The 5 Rights of Ownership
The 5 Rights of Ownership
On this weeks episode I am joined by Josh Baron and Rob Lachenauer from Banyan Global as they discuss the 5 rights of ownership and much more from their book Harvard Business Review – Family Business Handbook.
Josh and Rob describe these rights as being:
1 – The Right to Design
2 – The Right to make decisions
3 – The Right to Value
4 – The Right to Inform
5 – The Right to Transfer
In this engaging and really enjoyable chat Josh and Rob share their thoughts on what these rights mean for you.
You can find out more about Josh and Rob here: https://banyan.global/
You can order your copy of the book here: https://banyan.global/hbr-family-business-handbook/
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Russ Haworth: Hello and welcome to this episode of The Family Business Podcast. My guests today are Josh Baron and Rob Lachenauer from Banyan Global based over in the States.
We are going to be covering some of the topics that they have highlighted in their book, and I’ll let them introduce that and themselves to you.
So Josh, do you want to kick us off and give us a bit of background as to who you are and what you do?
Introduction to Josh
Josh Baron: Sure. Thanks Russ. Thanks for having us on, we’re looking forward to it. So I’m originally from from Denver, Colorado. And moved out East for college. I studied business as an undergrad, but then kind of unusual for a family business advisor perhaps I actually studied international politics in the UK and in the U S for my graduate school, basically really interested in why sometimes the most powerful countries in the world fight each other to the death. And sometimes they get along just great.
What causes the difference, and I kind of had alongside that this parallel track as a strategy consultant.
I worked for Bain and Company in the US as well as in South Africa and Australia, and then was part of the founding or startup of a spinoff of Bain that worked with foundations and non-profit organisations.
So my first real exposure to anything kind of family enterprise related, was in the world of Family Philanthropy and just really understanding the way in which these family foundations made decisions that were so different than the way these large institutional foundations did.
And so I ultimately just by happenstance, got connected to the the firm that I joined actually about the same time as Rob, about 12 or 13 years ago and didn’t really know that this was a profession that people did for a living. But honestly, I can’t imagine doing anything else. I get such a reward, such a believer in the power of family businesses and the impact they have on society.
Then about eight years ago, Rob, I, and some other folks spun off and created Banyan, it’s been such a glorious ride ever since. The things I like is that my world that was on these parallel tracks kind of come together because I teach at Columbia Business School class called Managing Conflict in the Family Business.
And a lot of the concepts actually come from the work that I’d done earlier in life when studying international politics and so on, so yeah, it’s been a fun experience and I have boy / girl twins that are the same age as Banyan, basically to the month.
So that was an exciting, exciting time period.
Yeah, both. Yeah, it was it was, it w it was definitely the most memorable time of my life. So far just starting a new business and starting a new family.
Russ Haworth: Either one in isolation, you’re going to lose some sleep. So doing both at the same time, it’s impressive as well.
Rob, same question to you is tell us a bit more about your background.
Introduction to Rob
Rob Lachenauer: Hey, Russ, it’s Rob. Good to meet you, first of all and thanks for having us. My background is similar, but a little bit different from Josh is I was groomed to be a steely-eyed capitalist.
After college I joined PepsiCo which is known for really hard edge culture, really aggressive marketing.
From there, I went to Harvard Business School, which is known as the West Point of capitalism. Then after graduating, I went to the Boston Consulting Group. Which is a leading firm looking at business strategies, how companies win and lose and competitive marketplaces. And I love that stuff.
This part of my path culminated in writing my first book, which was called ‘Hard Ball; Are you playing to play or playing to win?’
And it was seven strategies to trounce your competitors? It did really well. And we did really well helping companies, you know, winning in the marketplace. Ultimately, it was, it was unsatisfying. It was like, everything was one in one area. It was about maximising profits. After my father died and we had our third daughter my wife and I questioned the path I was on and I left BCG on the advice of one of my best friends.
I started looking at family businesses. And that’s when Josh and I met, it was I think about 10, or 11 years ago now. And eventually, as Josh mentioned, we co-founded Banyan together and there at Banyan, both in the people in Banyan and definitely in our clients, I found people who cared for things more than profits.
They had striking to me just a different definition of winning. What does it mean, you know, to do well? What is success? They cared about their communities. They cared more than profits. They cared about their employees. They made these, what from the outside seem to be highly irrational decisions.
And that fascinated me. So I decided I had a lot to learn from these people and Josh and I, and the other people at Banyan figured out that we had a lot to offer in helping these owners a great family businesses. So I was hooked and I’ve been the CEO for Banyan since its inception.
I’ve enjoyed leading it. And we’re about 30 people headquartered in Boston. Our other offices in Sao Paulo, Brazil about two thirds of our work is in the States and the rest of the work is everywhere. Josh has done a lot of work in Southeast Asia, all through Latin America, with big clients in Europe and also the Middle East.
