If you’re interested in family businesses, you’ve probably heard about the notorious case of the Boston-area grocery chain, Market Basket. Watching this family business melt down on national news has been fascinating and shocking—and a good lesson for the rest of us in the importance of managing our family relationships just as carefully as we manage our businesses.
There are so many layers to the story.
- The company began in 1917 as a small storefront owned by Greek immigrants. Over time, the business grew into a multi-billion dollar supermarket chain.
- The second generation had two brothers, George and Telemachus Demoulas, who worked side by side. George died suddenly in 1971, and Telemachus took control. Telemachus was sued by George’s branch of the family because he was diverting assets and stock shares to his own branch, according to an article in the Lowell Sun. George’s children and widow won the lawsuit against Telemachus, and were awarded 50.5% of the company and $206 million.
- In recent years, the board has been fairly evenly split between the two branches of the family, and has always voted along branch lines. Shockingly, a minority shareholder, George’s daughter-in-law Rafaela, has the deciding vote on all board decisions. In 2008, Rafaela’s deciding vote made Arthur T. Demoulas, Telemachus’ son president.
- But in June 2013, Rafaela switched sides back to George’s branch of the family, giving them the majority vote. After a year, they fired Arthur T. At that time, Arthur S. Demoulas, George’s son, became president of the company.
- Amazingly, upon hearing that Arthur T. had been fired, management walked out and the majority of employees and customers protested. Employees showed support for Arthur T. by not coming to work, and customers joined the cause by shopping elsewhere. The protestors succeeded in bringing the grocery stores’ operations almost to a halt during the impasse, and the business lost significant revenue.
- Arthur S. was forced to sell the company. There were several interested bidders initially, but only Arthur T was willing to buy the company at non-distressed prices.
How to avoid becoming the next Market Basket
The story is enough to bring out the voyeur in anyone, but let’s focus on the take-aways in this situation.
In my experience, families can never recover from a lawsuit between different branches. You can’t undo that kind of pain and suffering. That’s why it’s so important to make sure you never get to that point. (link to relationships post)
What’s most remarkable about the Market Basket case is that one person with a relatively small position was able to control the company. Everybody else was so entrenched in their own side that Rafaela, who had a 4 percent share and was trustee of another 1.5% in the company, was the controlling vote. This is an example of what happens when families fail to think strategically, and vote with complete irrationality along branch lines.
This is another reason it’s important to make every member of the family feel included, and to develop each individual’s skills and experience. You never know when their vote may decide the fate of the entire company.
In the case of Market Basket, there was no distinction between the family, the business and the board. The family’s battles were brought into the boardroom and even into the business itself, which is evident because of the loyalty battles among employees. And when family fights are impacting the business, it becomes almost impossible to hold onto good talent. People who are really talented will not stick around in a chaotic environment.
The kind of branch mentality that developed at Market Basket is one of the biggest risks a family business faces. When people set up their boards and their family councils along branch lines, they never break out of that branch mentality. They wait to see what the branch is doing and they vote with it or against it. To me it means that people aren’t thinking as individuals, but are letting their allegiance to their own branch of the family to decide their actions for them.
The other problem with focusing on the branch, rather than the individual, is it creates an attitude of entitlement. In such situations, individuals don’t focus on their own personal development to become qualified for their role in the family, the business, or the board. Instead, they wait to take on leadership only when their branch of the family gains power, making them ill-prepared to lead the whole company.
Focusing on the branch makes it much easier to avoid difficult conversations. If someone has a leadership position because their branch has gathered enough votes to gain control, their performance isn’t evaluated. The family doesn’t have a chance to say whether or not a person is qualified or underperforming. Being part of the right branch is qualification enough. Establishing true qualifications, developing a mechanism to measure a person’s role readiness, and providing real feedback along the way is very difficult in a family, but it is of paramount importance if the family wants to be the best possible partner with the business. It is important to have qualified individuals in leadership because there is so much at stake, not only for the long term well-being of the family, but for the long term success of the business.
The risk of falling into a branch mentality is lessened when families invest in inclusiveness, transparency and relationships. All of those things are equally important. Good stewardship is not just about how you manage the business. You also have to be stewards of your relationships.