A Psychiatrist's Guide to Succession Planning

Volume 26 No. 05


Mark Heitner, M.D., MBA, lives in San Francisco.

The struggle to bequeath a family business to a relative is the stuff of history, and many family business owners know the agony of King Lear all too well.

One-sentence Description: The struggle to bequeath a family business to a relative is the stuff of history, and many family business owners know the agony of King Lear all too well.

The struggle to bequeath a family business to a relative is the stuff of history, and many family business owners know the agony of King Lear all too well. Unique as passing a kingdom from one generation to the next is, succession of present-day businesses presents its own set of modern challenges. Family problems can delay a legal consultation and often frustrate the planning process. There are two kinds of unintended consequences of this delay.

First, clients fail to use powerful estate planning instruments. US Trust summarized the problems of the ultra-wealthy as follows:

  • Although 88% have an estate plan in place involving a will and beneficiary, 39% acknowledge that their estate plans are not comprehensive.
  • Clients consistently underuse sophisticated tools. Nearly half (48%) of wealthy individuals surveyed have not established a revocable trust, and 7 in 10 (72%) have no irrevocable trust, either. Three-quarters (78%) do not have a life insurance trust and nearly 9 in 10 (88%) have not established a charitable trust.

Second, the value of the asset diminishes. The achievements of the business are due in part to the founder’s leadership, indefatigable energy, technical knowledge, and business network that he has created. This skill set must be transmitted or it will perish with the founder.

Could a Lawyer Have Saved King Lear?

Getting his ear would have been the first step. Court jesters did this with sly-witted punditry. Psychiatrists now do this by asking exploratory questions. Candid questions cause family dynamics to be divulged. Asking these questions will not embroil the attorney in family pathology or rancor.

The first section of this article describes the most common clinical scenarios likely to derail succession planning. The second calls out strategies for fixing a process that has gone astray.

Begin at the Beginning

Perhaps the most important question an attorney can ask the client is, “Why have you made the appointment today?” Timing is everything. The issues that retard estate and succession planning may have been present for decades. It is significant that the issues are being brought to the attorney’s attention on this specific date. Some event has set in motion forces that have overcome inertia and created a propitious moment.

What is it? The client’s answer to this question creates the emotional context for the ensuing discussion and kindles the development of the client’s trust in the attorney. Candor in the conduct of the interview can foster credibility with the irresolute client.

Planning Paralysis

The next crucial question to ask is this: “What, or who, has thwarted succession planning?” The answers to this question capture the essence of the problem. The myriad answers provide insight into subtle and not so subtle explanations about why the incumbent will not step aside, even when the incumbent yearns to step aside.

“The business will fail without me.”

The client’s refusal to surrender control of the company is the principal obstacle. Clients fear they may be demoted from the central role in the family. So the client often creates a vision of the debacle that retirement would bring. This vision is then baked into the family belief system.

Candidate successors have little hope of being given much opportunity. It is highly dissatisfying to have ability without the opportunity to use it. A family business CEO’s greatest accomplishment may be in relinquishing the CEO role to a talented successor.

But then what if the heir apparent actually does not have the prowess needed? What if there is a dearth of candidates? The founder faces painful choices that may have been postponed for a decade or more.

“They don’t want to run the business.They are too lazy to run the business.”

The heir apparent may in fact have the talent to manage the business. One prerequisite for success is that stakeholders must have confidence in the candidate CEO. The founder, management, and family must believe the heir has the ability, desire, and energy to run the family business. Without faith in the heir’s ability and motivation, the heir will not be trusted, and there will be no commitment of resources to the heir’s success.

This lack of commitment manifests itself by failing to train the candidate successor. Unlike other executives, successors are not given enough responsibility to fail and to learn from their failure. They are given insufficient exposure to the business. Heirs may be thrust into roles for which they are ill-suited or given assignments without clear delineation of roles, goals, and responsibilities—or even a sense of how their work will be reviewed. All too often, they are inadvertently set up to fail.

Heirs are often unwittingly made two promises, which appear at first glance to be meant as reassurance. When it comes to the matter of succession planning, though, they are the kiss of death. The first, “there will always be a place for you in the business,” makes the family business the employer of last resort. It can easily be construed as a vote of no confidence. The upshot is the desultory pursuit of a career, one that somehow never gains much traction.