So that’s a little bit about our path.
Russ Haworth: Fantastic. Thank you. And you have written a book together. The Harvard Business Review – Family Business Handbook and as the name suggests, it’s a very comprehensive look at family business and how to maximise the opportunity that family business can bring.
Before we get into some of the specifics of what we’re going to cover in the show. What’s your overall hope for readers of this book?
Who is this book for?
Rob Lachenauer: I think our overall hope is to change a core misperception that family businesses are really poorly understood and often dismissed as a ‘terrible idea’. I was with my Mom this week and I took her to an acupuncturist and he said, “Oh yeah, my wife’s an accountant. Whenever a family business comes to her, she turns down the work because she thinks it’s so hard to work with family businesses”
You know TV shows like Succession compound this misperception that it’s all greedy people hurting each other. Our hope is to pop that bubble and show how family businesses can thrive across generations.
Not only the family business, but the business family can thrive. So how to do that is really what our key message is about.
Which is that the decisions that the owners make is the key to whether the company and family will thrive, or we’ll end up in destructive conflict. So in the book we identify the core owner level decisions that you gotta make well and you gotta make together.
And our hope is that people in family businesses or related to family businesses, customers, suppliers, in-laws will read the book and get kind of the insider’s guide, inside baseball guide to the way great family businesses are run and the way that they go across generations.
Russ Haworth: Josh, is there anything to add to that from your perspective?
Josh Baron: I think you’ll, you’ll hear us use the word ‘ownership’ a lot, probably in this conversation, certainly in the book. And I think that’s really what we see as our firm and hopefully this books contribution to you know, a well-developed field.
People have been working on this, you know, not as long as maybe they’re working on other kinds of business challenges, but it’s a field that’s emerged over the last 20, 30 years.
And our sense is that there’s been a lot of great work done to help people understand the importance of taking the family part of a family business seriously. And I think our addition to that, that’s obviously critically important, but our addition to that is this whole idea of ownership and why it matters.
And, you know, I mentioned that I teach in a business school, we don’t teach ownership.
We teach management, we teach a little bit of corporate governance.
Ownership is something that is not really discussed very much in business books and business schools and everything related to it.
And that’s partly because the way people think about businesses are these large public companies where the owners really don’t have much to do. They trade shares on apps, or they invest in index funds who own the entire market. They’re institutions or traders. They’re not people. And and in that world, ownership doesn’t mean very much at all, but we want you to think about ownership like you own your house, or you own your car.
It’s something that’s very personal, you’re very connected to. That’s what we mean when we talk about ownership in the context of a family business and it’s so incredibly powerful and we believe so incredibly misunderstood, and that’s a lot of what we’re hoping gets remedied through through this book.
The 5 Rights of Ownership
Russ Haworth: And you highlight in the book that as you mentioned, that power of family ownership and what that can mean for that business owning family. And one of the things that you mentioned specifically is ‘The 5 Rights of Ownership’ as a starting point, can you give us an overview of what those five rights are and what they mean?
Josh Baron: Sure, I’ll give it a stab.
I’ll see if I get off the five. I can promise I’ll get at least four of them. Now these are, these are kind of imprinted onto Rob and my brains at this point. I’m not sure what it would take to actually forget right now.
Russ Haworth: Are you saying them in your sleep.?
Josh Baron: Yeah, the tattoos I think are coming. Rob already had masks made for us!
So look, the reason why ownership is so powerful is that owners have rights. You know, they have like these legal rights to do things that no one else in the business has.
Like maybe the Government has some access to these, but until you give them up to others as the owners of anything of a house, a car, a business as we’ll focus on, you have these rights that give you the incredible ability to influence everything about the business, as well as you know about the family too by extension.
The Right to Design
And that’s where the power comes from. And the five that we’ve focused on in the book is, is first of all, is, is the right to design.
So, you know, you think about your house, you’re creating your new house from scratch your dream home. You’re architecting, like how many bedrooms, how many bathrooms?
How does it actually flow all together? In a family business you can design, what do you want to own together?
Is it just an operating company or a series of operating companies.
Do you want to own real estate?
Is that going to be separate or altogether?
Do you want to have a philanthropic thing?
Everyone does that on their own?
They’re all these choices you have to make about what is it, what is your family business? And then you have to just say, who gets to own it? is it all descendants of the founder or just those who work in work in the business or contribute to it?
The different ways that that’s structured and who gets control is you, do you share evenly or is it a certain person in each generation gets to all the power and you see all these different choices that you see add up to very different types of family companies, depending on how you structure those.
The Right To Decide
So that’s the first one is about the right to design. The second is about the right to decide. Rob you take over from here.
