Business Irish

Saturday 18 November 2017

There is no easy way to ensure escape from the big business family bust-up

Melissa, Gregory and Marian O’Gorman have found themselves in the news over their family dispute
Melissa, Gregory and Marian O’Gorman have found themselves in the news over their family dispute
Richard Curran

Richard Curran

The family dispute at the heart of the Kilkenny Design High Court action in which Greg O'Gorman is suing his mother Marian is not the first very public family business row in Ireland - and I am sure won't be the last.

Those of us on the outside of such family business bust-ups tend to have an initial reaction of "How could it have come to this?" But family business isn't easy. What is most interesting about the case involving the O'Gormans is how the family appeared to put in place one of the main planks that advisers say is necessary to avoid the big bust up - some kind of family shareholder agreement.

With the O'Gormans, the family business constitution that was part of a partnership behind the firm may have been inadequate or incomplete to deal with every eventuality. Or, it was unfairly set aside. That will be a matter for the High Court to decide.

The statistics around family businesses in general are not all that great. In the US, for example, around 80pc of the country's firms are family-owned. Yet, only 30pc of them successfully pass to the second generation; 12pc to the third generation and 3pc to the fourth generation.

It isn't that they are badly run. In fact, 60pc of failures arise from relationship issues and how the family gets along. Around 25pc of failures are from lack of competence or being unprepared and only 12pc are due to tax and traditional estate-planning issues.

In Ireland we have had more than our fair share of major high-profile family bust-ups. Perhaps the most famous was the legal battle involving Ben Dunne and the Dunnes Stores retail empire.

As spectators interested in a story, these rows have everything - colour, characters, intrigue and an insight into how the rich live. In reality, they leave enormous personal scars that can, but not in all cases, precipitate the implosion or sale of the business.

One of the most famous feuds was between the two brothers behind Puma and Adidas in Germany. Instead of the fraternal row causing the company to implode, it spawned two enormous corporate giants. Rivalry begot profit.

Brothers Adolf and Rudolf Dassler founded the shoe company in their mother's laundry room in the town of Herzogenaurach in Germany in 1924. Tensions grew between the two.

During the Second World War Rudolf was sent to the front. After his return he was picked up by US soldiers and imprisoned for a year. He was said to be convinced that his brother was behind his imprisonment.

The brothers split in 1948 and Puma and Adidas were born. Their bitter rivalry was said to divide the town - and it still has two rival factories at either end. The brothers never reconciled. When they were buried in the 1970s it was reportedly at opposite ends of the cemetery.

The best advice on avoiding these destructive family business feuds is to put structures in place that take away any ambiguity about a whole raft of situations. These might be very difficult to agree in the first place, but at least when they are in place there is less room for deviation as the rules are agreed and set.

These agreements between family members can involve succession planning, who should be promoted, who has control over day-to-day decisions and who has control over strategic decisions.

They can and do include details about how family members are expected to behave inside the company and what they are allowed to say outside of it.

In 2015 I interviewed Tom Gilbane, chief executive of Irish-American building firm Gilbane Construction. It is now in its fifth generation of family ownership and management and is listed as one of the top 100 family businesses in the US.

Gilbane was a big believer in putting structures in place. With the fifth generation of ownership there are so many family members now working in the business it is hard to keep count. But all of their entries into the family firm are streamlined and have rules governing them.

There is nothing casual about one family management person simply hiring his son or daughter or favourite nephew. Family members were all encouraged to take jobs outside the family firm before joining. This is also an important measure that can enhance the skillset they bring to the family firm and also provide a wider perspective. It can also ensure they really want to be there.

A survey by PWC in 2016 found that a quarter of Irish family-run businesses do not have a plan to deal with conflict between relatives. Some 26pc of those surveyed did not have procedures in place for dealing with family conflict. And, in fact, the figure had increased from the previous survey a year earlier. This can be read in two ways. It shows that Irish family-run firms are a little behind their international counterparts, where the average is better. However, I was surprised to learn that 74pc of Irish family-run businesses did have procedures in place. Of those which do, 50pc have a shareholders' agreement. Around a third have provision for a third-party mediator and 15pc have provision for some kind of family council.

The problem with family firms is that the lines can get blurred. Rob Lachenauer, of Banyon Family Business Advisors, has an interesting way of visualising the problems and ensuring the lines don't get blurred.

His philosophy is to see the business as having four separate rooms - just like those in houses. There is the owner room; the boardroom; the management room and the family room.

Some family members may inhabit all four rooms but only at different times and the conversations and participants in each room are different. So, for example, a non-family chief executive stays in the management room. He doesn't tell the head of the family empire where his children should go to university.

He doesn't decide what the dividends should be. Family members cannot have any conversation about any topic in any room. The room analogy helps to set decision boundaries in the business.

The truth is that working with family members is stressful and a family member may well say things they would never say to a non-family member. Equally, they may be slower to give a family member a pat on the back and say well done.

There are many examples of exceptional Irish family businesses that have handled issues of the next generation very well. It might involve hiring a non-family chief executive, as happened when the Noel Keating, founder of meat processing group Kepak, died quite suddenly in 1993.

It might also involve mechanisms that allow nephews and nieces to retain shareholdings but also to sell their stake if they have no long-term interest in it.

Another avenue that actually can help avoid conflict is where the company floats on the stock market. The discipline of the rules of the stock exchange and having an outside base of professional investors can put in place structures that ensure a family business continues to grow.

Look at the success of Kingspan in Co Cavan, which as a plc has not only become a multi-billion-euro business but has a second-generation chief executive at the helm, seen by many as one of the best in the country.

Despite the international comparisons, best practice and best advice that may be available, no two families are the same. People who build successful businesses tend to have forceful personalities. They often have extraordinary self-belief and don't always welcome change. They instinctively believe they know best.

Millions might be attainable but family consensus isn't.

Indo Business

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