.”  John has such high expectations that one has to wonder if he will ever be satisfied, even though he has more wealth than most of his age contemporaries.  There was discussion of both Charlie and John moving their families to Texas – home of zero personal income tax, but the Pacific Ocean is a long way away and their wives and children don’t want to leave the California sunshine.

If families in business are to avoid the Stockton heartburn, they must carefully examine the family monetary policy and what it is that holds their families together.

One of the family businesses I’ve worked with for many years in Turkey is Koç Holding, one of the largest family-owned businesses in Turkey, as well as Turkey’s largest industrial and services group in terms of revenues, exports, market capitalization and number of employees.

I felt honored to receive an incredible endorsement from Mustafa Koç, chairman of Koç Holding, as he gave an outstanding summary of the work I have done.

The workshop was a great success.  It was wonderful to share the stage with Mustafa, as well as other sharp minds in the world of Turkish business, including Ali Sabanci, chairman of Pegasus Airlines, Mustafa Boydak, Vice President of Boydak Holding and Nafi Güral of Gural Porcelain.

Thank you to Mazar’s, Capital Magazine, Bizz Consulting and Ekonomist for sponsoring the event.

Nepotism is the practice of showing favoritism toward one’s family members or friends in economic or employment terms, for example, granting jobs to friends and relatives, without regard to merit. Such practices have damaging effects on businesses, eroding the support of other employees, reducing the quality and creativity of management and diminishing the importance of competence and high-level performance.

The kind of nepotism that I have seen work in many companies is one in which business owners take advantage of relationships with respected employees and colleagues to help find and hire employees with a similar work ethic and values.

Here is a quick review of how to avoid the pitfalls of nepotism and use relationships in your favor:

1. Teach your children values that are eternal: honesty, integrity, dependability, respect for others, being industrious and doing one’s best in every endeavor.
2.  Never deny your children the opportunity to learn and understand the connection between effort and reward.
3. Make competence and proven, sustained, high-level performance your criteria for employment of any individual, including family members.
4. Understand your own values and capture every opportunity to have discussions with others about those values and how they inform your decision-making, the way you run your business and the way you live your life.
5. Get applicant referrals from employees and colleagues whose work ethic and values you respect.  This is the good kind of nepotism.

However, there’s a kind of nepotism that I have seen work in many companies.  Say you have a very competent employee who has worked for you for many years.  He/she is loyal and dependable.  It is clear that this employee’s values are fully compatible with your own.  Hiring additional employees with a similar work ethic and values would behoove your business.

The “good nepotism” works like this:  Talk to this valued employee and ask if they know anyone like themselves who might be looking for work.  Perhaps they have a friend, brother, son or daughter with those similar traits.  This should precipitate a discussion about the values that you hold, those of the company, and ultimately, the values of the employee.  In your discussion, look for opportunities to reinforce examples of how the employee has used those same values in the execution of his or her responsibilities.  You seek to connect with the employee and gain a “meeting of the minds” about values.  Then you can talk about any candidates this employee can recommend.

When you book appointments with these individuals, tell them the story of how the company was founded, the values that you and your family hold and how those values have served you and the company well.  Relate your experience to the values and performance of the employee who made the referral.  As the discussion proceeds, look for an opportunity to ask the question, “What experience have you had with using values to inform your decisions in the workplace?”

This process will open a window into the thinking of the individual, their priorities and the kind of person they really are.  It’s also interesting to explore a situation in which the candidate has had to compromise his or her values.  This discussion will make the window even larger.  There is hardly a person alive who has not found it necessary to compromise their values at some time.  If I find someone who says that it has never happened to them, I usually suggest, “That’s curious to me.  How have you lived in such a perfect world?”  Then I tell them an appropriate story of how I have had to make compromises at various points in my life.  Invariably, my sharing such experience opens the discussion even further.  With that level of discussion, you can make an appropriate decision about potential employment opportunities.

