Robbinex - Family Circus

The jury is still out on Belinda Stronach -- the latest Canadian rich kid to take over a family business. But despite her privileged upbringing, the CEO of Magna International Inc.

(TSE:MG.A)appears to be doing a good job running the multibillion-dollar auto parts empire built by her father, Frank. Indeed, Stronach's first 10 months at the wheel have produced a fairly smooth ride on a rather bumpy road. After 16 years' grooming in various philanthropic and managerial positions, the 35-year-old mother of two was handed the top job in February, just as North America's Big Three automakers were giving the industry white knuckles by tapping the brakes on production. Since then, Magna -- which had seen its shares stalled under $77 for more than a year -- has outperformed the competition, recording record sales in the first, second and third quarters by repeatedly expanding its share of a shrinking market. As a result, investors have chosen to keep nasty legal battles regarding the departure of former senior executives (not to mention growing criticism about the merger of Magna's engine parts operation with its European vehicle assembly division) in their blind spots, while driving the firm's stock to the $100 range.

Magna's selection committee, which was chaired by company director and former Ontario premier Bill Davis, insists Stronach's ascension to the throne was based on demonstrated abilities, not a birthright. So why mention the silver-spoon factor? Simple. Experts say hereditary CEOs often make bad leaders, especially when raised by rags-to-riches parents like Frank Stronach (No. 47 on this year's Rich 100), who launched Magna out of a Toronto garage in 1957, just three years after emigrating from Austria with only $54 in his pocket. "Handing down a family business fails at least 50% of the time," says Richard Wolfe, an industrial psychologist based in Rochester, NY, whose research has found that many rich kids simply can't help running the family firm the way middle-class sons and daughters drive the family car -- fast and carelessly -- the first time they get a chance to burn rubber.

According to Wolfe, creating wealth from scratch produces a "family business paradox," because children of self-made entrepreneurs develop different personalities, skills, work ethics, confidence levels and interests than the parent (or parents) who built the company. And when a rich kid isn't really interested in the traditional business, the level of overconfidence that can come with never really having to put blood, sweat or tears into anything frequently leads them to move the family firm into unknown corporate waters, sometimes just to relieve boredom.

The children of Family Inc. often don't have knowledge of other industries. But according to Wolfe, those with a high level of unwarranted self-esteem -- and the complementary staff of "executive Yes-men" that typically surrounds them -- could nevertheless decide that the family liquor business should become an entertainment company, or that dad's printing empire should acquire multimedia and cable assets, even "when objective evidence suggests that might not be a good idea." Simply put, Wolfe says, rich kids all too often "don't know when they don't know," and that's why so many firms end up with an "emperor-has-no-clothes" dilemma.

And, hey, think again if you don't believe this issue will affect you until you've made your first million and sired a few heirs of your own. Succession watchers say the economic fallout from poor family business planning will spread far beyond individual circles of rich blood. While 175 of the Fortune 500 are still largely family-owned, leadership woes are also expected to cause a flood of small business failures over the next few years. As Penn State professor William Rothwell ominously points out in the forward to Exit Right: A Guided Tour of Succession Planning for Families in Business Together, more than 40% of the people who run the closely held operations that comprise 80% of the North American economy will retire by 2007.

In Canada, where there are more than 120,000 private family firms with revenue in excess of $1 million, management consultancy Deloitte & Touche warns of a looming leadership crisis that could make the food-fighting McCains -- Wallace and Harrison -- look like masters of succession. The Achilles' heel of family-controlled enterprises appears to be planning, or, more accurately, the lack of planning, concludes the firm's most recent report on the subject. "What we found was that family businesses are very, very dependent on the current generation of owners," says John Bowey, a family business specialist with Deloitte & Touche. Indeed, while 44% of Canadian family-firm CEOs surveyed in 1999 believed their companies could easily fail without them, most had not taken time to create a business plan -- or even think about the process of finding someone qualified to fill their shoes. And more than half expect to step aside this decade.

What's at risk? Well, according to conservative estimates, Canada's family-run companies employ (directly and indirectly) around six million, while generating about $1.3 trillion in annual revenues. Among family-controlled media firms playing the risky convergence game, the Aspers, Péladeaus, Rogers, Thomsons and Shaws alone employ more than 115,000.

In Australia, where family businesses make up more than 80% of private-sector employers, investors appear keenly aware of the risks associated with corporate heirs. In April 2000, for example, about 14% of media giant News Corp.'s value disappeared after it was revealed that Rupert Murdoch was being treated for prostate cancer. According to the Australian Financial Review, "investors were clearly spooked that the old man might pass the baton" to his son Lachlan. The Aussies have had a similarly nasty reaction to the thought of James Packer rising to a position of absolute power at Publishing and Broadcasting Ltd., which runs the country's leading television network and publishes such magazines as Woman's Day and Cosmopolitan. Last year, when billionaire Kerry Packer was under the knife for a new kidney, investors chopped about $584 million off PBL's market value.

And don't expect company directors to help matters, at least not in the US, where family firms account for 78% of new jobs, 60% of employment and 50% of gross domestic product. According to Ross Nager, executive director of Houston-based Andersen Center for Family Business, US family firms don't fully utilize their boards, more than half of which meet only once or twice a year. (Almost 20% don't meet at all.) Then again, that may be because 68.6% of family businesses surveyed in 1997 didn't compensate directors. Those that did typically paid board members less than US$4,000 annually. "The succession issue is one of the reasons that the failure rate among family firms is so high," says Nager, adding that stubborn parents who fail to plan for their mortality are a real problem. "The stereotypical situation is an aging male founder who plans to die in the saddle. He doesn't want to give up the power and privilege associated with running the company. You often run into 80-year-olds who claim their 50-year-old kids are not quite ready yet. Who's kidding whom?"

