Ethics and Values: October 2006 Archives

Greg Mankiw's Blog has a summary of the New York Times review of a new book on family business Dynatsties: Fortunes and Misfortunes of the World's Great Family Businesses, by David S. Landes. The book profiles a handful of family businesses, some famous and some not as well known.

While it is interesting to note that "family" businesses in the Fortune 500 (no longer private family businesses, but still family controlled) outperform their "professionally managed" counterparts, their recognition of the power of a truly good corporate culture is what is most intriguing to me. From the New York Times:

There's also much to be said for family "stewardship" -- the sense that you have been entrusted with a multigenerational inheritance, not just a company. The Northeastern grocery chain Wegmans is now run by a fourth generation of family managers. Regularly voted one of the best American employers, it is known for the range and quality of its goods, its beautifully appointed stores and its knowledgeable and friendly staff. The buyout experts who snapped up grocery chains through the 1980's and 90's, firing workers and cutting benefits, would not have understood what the Wegmans are about.

The link to Greg Mankiw's Blog came from Ben Cunningham, who raised the interesting point in his e-mail to me about what these businesses can teach us about the estate tax. These families not only build good companies, but profitable ones, as well. Is it not in the public interest to try and support these businesses rather than try to tear them apart through the burdens of the estate tax?

A common practice in writing business plans is to offer three scenarios: most-likely, best case and worst case.

When I see worst cases presented in most business plans, they are almost always not the worst case scenario. They are most often a less optimistic variation of what the entrepreneur thinks will actually happen. The real worst case should be this: if things don't go as planned and the deal fails, what is the outcome for investors and lenders?

Entrepreneurs seem to operate under the assumption that if they don't plan for failure, it can't happen. If they don't ever address the real worst case, investors and lenders won't think about it.

I get push back on thinking and planning for worst case from my students. "Don't you think my idea is any good?" That is not the issue here. Even good ideas can fail, as most opportunities come from a dynamic, changing environment.

All of this came to mind after a conversation yesterday with my father. We were talking about a potential deal, and he made the statement that he wants "protection" in a deal. That was an interesting word to me. After all, we aren't a bank that can get a personal guarantee on debt. Any investment would be at risk.

But, he meant something else. He simply looks at every deal and imagines what it will look like if it goes bad. What can he hope to take away from it? He thinks this way because his generation saw the ultimate worst case -- they lived through the depression. It is not that he is risk averse as a result -- to the contrary. Rather, he is always soberly realistic that deals go bad, and we should understand where that will leave everyone involved. That is a perspective that we seem to be losing in our society.

Failure is real, and it can happen to even the best among us. So plan for it. Just in case it does happen, and hopefully the odds of that are slim if you have done your homework, you will be ready to move on to the next opportunity. You will have created a deal in which you have actually planned the worst case and have created a business where the worst case is not the end of the world for you -- just for that deal.

And just so you don't go in the wrong direction with this, your outcome in the worst case should not be to declare bankruptcy for the deal. That is a reputational scar you do not want in your background as an entrepreneur if you can avoid it. To plan for bankruptcy is in my opinion, unethical. Once in a while it unavoidable, but that should not be the predetermined plan.

Don't be in denial about the worst case. Understand it. Plan for it. Make it an outcome you can move on from.

Married couples are now a minority in America, according to a recent article in the New York Times.

Reflecting on this, columnist Cal Thomas puts at least some of the blame where it belongs -- on those of us who are the Baby Boomers:

My generation has been obsessed with making money and acquiring things in place of investing necessary time on marriage and children. The message the kids get is that if marriage is mostly about accumulating wealth and acquiring stuff, they can do that without getting married.

Family trees are beginning to resemble kudzu....

The Entrepreneurial Generation (those 25 and under) places the blame in the same place (see Michelle's comment on this post as an example of how they feel). They want to try to work hard on both their careers and their families. For the sake of both our culture and of this great country, let's hope they get it right...