Promise number two: “You will never have to work.” This promise, made to an heir before employment at the family firm, is reassuring, in a way. But to the heir it may mean that the heir’s accomplishments involve no risk and therefore require little discipline or persistence. Further, the heir may think that it is pointless to make much effort to succeed, because his accomplishments will pale next to the parent’s. To not have to work means, ultimately, that you don’t have to grow up. This is cold comfort for a prospective successor. Those who succeed will have had ample opportunity to learn the business and to develop trusting relationships with all of the constituents that comprise a family business.

“I’m too young.”

Clients have to overcome their aversion to dealing with death to complete estate planning. At a minimum, the client must discuss the thought of not being involved in the business at some future date. It goes against the grain to spend energy imagining one’s exit from the firm when one has spent the better part of one’s life’s energy building it. But the CEO must move on.

“What does my spouse think?”

The spouse can be a strong advocate or a tenacious opponent of succession planning. This turns on three important matters. First, succession planning can be seen as the onset of raw, undisguised family hostilities, or as a way of settling conflicts. This may be a particularly distressing matter if there is a choice to be made between the children or between the spouse and children. Second, the spouse has often played several roles within a family business, among them the éminence grise. The spouse may welcome those changes or fear no longer being in the limelight. Third, the old saw, “For better or worse but not for lunch,” applies here. Succession planning may awaken a raft of unresolved disputes as the incumbent stops devoting every waking hour to the firm and comes home. The spouse’s despair may render this process futile.

“I hate watching TV.”

Nearly half (47%) of wealthy family business owners report that there have been consequences associated with accumulating their wealth, including not taking enough time off, being too busy to spend time with family, mishandling personal relationships, and even letting their physical health suffer. Nevertheless, succession planning is often delayed until the incumbent becomes too ill to work.

The incumbent may have no notion of retirement. It is now generally understood that retirement implies starting a new business, traveling, philanthropy, volunteering, and continued routine use of the skill set that has taken decades to develop.

But having many options in retirement does not mean that the incumbent has given them a moment’s thought. Instead, the incumbent is haunted by two unthinkable thoughts: not having to go to work or, worse, feeling unwelcome at work and wondering how to fill the empty hours of doing nothing. Incumbents must reinvent their lives, which can be liberating. They do this or succumb to stagnation.

The incumbent may announce retirement only to move one door down from the corner office. How many new CEOs are able to effectively lead when the former CEO or majority shareholder sits in the office next door? Optimally, the incumbent will withdraw from daily management of the firm and assume a stance best described as “Nose in, hands off.” (Pay attention but don’t interfere.)

Secrets of the CEO: What the Client May Not Tell You

According to Freud, the mind is like an iceberg—it floats with one-seventh of its bulk above water. Both patients and clients fail to disclose problems, either because they do not know or do not want others to know that they exist. The estate planner should be mindful of two problem areas that make for particularly stormy succession planning.

Sick Family, Sick Business

Consider the family and the family business as one psychological system. An illness in the family will generate an illness in the family business. The family business can suffer a psychological cancer.

Unhealthy family relationships are replicated in a business setting, and the family pathology is inflicted on the business. The wealth generated by a family business can allow the family to continue its dysfunction from one generation to the next. For example, a highly critical and demanding father is probably a critical and demanding boss. This person will create a charged emotional climate in both settings. Family members who are employed at the business are subjected to this all day long and may be warped by it. The successor that emerges from this poisonous environment is likely to be ravaged by this lifelong experience and prolong unhealthy relationships and management practices into the next generation.

Chronic conflict, outright nepotism, clashing personalities, intolerable incompetence, and stunningly self-destructive behavior characterize these firms. Ill family businesses have in common the emotional dependency they create in their members. This dependency manifests itself as the inability to leave. Family members who are employed by the firm may consider themselves as prisoners of the family business. Information about family illness may not be forthcoming without interviewing family members.

Alcoholism, Addiction, Bipolar Disorder, and Depression

Families and family businesses suffer from many psychiatric illnesses, but alcoholism, drug abuse, depression, and bipolar disorder cause the greatest devastation. These illnesses have in common the propensity to reoccur and to substantially disrupt a person’s job performance, interpersonal relationships, and social judgment.