Rob Lachenauer: Owners have the right to make every single decision in their business.
Especially in a, you know, just a startup. When there’s one woman who started the business, she’s going to make every decision. You know, if it’s a bake shop, how to price, what to make, where to locate all, how to own it. All of these things as companies and families grow, especially across generation, there are some decisions they’re called reserved decisions that the owners probably want to keep to themselves.
But given the complexity they’ll find that many of the decisions they shouldn’t they’ll hire people who are better at logistics. We’re better at pricing or better at baking than they are themselves. It’s a real hard thing for especially first-generation owners. To let go of decisions. And it’s actually a really hard thing for second generation owners to kind of figure out what do they want to decide together as a group or individually, or let management to.
What we’ve learned from our clients is there’s a nice model to describe how the ownership decisions can be made in a family business.
We call it a Four Room Model, going back to the architectural design design thing that Josh mentioned. There’s a Management room where the CEO has got a budget, decisions to make, and it’s usually thousands of decisions. It’s a hierarchical system. People are fired or hired depending on their competency of doing things.
The next level up is the Board.
If you’re big enough, you should consider having a Board of Directors and boards are very different.
Not many decisions here, you should be overseeing the business. You should decide if we’re on the strategy, you should hire / fire the CEO. You should set the annual dividend and that’s it.
You should oversee the business, but not put your hands into the business every day. But who runs the board?
That’s the owner room that is where owners play. They again have very few, but actually the most important decisions, the reserve rights that can never give up are the things that Josh was talking about, about the type of ownership who should own this place.
What do we want to do?
We want to grow the place, you want liquidity. Do we want to control? And in certain way, the fourth room, which is also super important for longevity in a family business, kind of sits over to the side. We call it the family room and family rooms actually have, I call it the trade, not in competency or wisdom or power, like those three other rooms.
They trade in emotions, great family businesses that we’ve got to know consciously develop the unity of their family over time. If you don’t develop unity, you’ll have disunity. That’d be very hard to keep the family business together. They look after the development of the next generation. They figure out how to bring in, in a positive way, spouses and in-laws into their business.
So in making decisions, you have to figure out which decision belongs in which room, which person, or which people belong in which room, and also how to connect the rooms. So going from a single owner just opened up her bake shop to something that’s maybe a hundred million dollars. You’re going to be on a journey of deciding how to decide.
Where and how decisions are gonna be made. And that’s a right of owner and that’s the second right?
Russ Haworth: And who’s going to take the third
The Right to Benefit
Josh Baron: I’ll jump back in.
So the third right, is the right to value. Which basically means if you own something, you get the right to benefit from what’s left over after you pay all your bills and all that kind of stuff, you get what’s left over there, the residual from it. And you know, because of that, you get to decide what success means for the business.
When you work in a public company environment, like both Rob and I did in our earlier strategy consulting days, we never asked the COO the question of “what do you value?” Because it was assumed. “Oh, we value increasing our returns to shareholders” is a very easy way to decide what you value.
One of the wonderful things about working for family businesses, whether they’re privately held or they’re maybe publicly traded, but private, you know, family controlled is that that’s not necessarily the case. And they may value growing the size and scope and financial stature of the business, but they might value other things as well.
Like they might value taking money out of the business to give it away or to to spend it on whatever they want to spend it on.
They also might value control. So basically being able to control your own destiny. And one of the things that we talk about is that you can kind of take those three, three main types of things.
You can value growth, liquidity, and control.
Think about them as kind of a triangle. And as an owner, you can kind of move yourself from one edge to the other, trading off some things for others. And that’s kind of what we try to really focus on is that you have this right to define what you value.
But there are trade offs in life and you can’t have everything.
You’ve got to, if you want more of one thing, you have to get it by giving up something else. And those are all decisions only the owners can make. No one can come in and say, “Oh, this is a great business, you should double it in size and you should borrow a bunch of money from the bank to do it”
You don’t have to do that. That’s your choice. And that’s a lot of the work of ownership is really wrestling with those trade-offs and choices that you get to make. And so through this right to value.
Rob Lachenauer: In some of our clients, to build on what Josh was saying, most family businesses are owned by more than one person.
And it’s not always the case that everyone has the same ownership goals in mind. It could be that if Josh and I own a business together, he wants to grow it and I want to take a lot of money out of it, and this is kind of a latent source of conflict where it’s just kind of percolating along every year.
I say more money out, Josh says, “No, I want to grow it!”
Rob Lachenauer: We really hope the family businesses that are listening think clearly about growth, liquidity, and control, and then talk to each other about what they want. And if you can, we find once you’ve talked to each other, it’s much more clear. And sometimes the clarity is, “Oh, we all want the same thing.”
