WOLVES CHANGE RIVERSDANIEL A. GUGLIELMO

LOOK DEEP INTO NATURE, AND THEN YOU WILL

UNDERSTAND EVERYTHING BETTER.

ALBERT EINSTEIN

WOLVES CHANGE RIVERSDANIEL A. GUGLIELMO

Forward vWhat Others Are Saying viiAcknowledgements ix

Introduction 1Lessons from Nature to Bolster Business SuccessionSuccession Is Your ResponsibilityThe ChallengeA Generative Succession Is the Way Out

Part I: Generative Abundance 11We Are Generative By NatureHow Generous Are You?Teaching Men to Fish: A Case StudyGrowing a Generative Culture: A Case StudyWhat Your Core Values Say About Your CultureArticulating Your Core ValuesStewardship Is LeadershipMoney Ball + Stewardship

Part II: Embracing Necessary Change 27First the InsightWhat’s Keeping Us Stuck?Moving from Insight to ActionCarl’s StoryCarl’s Immunity ChallengeCarl’s InsightsMoving Toward ActionLessons from Carl

Part II: Embracing Necessary Change (cont.)Hire an Executive Coach & Find a Peer GroupCoaching V. AdvisingGetting From Here to ThereFind a Peer GroupThe Facilitator: Bringing the Peer Group TogetherPeer Groups Making a Difference: A Case Study

Part III: Anchoring the Succession 51Connect to What Really Matters1. Voice and InfluenceThe Succession Board: Sharing Strategic DecisionsMaking Your Succession Board Productive2. Personal Wealth Creation Connected to the Business’ SuccessDeferred CompensationOwnership as an Incentive3. Protecting Partners’ Interests: The Buy-Sell AgreementBuy-Sell Agreements: Rules of the GameFunding the Promises: A Word of Caution

Conclusions 73Three Key ElementsRegenerationRecognition and RewardRemember the Beginning

About the Author 83

Table of Contents

iii iv

I have known Dan for over four years. During that time, I have gotten to know him as a person and have seen the quality of the work he does with clients. What Dan brings to the table is not only deep competence, but profound compassion. His clients are lucky to have him in their lives and at their sides.

Books by such extraordinary people rarely express – with simplicity and clarity – the competence and compassion resident in the heart and soul of the author. This book is a happy exception.

In the pages that follow, Dan will take you on a journey. It is a journey that will not only help you practically transition your business, but will help to transform who you are as a person in the process. You will learn what is essential to lead a successful transition and to come out the other end without regret. In that process, you will become more self-aware, more effective and more fulfilled as a human being.

The succession transition you are embarked on is a fitting end to a “hero’s journey.” Your journey started when you founded a business. It continued as you built it. And now, after many trials and triumphs, you are coming home.

But it is a different home from the one you left. The journey has not changed the world you left…it has changed you. Your journey lifted you from the ordinary world as it was before and you return to the ordinary world a different person than the one who began that journey.

Whenever the stories of heroes come to their conclusion, the homecoming involves the full realization of a transformation. In the end of the adventure lies the discovery that the hero’s life is whole and complete without the need of the adventure to make it so. Too many business owners hang on for too long because they don’t know who they will be without the business. Too many succession books have no good answer to that central existential problem. Dan squarely takes on that issue and weaves it into the natural flow of the nuts and bolts of the process of transitioning the business. Coupling self-actualization with buy-sell agreements – and elucidating the intimate connection between them – make this book a powerful and singular contribution to the field. Only Dan could have done it this way. And this book has become Dan’s invaluable offering to you.

The people who will be reading this are not only business people looking to create a succession “plan,” but the advisors who help them. Too often, your work, out of necessity, focuses on the technical aspects of a transition. Beneath that is a psychology you understand well, but cannot adequately address. You find that the psychology affects the success of deals far more deeply than the technical aspects of your particular profession. You see

that at every turn. You have your job well-covered. It is what is not covered by your job where value is lost or even destroyed. This book helps you with the psychology of it in four ways: (1) It gives you more precise insight into what is going on with clients; (2) It gives you a new language to address that insight; (3) It gives you concrete strategic advice you can pass to clients; and (4) It provides you with something to give to clients that will be invaluable on their journey.

The adventure awaits. Bon voyage.

Matthew WesleyFounder and Family AdvisorThe Wesley GroupJanuary 29, 2015

TO BUSINESS OWNERS TO BUSINESS ADVISORS

TO YOU

FORWARD

v vi

vii

What Others Are Saying

“Thought provoking! As a business owner reading Wolves Change Rivers, I found myself planning while reading, as it provided affirmation on things I was doing right, reminders on areas in need of improvement, alerts on shortcomings, and important additions to my ‘to do’ list. This book speaks to the business owner in a way few other books do. It is not just a ‘must read,’ it’s a ‘must read again and again!’”

CHRIS M. MELLEN President & Founder, Delphi Valuation Advisors, Inc.; Co-author of Valuation for M&A: Building Value in Private Companies

“Dan brings a thoughtful, inspirational voice to the topic of exit planning and has created a unique contribution to the topic with Wolves Change Rivers. He speaks to your heart and your mind--and makes a convincing case that you need both to build and recognize the full value of your business. This is a must-have addition to any exit planning library.”

MARY ADAMSFounder, Smarter-Companies; Co-author of Intangible Capital: Putting Knowledge to Work in the 21st Century Organization

“I know of no one better qualified to write a book on the topic ofsuccessful succession planning than Dan Guglielmo. In his book,Wolves Change Rivers, he eloquently delivers the essence of whatis required to create and implement a successful succession plan.The primary ingredient is GENEROSITY, which describes Dan’sbook and his life’s work. He teaches us all to be better.”

STEVE SNYDEREntrepreneur in Residence, Gesmer Updegrove

As a shareholder of a 52-year-old privately-held business, mentioned in the book, I found Dan’s book inspiring and thought-provoking. I recommend it highly to any business owner who really is serious about seeing a business continue to a next generation of owners. I read the book at an interesting time, as we just completed a succession plan for the business, founded by my father, to pass to a third generation of shareholder/leaders. Much of what Dan wrote about in the book, both in terms of questions that needed to be addressed and obstacles to overcome, were the very ones that had us “stuck.” This book really gets at the core issues that keep leaders from executing this important task. It can be a great resource for getting you started (or finished) on taking the critical steps to let your business continue to a next generation.

LARRY J. RYBKA President & CEO, ValMark Securities, Inc.

Eventually, all organizations pass through a time of leadership transition and succession. The opportunity for the entrepreneur is to ensure that the transition to a successive leader positions the organization to move forward to new levels of success – to innovate and to accelerate growth. This can only happen if the process of succession is well-timed, well-planned and well-executed. Wolves Change Rivers provides those contemplating or in the midst of a transition with a thought-provoking primer on many of the issues to consider.