The business costs of alcoholism and depression are staggering, but the failure to address them can be larger. Many costs resulting from alcohol abuse cannot be measured directly. This is especially true of costs that involve placing a dollar value on lost productivity.

There is a metric, however, for assessing the time lost to illness. The disability-adjusted life year (DALY) is a measure of the disease effects, expressed as the number of years lost because of ill health, disability, or early death. DALY assumes that the most appropriate measure of the effects of chronic illness is time, both time lost because of premature death and time spent disabled by disease. One DALY, therefore, is equal to one year of healthy life lost.

A November 2011 study by the New York City Department of Health and Mental Hygiene measured the leading causes of DALYs in 2005. Major depression was the second leading cause of DALYs, behind only heart disease. Alcoholism was fourth.

Online tests can identify conditions that warrant professional evaluation but are not by themselves tools for diagnosing any type of health or mental health condition:

  • Alcoholism: Alcohol Use Disorders Identification Test (AUDIT),
  • Depression: Beck Depression Inventory, and
  • Bipolar Disorder: Mood Disorder Questionnaire (MDQ).

These are not, by themselves, used for diagnosing mental health conditions.

What Comes After Issue Spotting?

Issue spotting begins during the first interview with the new client. The obstacles to succession planning can resemble a Gordian knot and admit no easy answers. Epiphanies are rare.

The attorney should marshal a team. Family problems are multidimensional and interdisciplinary. Each of the clients’ advisors—CPAs, investment managers, and attorneys—work within their silos but seldom work together.

A meeting of these advisors can be exceptionally productive, and it is strange that they are so rare. Imagine what might happen should a patient’s surgeon, cardiologist, and anesthesiologist never collaborate. The client’s advisors, acting as an assiduous team, can get a client’s buy-in to solutions that clients may be otherwise unwilling to embrace. Of course, the client must agree to a meeting of the advisors, and privileged information must be kept privileged.

The attorney can propose exploration of four options, without venturing close to the quagmire of family pathology. But first, the attorney must educate the incumbent about what can be reasonably attained. The advisor can explicate the meaning of success, to frame the conversation.

What Is Succession Success?

Success can be best defined as:

  • The next generation of senior managers becoming the genuine and effective leaders of the business without substantial business or family disruption or
  • the business is sold in such a manner as to be recognized as a well-executed transaction.
  • In either case, major stakeholders feel that their interests were not unduly compromised, and they were treated in a respectful manner.

Myron Sugarman, a San Francisco attorney, suggests a more operational version of success. Too much of a non-employee owner’s assets are in an entity (the family business) over which the owner has no control. Therefore, Sugarman posits that an optimal arrangement involves:

  • Creating mechanisms for regular distributions of or access to cash in amounts greater than other investments, coupled with
  • an overall situation in which each owner’s interest in the business represents a reasonable portion of his or her investment assets.
  • Non-employed owners are most likely to be happy with an interest that

—represents a reasonable portion of their investment assets,

—grows at a greater rate than the S&P index, and

—generates “spendable” cash efficiently and regularly.

• Some form of an exit strategy, whether an ability to sell the interest to the other owners or force liquidation of the entire enterprise.

Four Potential Remedies

The Sale of the Company

Unless succession planning has been well managed before initiating estate planning, the odds of a successful intra-family transition are long. The owner’s poignant efforts to put a plan in place may be too little too late. The fact that the incumbent has not systematically pursued this goal is a measure of the obstacles that have blocked this process, not the least of which is the incumbent’s willingness to come to terms with the many issues noted above. Relinquishing the idea of intra-family succession is akin to awakening from a dream of unrealistic business fantasies.

That said, the largest obstacle to the sale of the business is the profound unwillingness of the owner to want to sell. Deals fall apart over psychological issues far more often than price. A family business consultant can prevent these deal breakers.

The sale of the family business might be a successful business outcome, even a best-case outcome. Clients may feel some comfort in being reminded that the Rockefellers sold Rockefeller Center.