If you end up employing one of the individuals you have interviewed in this manner, this employee will never forget the values conversation you’ve had.  It will be the basis of his relationship with you and the company for years to come.  It fosters an environment where employees feel that the employer really cares about them, and these employees will likely tell others about this experience and what a fine place your company is to work.

In short, the good kind of nepotism takes advantage of relationships with respected employees and colleagues to help find and hire employees with similar traits.

My next post will give a quick review of the dos and don’ts of nepotism.

In many smaller family-owned businesses, nepotism is viewed in positive terms, often because it is a cheap source of labor, and is considered a synonym for “succession.” This rationale is a mistake. Competence must be the criteria for employment, followed by years of consistent, high level performance that can lead to succession.

Nepotism is neither good nor bad, in and of itself. It only takes on a positive or negative charge in the context of how one has raised one’s children. I believe that the task of being a parent is simply this, “To raise responsible adults who have high self esteem and can function independently in this world.”

This process involves instilling those values that will lead to competent employees – honesty, integrity, dependability, respect for others, being industrious and doing one’s best in every endeavor.

Failure to teach these principles opens the door to children feeling entitled – believing that they are the privileged and should be given everything. This deficiency becomes a ripe incubator for problems to emerge when the child works in the family business. Children who come to the business with an attitude of entitlement will think they are exempt from the rules that apply to “ordinary people.” They often don’t understand that they must earn their place in the company through hard work and consistently-demonstrated competence. A seemingly small thing like coming to work on time is an example.

Experience has shown that nepotism works IF and ONLY IF the values of the family members are congruent and the successor is fully qualified.

In my next post, I’ll address ways that companies can institute “good” nepotism practices and create solutions to the challenge of finding the best employees.

Scope of the Advisory Board – Advisory Boards have complete access to all information about the business.  This includes financial statements, bank covenants, shareholder agreements, special arrangements or contracts within the owner group, existing strategic plans and other such information that will enable them to give sound advice on all matters.  The Board makes non-binding recommendations on strategic issues, including but not limited to any financial transaction that represents more than 15%* of the company’s beginning of fiscal year equity.  (*This percentage needs further discussion in each business.  The intent is to include all matters that are strategic, regardless of the financial requirements, and to exclude those issues that are not strategic and below a certain financial level.)  Once established, the Advisory Board can only be abolished by a unanimous decision of the active owners.

Composition and Terms of Service – An effective Advisory Board is comprised of four individuals, plus the active owners of the company.  The length of the term of service for each of the four should be staggered such that there is a beginning and an end to the time of the appointment.  Two, three and four-year terms are advised, with two of the four members taking three-year terms, and after the first cycle, all terms become 4-year terms.  This allows for overlap of experience, re-configuring the board as owners gain experience with having such a group advise them.  It is also a graceful way of changing the Board should any of the members be not quite the right advisor.  Members may serve more than one term, should that be deemed appropriate.

Of the four outside advisors, one of them is to have clear financial expertise; one is to be known as a “visionary” in the industry and one is to be known as a person who “thinks outside of the box.”  The fourth advisor should be about the age of the youngest generation in the family, and be known as a “go getter” in the industry, one who is viewed as a future business leader.  This latter advisor can be identified by the younger generation working in the business.

Often when forming an Advisory Board, owners will think of appointing their accountant or lawyer.  Experience suggests that the talents of these professionals are best utilized when they are engaged professionally to provide the services of their profession.  After all, the business owner should be getting their best advice as a result of the fees that are paid.  Further, including them on the Advisory Board violates the fundamental purpose of such boards. (See my previous post for more detail.)

In the first year of operation, the Advisory Board meets three times.  The general model requires advisors to arrive at the meeting location in time for dinner the day prior to the meeting.  Meetings will always include a “rolling 6 month” projection of business opportunities.  Once the Board is in operation, members will receive an information packet five days in advance of the meeting that they will review before the meeting.

Compensation for the Advisory Board members varies by industry and from country to country.  Compensation ought to be at a level that makes it attractive for the person to serve on the Board.  In some cases, companies have offered alternative compensation, such as use of company perks or the company plane, up to a certain value.  This is a negotiable matter.