BRYAN PEARCEGlobal Leader, Ernst & Young Entrepreneur Of The Year

viii

ix

AcknowledgementS

Wolves Change Rivers is a mini, self-published book. It is nonetheless my first book, and I don’t think it will be my last. The experience has been extraordinary, and surprising. More than anything else, the experience is rich with self-discovery and emotions. I discovered that self-doubt can be managed. I also discovered how eager my colleagues and loved ones are to support and encourage me. I experienced a deep sense of fulfillment from the early morning ritual of waking, meditating and then writing. A sense of doing something important and right – a good and worthy use of my time – grew more convincing each day. Best of all is discovering how incredibly collaborative writing – even a mini-book – is. This book would not have happened without the courage and contribution of many others.

• Cindy Schumacher, my executive coach, you are a good and dear friend for life. Thank you for helping me see the way, stick to my guns and grow in self-awareness and self-trust, all of which lead to this book.

• “MJ” (Megan Joe Wilson), you are a prophet in my life. You changed my life when you publicly exhorted me to write because “I want to read the book you have in you!” The serendipity in that you were my first partner in the book as the editor is nothing short of remarkable; it is one of those things in life that is so perfect in its coincidence. Thank you for the shape and tone you helped me bring to the book. You helped me find my voice.

• Barry Michael Guglielmo, my middle son, you are a gracious and graceful young man – a philosopher-teacher. You were an intellectual partner early on when we discussed the generative notion, which became a central theme of the book. Your research is at the heart of the book son. Thank you.

• Barry Michael Burke, my favorite father-in-law, thank you for finding my typos and mistakes. There is something poetic about the role you play in my life. No doubt, there is a limerick here.

• Staci Eckenroth, you are good friend and now a colleague, fresh out of graduate school for creative writing. The timing of your arrival on the scene is evidence of the law of attraction. I marvel at the memory of the morning you casually picked up my final draft at the kitchen table, grabbed a pencil and began marking the transcript with subtle improvements. Your precision blew my mind. Staci, your eye for perfection is special and deeply appreciated.

• Debbie Prinz, I so value and honor our many years of collaboration. This one though is like no other. Your imprint on this book is massive. Your fingerprints are more like finger painting! Your encouragement meant so much to me because of what you have seen and done. I realize now that you were the project manager. You are part editor, big part graphic designer and part coordinator/ manager of Bethany Brown and Jennifer Baldwin who perfected the graphic design, as well as the web and social media interface, for which I am also grateful.

• Lisa Witschel, your interest in my work is a blessing. The timing of your introduction to Herman Hess and his book, Siddhartha, was uncanny. His quote in the book is for you and because of you.

• Tara Goodwin, you planted a seed and watered it. Your instruction on what I needed to do to have my voice heard is a big driver of this project. I love the way you speak into my life. Thank you.

• Matt Wesley, you inspire me and have from the day we met. Many of the themes running through this book were shaped and developed not only by our conversations, but also by books you recommended. You are a mentor and partner, and best of all you are my dear friend.

• Ann, my lovely wife, mother of our children and CEO of our home, you were so delighted when I sat down to do this - tickled may be a better word. You watched me, and when you did, I was encouraged by you. Had you not believed in me and supported me, this book could not have happened. Thank you.

x

INTRODUCTION

1

LESSONS FROM NATURE TO BOLSTER BUSINESS SUCCESSION

Small, strategic changes at the top can snowball into significant transformation in a short period of time.

Change from the top holds the most promise. This is true whether the alpha wolf at the top of the food chain or the CEO at the top of the organizational chart initiates the change. Change leading to improved health of the system is generative change. When the essential culture of the ecosystem is generative in nature, it becomes a self-sustaining system that is naturally inclined to seek out its own path to succession.

A magical example of the generative power in nature is in the trophic cascade, which George Monbiot artfully chronicles in the short video entitled How Wolves Change Rivers. According to Monbiot, a trophic cascade is an ecological process which starts at the top of the food chain and tumbles all the way down to the bottom. In this instance, it is the reintroduction of wolves to Yellowstone Park, gone

for some 70 years, which sparked the trophic cascade that Monbiot chronicles in his video.

With the return of the wolves, the deer move out of the valley and gorges to higher ground. The dangerously over-grazed valleys and gorges begin to regenerate. Aspen, willow and cotton wood trees flourish. The height of some of the trees quintuples in six years! Birds and beavers come back. Beavers get busy damming the rivers and creeks, recreating habitat for otters, ducks, muskrats, fish, reptiles and amphibians that had disappeared. The mice and rabbit populations explode because wolves kill coyotes, inviting back more hawks, weasels, foxes and badgers. Bald eagles and bears come down to feed on the carrion of the wolves. An increasing crop of berries also attracts the growing population of bears into the valley and gorges.

“But here’s where it gets really

interesting,” Monbiot points

out. “The wolves changed the

behavior of the rivers. They began

to meander less. There was less

erosion. The channels narrowed.

More pools formed. All of which

were great for wildlife habitats.

The rivers changed in response

to the wolves.”

Small, strategic changes at the

top can snowball into significant

transformation in a short period of

time. The wolves are an exquisite

and graphic example of the

natural, generative pull of Mother

Nature. It is also a powerful

metaphor for your business

succession, and your role as

the leader of the organization.

Given the right conditions, your

business culture will thrive and

recreate itself in a relatively

short period of time.

2

SUCCESSION IS YOUR RESPONSIBILITY

A STALLED SUCCESSION

IS A REFLECTION ON YOU,

AND TO SHAKE IT LOOSE

REQUIRES CANDID INTROSPECTION.

What’s going on at the top of your organization that’s getting in the way of your trophic cascade? This is an organizational question. This is first your question, and a deeply personal question. How you respond to the question may be life (generative) or death (degenerative) to the business.

The more pointed and better question may be: what is generative or de-generative in your current leadership posture, particularly as it relates to leadership transition? Are you getting in the way (or not getting out if it), and what’s keeping you from doing what you know the business needs to thrive and have a robust future?

A stalled succession is a reflection on you, and to shake it loose requires candid introspection. Let me say it again:

What’s keeping you from doing what you know the business needs to thrive and have a robust future?

4 5

The Challenge

You have owned your company for many years. It has supported a meaningful lifestyle, providing the means to raise your family, pay for your home and put your children through college. You have taken vacations and have had wonderful experiences. You have also faced sleepless nights and profound challenges that tested you at the deepest levels. You have always assumed that the sale of the business would be your big wealth creation event, or perhaps you dream of passing the business to your children. Or perhaps you are waking up to your own sense of mortality and an increasing urgency to do something.