Sometimes the clarity is we want such different things that we shouldn’t own this business together.
Josh Baron: And often just to build on what Rob said, oftentimes the owners are actually on the same page, but they haven’t communicated it. And really that’s, it’s really there’s a gap between where the owners may have a pretty shared perspective, but the board doesn’t know what it is or the manager team doesn’t know what it is and that can cause tensions or different directions or even decisions that are counter to what the owners want?
Well, Rob actually, I believe the only time Rob and I’ve worked together with the family (we usually work on separate things) and it was this family that had created this really incredible luxury business, it was an art project that they had started that became this very well-known brand and they didn’t really care about growing it.
You know, it’s interesting, they could have grown it a lot but you know, they used to say, as long as it continues to go up year over year, incrementally, as long as the business still pays out enough for us to fund our lifestyle and as long as we keep the control, we want the culture to retain what we started with.
That’s really what matters to us. And then they brought in a hard charging non-family CEO who really wanted to grow the business. And started borrowing money and taking these big, aggressive bets, all things that were perfectly reasonable if that’s what the owners wanted, but they didn’t.
And that actually caused a fair amount of conflict and steps backward. And so there was a need for them to really kind of step back in and say, okay, Here is what we want. These are our objectives. Let’s make sure that the strategy of the business is in line with those.
Russ Haworth: And that’s a really valid point there around the introduction of people who are outside of that family system as well, because it’s going back to the four rooms. It’s not always the case, but perhaps where businesses starts up. It may be, but as they grow and as families grow, there’ll be different people populating each of those rooms.
And so ensuring those conversations are happening and that the ownership philosophy has been passed down to those that are making decisions within the business makes everyone’s lives easier.
Rob Lachenauer: Right. That’s a really good point. We find that when family businesses are maybe establishing their first Board of Directors.
If they get people who are independent directors, who are from publicly traded companies, those people are so used to the same goal ‘total shareholder return has to be grown’, that they often have a hard time understanding what the family wants. We urge our owners to get together collectively and write it down.
We call it ‘owner guard rails’. Here’s what we’re looking for from the business. Be it growth, liquidity or control. And if so, what kind of control and have a discussion with those directors? We also urge our family business clients if we’re setting up a new board if you are considering getting independent directors, at least some of them should have family business experience, because they know the trade-offs that are going on in such a family.
Russ Haworth: Think we were up to three, three down
The Right to Inform
Josh Baron: So number four is the right to inform. Basically as an owner, you have access to information, more or less anything you want to know everything from who owns shares to, you know, who are the main customers and suppliers, how’s the company doing?
And no one else, as I said, maybe other than the Government, depending on where you live. If you haven’t gone public, right, making a decision to share that information, you are private, you can control that information. And because so much of that sits within the owners, it gives the owners of a business, really the ability to control the communication flow of information, you know, how everything flows and that’s within the broader ownership group.
If you’ve got a few that are really connected and then some others that are not so involved, the next generation spouses, employees, suppliers, and so on. There are all these choice points that you have to make as an owner about what do you do with that information?
Do you tell people how the company is doing or what your succession plans are, or, you know, who owns the place, all that kind of stuff.
And what we find is that there’s this natural inclination to hold onto it. The there’s this inclination towards privacy. And it’s an understandable one because information and knowledge is power. Information can be used for purposes that you don’t want.
We’ve heard people say, “well we don’t want our employees to know how much money it’ll make”
Cause then they’ll ask for a raise or “we don’t want the next generation to know how much money we have, because then they won’t work as hard”.
And so there’s this really understandable instinct for privacy inside of a family business. And I think what we’ve talked about in the book and we think is important to counterbalance that with is to think about what you’re giving up by keeping too much control over information, because the way that you communicate is actually how you build the trusted relationships that every family business needs to meet needs to thrive, needs to needs to grow.
If you’re not building up that trust among whether it’s among the current owners or with your employees you’re not going to be able to have those trusted relationships that you need to be successful.
It’s one of the things that makes family businesses bring some of their competitive advantages is the ability to bring and to build these long-term relationships with employees, with suppliers and customers and so on.
If they’re in the dark about all these things that are important, it becomes hard to do that.
And sometimes it gets too focused on the financial information, but there’s all kinds of things that you oftentimes can share ‘what’s our succession plan’. We find to be in business for a long time there’s lots of things that you actually can share to build up those level of trust relationships.
Russ Haworth: And I think if we look at things as they are currently, we’re obviously facing a global pandemic and the impact that that’s going to be having on people’s concerns about that. Their futures and their livelihoods, whether they’re part of the ownership group or whether they’re employed within that business, presumably that level of transparency and communication, but which family businesses are able to do without having to do profit warnings to the stock markets and that kind of stuff.
