Thursday, July 27, 2017
The Limits of Stage 3 Planning: Part 1
By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman
Welcome back to the blog, where we hope to provide you with tools and resources that could benefit any family business.
Now that we’ve discussed the process of “Stage 3” planning and its component parts, it’s time to examine its limits, which we’ll do over the next two weeks.
We credit many of the family business consultants with having made important contributions to their clients—and the field—through “Stage 3” planning initiatives by seeking to focus on critical inter-personal issues, and providing important perspectives to those traditionally offered by lawyers, accountants, and financial advisors.
Notwithstanding these important contributions, many families in business together continue to struggle, and available data suggests such initiatives remain inadequate for the task(s) at hand. There are undoubtedly a variety of factors that contribute to the suboptimal results of contemporary family business planning including, for example, the lack of strong commitment to the process because of the ongoing press of business, the unwillingness of some family members to engage in the process with a requisite level of enthusiasm, or, frankly, the lack of business acumen by some family members.
We believe the most important reason contemporary family business consulting strategies fail to accomplish their objectives, however, is because such strategies—whether “Stage 1,” “Stage 2,” and/or “Stage 3” strategies— are too often informed by outdated assumptions that date centuries back to economists like Adam Smith and John Stuart Mill, who posited that individuals are “rational” and act on the basis of complete knowledge and the desire to maximize economic returns and wealth. Such planning fails to appreciate insights from new fields of study, such as neuro-economics and behavioral economics that, for example, are demonstrating our propensity to acquire rewards and avoid losses, the role of emotions in decision-making, strategic decisions and social decisions, etc.
Consequently, traditional planning fails to address considerations such as family members (1) not being nearly as rational and unbiased as assumed, (2) having imperfect memories or (3) retaining a “fight or flight” response that, today, generates overreactions due to “fear based” thinking.
Tune in next week for our second installment of the limits of “Stage 3” planning, where we’ll be discussing the causes of negative emotions and behaviors that can lead to incivility and infighting in the workplace.
 See supra notes 11–12 and accompanying text; see also, Wayne Rivers, Family-Owned Business Planning Done WRONG, Fam. Business Inst. (Nov. 4, 2015), https://www.familybusinessinstitute.com/family-owned-business-
 See, e.g., John Stuart Mill, Utilitarianism 2-3 (1901) (“All action is for the sake of some end, and rules of action, it seems natural to suppose, must take their whole character and color from the end to which they are subservient.”); Adam Smith, The Theory of Moral Sentiments 311-12 (New York, Augustus M. Kelley 1966) (1759) (“The prudent man always studies seriously and earnestly to understand whatever he professes to understand, and not merely to persuade other people that he understands it . . . He neither endeavours to impose upon you by the cunning devices of an artful impostor, nor by the arrogant airs of an assuming pedant, nor by the confident assertions of a superficial and imprudent pretender: he is not ostentatious even of the abilities which he really possesses. His conversation is simple and modest, and he is averse to all the quackish arts by which other people so frequently thrust themselves into public notice and reputation.”).
 See, e.g., Paul J. Zak, Neuroeconomics, 359 Phil. Transactions Royal Soc’y London B: Biological Sci. 1737, 1737 (2004) (“Neuroeconomics is an emerging transdisciplinary field that uses neuroscientific measurement techniques to identify the neural subtrates associated with economic decisions.”).
 See generally, e.g., Richard H. Thaler, Misbehaving: The Making of Behavioral Economics (2015) (describing how the study of human miscalculations reveals that we all succumb to biases and make decisions that deviate from the assumed standards of rationality, often resulting in serious consequences in our lives and businesses).
 “The traditional view in economics is that individuals respond to incentives, but, absent strong incentives to the contrary, selfishness prevails. Moreover, this ‘greed is good’ approach is deemed ‘rational’ behavior.” Paul J. Zak, The Neuroeconomics of Trust, in Renaissance in Behavioral Economics: Essays in Honor of Harvey Leibstein 17 (Roger Frantz ed., 2007). Nevertheless, in daily interactions and in numerous laboratory studies, a high degree of cooperative behavior prevails—even among strangers. “A possible explanation for the substantial amount of ‘irrational’ behavior observed in markets (and elsewhere) is that humans are a highly social species, and to an extent value what other humans think of them.” Id. at 18.
 See, e.g., Gary Marcus, Kluge: The Haphazard Construction of the Human Mind 15 (2008) (“Mainstream evolutionary psychology tells us much about how natural selection has led to good solutions, but rather less about why the human mind is so consistently vulnerable to error.”); Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness 37 (2008) (“The picture that emerges is one of busy people trying to cope in a complex world in which they cannot afford to think deeply about every choice they have to make.”). As a result, for example, the failure to constitute a board of directors or an advisory board that includes non-family members can result in poor decisions by families without sufficient experience and expertise to make thoughtful judgments, as well as decisions that, fairly or not, are perceived as biased and favoring one family member, or branch of a family, over another. See Koren, supra note 64, at 36.
 As a result, the failure to reduce agreements on important subjects to writing can create diverging recollections as to what was agreed to. See Michael J. Conway et al., The Family Owned Business, Pepp. Univ: Graziado Bus. Rev. (2007), http://gbr.pepperdine.edu/2010/08/the-family-owned-business (noting the dangers for family businesses that fail to reduce agreements to writing). For a general discussion of memory issues, see generally Daniel L. Schacter, The Seven Sins of Memory: How the Mind Forgets and Remembers (2001).
 See infra note 109 and accompanying text. Failing to develop thoughtful and consistently applied principled policies and plans can lead to the perception, whether accurate or not, that decisions and actions are driven by bias and self-interest, diminishing intra-family trust and a shared commitment to the family’s success.
Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev., May, 2017
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