You have little experience that prepares you to either sell the business that means so much to you, or engineer a generational transition that will work. You know how to run a business, but you are not at all certain how to leave it - or whether you really want to. You have heard horror stories about the two most common scenarios: owners who sell for far less than they should, and families who are torn apart by conflict. You have become acutely aware of the risks you are hearing about. The stakes seem to be increasing with time, and potential landmines are everywhere you might step. This new frontier can be paralyzing. And all this can leave you feeling stuck, trapped and exposed.

You know how to run a business, but you are not at allcertain how to leave it – or whether you really want to.

6

A GENERATIVE SUCCESSION IS THE WAY OUT

A generative succession stands on three big ideas: 1. Creating a generative culture; 2. Embracing necessary change; and 3. Anchoring the succession plan with the right financial incentives for the next generation of leaders.

1. CREATING A GENERATIVE CULTURE.The first big idea suggests that once generative attributes are nurtured into culture, the business becomes a high-value, low-risk enterprise. Yellowstone Park quickly became degenerative when the wolves were removed, and then regenerative when they returned. Risk is never eliminated from a commercial enterprise, but in a generative ecosystem with strong leadership, the system is naturally predisposed to minimize threats to its sustainability. Good health and regeneration is a hallmark of any generative system.

The generative nature that is ours is abundant and pervasive. We are all naturally predisposed to be generative, but due to our condition

as human beings with free will, we can miss it, deny it or decide to ignore it altogether. The good news is that because it is inherent in each of us, it can easily become widespread in our organizations, if only we pay close attention.

2. EMBRACING NECESSARY CHANGE – is the second big idea. Invariably, meaningful cultural change is driven from the top of the organization, much like the trophic change Yellowstone Park experienced when the alpha wolves were reintroduced to the system. Once you are clear on which generative attributes are needed to shift your culture, you must make it personal, focusing on what behavior shifts you need to make to spur your culture towards a succession.

3. ANCHORING SUCCESSION – is the third and final element. Here we get concrete and practical about how to design the right financial structures to align the next generation leaders with your plan for a generative succession.

Once generative attributes are nurtured into culture, the business becomes a high-value, low-risk enterprise.

8 9

GENERATIVE ABUNDANCE

PART I

Generative paths lead to resourcefulness, patience, and general creativity in all of life. They lead to cultural – and human – thriving.

MAKOTO FUJIMURA | ON BECOMING GENERATIVE: AN INTRODUCTION TO CULTURE CARE

11

WE ARE GENERATIVE BY NATURE

We are generative by nature, and this nature is in every aspect of the universe. The original cause – the power that unfolds the universe – is generative, with a big bang! Our nature, when generative, is to be productive, fruitful, gracious, creative and life-giving. It is the urge to procreate; but it is far more than the survival instinct – our generative nature moves us to thrive.

Maslow’s Hierarchy of Needs makes the point graphically. At the base of the pyramid, Maslow includes procreation as

a foundational element of human development, which is followed, in ascending order, by the need for safety, love and belonging, self-esteem and, at the pinnacle of the pyramid, self-actualization. As we make a conscious effort to thrive in a moral sense, we begin living out generative values and behaviors. Not only are these values contagious to those around us, they naturally tumble into future generations as learned behaviors. Over time and with persistence, a self-sustaining, regenerative culture can blossom.

Over time and with persistence, a self-sustaining, regenerative culture can blossom.

12 13

HOW GENEROUS ARE YOU?

Makoto Fujimura, author of On Becoming Generative: An Introduction to Culture Care, found generative behavior is often sparked by failure – a “genesis moment.” The genesis moment in the Yellowstone Park example happened when the park rangers realized that removing the wolves had become more painful and degenerative than including them. Genesis moments, according to Makoto, are fueled by generosity and are an antidote to a scarcity mentality, or what he refers to as the “survival and utility mindset.” For Makoto, his genesis moment came when he was a young struggling artist living off cans of tuna when, unannounced, his wife surprised him with flowers. He shrunk at the sight of the flowers, scolding her for being financially irresponsible.

In the face of his fear, Makoto’s wife proclaimed: “We need to feed our souls, too!”

Can you feel her generosity? Can you see the light she brought into their lives in that moment, and how it is still tumbling forward through his book into your life as you read about it here? Makoto writes, “What emerges from generative moments is something new, transformed from its source, something that is both free and responsible to make its own ongoing creative contribution.”

Take a moment to reflect on this passage in the context of your succession plan. How generous are you? If this question has you worried that you should be increasing employee income, you are going in the wrong direction. Generous, in the generative sense, is far bigger and more impactful than money. Of course money matters, but the type of generosity referred to here touches more than the wallet; it engages the soul and spirit of the individual, igniting a deep-seated sense of purpose and a natural inclination to be generative. Your generosity awakens the inclination in others to do as you have done to them – pay it forward to others.

Your generosity awakens the inclination in others to do as you have done to them – pay it forward to others.

14 15

TEACHING MEN TO FISH: A CASE STUDY

Are you simply giving away fish? When you look around, how much generous teaching is cascading down the hierarchy? How much fun, high energy and camaraderie do you see in your firm? Whatever it is that you see, it is a direct reflection of who you are as a leader. The difference between teaching someone to fish and simply giving a fish can appear to be subtle. But it never really is. The results can certainly be stunning.

I was asked to facilitate a conversation between a company founder and her top two leaders who she had chosen to be the firm’s successors. My assignment was to help the team design their succession plan and the ensuing buy-sell agreement as well as secure the life insurance required to fund the buy-sell arrangement.

The firm is in the financial services sector, and, with its famous founder, Nancy, is considered the best at what they do. Nancy started the firm 17 years ago after enjoying a stellar career at an internationally-recognized, multi-national business. She is in her early 70s, and in good health. The firm has 17 employees and gross revenues of $24 million. A recent professional appraisal valued the business at $38 million. Her chosen successors, Lynn and

David, have been with the firm for 7 and 15 years respectively. They both have top-shelf education, experience and track records. When hired, the founder told them that they were the future of the firm and could expect to be her successor.

Over the years, Nancy made no progress on her succession promise. She thought about it constantly, but it was always easier to focus on business as usual. Nancy has always had absolute control of the business. She is the sole shareholder and the only executive. As much as she wanted to and thought she was ready to, Nancy had not delegated any executive duties to her so-called successors or given them any meaningful influence over the strategic decisions of the firm. Though she had often brought up the succession topic, the conversations never led anywhere. By the time I met David and Lynn, succession had become an elusive and sore topic. They were skeptical, if not jaded.