That that’s a hugely valuable way to be keeping people on top of what’s going on within the business as well.
Josh Baron: To your point, Russ, we were really curious about when this all started happening in March, it just felt like a tsunami of overwhelming disruption, everything going on.
And so we launched a survey to try to figure out how people are managing through this time period. About a couple hundred responses globally, we’ll be redoing the survey. But that communication was one of the things that came out the most. And I think to your point it’s what people really want to hear is “are we going to be okay?”
Obviously, you don’t want to be deceptive or anything like that, and you want to be transparent, but you also want to be kind of positive. And, and the reality is, is that if you don’t share what’s going on, people are going to draw their own conclusions.
And more often than not, their conclusions are going to be more pessimistic, more negative than probably the reality.
And so there’s a huge value, always, in driving the narrative. Especially at a time like this, when people are so uncertain about so many aspects of their life to give, to drive, to create as much certainty as you can, as your business is going through this.
Russ Haworth: And I think as well, because it’s a global event, a global pandemic. It’s not affecting a particular area or a particular sector, it’s kind of agnostic of that. But people are going to understand that times are tough and that is going to have an impact on their business. So communicating that’s not necessarily going to be a surprise, but as you say, it does take out the element of people making their own mind up of, well, it must be bad news if we’re not hearing anything from the owners or the people that run the business.
Josh Baron: One conversation we had with the families we work with and they are very tightly controlled about what the owners will say. They’re all working in the company. They’re there in what we call this partnership approach, where you have to be employed in the business in order to be an owner and they’re very much bought in to the business, but also, you know, pretty careful about what they share and what they talk about.
And one of the things we found out was that (this is pre COVID) is that the senior management team really wasn’t clear what was going to happen. Like the one generation was coming up towards retirement. The next generation was there, but wasn’t really in the front and centre, they really weren’t in the leadership driver’s seats so far.
The management team didn’t need to know all the specifics about this ownership percentage is going to this person, or even like how much money we’re making. They just wanted to know, ‘are you committed to this?’ ‘Do you plan to transition to the new this next generation?’ Help us understand that you’re taking this seriously because we take this business seriously.
It’s our life. We may not own it, but we’ve worked our lives here, we want to know that’s going to happen. And I think just having that conversation and giving us a forum to frame it, talk about how what’s going on. And that sort of succession process helped just to calm the nerves a tremendous amount.
And they sort of got into this helpful back and forth dialogue of the non-family executives, kind of helping the next generation to get ready, all these wonderful things came out of it and that was done without sharing a single piece of financial information.
It really helped to change the tide of how people were feeling about where things were going.
Russ Haworth: Thank you. So, just summarise where we are with the the five we’ve done, we’ve done four. So we’ve covered Design, Decide, Value and Inform. Yes.
The Right to Transfer
Rob Lachenauer: We call it fifth one the right to transfer. And it’s a huge right and transfers the right that you have as an owner to determine the future of your family business.
Say you are 60 years old, you own something with your sisters and you’ve got a series of choices in front of you. You could sell the business and many do just to whoever, to a private equity firm, to your competitors, whoever.
You could divide it. We have seen many families that have done this. There’s a classic one that’s actually in Texas where they, I think it was like a pest control company. Father owned it. He had three sons and he said, okay, son number one, you get West Texas, son number two East Texas, son number three North Texas. And they just divided Texas up.
So that’s a good example. We see it. Often and people think that division of the family business can help in many ways because they know there’s always sibling rivalries. They can go on. And this is a way to get take care of sibling rivalries. There are many downsides of dividing, you give up the economies of scale of having a bigger family business.
And you can, I guess the potato famine in Ireland happened because they kept making smaller and smaller pots off of the land that they have. What we see most often, however, are family businesses that want to try to in some way, transfer the family business to the next generation, and that’s really complicated.
There’s a lot going on. The the analogy we often start with on this one is what it’s not. Do you remember the Lion King movie and Broadway play? The beginning of the movie, at least Rafiki. Who’s like the baboon. He holds up the little baby cub Simba, I guess is his name and he’s to be the next ruler and they hold them up over the African Savannah and all of the animals in the kingdom bow down to him.
Great music. Papa’s very pleased. Well, that’s a transition. We’re all done, right. Well, not really the whole story failed. Dad died too quickly. Brother was not on board. Good as him growing up to do all of these things. What we find is that there’s a natural tendency to try to have a repeat performance.
Oh, we’ll have the next generation be just like us. Rarely, I’d say one out of 20, is that anywhere close to what can happen?
So what should happen is you need to think through three interrelated things. The first thing is how are you going to pass down your assets? Right. As Josh was mentioning earlier, it could be that you own a business.
