Reflections on Leadership & Conflicts
Reflections on Leadership & Conflicts
The educational market is saturated with advice for business-owning families, aiming to help them navigate the inevitable tumultuous family conflicts that all-too-often seem to plague family-owned enterprises. Want some dispassionate advice? Then, let me throw in my two cents as a trusts and estates attorney who’s worked primarily with business-owning families, for many years.
One might think that the logical solution for families to avoid these conflicts—or at least substantially mitigate them—lies in undertaking more structural business or estate planning. But, that is too narrow a conclusion. One thoughtful family advisor perceptively (& humorously) articulated the problem:
There is an old estate planning joke (of sorts) where an attorney is being arrested standing over the dead body of a client with a smoking gun on his desk. When questioned as to his motive, the lawyer says, ‘That plan he just signed was so complex and elegant, with so many moving pieces, I just had to see if it would actually work. (1)
Families need to be aware that there is no shortage of real-life cases where the courts have commented on the brilliance of some type of estate planning strategy, which resulted in significant estate tax savings for the family. But, often, that same strategy also provided fuel for the fire of acrimonious litigation, thereby resulting in the near-destruction of the family enterprise.
Families need to be acutely aware that highly technical, tax-driven estate and succession planning that ignores family dynamics and business elements, can trigger conflicts of interest(s) between different family members down the line. These conflicts can quickly intensify, endangering the fabric of the family, and stressing the entire business enterprise.
It’s easy to ignore vulnerabilities to your succession planning when things are going well. But, all things are subject to change—including the values and perspectives of different family members, which may ultimately diverge from the tax-centric “estate planning” strategies embedded in the succession planning documents for the business. It is critical to address any vulnerabilities to your succession plan before your business hits a crisis point.
Where does the conflict come from?
The relatively young multidisciplinary world of advisory services focusing on family-owned enterprises has extensively researched the root causes of both family business conflicts and those events that trigger those conflicts. (It should be noted that even the word “conflict” in family-owned enterprises can be a misleading term. Some practitioners have noted the positive outcomes of family conflict: “Conflict provides an opportunity to obtain greater understanding of the opposing parties and how they think, act and feel. It gives individuals a chance to demonstrate an acceptance and respect for the unique ways in which others think, act and feel.” (2)
But conflict, left unchecked and without help from professionals schooled in understanding this area of work, can spiral out of control. As many professionals have noted, families in business often have a hard time openly talking about and analyzing these divisive issues—even when those issues can negatively impact an operating business.
So, what triggers these conflicts?
One contributing factor is that too few lawyers are actually trained in this complex area of work. Few dedicated educational programs exist for attorneys to enrich their learning curve, relative to family business planning. The result—as many family advisors will attest—is that estate plans can too often become the root (though, not sole) cause of family business conflict. As noted earlier, many of these “estate plans” seem fine when conceived. My observation is that, over long periods of time, a subtle noxious interplay develops between leadership and highly structured estate and succession planning, which has the potential to alienate different family members by creating subtle conflicts of interest. These are especially apparent when a family member serves as both a leader of the business and a trustee of a trust that owns shares in it. When a leader must also serve as a trustee, the trusteeship can compromise the leader’s vision, by creating conflicting legal duties and obligations. And, when conflict erupts, the differences in the attributes of a leader and a trustee’s fiduciary duties become apparent. Compromised family leaders become targets of anger.
So, how should families think about this quandary of the dual roles of leadership and trusteeship?
Lawyers serving as counsel for family enterprises should advise their clients to pay careful attention to the different roles and duties of a leader, as opposed to a trustee/fiduciary. Being a trustee and being a leader of a family enterprise should never be confused as simultaneous duties. There is indeed a fundamental difference between a family choosing the right leader, and choosing a non-conflicted fiduciary whom can act as Trustee for other family members who are stakeholders in the family’s enterprise. A family member who assumes the twin duties of these two offices (leader and trustee)—even under the best of intentions—will likely find themself in a position of conflict.
In the context of planning
It is not unusual for the founders of a family enterprise to transfer their discounted and non-voting business interests to their descendants in lifetime trusts. These trusts are typically centrally-managed by trustees. Unfortunately, those trustees often lack a deep understanding of the family, business, and fiduciary duties.
This type of planning fails to account for the fact that, as a consequence of such tax-motivated planning, the beneficiaries of such trusts become disenfranchised; have no voice in the vision of the company; and have few, if any, clearly-defined exit strategies to monetize the value of their inheritance. This type of legal planning serves to only exacerbate deep-rooted family behaviors.
Failing to carefully think this aspect of your succession planning through, and build a set of checks and balances into the planning documents, is like walking on thin ice in an April thaw. Go too far out, and in time, there will likely be severe fractures in the values and expectations of different family members—culminating in the entire family falling into dangerously frigid water. One never knows when exactly these fractures will occur, but poor governance systems based solely on tax planning are examples of these fracture points.
While it is often noted that not all conflicts are conflicts of interest in the legal sense—for example, appointing a family leader to serve as a trustee—families must carefully plan with key professional advisors the structures of governance that acknowledge these different roles and duties. And, advisors must help families understand and be wary of these likely friction points. Families who undertake formal estate and succession planning—and the lawyers who provide counsel to these families—must be aware of the deep conflicts that can arise from potentially divisive decisions, such as making a family leader the trustee of a trust that owns shares in the business.
Your succession plan shapes your future
“Estate plans” are, of course, an important part of your business’s future. But an estate plan (as practiced by much of the bar) is not a succession plan. An estate has one major role: to distribute assets after someone passes away.
Succession planning, on the other hand—practiced by attorneys and other family advisors schooled and skilled in this area of work—prepares a family (and its enterprises) to navigate likely storms and points of conflict that arise in an intergenerational transfer. For example, when professionals and the family acknowledge the inherent conflict between serving as a business leader and serving as a trustee—and develop structures of governance to manage such conflicts—the family and the business will be better able to cope with the challenges that lie ahead.
Taking the time, now—before conflict arises or spins out of control—to create an intelligent Succession Plan that works best for your family and your business, will enable you to prosper philosophically, emotionally, and financially—together.
1. Wesley, Matthew. “The Problem with Planning.”
The Wesley Group, August 26, 2015, http://www.thewesleygroup.com/blog/?p=663.
2. Hausner, Lee, and Douglas Freeman. The Legacy Family. Palgrave Macmillan, 2009. Print.