This is a story of too little, too late. The succession topic was on the table now because of recent regulatory changes. Outside forces put the firm’s back up against the wall. They had to establish a formal succession plan or lose their best

Give a man a fish and you feed him for a day;Teach a man to fish and you feed him for a lifetime.ANCIENT CHINESE PROVERB

clients. The new law forbids Nancy’s customers from doing business with firms that do not have a succession plan. Ironically, it took the federal government breathing down her neck to get serious about her succession plan.

It may be easy to assume in this story that Nancy had issues. But she really didn’t. She is a woman of extraordinary character, talent and skill. The firm’s operational culture was highly functional in delivering its service. Everyone I met had a positive attitude about work. But when it came to leadership succession, the history of unfilled promises and false starts eroded trust. Regardless of the concessions Nancy made in the negations, Lynn and David could not bring themselves to believe that Nancy would ever change her ways and give them meaningful control and a real voice in the future of the firm. After nearly a year of facilitated conversations, the parties could not come to an agreement. As a result of the negotiations, Lynn and David became acutely aware that they had no choice but to move on to a different firm. Staying with Nancy became riskier for their career than leaving.

Nancy, to her deep regret, had never involved Lynn and David in leadership. She had never let them fish. She had only given them a fish in the form of a job as a high-end, well-paid professional. They were not ready to take over the business when she was ready to let them take over. In this instance, Lynn and David doubted not only Nancy’s ability to let go of the reins, but also their own ability to lead.

16 17

GROWING A GENERATIVE CULTURE: A CASE STUDY

The ValMark Securities story is in stark contrast to Nancy’s. ValMark is a leading life insurance-based financial services firm, and a fine example of a generative culture. This privately-held firm is a thriving second-generation business, which is cultivating the sprouts of its third-generation leadership.

One fine example of its generative nature is the partnership it developed with the local university. As a commitment to the financial services industry, and with a long-term vision, ValMark helped to establish a formal undergraduate program in financial planning.

The harvest is plentiful, bearing fruit in the form of new, young leaders. The program is graduating an average of 20 Certified Financial Planners each year. Many of the top graduates find their way to ValMark and are now continually generating fresh, cutting-edge tools and platforms for the company and its member firms.

ValMark is an inspiring example of giving back to the community in a manner that not only helps to cultivate the next generation of leaders in its industry, it has also laid the groundwork, with this program, for its own future.

19

WHAT YOUR CORE VALUES SAY ABOUT YOUR CULTURE

ARTICULATING YOUR CORE VALUES

Every business has its own set of core values, even if they are not in writing. If yours are not in writing, getting them on paper can be helpful – first as an exploratory effort to understand your current culture, and later to help you to chart a more generative course. If this interests you, consider hiring a consultant to conduct interviews with your employees and leaders. The purpose is to distill the core values currently driving the business. Ask the consultant to be brutally honest and to search for both the generative and degenerative values that are at play.

Once the current values are articulated, ask your people which ones should be emphasized and which ones should be avoided. Next, begin a conversation with the firm about values that might be developed to move the firm in the generative direction. Once these are established, begin to explore what these more generative values really mean and how you can begin to tangibly live them out. Perhaps most importantly, ask yourself: “which of my behaviors promote the generative values and which do not?”

Zappos is another perfect example of a generative culture. Here are their core values:

1. Deliver WOW through Service

2. Embrace and Drive Change

3. Create Fun and a Little Weirdness

4. Be Adventurous, Creative, and Open-Minded

5. Pursue Growth and Learning

6. Build Open and Honest Relationships with Communication

7. Build a Positive Team and Family Spirit

8. Do More With Less

9. Be Passionate and Determined

10. Be Humble

These ten core values are an explicit representation of the Zappos culture. Indeed, they both flow out of and perpetuate the firm’s culture. Makoto has coined a term for generative cultures like these – Culture Care, which he says is “applied generative thinking,” that “ultimately results in a generative cultural environment: open to questions of meaning, reaching beyond mere survival, inspiring people to meaningful action and leading toward wholeness and harmony. It produces a thriving cross-generational community.”

Which of your behaviors promote generative values and which do not?

20 21

STEWARDSHIP IS LEADERSHIP

In generative cultures, the leader’s role shifts and expands from the traditional notions of corporate leadership to include stewardship responsibilities. Keeper, custodian, agent, overseer, curator and guardian are all synonymous with steward. Stewardship embraces culture as the manifestation of the whole. In this light, the organization

is seen more as an organism – a complex, interconnected entity with a personality and life of its own, which is driven and sustained by the human dynamic. It is one thing to see yourself as the manager of the till and the bricks and mortar of the firm. It is quite another thing to be the guardian of a complex, thriving ecosystem that has a life of its own.

Your organization is an organism – a complex, interconnected entity with a personality and life of its own, which is driven and sustained by the human dynamic.

22 23

MONEY BALL + STEWARDSHIP

Some of the attributes of stewardship might include such things as:

• The depth and tone of communications

• The level of employee engagement

• The voice and impact employees experience

• Openness and transparency of information

• Buy-in to core values

• The ability to offer ideas and participate in the creative process

How do these attributes stack up in your business? How does a stewardship view of leadership change or inform your current leadership style? What do you need to do to move the firm in the generative succession direction?

This is where it becomes deeply personal to you, the leader, who is most responsible for and has the most potential to ignite change in the organization. It is here where your challenge ratchets up, calling you to be the change that you want to see in your organization. This is where overcoming resistance to change can be a powerful ally and help you to build a generative culture by example.

To build a more specific picture of what generative leadership looks like, let’s take a page out of professional baseball by comparing the perspectives of a team manager to the team owner. An owner is more likely to be attracted to the “money ball” approach to management, preferring to rely on tangible metrics as opposed to human chemistry. The win/loss column, for the owner, to exaggerate the point, is likely to tell the whole story. Winning, after all, drives revenues through the roof.

A good manager or coach knows that this view is simplistic; winning is symptomatic of a healthy team. It is the chemistry and culture of the team that elevates talent. Though hard to measure, the manager or coach knows that team chemistry is the real key to success. In this sense, the manager is stewarding the overall ecosystem, hoping to find health and balance with the intention of maximizing efficiency and impact.

When this happens, the team gels and the wins mount. When owners appreciate this dynamic, they make room for managers who know how to curate culture.

The same is true of business. A “money ball” approach to business is perhaps the more traditional approach, where the business plan and financial results reign. It’s not that this is bad or inconsistent with the stewardship approach. Rather, stewardship understands that the tone of the conversation in the clubhouse can have a big impact on the results in the field. Here, a different, more expansive expectation of the players is in play.