So what's a dysfunctional family business to do? That's easy, says Doug Robbins, president of Robbinex Inc., a Hamilton-based intermediary firm that helps owners of midsize-to-large family businesses decide whether to hand down, sell or bring in a third party to run their companies. Robbins thinks corporate clans should relax -- and spend time on a couch with someone like Wolfe, who has about 20 years' experience testing offspring for leadership potential on both sides of the border. Robbins regularly sends his clients' "heir presumptives" to see the psychologist, who employs a "failure-focused" profiling technique to look for personality traits that raise red flags.

Personality testing for family-run firms has its critics, who claim industrial psychology works better in HR departments that can assess thousands of results over time. But Robbins and Wolfe swear by the process, which includes a series of interviews and tests that measure behavioral tendencies, motivational makeup and the cognitive ability of all key players, including the parents. In fact, Robbinex, a $5-million firm that also has offices in the US, recently retained Wolfe as a regular consultant so that it could expand its offspring-testing business. "We're busy," says Robbins, adding that most clients are surprised by the high failure rate among hand-me-down enterprises.

The worst transitions, he maintains, are situations in which a family just assumes a business should be handed down -- and trouble usually follows when the "kids expect it" or " a father demands it." Too many parents simply want to believe their children are members of what succession experts affectionately call "the lucky sperm club." In the case of the D'Abbondanza family -- who used to own Royal Shirt Co. Ltd., based in Concord, Ont. -- Robbins used personality profiling to convince parents Luigi and Mary to sell the family business rather than hand it down to their daughters. Tests showed they didn't have what it would take to run the company, which was sold to a US firm.

The succession expert, however, is quick to point out that positive test results can also take a family by surprise. For example, the Lanings of Waterford, Ont., had written off a son as a successor until profiling showed he would be as good, if not better, at running the family's farm equipment firm than his father.

Still not convinced? Wolfe says to look at it this way: for a fee of less than $15,000, the Eatons' retail empire might have been kept out of the hands of Sears Canada. Warning signs are often easy to pick up, he insists, recalling one business owner with a world-class ability for self-sacrifice who was considering whether to pass along her consumer product company to a daughter and son-in-law. "I interviewed them and one of the things they told me right from the beginning was that neither wanted to work as hard as the mother," he says with a chuckle. "They wanted to work 40 hours a week, while the woman who ran the business probably worked 70 to 80 hours a week. In their minds, they believed two people working 40 hours a week was the same as one person working 80."

But before you start feeling depressed by the sad state of Canda's family affairs, here are some cross-border differences that may cheer you up. Wolfe, who also profiles CEO candidates for non-family firms, says Canadians are a bit better than Americans at listening to management guru Peter Drucker, who warns family-run organizations to leave the question of succession to outsiders. Down south, Wolfe says, a family firm typically waits for a leadership feud to break out before seeking third-party advice. And when it comes to being told that they don't have what it takes to lead a company, he claims Canadian offspring generally accept the news stoically, while US corporate brats sometimes threaten to hold their breath until someone on staff finds a way to discredit his findings.

"I always do a feedback interview," Wolfe says. "Often the response of the parents -- and many of the family members -- to a negative finding is, 'You're right. We've kind of known that all along. But we were hoping, despite the problems, it would work out.'" Nevertheless, Wolfe recalls an uncomfortable situation five years ago when he had to tell a CEO candidate for a US$4-billion telco that he was too big a risk because he was a bull-headed kind of guy who couldn't stand contrary opinions -- even if they were sound. Unfortunately, the cocky candidate was chosen -- despite his lack of industry experience and Wolfe's US$2,400 negative report. "At the time, the company's stock was selling at US$47," he says. "Within a year and a half of hiring this guy, its stock was selling at US$16. The other thing that happened shortly after he became CEO was he put a ban on psychological testing."

Nager, of Andersen Center for Family Business, emphasizes that personality profiling is just one step in a tough, complex and emotionally charged planning process that should begin at least 10 years prior to a change in leadership. "I'm all for getting more information," he says. "But it's going to take more than just the outcome of some tests to measurably change these horrible failure statistics."

When you really think about it, Nager argues, the people making succession decisions in most family firms -- meaning moms and dads like Frank Stronach -- know their kids better than anyone. Like Drucker, he thinks convincing family firms to appoint and listen to an independent board of directors is the key to solving the succession crisis.

But John Fast, executive director of the Centre for Family Business at Ontario's University of Waterloo, supports any process, including personality profiling, that tries to dig down into the real feelings held by family members who work together. As a business consultant, Fast -- who has worked as a family counselor -- is also in high demand these days. "I'm working with families night and day," he says. "I've got them backed up three deep. I can't get to them." According to him, family firms must "get honest and take their fantasies off the table. We all know what sunk the Titanic, right? It wasn't the 10% above the water. It's the same with family firms and succession. It's the stuff under the surface that will sink them."

So go ahead and build your empire. But remember what mixing personal matters and business did to Italy's Guccis, who spent many family gatherings discussing the fashion business with their fists. At the end of the day, you may simply want to follow the advice of Alfred Cuddy, the bitter patriarch of London, Ont.-based Cuddy International, the multimillion-dollar poultry producer torn apart in the late 1990s by a very public family battle. (One of his five sons sued him for misuse of company funds.) "You can hire better than you can sire," he told Gordon Pitts, author of In the Blood: Battles to Succeed in Canada's Family Businesses. And Cuddy should know. After all, the man made a pretty good living breeding turkeys.

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