It could be that you own land. It could be that you own a lot of other stuff. Is all that going to be bundled together and passed to the next generation is all going to be bundled together and passed equally to the next generation. Are you going to put it if you’re in an estate, in a country that has trust, we put it in a trust.
We do it directly. It’s really complex with long-term implications. So the first thing you need to think through carefully is the passing of assets. But you’re only started in your journey once you would have thought that through the second big thing is what are the roles?
What are the roles in your generation?
What are the roles of the next generation? We think the role of the CEO of the business, right? That’s because that gets so much publicity and business presence, and you’ll see you as all powerful. No, this is a family business with family owners. The power actually exists upstairs with the owners and CEOs got that management room that he or she is running, hopefully well, either as a family member or a non-family member, but they’re usually in very important roles.
If you’re trying to go for passing down generations, including board of directors, do you want any family member on the board of directors? Owner room, will you have a leader of your owner room? Who’s really getting the voice of all the owners together. Remember if they go separate ways, you’re going to have troubles, and family room who will run your family room?
They’re great leadership roles that should be thought through and allocated out and developed over time. So roles is the second thing I think, given there’s so many different roles. You really got to work a lot on developing the capabilities of the next generation.
You have to start laying out some of the roles and then a developmental plan. There are so many, I’m sorry to say, so many mistakes, easy mistakes to make at developing your own children in the business. We often advise you also get an outside Board or some advisors to help you with development of your son?
I’m a pretty good CEO, even Josh would agree. I think sometimes…?
Rob Lachenauer: For one summer, my daughter, Ellie, who’s our middle daughter worked as a summer intern in the company. During that summer, I was not a very good CEO. It’s really interesting. Cause you’re working, you’re used to working with Josh and Karen and other people or your business pals.
And then you add a family member inside the levels of communication and everything just went wonky that summer.
I developed a whole new appreciation for what our clients go through. Realise we suggest to our clients, we realise you may not be at your best when you have your son or daughter or your cousin or your niece or nephew in the business with you.
So developing their capabilities is probably not something you should do directly. So those are three of the big things that we say don’t just put Simba up and let the Savannah kneel to him. Think through how the assets are going to go, what roles there are and how you’re gonna develop the capabilities for those roles.
Russ Haworth: I like the Simba example, because the way I look at it is that that lion has got absolutely no idea of what is ahead of him. He’s got no concept of what’s happening at that point, has he? He’s he’s thrusted up there as the heir apparent, you’re the new leader. No discussion, that is your role and everything beyond that is then designed to help him get there.
Rob Lachenauer: Yeah. And his first reaction, as simple as to say, I don’t want that. I want to go somewhere else. I get to go on my own journey. I won’t take what dad gave me. Yeah, that’s a good analogy. And yet of course it literature, it’s all over literature, but it’s a really good example.
Russ Haworth: Yeah, absolutely. Sorry I interrupted.
Josh Baron: Oh, no, no. I think just to amplify a couple of things that Rob said, especially in that development of the next generation part I think one of the hardest things to do is to develop the next generation to be owners. Because I said, there’s lots of places you can go to, you can go to business school and learn how to be a good manager.
Ownership as a Profession
You can get training on that and you can go work in another company. You can sit on a nonprofit board to learn how to be a good board director. It’s actually not so easy to learn how to be a good owner. One of the things we talked about is the importance of really thinking about ownership as a profession, that there is actual expertise that you need to, that you need to develop.
And there’s certain skill sets that you need if you’re going to be an owner of a business, whether you’re working there or not, you don’t have to be fluent in finance and financial statements, but you have to be at least proficient and same things with like trust. If you’re a family business owned by a trust.
You can’t have no idea what any of that means. It just say, I’ll let the lawyers figure that out. You have to at least get a little bit up to speed on some of these things in order to really be able to step into that role. So that’s something I think that is really important.
For those that want to keep a family business going to think seriously about how will that next generation and especially those that aren’t going to be working there all the time, or as connected, learn how to be effective owners. And the second thing I would just highlight is that, you know, family business is a team sport, at least almost all the time.
And so a lot of what you’re trying to learn and inculcate in the next generation is just not how to be a star, you know, whatever position. We’re both big basketball fans. So it’s not just about being like the star point guard, but you have to be really good at being a team player. And that means learning how to communicate effectively.
There’s lots of good stuff out there for that. Having some experiences and opportunities to learn how to work together with the next generation earlier on, some families have done a really nice job of coming up with, the next generation is going to come up with an investment opportunity, a small one, you know, invest a few hundred dollars or give away a few hundred dollars or whatever.
It doesn’t even matter what the result is. It’s the experience and process of building the muscle memory of working together. And so I think that that’s, when you’re thinking about that development of really positioning the family business to be successful down the road that whole aspect of how are you going to instill great teamwork is an important part of it.