A business plan measures you against concrete results. A stewardship plan measures you against a host of different attributes, the sum of which is the overall health of the organization. Given that the stewardship is of the culture, most of its attributes are intangible and concern the quality of human relations, or the chemistry of the team.

A stewardship approach understands that the tone of the conversation in the clubhouse can have a big impact on the results in the field.

24 25

Expecting you and your people to change behavior is a tall order. The

longer patterns have been in place, the riskier the change initiative is.

JUMPING THE CHASM FROM INSIGHT TO ACTION

27

PART II

EMBRACING NECESSARY CHANGE

FIRST THE INSIGHT WHAT’S KEEPING US STUCK?

Kegan and Lahey’s partnership started almost 35 years ago. In the 1980s they discovered that personal growth does not end in adolescence when our bodies stop growing, as was widely believed by the scientific community at the time. Just imagine seeing and coping with the world today in the same way you did as a young adult emerging from your teens!

They also discovered that when people evolve, it is in the same sequence, like climbing the rungs of a ladder. “Each qualitative leap forward enhances not only people’s ability to see (into themselves and their world) but to act more effectively as well.” Remaining ever curious, Kegan and Lahey wondered if we could shift our own mindsets.

In the 1990s they began to crack the code when they discovered the keys to the “master motives,” or what keeps us stuck at a current rung. Kegan and Lahey refer to our natural resistance to change as

“immunity to change.” This is a metaphor comparing our physical immune system to our emotional and mental system’s resistance to behavioral change.

Our physical immune system helps us resist disease, keeping us healthy and safe. The personal development “immune system” does something very similar, but rather than resist disease, it resists behaviors and thoughts that do not align with our current construct of reality.

Even the thoughts of future behaviors, which are at odds with our current worldview, can create anxiety and skepticism. These feelings of anxiety and skeptical thoughts are the antibodies of our personal developmental immune system. They resist change, keeping us in place, where we are “safe.”

We all are hardwired to resist change. Understanding your resistance, and how to overcome it, is the key to unlocking your ability to lead the charge for a more generative culture.

Embracing necessary change is a perfect partner to the first big idea: building a generative culture. Each big idea works on different parts ofthe system. Building a generative

culture is a “macro” concept working on the “whole,” and overcoming immunity is a “micro” concept working on the individual part.

Building a generative culture is an overarching and holistic paradigm; it is like oxygen, ever-present and touching every aspect of the firm’s culture at once. Embracing necessary change is a powerful micro concept, strategically activating key leaders toward the grand goal of a more generative culture.

To minimize your risk of a false start, we turn to Robert Kegan’s and Lisa Laskow Lahey’s seminal work on changing human behavior, which they write about in their book Immunity to Change: How to Overcome It and Unlock the Potential in Yourself and Your Organization. Kegan and Lahey have dedicated their professional lives to solve the problem of how to “close the gap between what people genuinely intend to do and what they are actually able to bring about.” Their bountiful and groundbreaking work holds extraordinary potential.

28 29

MOVING FROM INSIGHT TO ACTION WHAT’S KEEPING US STUCK?

IN COLUMN 1 – we write down our goals, or what they refer to as our visible commitments – the things we want to change.

IN COLUMN 2 – we write down current behaviors that keep us from our goals.

IN COLUMN 3 – we write down our “hidden” commitments or beliefs that support and keep us attached to our current behaviors (those listed in Column 2).

COLUMN 3 exposes the antibodies that powerfully support our immunity to change, keeping us stuck. It is a defense system that protects us from becoming over-whelmed by our world. It keeps us from wandering off the reservation we know.

It took Kegan and Lahey seven more years to make the leap to developing tangible tools to help us jump over the chasm from insight (wanting a generative succession) to action (making the personal and corporate changes/improvements required to meet the goal). They recognized that their goal of helping people to make behavioral changes is “intimately related” to shifting their current social constructs or mindsets.

With this final development, Kegan and Lahey went from diagnosing immunities to change, to helping people overcome them. As a result, they have demonstrated that adults can “make significant improvements in focused areas where they have many times tried and failed.”

First, according Kegan and Lahey, you must formulate the change challenge in a specific way. When you state the challenge correctly, it allows you to adapt from living the challenge (the change you want) to seeing the challenge. Think of it this way: we all have our own unique lens or filter through which we see and process life. These are our personal paradigms, or social constructs that inform or direct how we move through life. Kegan and Lahey often refer to these as our mindset for making meaning.

With a simple, written process, you go from looking through the lens to looking at the lens. Adapting how you perceive your challenge is the first step towards changing your behavior. It is a dialectic game, purposely transitioning from subject to object. The lens shifts from being the eye through which you navigate the world, to being an object on the table in front of you that you are dissecting.

To understand the genius of examining our lens we must understand the power and purpose of our internal system that naturally resists change. As mentioned earlier, this resistance to change is what Kegan and Lahey calls our immunity to change.

For example, when we are able to expose and carefully examine our lens of reality, we can graphically see the chasm between who we are now and who we want to become. This is the gap we must somehow cross to achieve the intended results. With a three-column, written exercise, Kegan and Lahey show us how to jump the chasm. Their format helps us to clearly formulate our change challenge.

JUMPING THE CHASM FROM INSIGHT TO ACTION

G O A L S C U R R E N T B E H AV I O R S

B E L I E F S

1 2 3

30 31

CARL’S STORY CARL’S IMMUNITY CHALLENGE

On the opposite page, you can see how Carl McVey, the CEO and founder of a medical device manufacturing business, formulated his Immunity Challenge.

After Carl asked me to help him with his succession plan, one of the first things we accomplished together was to articulate his Immunity Challenge. Carl is 58, has been married for 30 years, and has three adult children. None of the children are coming into the business.

Carl is very interested in gaining momentum for his succession, even though he remains uncertain about his ultimate exit – whether it will be an internal sale to management or an external sale to a third party. Carl understands that having a strong leadership succession plan will improve the salability of his business regardless of to whom or when he sells his business.

GOALS: Column 1 of Carl’s Challenge lists the changes to which he aspires in his effort to move along his leadership succession. He wants to:

• Be more open and engaged with his apparent successors – the four Senior VPs who report directly to him.

• Delegate his hands- on responsibilities while concentrating his efforts on strategic responsibilities.

• Give more voice and influence to leaders; teaching them to co- create the future of the business.

CURRENT BEHAVIORS: In Column 2, Carl created a candid and honest list of the things he did (and failed to do) that ran contrary to these goals.

• An often irrepressible urge to just get it done.

• When deadlines are being missed or appear to be at risk, he starts to tell everyone what to do or just does it himself.

