Who hasn’t heard of a successful, hard-driving, dominant patriarch, who built a family fortune, watch the family (and business) implode due to family conflicts? For ESOP companies with family in the businesses or closely held businesses, setting up trusts for their children and other wealth strategies doesn’t help deal with the business issues. For the CEO of an ESOP company with family in the business, the emotions, not strategy can weigh heavily on the family and business governance structures they are leading and taxing their minds and emotions.
The story of the Mondavi family illustrates this reality. As the story goes, Robert Mondavi, founder of the publicly held Mondavi Winery, invested heavily in family governance structure (e.g., hiring psychiatrists and psychologists) to build a family council as well as develop opportunities to improve relationships among the family members. Although he took the right steps toward ensuring effective family governance structures, Mondavi’s execution failed. Why?
Most historians note the company’s board didn’t change the way the company was managed. Effective family business and ESOP governance would have avoided many of the pitfalls the Mondavi family faced. Some of their challenges the company board did not address were: the company was gridlocked by a brother’s inability to make decisions, the executives started meeting without the family to get more done, and a market in transition made it hard for the winery to adapt. A good board would have discussed these difficult issues and set a plan in place to address them.
With a large portion of the ESOPs having family in the business, many companies don’t deal with issues that impact the company. In the family business field, there are advisors who believe “family issues drive business decisions.” For the vast majority of my clients caught in family conflict, once the business governance is following best practices, the family conflicts significantly reduce or disappear. Family issues take a back seat to running the company. Having family involvement in the business has its benefits, such as creating a pool of succession candidates, providing a way for family’s legacy and traditions to continue, and having family in management and ownership creates a direct management-owner relationship that allows management to take risks and make investments that might otherwise be ignored in a non-family-owned company. Think of the Ford Motor Company during the great recession in 2008. Developing loyal investors, like Ford or the Benjamin-Moore Paints did for more than a century, is a true test of good company governance that can lead to family harmony and continued legacy. ESOPs are designed to create “loyal investors.”
How could Mondavi’s board have improved these conditions? Robert Mondavi, the founder of the winery, followed his own instincts in running the company and not listened to the board, when what was actually needed was a reshaping of the governance from a single proprietorship to a more engaged and collegial board. By listening to the board, Mondavy would have developed a more structured environment and taught accountability and teamwork to the next generation. Second, with good committee oversight from the board, the founder would not have been forced to choose between his two sons to succeed him. There would have been a more collaborative process that would have helped define roles and responsibilities without forcing the founder to make an awful decision. Had he used his board effectively, Robert Mondavi would have had more enjoyable Thanksgivings and Christmases and a better-functioning company.
If the board had been measuring its own and the management team’s effectiveness using surveys and other tools, it would have uncovered the troubling board behaviors evidenced by the company’s lack of adaptability and the executives’ secret meetings, desperate efforts to keep the company and jobs alive. The board’s measurements would have surely benchmarked how much the market had changed and would have pushed management to be more accountable for improving the company’s efforts while the founder was receding from an active role.
If you are a CEO reading this article and are having problems with succession, invite your independent directors of your board to help you. Speak candidly with them of your concerns and views. Allow them to assist you with developing structures and processes that will remove you from selecting the next generation of company leaders. Push them to get you out of the decision. Before you do so, let your spouse (if you are married) know that you are doing this to keep family harmony. When I am invited in by the widow/ chairwoman to help fix a company’s problems, invariably one of her top three goals is family harmony. I use board governance to help her, and it works. Try following your board’s suggestions rather than controlling the agenda yourself. Whether you are a father or a mother, son or daughter, you should push your outside board members to challenge you and the family to improve governance practices.
Once everyone is on the same page with regard to the company’s strengths and weaknesses, the board should then be able to help build accountability to family and non-family members within the company. The faster you start, the sooner the conflicts will recede.