Family Business

Authors say Titanic sinking provides lessons for family businesses

May 26, 2012 

I read a family business book the other day that was so interesting that I am compelled to write a review about it. “Sink or Swim: How Lessons from the Titanic Can Save your Family Business,” written by Priscilla M. Cale and David C. Tate, is about how the causes of the sinking of the Titanic parallel the reasons behind why family businesses fail. The book focus on five key flaws:

Overconfidence. The public relations machine of the Titanic’s owners, White Star Line, called the ship “unsinkable” and broadcast that message so aggressively that even the owners and employees believed it. The captain sped through the icebergs, even though he received multiple warnings, there were not enough lifeboats, and many passengers didn’t even get into the lifeboats when the ship was sinking!

Similarly, family businesses can suffer from over-optimism about business performance and underestimation of risks. This can lead family businesses into risky ventures, unrealistic goals and the suppression of bad news. Other characteristics can include arrogance, a grandiose sense of self-importance, entitlement and lack of empathy for others.

Ineffective leadership. Captain Edward J. Smith neglected the ice warnings and did not pass the information on to the members of his team. Moreover, he failed to relay decisive commands during the crisis. At the same time, the White Star Line owner, Bruce Ismay, circumvented Smith and instructed the chief engineer to run the ship at maximum speed.

Effective leadership in a family firm is critical. The book expounds on this idea by presenting 12 leadership challenges for a family business. It also explores non-family leadership, boards of directors and family councils. It notes that family business leaders must have high emotional intelligence.

Lack of planning and preparation. The crew of the Titanic failed to plan how they would navigate through an iceberg zone, to have enough lifeboats, or how to evacuate the ship in an emergency. In the end, 68 percent of the passengers died. Coincidentally, family businesses fail at virtually the same rate as the death rate of Titanic passengers on April 15, 1912. Authors Tate and Cale show how planning and preparation can greatly improve this statistic by outlining key areas where planning should take place, including succession, business strategy and estate planning.

Frail architecture. While the Titanic boasted a double bottom and watertight compartments, it skimped on materials and labor to save on costs. Hence, the damage to the ship was much worse than it should have been. Another flaw is that the main engine could not go in reverse, only the small outer engines could. Thus, in reverse the thrust was too weak to turn the ship and it is argued that had the crew simply turned the ship, it might have missed the iceberg.

The authors compare the Titanic architecture to the governance structure and policies of a family business related to the core operational areas of a business. If they are not constructed well, they will break under stress: shareholder agreements, business valuations, and estate plans. This plan clarifies objectives, ensures wealth transfer and minimizes taxes. Having all of these elements appropriately in place for your family business will help avoid “icebergs.”

Team fragmentation. The Titanic had three major team breakdowns. Captain Smith rearranged the senior officer team just before the voyage, pushing off the officer who had access to the binoculars for the lookouts, and the people receiving the iceberg warnings did not work for the ship and were paid to send messages, not receive them. The captain did not receive the last ice warning only 45 minutes before the collision. Family businesses have an inherent potential for team fragmentation. All family members bring their own family baggage and have “invisible fault lines” that can crack a family team apart under stress.

The authors of “Sink or Swim” have done an exceptional job describing the causes of the Titanic disaster and drawing parallels to family business issues. In doing so they drive home the importance of taking action before it is too late. So if you are a family business leader, be sure to heed important warnings, check the lifeboats and make sure your crew is working as a team.

Henry Hutcheson is a nationally recognized family business speaker, author and consultant in Raleigh. Send questions to henry@regeneration-partners.com.

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