Grooming a Successor Autocrat? Not so Fast!

Autocrat (def.) a person having unlimited power.

Highly successful entrepreneurs become autocrats inside their companies. Benign sometimes, benevolent sometimes, approachable perhaps, but no one doubts who has the last word, who makes the final decision. Beloved by some employees, feared by all, the autocratic entrepreneur rules.

I have encountered a number of entrepreneurial autocrats who are grooming their successors to rule as they have ruled: absolutely.

Problem is: family members (and often employees) won’t accept successors’  autocratic leadership styles. The pushback runs like this:

“We took it from him but we’re not going to take it from you!”

His father and uncle groomed Jay Schottenstein as their successor autocrat to rule their rich retailing empire with an iron hand. Headquartered in Columbus, the Schottenstein name carries lots of weight in Ohio. Indeed, basketball star Lebron James nominated Jay for Time magazine’s list of 100 most influential people.

Jay’s sisters Susan and Ann (who don’t hold him in such high esteem) are demanding that Jay be removed as trustee of trusts that hold big stakes in family brands such as American Eagle Outfitters, DSW, Cannon, Bugle Boy and Steuben Glass. After a quiet year-long court battle Forbes magazine broke the story (“The Schottenstein Family Feud, June 30, 2010.)

In their lawsuits, his sisters allege that Jay (who inherited twice as much as his sisters’ families) used his office as trustee to favor his own children over theirs, failed to make adequate distributions to his sisters’ families, imprudently invested trust assets (e.g. with Bernie Madoff) and used his trustee powers to elect himself as chairman of important family companies thereby acquiring valuable stock options that diluted his sisters’ shareholdings.

Jay responded that his sisters were simply bitter and resentful that he was left in charge and with a double share for himself, that all beneficiaries had received lavish returns as a result of his management, and counterclaimed for compensation as trustee.

The Schottenstein autocracy apparently extends to affiliated public companies controlled by a family holding company. (Forbes, “The Wasteland” November 24, 2003.) The holding company charges its affiliates fees for legal services, benefit plan work, insurance administration, store planning and design, importing merchandise and real estate management.

The charter of one affiliate permits its officers and directors to give preferential treatment to the parent holding company without violating their fiduciary duties. So long as they follow prescribed procedures, management and the board may make choices that adversely affect the affiliate’s best interests. Moreover, the family holding company may “cherry pick” business opportunities for itself while absolving its officers and directors of liability to shareholders of publicly held affiliates for doing so.

Siblings may tolerate an autocratic father, but not an autocratic sibling. This is the lesson of Schottenstein and the families I’ve encountered who have tried to impose a successor autocracy upon unwilling siblings.

It’s hard enough for a sibling to function as first among equals.

Start succession planning there.

Forget successor autocracy.

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