• A tendency to micro- manage, requiring detailed management reports.

• An inclination to be defensive or combative when ideas arise that challenge the status quo.

BELIEFS: In column 3, Carl lists his “hidden commitments” – the beliefs, or antibodies keeping him stuck and immune from change.

• It’s his business. It’s his responsibility!

• Others are afraid or don’t know how to take responsibility like he does.

• Only he understands what is really at risk.

• He created the business, and has always run it, profitably. He knows what to do, and must appear invincible to maintain the trust of those he leads.

1 2 3

33

CARL’S INSIGHTS

Control, though not used by Carl to describe any of his hidden commitments, underscores every one of his beliefs that are keeping him stuck in old behaviors. As you can see, this exercise is doing more than simply identifying the gap between what Carl said and what he means. In his Immunity Challenge, you can see what he wants, what he currently does, and why he does what he no longer wants to do.

Change does not fail to occur because of lack of desire or insincerity. “The heart patient is not insincere about his wish to keep living, even as he reaches for another cigarette,” writes Kegan and Lahey. New behaviors fail to occur because we want both things – the old behaviors and the new behaviors.

Now, for the first time, Carl can see his predicament on paper. In writing, he can see his desired new behaviors next to current and undesirable behaviors, as well as the beliefs that will keep him loyal to his current patterns.

This black and white reality makes it very difficult to deny the contradictions. The veil has been pulled from the hypocrisy. Not only do we see the conflicting behaviors (desired v. current), but also the beliefs that have heretofore sabotaged change, creating a moment of truth. Carl now gets to test the beliefs, asking himself if they still hold water.

“My Immunity Challenge,” Carl said, “is a study in contradictions. Seeing in writing why I hold on to old patterns is weird. I can understand why I feel that way, but, given my goals, they no longer make sense. I don’t think I believe myself anymore.”

Now that his hidden commitments are exposed to the light of day, Carl gets to decide, in a much more rational way, whether the beliefs keeping him stuck are still true or have become false. If he concludes they are now false, he is on the way to breaking the chains of immunity.

The true profession of man

is to find his way to himself.

HERMAN HESSE

34 35

MOVING TOWARD ACTION

The challenge went well for Carl. The first decision he made – to be in alignment with his newly stated goals – was to share his Immunity Challenge with his executive team. This was a big step for Carl because he had always resisted sharing his personal goals and feelings with his team. Carl remembers feeling a bit awkward and vulnerable. He remembers feeling “childish” and thinking that “CEOs are not supposed to open themselves up like this.” As this thought, and similar thoughts, arose for Carl, he began to recognize them as his “hidden commitments” in Column 3 of his Immunity Challenge. He realized that this was his “old” lens attempting to filter out the new behaviors. As important as this moment of recognition may have been, Carl’s change event, or what Makoto calls “genesis moment,” happened a few weeks later in an executive meeting.

At the beginning of the year the company had launched a significant branding campaign intended to help the company fully embrace and leverage social media, something the company had been slow to understand and incorporate in its sales and marketing efforts. A consulting firm was hired and the VP of Marketing, Sam, was responsible for the initiative as well as managing the relationship with the consultants.

In the meeting, Sam reached out to the executive team for some perspective. He was having difficulty communicating with the lead consultant and wanted to troubleshoot.

Carl, when he heard Sam’s concerns, did his usual thing. He jumped all over it, and said he would call the consultant to straighten out the situation. Sam’s body language was muted and disciplined. He looked Carl straight in the eye and remained motionless with a blank expression on his face as if he wanted to say something but knew better. The issue appeared to have been resolved when the CFO, at what seemed to be the last possible moment, blurted, “Wait Carl! This is Sam’s project and I don’t think he is looking for that kind of help.”

“This is important and urgent, and we can’t get this wrong,” was Carl’s immediate response, as if the conversation was over. There was an awkward moment of silence, and then, Mike, the COO, carefully intoned: “Hold on Carl. This is your challenge. Stepping in like that … isn’t that what your Immunity thing is about?” Surprised, Carl took a deep breath and slowly looked around at everyone in the room and said one word: “Oops.” Then, looking at Sam, he said, “This is yours and should remain yours. Why don’t we see what others have to say?”

36 37

LESSONS FROM CARL HIRE AN EXECUTIVE COACH & FIND A PEER GROUP

“Owning” and “believing” in our big decisions form the foundation of leadership strength. To arrive at and maintain this level of leadership fortitude is no small feat. Someone else’s advice or conviction is never enough – it has to become yours. You not only have to know it in your head, you have to feel it in your bones.

Executive coaching is designed to help you to find, own, and believe in your own answers. Coaching helps you build commitment and resolve in your vision and plans, which makes it the perfect complement to help you embrace necessary change. Behavioral change requires courageous self-inspection. How willing are you to look in the mirror and tell the truth? Are you committed enough to ask for help?

When you engage your coach, make it clear that the general goal for the coaching engagement is to achieve

a generative succession. Frame your engagement with this book and Kegan and Lahey’s book, Immunity to Change. With this framework the coach should help you to clarify what a generative culture means in your particular situation.

As this becomes clear, you will gain insight about more personal goals – improvements and changes in your behavior that are necessary to begin the cultural shift in your organization. Specifically, the coach should help you make sure that you have carefully and accurately “formulated” your immunity “challenge.”

Once this is accomplished, the real work has begun! Now the coach helps you to remain aware of and accountable to the shift you seek as you up your game to become the leader and the change that your organization needs.

Behavioral change requires courageous self-inspection. How willing are you to look in the mirror and tell the truth? Are you committed enough to ask for help?

Because of what happened in the meeting with Carl and his Senior VPs, the team decided to create an Immunity Challenge for everyone on the executive team as a means of formally launching into the succession planning process.

To be successful in his Immunity Challenge, Carl needed to see the contradictions in bold relief in order to consciously exert influence over them. Openly embracing necessary change, as Carl modeled, is hugely generative. Kegan and Lahey argue that the leaders who are asking themselves, “What can I do to make my setting the most fertile

ground in the world for the growth of talent?” put themselves in the best position to succeed. These leaders understand that for each of us to deliver on our biggest aspirations – to take advantage of new opportunities or meet new challenges – we must grow into our future possibilities. These leaders know what makes that more possible – and what prevents it.

This is a rigorous process of self-inspection. Carl would not have been successful attempting to do this alone.

38 39

COACHING V. ADVISING

To gain a deeper appreciation of the role your coach plays, notice the stark difference between coaching and advising. At first, the difference may appear subtle, but it is anything but! Advising, as in what you receive from your lawyer, accountant or investment banker, is a form of telling and educating. These professionals are geared to give advice; they tell you what you ought to do. Clearly, there is a time and place for advice. Your lawyer, accountant and investment banker play indispensable parts in any succession plan. But too early in the curve, their direct advice can be unnerving, and quite frequently (and unwittingly to all) sabotaging.