Russ Haworth: Having covered the five rights that they have there. And again, just to summarise those, you’ve got Design, Decide, Value, Inform and Transfer. Excellent. I’ve been listening.
I know it’s not necessarily directly linked to necessarily to pure succession in that sense, but succession or continuity or transition, however we term it is such a big topic, we probably don’t have time in this show to cover everything that is associated with that, but what are some of the essential elements that you see to successful continuity or transition or succession or whatever terminology you want to use?
Rob Lachenauer: It’s sometimes really hard for the current generation and then the next generation to understand that it’s a team sport, you’re handing it off to someone. And it’s really hard because you’re really handing it off to kids and they always feel like they’re going to remain 30 years younger than you.
And you can never get over the fact is by 60 years old and you’re 90 that they’re kids, We see too many family businesses, current generation creating a great plan for how they’re going to transition to the next generation yet they forget to involve the next generation in what they want. So here it is Simba.
Well, I don’t want it. What did you think that they think they know? Cause you know, they’d been giving things to their children since they were one day old. Here’s a bottle, it continues. So getting a process going where you can have what we call ‘eye to eye’ conversations between the current generation and the next generation.
What do you have?
What assets, roles and capabilities.
What do you want? Asset, goals and capabilities.
So really hard because you’re, this is why the room model helps a lot. If you’re trying to do that kind of transition just in the family room and Oh dad, thank you. It’s going to be really hard to actually do that as an owner.
We say when you’re in the owner room, and there was no family language going on. You’re an owner, you’re a beneficial owner. You’re a future owner, but you’re not playing the dad role. And the daughter role, you’re playing the continuity of ownership role. So getting it so that the current generation can not only let go, but involve the future generation in what they want really hard to do.
Succession is a Process not an Event
Josh Baron: Yeah, I think a few of these themes you’ve already touched on, but just to highlight a couple of things. I mean, as Rob was kind of getting to, this is a process, not an event. And we kind of think about succession as this literal handoff passing of the baton metaphor.
But of course it doesn’t. You’ve got to get into that position of running alongside each other before you can do the handoff. And I’m not expected. It’s just sort of like, you’re going to have a simple plan. It’s going to just come off. It really is something that takes, it takes a while.
I mean, some families, you know, you finished one and you’re kind of almost immediately on to the next one. It’s really a continual process of moving from one thing to the next, I think as you’re going through it, and this is hard, is you have to somehow make it clear that you’re valuing what the current generation, the one who built this, or at least this piece of it, you’re valuing what they did and appreciating what they did.
Without saying that, because you did it this way, that we have to do it this way. And I think that there’s, there’s a way to talk about this.
“Yes, that worked very well for you. We’re so grateful for everything that you did, but our circumstances are different”. And that’s just the reality of it when I’m talking to one family business and they were the, you know, oftentimes you know, we oftentimes talk about it’s like the first generation and the second generation kind of rest on their laurels or generations over again.
Maybe we’ll come back to that. I’ll say more on that at the end, but in many family businesses is actually it’s the second generation where things really take off. The first generation starts something relatively small, they’re really building it. And it’s really in the third generation that they’re having to sort of see something that’s already formed.
When I’m talking to one family business and they said, you know, this third generation, they weren’t here when we were building these walls and we’re sitting in their factory and he’s literally referring to the walls around him, and talking about how, you know, we were there when it was built up from literally nothing.
We experienced that with our father and mother and so on, and they’re just in a very different spot. And I think that’s important to keep in mind that the things that they’re going to need to be successful, the skills they’re going to need, what you’re looking for in leaders, it’s going to be very different than the kind that got you to this point.
I think that’s a really hard recognition, a really hard realisation, but it’s critical to getting this process right. Value and appreciate, but also say, but that’s not what we’re having to deal with. We have to deal with all this other stuff that you didn’t.
Russ Haworth: Completely agree. Family businesses can be a fantastic enabler for wealth generation for people living fulfilled and, and happy lives. You’re saying about the generational differences of those that perhaps start the business and start to build the generation of that wealth.
The second generation who are then potentially growing it, and then the third generation beyond them. We’ve heard the phrase is “clogs to clogs” or “shirtsleeves to shirtsleeves” in three generations. What can families be doing to help their own family members to become responsible with this wealth to try and avoid that cliche of “shirtsleeves to shirtsleeves?”
Rob Lachenauer: Why don’t we answer it in two parts?
One is to rebut the “shirtsleeves to shirtsleeves”, (which we know you’re not saying) it is simplistic thinking. That’s actually untrue in many cases. So the first thing is to don’t accept that there’s a thinking that it’s going to be built up and it’s going to be torn down.
