The
Alienated Family Shareholder:
How
Important Are They?
Over
and over we see families where one member becomes alienated from the
other family members yet ends up the determining factor in the future of
the family’s business. The individual may distance themselves
from other family members to the point of not talking to family members
for years. Their behaviors are often rooted in longstanding
unhappy feelings towards other family members, deceased parents or be
afflicted by drugs, alcohol or criminal-type behavior. Typically
the parents in order to be “fair” to their children want
non-involved children to benefit from the family fortune. So these
family members are often shareholders of the company and receive normal
dividends and other benefits. Why does this occur and what are the
implications for family governance?
There are usually
long histories to these stories, often involving favoritism and spoiling
of the child when he or she was a child which fed feelings of
entitlement and irresponsible behavior. Take the case of the
Alvarez Family. Peter and his wife Mary had five children.
Gustavo, Jorge, Alberto, David and Cecilia. Jorge died as a young child
due to illness. Alberto, the middle child was particularly
loved and adored by his father. David did well in school, was
sent to the USA to study law, married an American and settled in Dallas.
Alberto had
difficulty in school and early in life developed the habit of lying to
his parents and teachers. In fact when he “graduated” from
college in the USA and sent his parents’ pictures of the celebration
it was actually not true. He did not graduate! As a young adult,
he asked for and received money from his father for fast cars,
apartments, etc. which (as one of the sons of a very successful
businessman - he felt entitled to. At the age of 25 he
joined his brother Gustavo in the family business.
Although his
brother had already been working in the business for over 10 years and
had a much more substantial position Alberto insisted on equal pay. This
infuriated Gustavo and the brothers grew increasingly hostile towards
each other. Gustavo considered his brother to be quite incompetent
(which was shared by board members) and felt that he was always cleaning
up his Alberto’s messes. After several years, the only way Dad could
manage his two sons was to have Alberto work in a facility in a
different city.
Cecilia was
interested in the business however the father insisted that she not work
in the business. Dad always said “You should concentrate on the
finer things in life. I’ll make sure you are always very well
taken care of”. This conflict escalated to point where Dad and
the daughter barely spoke for two years. Further, Cecilia became
furious at her brothers (particularly Gustavo) whom she believed
convinced Dad not to hire her. Over time she grew more and more
distant from Dad and her brother Gustavo although she remained close to
Alberto and David.
Over time the
distance grew between Alberto and Gustavo. Gustavo’s lack of affection
and respect for his brother grew. Alberto considered himself the smart
one – after all he got plenty of money for little work (his facility
was much smaller then the major operation in Bogota) although he worried
that his brother was really taking advantage of Dad through high salary
and company perks. When others confronted Alberto, he would get
more and more aggressive. Whenever Alberto complained to his father
about needing more money, the father gave him personal monies to “keep
things equal”.
Over the course of
30 years, Gustavo became the CEO. Alberto developed a drug problem,
attended several quite expensive Rehabilitation Centers in the USA and
constantly said such statements as “This time I’ll really beat this
problem. If not for Dad, I would never make it. Money is to
use and enjoy anyways. Dad favors and overpays my brother who has
ruined the company”. There was little communication
between the two brothers and even less with their sister who eventually
moved to the Spain and their brother David who had become very
successful in the USA. There was even less communication between
the children of each (the third generation).
At the age of 80
the father and mother passed away. Through the use of offshore companies
and expert legal manuvering, a quite brilliant international estate
planner was able to plan the estate according to the patriarch’s
wishes. Gustavo and Alberto were each left 30%, David who the
father considered the most successful
and therefore not needing financial support was left 15%. The sister
Cecilia who had the most children and in the father’s eyes
needed financial support was left 25% .
Within a year’s
of the passing of the parents, it was clear that any major decisions
were actually made by whoever courted Cecilia’s vote – after
all she had the deciding vote – and usually it was Alberto. Imagine,
after 60 years – the major decisions were now made by the family
shareholder with the least amount of interest and understanding of the
business.
Our next article
will provide a way to not only avoid this catastrophe but to construct a
wealth, family and business succession according to the family’s
highest values.
Marc
A. Silverman is a Family Business Consultant practicing in North and
Latin America. He can be
reached at marc@sii-inc.net.