Before seeking advice, it is best to first have a strong handle on what you want and need. Any questions you bring to your experts should be specific and well developed, emerging from thoroughly developed context. If you think about your past experience with advisors, you most likely felt best about advice you received in connection with the issues that you understood well –

when you had a clear idea about what you wanted the advisor to do for you. Succession planning is not likely to fall in the category of things you understand well. Preparing you to receive advice from experts, especially for complex situations, is where quality coaching shines in a big way.

Coaching is designed to help you to rely on your own wisdom; it is intended to guide you to your own conclusions after answering artful questions. This approach is powerful because you are actively involved with solving your own problems. Coaching is a far cry from having an expert tell you what he or she thinks you should do before the problem is well understood. Even if the advisor’s advice is spot on, you will not be ready to hear or process the sage advice until you have examined the contours of your problem. You will not fully appreciate the advice because you are not ready to hear it. All of the connections and implications have not yet been fully explored.

Preparing you to receive advice from experts, especially for complex situations, is where quality coaching shines in a big way.

40 41

GETTING FROM HERE TO THERE

Coaching makes sense in complex situations where work is needed to first gain perspective and a sense of balance as the context is sorted out. Taking the more patient approach with a coach is pragmatic; you know more about your business and life, and frankly care more about these things, than any advisor or coach ever can. You are also intelligent and creative. You wouldn’t be in the position you are if this were not true. Using a coach allows you to rely on the most important player on your team – you!

A trained and skilled coach starts by helping you to define “where you

are.” This work may include taking alook at who you are, as well as where you want to go, and who you need to be to get there. This is context building. Think of context as the ground you stand on; it is the only place from which you can take your next step. Everyone’s context and journey are unique, especially when dealing with the very personal issue of spotting and rectifying your immunities to change.

The first step will be unique to your deeply personal situation. Without having a deep appreciation of your context, you will remain ungrounded and likely to stumble, unable to make decisive decisions to which you are committed.

A trained and skilled coach starts by helping you to define where you are, who you are, where you want to go, and who you need to be to get there.

42 43

FIND A PEER GROUP

Positive peer pressure is unlike any other form of accountability. This may be truer in the founder/CEO setting than any other, where the CEO lives at the tip of the spear, alone, and solving problems for everyone else. Rarely does he or she enjoy the pleasure of being vulnerable and asking for help.

A team of peers who walk in similar shoes can be of enormous help. Coaching is powerful and necessary when confronting personal change. With a peer group added to the mix, progress in your chosen direction becomes even more likely. In this light, coaching and a peer group is risk management; your odds of failure substantially decrease.

With a peer group added to the mix, progress in your chosen direction becomes even more likely.

44 45

THE FACILITATOR: BRINGING THE PEER GROUP TOGETHER

A peer group is just that: a group of peers. Peers are peers because they have some sort of affinity. In the immediate setting, the affinity is running a privately-held enterprise. To be effective, peer groups must have focus, management and artful facilitation. Someone, other than the group members, should have the responsibility of keeping the group on purpose. A participant should not take on this responsibility and attempt to be the group’s facilitator. Participants should participate, rigorously and freely.

Facilitation is an art and a discipline.

The magic emerges from two places: the peer affinity and artful and disciplined facilitation. With skillful facilitation, the facilitator “disappears” from the mix. A skillful facilitator allows the peers to appear and the group to gel. Setting tone and direction, clarifying questions and answers and keeping the conversation on track are the responsibility of the facilitator. Good facilitation removes all of the responsibilities for managing the group from the members. The time, place, agenda, temperature in the room, the food and the audiovisual equipment responsibilities belong to the facilitator. Your job is to show up and engage.

A skillful facilitator allows the peers to appear and the group to gel...setting tone and direction, clarifying questions and answers and keeping the conversation on track.

46 47

PEER GROUPS MAKING A DIFFERENCE: A CASE STUDY

Peer groups, when facilitated well, become the board of advisors for your business, and they become friends and family. Michele, a Vistage Chairperson for nine years, tells a powerful story of the meaning a peer group can have in the lives of its members. Vistage is an international peer group founded in 1957 with over 19,000 business owners who are members. Vistage peer groups range in size from 12 to 16 members. The Chair of the group is the facilitator.

John, a member of a peer group, became ill late in the night. His wife Sally, in a panic, reached out to the group facilitator at 3 AM. The facilitator urged Sally to call 911 and get John to the hospital as soon as possible. The facilitator also said she knew the hospital president, and would call him. When she reached the president, he said he would call the Chief of Neurology and they both would come to the hospital. They arrived at the same time as Sally and John. Also, by 6 AM, all of the members of John’s peer group were at the hospital.

As it turned out, John had a fast-growing brain tumor and was given two months to live. Devastated and wanting to help, the peer group came up with a remarkable plan. They did not want John’s family to worry about the business. They wanted the family to be with John and have an opportunity to grieve. They asked John’s son, Adam, who worked for the business, to take John’s place in the group. Together, the peer group pitched in to run the business for the next several months. After John died, Adam remained in the group. The Vistage team continued to help Sally and Adam through their difficult and unexpected transition.

With coaching, a peer group and the Kegan and Lahey technology, you have three powerful tools working together to shift behaviors and help you meet your succession goals. With these three support systems you have set yourself up to succeed.

49

The speed of the team is set by the speed of the leader.

BILL HYBILS

FINDING THE RIGHT INCENTIVES FOR YOUR LEADERS

51

PART III

ANCHORING THE SUCCESSION

50 51

CONNECT TO WHAT REALLY MATTERS

When it comes to compensation, the risk/reward profile of your future leaders is likely to be significantly different than yours.

You have examined and shifted your behavior and can see its impact on the firm’s culture – green sprouts in the firm are increasingly evident. Employee, and especially leadership, engagement is shifting and becoming more generative, following your example. Now is the time to start driving anchors into the succession plan by attaching your firm’s values to leadership compensation. It’s time to build the structures that will retain and reward your next-gen leaders. To succeed in attaching your leaders to what really matters for the business and your succession, the incentive plan must be thoughtfully designed to merge the success of the business with the personal goals and values of your leaders.

When it comes to compensation, the risk/reward profile of your leaders is likely to be significantly different than yours. This will have to do with your stage in life, as

well as your role as the founder. As a result, getting a bead on what your leaders value most can be tricky for founders when the general assumption is that “leaders like me must value the things I value.” When it comes to financial incentives, this assumption is almost always incorrect.