Our belief is much more than it can be built up and with the right kind of decision-making it can continue. Don’t assume it’s going to go down. Don’t assume that the third generations is gonna mess up. We live our life, Josh and I working with great family businesses that are third, fourth, fifth, 12th, one was 21st generation.
So there is no, your fate is not to be a third-generation failure. So, well, we can talk more about that and we statistically can show why that’s not true on growing next generation to be responsible with, with the wealth or a few things that we see our clients doing really well.
A Beautiful Business
The first is around, most of the wealth of the family is in the business. And you want your next generation to view it, not as a investment, but as a I’ll use a word or phrase, “a beautiful business”, any business that I get in and really understand how it works, how the employees, what the culture is, what they make, how their supply base works.
There’s a bunch of incredibly interesting, interesting things. We have stories of some of our clients and they may have sugar beets and the grandfather took his granddaughter out into the fields and showed them and had her eat some of the sugar cane that they were making.
It tastes awful because it hadn’t been processed yet, but he said to her “darling, this is in your blood”. And that’s stayed with her for the rest of her life. And indeed she’s the head of the family council for a multi-billion dollar corporation that as you’re processing, expose your children, not to the money first, but to what you appreciate about the business.
The second thing I’d say, we’d say a lot on this is I deeply believe kids see exactly what’s going on in you. So if you’re driving a Maserati, they’ll say that’s what our family does. So if you show it, they’ll play it into the next generation.
Those families we think are most successful. Talk a lot about how appreciative they are for the benefits that they’ve derived from their family business. They talk about the history from where they came. Maybe they’re the fifth generation. They’ll talk all the way about the ups and downs. They call it the oscillating narrative that got them here.
They’ll talk about the associates or the workers, the employees in their business. And they’ll know it’s getting, it’s not an investment. It’s something that they hold dear to their heart. So there are a couple of things I think we can go into, we could actually have a whole podcast on that one.
Russ Haworth: Absolutely, and there are so many areas that we could go into a huge amount of depth on, but conscious of our time now, are there any concluding thoughts from what we’ve discussed today, to summarise what we’ve covered to those listening.
Avoid Silver Bullets
Josh Baron: One is, avoid the search for a silver bullet. I mean, often, especially out in the world, so many people are saying, Oh, we just need to go away for a weekend and write our family constitution, everything’s going to be sorted and so on.
That’s not going to do it. I mean this involves real, real work in order to get right. To be successful in keeping a family business going that’s so complicated and so many different things going on that you’re going to have to really be willing to engage.
And so if anyone’s offering you some sort of simple solution I would be really careful about it. And I just want to highlight, I think that, that that three generation thing, I think this is one of the most, I think it was one of the most damaging statements or ideas in the whole field of family business.
We don’t use it as, you know, people use it as a scare tactic. We don’t use it anymore.
I don’t think the data that supports the idea at all, especially the idea of wealth dissipating within three generations. It’s nonsense, and I think even more importantly than it not being true, is that it creates the self fulfilling prophecy where people say, I teach in class, I can’t tell you how many students I’ve had walk in and say, yeah, I’m the third generation.
I’m the one that’s going to screw this thing up. No, you’re not, that’s not how this works. Instead of worrying about how you’re going to screw it up, you know, focus on the things you can do to make it better. And that’s, I think where our messages in this five rights, you know, on the structure of core structure of the book, is that okay?
You know it’s work. But it’s all doable. And I think what we try to highlight is that you can map out your own, your own course. You can figure out the things that need to get done and have a great time along the way. I mean, family businesses can be a drag when they go badly, there’s probably nothing worse than sort of having this business that is draining your energy and all that stuff.
But when it goes well, there’s nothing better. There’s nothing more satisfying than building up this business and doing it with people that you are, are so connected to.
Rob Lachenauer: What Josh was saying.
We often think that family businesses are both the worst and the best form of capitalism. And it depends upon the owners making, having the ability to make great decisions together. If you can get the owners together, making great decisions, you’ve got a good chance of having the best kind of company around.
So good luck out there.
Russ Haworth: Fantastic. Thank you. And finally, how can our audience find out more about you and the book?
Rob Lachenauer: So banyan.global is our website for the company. You can find our bio’s and links into the book. And the book again is called the Harvard business Review Family Business Handbook. And if he just put that in and probably you want to use Josh’s name, Josh Baron, it’s easier than spelling ‘Lauchenauer’ or search Family Business Handbook by Harvard.
You’ll find us on Amazon or any other place in the web. Thank you, Russ. We appreciate you.
Russ Haworth: thank you. It, it it’s been great fun. Really enjoyed it. And there’s lots in there for our audience to takeaway. So thank you both for your time.
Josh Baron: Thanks Russ, really appreciate your work.
You’re doing a good job.