Outside Board of Director Members

The lack of outside board members is perhaps the Achilles heel of a family business. David Leibell reports that 52% of family businesses had boards that met fewer than three times a year. According to Leibel, boards that meet fewer than three times a year provide little effective support of management or the shareholders. Of the active boards, only 25% featured two or more independent directors.

Most boards comprise family members or senior managers. They are too dependent on the incumbent to offer the perspective of an unbiased party. Their acquiescence to the CEO may constitute dereliction of their fiduciary responsibilities.

The board may chafe against outside interference notwithstanding its own abysmal performance. Cronyism can result if the qualifications for board membership are not explicit. The process of integrating an outsider with a dysfunctional, family-dominated board can be vexing.

Outsiders may offer trenchant criticism that roils the board. They are not beholden to the founder. Therefore, they can guide the corporation through the exigencies of succession planning.

Outside board members hopefully bring with them a sense of the fierce urgency of now. This sense, that now is the time, can be an antidote to the inertia that derails the planning process. They can put discussing the CEO’s retirement, the selection of a new CEO, and the preparation of the company for sale on the board’s agenda.


A founder’s greatest fear is that the family’s accumulated wealth will corrupt his or her children. The opportunity to involve a problematic heir is one often-overlooked benefit of a family foundation. Running a foundation may be an errant heir’s sole productive activity. It provides an heir an opportunity to become financially literate and learn about operating a business. The heir can develop a passion for using wealth to solve a social ill while learning how to manage a new venture. This brings a sense of purpose and competence and teaches the value and meaning of wealth. Another serendipitous result can be that the founder connects with the heir through collaboration on the foundation. This can even be the genesis of the heir’s interest in the family business.

The Single Family Office

The ultimate objective of a family office is transgenerational wealth management. Creating one can cause a sea change for the family insofar as the emotional issues are addressed. The office can be created or modified or aligned with the business succession and estate planning process. A single family office (SFO) can be designed to provide a structural solution to contain the various family businesses, family wealth, and psychiatric issues that constitute succession planning. It can help remove families from ongoing involvement in the primary family business, inasmuch as the family office is often designed to serve second and third generations of wealthy families. A Wharton study found that the average SFO serves 13 households and 40 family members.

Incidentally, estate planning is identified as a very important benefit by more than half of SFO participants. Outside counsel is sought by 93%.

Beyond their cost, however, there are a number of caveats in creating SFOs. The overall management and structure may simply replicate the problems in the family and the family business and fall prey to sabotage as a result. The choice of the head of the family office most likely determines its performance. A properly designed SFO should provide the structures for managing change and a process for transferring assets and power to the next generation. Hurdles abound. But family business consultants can help design a migration plan or manage an impasse that arises in toxic, refractory families.

A second or third generation family may have a long established SFO that has replaced the operating business that created the wealth. There may be trusts or joint ownership that involve many groups of cousins, all with different agendas and understandings of the facts.

Experienced managers of these SFOs understand the definitions of success noted above and have seen how cabals of cousins can press their goals to their detriment and to the detriment of others. Championing change may involve substantial risk. Direct sabotage of the SFO, interminable stalemates, and relentless invectives can predict a fiasco.

Family business consultants can facilitate a resolution of the acrimony and greed. At times, a system-wide approach, involving discussions of family values, a family mission statement, and a family constitution, is quite beneficial. This approach is helpful when the goal is to increase cohesion among family members. Mission statements, however, may be no more than lies agreed on and a poor substitute for straight talk. A “family mission” may be an oxymoron. A family constitution can be unnecessary, and even counterproductive, by leading to analysis-paralysis. More family consultants are now using a problem-oriented focus with measurable results.

Many Receive Advice, Few Profit from It

Patients ignore their doctors’ admonitions to stop smoking just as clients reject their attorneys’ advice. But attorneys can borrow a page from the psychiatrists’ playbook. Psychiatrists focus on the doctor-patient relationship to create a therapeutic alliance with patients. They then construct a plan together. This alliance facilitates patients’ adherence to a prescribed course of action. This kind of psychological approach to the attorney-client relationship also pays dividends.

Questions for Each Interview

Each new client deserves to be asked what his fears are about the succession planning process. Psychologically oriented questions should be incorporated into the standard question set for any new client. The answers will show the attorney how to be the client’s best advocate.


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