It is important to set dates for meetings far enough in advance so they can easily fit into the advisors’ schedules.  As the board becomes fully operational, it is often helpful to set the meetings a full year in advance.

Sample First Agenda

At dinner – Introductory Session – “What We do as a Company”

Next Day:

• “Show and Tell” – visit all plants and other facilities
• Discussion of company special processes, patents, and/or exclusive opportunities that influence the business
• Complete financial review
• Understanding existing owner agreements
• Current market position.
• Strategic plans for near-, mid- and long-term
• Operation of the Advisory Board – terms, information board prefers to receive in advance, formalizing the meetings schedule

If the concept of an Advisory Board appeals to you, I encourage you try it for a period of two years to see if you like the results.

 Creation of an Advisory Board made up of outsiders who are experienced business leaders is a way to “push the envelope” and cause business owners to examine directions and possibilities they might not otherwise consider.  An Advisory Board can make the business stronger, increase shareholder value and better position the company to capture the opportunities that are available in the market place.  Advisory Boards are ideal for those companies that are not yet ready to have a “full charge” board of directors.  A board of directors has power to direct that actions be taken, while an Advisory board is just that, advisory.  Their decisions are not binding.

An Advisory Board is not there to “tell the owners what to do,” but rather to ask penetrating questions that cause a more thorough, in-depth examination of the opportunities.  They often ask the questions that insiders are reluctant to ask.  The business owners benefit from outsiders looking at their business and making a comprehensive review of all activities.

Properly constructed, the Advisory Board gives owners access to high-level executive and management talent beyond that employed by the company.  In some cases, it means having access to millions of dollars of executive talent at only a fraction of the cost to hire this level of talent.  In creating this kind of forum, the owners come up against those who have had different, complementary and sometimes broader experience within or outside a particular industry, thus leading to a more thorough consideration of issues, decisions and financial management.

Advisory Boards create a forum in which active owners, in concert with advisors, impact the strategic issues facing the company.  Owner decisions become less insular, often tempered by the broader perspective of Advisory Board members.  Advisory Boards have no formal, legal function.  Members do not have any fiduciary exposure and thus have no legal exposure when serving on such boards.

In my next post, I’ll talk in more detail about Advisory Boards.

Bork speaks to students at Univ de Desarrollos

As an aside, in my last two posts, I wrote about the importance of mentors in family business.  The mentoring relationship with my friend from Barcelona has been very rewarding and has resulted in a network for me of those speaking Spanish who are involved in family business

I was honored to take Claudio up on his offer, and on November 10 I spoke to his class in Santiago.  It was refreshing to speak to the young students and also a great way to practice my Spanish, which I’ve been studying for the past several years.  There were about 100 persons present, 75 students from his classes, other professors and businessmen.

Students received a copy of my most recent book, The Little Red Book of Family Business**,  in advance and worked in groups to prepare questions.  I presented a few of the fundamental principles of Family Business, then took questions.  (From time to time I had help in translation of the questions!)  It was a very lively exchange, in both English and Spanish!

One young man started his question by saying that he and his father fought a lot because they are so much alike.  “What do I do,” he asked.  I advised him to speak with his father about the dynamics and perhaps get a job elsewhere for a couple of years to earn his father’s respect as a good employee.

As I was speaking about the Little Red Book, one student asked why it was red and also why I had red glasses?  I explained that Chairman Mao’s Little Red Book was intended to be the “last word” on Chinese communism and I intended my book to be the “last word” on FB, that the intent was a “chiste,” meaning joke.

What a pleasure my trip to Chile was!

*FFI is organization of diverse professionals serving family business – lawyers, accountants, money, managers, therapists of various stripes, business consultants, etc.  I chaired the annual meeting in 1991 and have been a key presenter at 23 of the Conference’s 25 years.

**Visit the Books page of this website for details on The Little Red Book of Family Business and other books about Family Business.