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Whose Fault is Failure?

Dear Advisor:

My brother-in-law has led our third generation family business into Chapter 7 bankruptcy. When confronted by family member minority shareholders about his failure, he simply shrugged and said, "I did the best I could." Is there any action that we can take against him to recover our value?

Failure is always a bitter pill. Without more detail, we cannot advise you about the possibility of recovery of any assets. However, unless gross negligence or illegal activity occurred, the situation does not sound promising. We can only advise you to contact an attorney.

We are concerned about the finger pointing in the ruins of your family business. We wonder how your brother-in-law became the CEO, what kinds of budgeting, planning and operational controls were in place? What were the characteristics of your board of directors--did it meet regularly, did it focus on important issues, did it include outsiders?

In our view, simply blaming the CEO for failure misses some very important points. When a business depends entirely on the performance of any one individual, it is in serious danger from numerous risks--illness or death, error, mistakes of judgment, lack of will, ethical or legal lapses, etc. To manage these risks, controls, oversight and accountability are essential. That is the serious responsibility of the board of directors.

Owners have responsibilities too. They are stewards of their resources, obliged to assure that their assets are being used well. That obligation is best fulfilled by making sure that a solid and active board of directors is in place.

If your family business truly depended on one person for its success, then the failure to develop appropriate systems and processes must be viewed as a major culprit in the situation leading to bankruptcy. If systems and processes are not in place in a third generation family business, then generations of shareholders can claim a bit of the responsibility for the business' demise. The CEO may or may not have done his or her best, but by not demanding and implementing sound governance procedures, the owners certainly did not do what was best for their business.

And finally, even with the best management, some businesses do not survive. Businesses are subject to competitive and other forces that cannot always be anticipated or successfully defended against. Failure often is due to a combination of factors and the actions of many people.

Hindsight is wonderful, because it is always 20:20. For the sake of family harmony, thoughtful consideration of all factors is a must in these difficult situations.

The Advisor

 

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