Essay on "Third Generations"

Essay 6 pages (1885 words) Sources: 1

[EXCERPT] . . . .

Third Generations

One of the biggest challenges that all family businesses will face is succession. This is because, family members will often argue over who is entitled to ownership and the ability to set the strategic direction for the firm. In most cases, this means that there will be some kind of lengthy court battle (which often results in dividing various assets among the heirs).

The Saint Paul Warehouse Company faced similar challenges, when the founder and owner (Harry McNealy Sr. ) died in 1968. Thirty years prior to these events, is when there was a major transformation. At the heart of this focus, was to ensure that his sons Don and Harry Jr. were brought into the family business. At first, this provided the company with new executives that could build off what was completed by Harry Sr. However, in time Don began to make his own deals (which drove Harry Sr. crazy) based on his desire to control the company. (Carlock, n.d.)

Once Harry Sr. died, is when there were tremendous amounts of infighting between his children. What was happening is his two daughters (Jean and Audrey) challenged the will and the direct control of the company (given to Don as well as Harry Jr.). To prevent any kind of litigation from smearing the firm's name, both Jean and Audrey were given a 10.5% stake individually. (Carlock, n.d.)

As time went by, this was supposed to ensure that the firm could grow well into the future. The problem is that this contributed to even more infighting within the family. As a result, the courts had ordered the company to be spilt into two different entities (one that is controlled by Don and the other that is managed by Harry Jr.). During this process, is when the challenges increased, as to who will succeeded Harry and Don in running these businesses. The combination of these factors, created an atmosphere of animosity and tension. To fully understand what is taking place requires looking at the challenges faced by different family members during this process. Together, these elements will offer insights as to the difficulties associated with succession inside a family business. (Carlock, n.d.)

The Challenges Facing the McNealy Family and the Businesses

The biggest challenges facing the McNealy family businesses were: the strategy for operating the firm and succession. The combination of these areas created a situation that led to even more divisions inside both organizations. As far as the strategy for operating the companies are concerned, there were divisions between Don and Harry about how to deal with these challenges. Don wanted to have the family maintain some kind of control of the business. While at the same time, he hired managers and executives with the ability to help build the company over the long-term. Harry Jr. was interested in: having independent directors and select family members of board. The basic idea was to ensure that the family maintained operational control and is using the ideas of other directors to help the firm grow over the long-term. (Carlock, n.d.)

In the case of succession there were differences between the family members (most notably: Harry and Don). Harry Jr. wanted to ensure that his son was brought into the business. This is because he felt that the company should be passed onto future generations. The problem was that Harry's son (Paddy) had no experience in working with the day-to-day operations of the firm. As he had been employed in the financial industry for many years and only joined the company after his father pushed him to become more involved. (Carlock, n.d.)

As a result, Paddy was hired as the President of the firm and he was given a seat on the board of directors. This created conflicts within the management, who did not believe that Paddy had the ability to deal with the unique challenges facing the firm. Instead, they felt that he needed more experience. To address these issues, the company hired one of their top executives to serve as the President. Paddy's role was to be the Vice President and gain specific insights about how to effectively manage the firm. (Carlock, n.d.)

Don did not want to have family members involved in the business. Instead, he was interested in liquidating the firm or having a separate management / board of directors. The remaining family members would retain some ownership, without the ability to make decisions. The combination of these issues created an atmosphere of contention. (Carlock, n.d.)

At the same time, Harry realized that if the two firms were combined into one entity. They would provide more consistent earnings and allow the company to compete more effectively in the marketplace. After a series of meetings, it was agreed that the two companies would be combined into one. Paddy would become the new CEO and select family members will have seats on the board (along with independent directors). (Carlock, n.d.)

The Foundation

Moreover, the McNealy Family Foundation was established in the mid-1960s. Its goal is to provide low income and minority students with educational scholarships. In general, the other family members served on the foundation (in an effort to make a difference in the community). However, the tremendous amounts of infighting among family members forced the IRS to restrict the donations of company stock from: family and non-family members. Despite these challenges, the foundation continued to provide beneficiaries with assistance in paying for higher education. This helped the family and the two firms to maintain their favorable image (despite a court ruling that ordered the liquidation of the firm prior to splitting into two). These elements are illustrating how the company was able to protect its image from the foundation's activities. (Carlock, n.d.)

The Impact of these Issues

The impact of these issues is that the company and the family were divided based on who controlled the business in the future. This led to increased amounts of infighting and animosity (which resulted into the two firms being valued lower). Years later, is when Harry and Don realized that this was a major mistake that resulted in both companies earning lower revenues. (Carlock, n.d.)

Evidence of this can be seen with observations from Harry's daughter who said, "I think that the decision to divide the company into two was prudent. It satisfied both brothers' desires to separate. They had really different goals in terms of business strategy and how involved they wanted their families to be. They were finally able to go their own paths and yet not abandon a lifetime of work building the company." This is showing the differences in passing the business from one generation to the next increased the overall amounts of animosity between family members. (Carlock, n.d.)

As a result, the decisions that were made caused both brothers to miss out the on the ability to expand the business and dominate select markets. Instead, there was focus on how to be able to follow specific visions that were not empowering for: the firms or family members. Once Harry and Don realized this, is when their focus changed from having their own companies to combining both entities into one. This is illustrating how the succession issues resulted in the company being divided and reunited in the future (once it was determined that this strategy was ineffective). It is at this point that everyone realized how this hurt the company's ability to compete. In spite of these issues, the firm was able to adjust with these challenges over the long-term. (Carlock, n.d.)

Once the merger was complete, is when the company was able to improve their ability to deal with customers issues and adjust with new challenges. This is because the combined entity took the best ideas from both brothers and integrated them into a workable strategy. After several years of following this model, the company received the Minnesota Family Business of the Year Award given by the University of St. Thomas. (Carlock, n.d.)

Commenting about these events, Harry Jr. said, "Now all the families are represented on the board of directors and foundation by a third generation of cousins, brothers and sisters. it's fun seeing everyone getting along. I sit back and say to myself that if we followed previous structures, I wonder how well we would work together. Under this approach, everyone is works with each other, so there are some saving graces." These different elements are showing the challenges facing succession in family businesses. (Carlock, n.d.)

The way that this can occur is through infighting and different ideas about what direction to take the firm. This is when court battles took place, which resulted in the company receiving a liquidation order (leading to its break up). The only difference is that family members were able to control each new entity and take them in alternate directions. After following this basic strategy for several years, is when everyone realized that there were little economic benefits from this approach. (Carlock, n.d.)

Instead, the two brothers understood… READ MORE

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