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Helping Family Businesses
Prosper Across Generations®

A Secret About Secrecy

Entrepreneurs tend to be closed-mouthed and close to the vest. They see information as power and a competitive edge, so they protect it carefully. Moreover, given the crushing time demands of a growing business, they have little time for the meetings and memos that are required to share information. While a powerful entrepreneur can achieve considerable business success with very limited communication, ultimately business and family growth will be stunted, if not destroyed by the practice. Outcomes of too much secrecy can include: inadequate successor development; failure to build a strong management team; lack of coordination, planning and control; and alienation, resentment and conflict among shareholders and family.

Unfortunately, the tendency toward secrecy can be reinforced by the very professionals that business leaders turn to for advice. Attorneys often believe in the “good witness” theory which calls for providing as little information as possible. Trust officers and bankers rightfully view secrecy about their clients’ affairs as the height of professionalism. Justifiably, advisors may remind the dominant owner/manager that there is no legal obligation to share information about business conditions or personal finances or estate plans with anyone else, including the family. Unfortunately, ours is an adversarial legal system. Consequently, anyone other than the client can be viewed as a potential adversary--even spouses. From that extreme view, only fools expose themselves to the risks that ensue from trust and sharing.

The tendency toward secrecy also may be reinforced by the entrepreneur’s experience in the business and family. Weaknesses can be revealed along with information. Sharing of data, plans or results can leave one open to discomforting questions or challenges.

The result: a philosophy of “it’s none of your business” develops. And not surprisingly, as the family comes to understand the family business as “none of their business,” the philosophy becomes a self-fulfilling prophecy.

The almost predictable fallout from excessive information sheltering is the erosion of commitment and trust--leading to bad feelings, suspicion and disputes--and sometimes leading to the dramatic demise of the family business.

The good news, however, is that excessive secrecy seems to be going out of style. Family meetings are being embraced by more and more family businesses. The question we used to hear most frequently was “why have a family meeting?” Now we hear “how do we do it and who should attend?”

We see many other positive indications supporting the idea of purposive communication and information sharing within owning clans. A newly formed association of attorneys who work with family firms includes lectures for their members led by family therapists on listening and communication skills. Professional associations of accountants and insurance specialists are training their members to beware of the impact intra-family secrets have on the business and the family. “Open Book Management” has moved beyond being an executive fad. Stephen Covey’s book, The 7 Habits of Highly Effective Families, stresses the need for open communication and family meetings.

We recommend the adult members of business-owning families consider these steps:

  • Don’t confuse shareholder meetings with family meetings. The former has a legitimate exclusivity. Nevertheless, we do recommend that presentations be made during family meetings that teach inactive family members about the business. Not all of the information shared at a shareholder meeting needs to be discussed at a larger family meeting. However, if that is the shareholders decision, we recommend that a policy and rational be drafted which explains why certain financial or operating information about the business is not openly shared.
  • Find a way to involve your adult children’s spouses in the family and educate them about the family’s business. As parents of future business leaders, employees and shareholders, their attitudes are crucial. If they feel alienated from the business, they may discourage their children’s commitment to the enterprise. To encourage their commitment, exposure to the business and education about understanding it should begin early.
  • Share compensation information openly, at least with shareholders. The cliche “no matter how little you may be paying yourself, your inactive shareholding relatives think its a lot more” is both true and understandable, particularly if they feel cut off from the business and its financial performance.
  • When using trusts as estate planning devices, go to great pains to teach beneficiaries about the trusts’ rationale and terms. Beneficiaries, particularly those not employed in the business, often feel mistrusted when stock is transferred to a trust rather than directly to them. An estate planning tool that protects the financial integrity of a business asset from creditors and the IRS thus becomes a source of family conflict.
  • Be sufficiently open about estate planning to permit your children to deal with their estate plans in a responsible and coordinated way. Next generation adults are often embarrassed by an attorney’s questions in the process of drawing a will. Because they lack answers about stock in the family business that may be their principle asset, they feel stupid and immature.

If a strong family is a goal your family values and embraces, the family business’s leaders must provide the example. We’ve seen families transformed by a patriarch’s decision to include the family in his knowledge of the business and the family’s finances. A meeting at which the parents take the next generation into their confidence can serve as a moving rite of passage, building mutual respect and acceptance of ownership responsibilities. If that initial, dramatic “breach” of secrecy is followed by regular information sharing, the chances of multi-generational family business success soars.

The secret about secrecy is that while it can raise an entrepreneur’s comfort level in the short-run, in the long-run it can destroy both the business and the family. And after all, family businesses are about the long run.

 

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