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A Cautionary Tale: Lessons from the Inferno

This week’s guest blogger, Mitch Vandiver, presents us with a cautionary tale on the perils of neutrality for family enterprise advisors and consultants.

A Cautionary Tale: Lessons from the Inferno

The PractitionerThe darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis. (Dante Alighieri, The Divine Comedy) 

Dante Alighieri’s The Divine Comedy and Dan Brown’s book Inferno, which includes many references to Dante’s epic poem, would seem an odd place for advisors to find guidance regarding their work with family businesses. Yet, one of the novel’s main protagonists, the Director of the Consortium, provides a cautionary tale in the perils and the flaws of how certain advisors work with their clients.

The Director of the Consortium, who is sought out for his services, is guided by the following principles:

  • Provide the service
  • Trust the clients
  • Ask no questions  

The Director thus practices neutrality. How does this relate to advisors working with privately held businesses? Following the principle of neutrality can lead to dysfunction and further exacerbate the complexity at the intersection of the family, the business and the ownership dynamics present within the family enterprise.

Consider the following scenarios presented to advisors.

  1. Two brothers who formed a business asked their advisors to draft a partnership agreement with 50/50 ownership, little to no governance for dispute resolution and no clear methodology to allow for the entrance and/or transition of the business to the next generation.
  2. A founder went to his advisors and instructed them as follows: “Pass the ownership to my three sons and daughter in equal percentages. Do not provide an easy exit should one want to leave the business or prove disruptive. Further, create equal compensation plans and equal roles for each.”
  3. A 2nd generation CEO formed a board of directors made up of friends who shared similar business experiences. Over the years they had all become close friends and lost objectivity. Thus, they were unable to ask the tough questions and provide impartial advice out of fear of harming long held friendships.

How did the advisors respond to the scenarios above? In each case, the advisors’ responses were similar.

  • Provide the service
  • Trust the client
  • Ask no questions

Therefore, the advisors remained neutral.

Not surprisingly, in each example, the advisors’ neutrality was detrimental to the clients’ well-being.

  • In the first example, the advisors ignored their own previously bad experiences with equal partnerships. Instead, they simply followed the clients’ wishes of equality and the brothers’ proclamations that they had always been able to work through their differences and would remain able to do so regardless of the issues.
  • Unfortunately, the reality was, that despite the brothers’ spoken requests, one brother wanted to bring his oldest son into the business while the other brother was against bringing his nephew into the business. The two brothers fought over this issue as well as the related issue of whether the business was a legacy business or one that was to provide a liquidity event for the founding generation. Because advisors failed to incorporate dispute resolution methodologies, an agreement was never reached. The partnership fell apart and ended up in litigation due to the lack of a clear governance structure. The business failed and the brothers never talked again. Their once shared vision became disparate and neither realized his goals.
  • In the second example, the family fought for years over control, roles, and the relationship between contribution and financial reward within the company. Even though the advisors in this case did work to put in place a governance process that addressed control, compensation and other matters, the founder continued to insist on equality for his three sons and daughter believing that this was the only fair solution.
  • Although the advisors’ experience had shaped their view that equality is often inherently unfair due to unequal contribution, they failed to ask the right questions to provide ways to accomplish the owner’s goals while at the same time minimizing future risks. Instead, the advisors trusted the client’s wishes and continued to try to provide the service as requested. Ultimately, the effort to pass the ownership in equal percentages as desired was unsuccessful. The business had to be sold and at a diluted value.
  • In the third example, the board acted as a series of “yes men.” When the 2nd generation CEO entered into a series of acquisitions which the board members disapproved of in private, they remained silent and failed to push back. The acquisitions and subsequent failed integration dramatically diluted the value of the business and the owner’s exit timeline and ability to create a succession plan passing the business to the 3rd generation.

In each case the advisor team provided the service, trusted the client, asked no, or the wrong, questions and remained neutral. In other words, they honored the client’s requests despite knowing that doing so could be harmful to the client.

Why would advisors act this way? Possibly because remaining neutral allows advisors to avoid dispute, the risk of termination, and is quite often the easiest path to take.

Dante’s foreboding vision of hell, however, provides guidance to advisors. We should ensure that we do not remain neutral, that we do not avoid the tough questions and that we do not simply follow orders. As advisors we should be objective and direct. Most of all, we must not remain neutral. We should have a passionate interest in the best outcomes for our clients and deliver advice even when we know that it may be difficult for the owners to accept.

About the contributor:

Mitchell Vandiver IIIL. Mitchell Vandiver III is president of Strategies, Inc. located in the Baltimore-Washington corridor of Maryland. Mitch and his team leverage their collective experiences to help family businesses control their futures and overcome hurdles through organizational assessments, board development, strategic planning and succession planning. He holds the Certificate in Family Business Advising. Mitch can be contacted at mitch@strategiescorp.net.

 

 

Stay tuned next week for another issue of The Practitioner.

Yours in Practice,

The Practitioner

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