The owner/entrepreneur who created the business is much more motivated to reinvest profits back into the business and wait for a big wealth creation event at some unknown time in the future. There is a constellation of reasons for this, the most obvious of which is your control over every aspect of the business. An approach of concentrating nearly all of your wealth in the business does not feel nearly as risky to the founder as it does to the executives who have little or no ownership and little or no real voice and influence in the business.

The next-gen leaders want a well-rounded – balanced – approach to their incentives, and these incentives are not all financial. The full package falls into three categories:

1. Voice and influence in the future of the firm

2. Personal wealth creation connected to the success of the business, and

3. Protection of partners’ financial interests in the firm upon his/ her departure, whether at death, disability, or retirement.

When these three components come together, they are hugely synergistic. Together they are generative, building a firm foundation for leaders from which they can confidently envision their future and the future of your firm. One component alone is never sufficient. Two is better, but all three completes the job.

52 53

1. VOICE AND INFLUENCE

In a generative system, information flows freely. The system is open and dynamic. Natural strengths are understood, and they are liberally accessed for the good of the whole. Governance in a healthy human system comes down to communication – who does what, when and why. The streams of communication flow generously, without restriction, through all organizational levels.

To embrace a generative culture, governance at the top levels must expand to explicitly give the next generation of leaders real voice and influence, which is expressed in strategy and tactics.

THE SUCCESSION BOARDWhen transitioning from a first generation model where strategic decision-making is vested in the founder who is also the CEO, it is best to create a board of directors made up of the founder and the next generation leaders. I refer to this as a succession board. With the new model, responsibility for all strategic decisions is vested in the succession board. The policy and process of your succession board should be clearly articulated in writing and treated with the utmost respect.

The policy and process of your succession board should be clearly articulated in writing and treated with the utmost respect.

55

THE SUCCESSION BOARD: SHARING STRATEGIC DECISIONS

The arrival of the succession board represents a big shift in policy for most privately held businesses. In most founder-led businesses, even where an outside board has been in place for some time, the high-level strategic decisions remain firmly in the grasp of the founder. Even though you may be open to input into strategic decisions by your advisory board, the final say remains with you.

In a generative leadership succession model, this cannot remain the case. If it does, real leadership responsibility is not transitioning, which means that a succession is not in play.

Real decision-making control – voice and influence – must yield to others at some point, preferably before you die. Think about it. The only time you can be a guiding steward over the transition of leadership is before you die. However, “real voice and influence” does not necessarily mean that majority ownership has shifted away from you. It means that you have demonstrated that you will support and follow your team when their opinion is different than yours.

Forming a board to include those to whom you intend to give voice and influence is the most obvious way to begin to demonstrate your ability to share strategic control of the business. When you form a succession board, voice and influence on strategy is shifting from you alone to your leadership team as a whole. You will be part of the team and continue to exert considerable influence as a member of the team, at least for a period of time. In fact, if you continue to own a majority interest, you will have the trump card in your pocket. If you ever use it, you will undermine what you have built – trust from your leadership and your succession plan.

Make no mistake about it; your team knows what your majority interest in the business means. When this is the case, giving real, day-to-day voice and influence on the future direction of the business is indispensable to winning the hearts and minds of your leaders. It is more important than money.

56

MAKING YOUR SUCCESSION BOARD PRODUCTIVE

The most important rule of your succession board is how each member’s voice is counted and respected. There is any number of ways to do this; only your imagination limits you here. Regardless of your particular solution, the voice and influence of your leaders must be explicit and result in a meaningful impact on the organization. One vote per member is an obvious approach. A “fist-of-five” is another possibility. This is where a sliding scale is used to indicate the conviction of the decision. One finger is strongly in favor, two is a “yes,” three is on the fence, four is a “no” and five is strongly against.

The succession board’s job is to set the vision and mission of the firm. It is also the board’s job to create and approve the business plan. Once the business plan is completed, thesuccession board will articulate

how the business plan flows to the executive functions of the firm for execution.

This is accomplished by defining the executive roles with a written job description detailing for which parts of the business plan each executive is responsible. It is here, in the executive function, where the tactical aspects of the business plan are implemented.

The empowerment that successors experience from their role on the succession board and clearly defined executive roles is enormously motivating and valuable to successors who truly are leaders at heart. This empowerment transcends the value of money in an account because it gives the successors real control over the future of the firm and the creationof wealth.

58 59

2. PERSONAL WEALTH CREATIONCONNECTED TO THE SUCCESS OF THE BUSINESS

As motivating as voice and influence is, to make it matter, it must be supported by the creation of personal wealth. This can come from many forms of financial incentives, including:

• Salary and bonus• Qualified retirement accounts• Deferred compensation, and• Ownership, whether real or synthetic

The last two – deferred compensation plans and ownership arrangements – hold the most potential for senior leadership.

These are the building blocks of meaningful and differentiating financial incentive strategies. Most businesses have figured out the first two incentives listed – salary and bonus, and qualified retirement accounts, such as 401(k) plans. There is an art and science to setting salary and bonus plans, as well as establishing and maintaining qualified retirement plans. Having the right providers and resources to calibrate and manage your approach to these incentive plans is advisable.

Deferred compensation plans and ownership arrangements hold the most potential for senior leadership.

60 61

DEFERRED COMPENSATION

Deferred compensation is also referred to as Executive Compensation or “nonqualified” deferred compensation. Deferred compensation, as the name implies, is compensation earned currently but paid at some time in the future. There are many types of deferred compensation plans. Under the right circumstances, they can be structured to give the executive an income tax advantage by delaying the realization of income taxation until the money is received. This means that the deferred compensation account is a pretax investment, much like a 401(k). The type of corporate entity,

and whether the executive is also an owner, will impact the design of the plan.

There are a number of reasons to establish deferred compensation plans. The most important, from the executive’s point of view, is the ability to accumulate real dollars in a retirement account. In a 2013 survey by Principal Financial Group, 91% of executives who participated in a deferred compensation plan did so because they found the plan important in reaching their retirement goals. In fact, nearly a quarter of the participants estimate that the plan will represent 40% or more of their retirement security.

In the illustration above, the brown section entitled “Gap” describes the deficiency in retirement savings that most executives are experiencing. A well-crafted incentive plan aims to fill this gap. This gap, or supplemental retirement saving need, is the amount of savings that is needed in addition to social security and qualified retirement benefits.

91% of executives who participated in a deferred compensation plan did so because they found the plan important in reaching their retirement goals.

62 63

OWNERSHIP AS AN INCENTIVE

The belief that ownership – a piece of the rock – is what most excites the next generation of leaders can be dangerously misleading. This is a frequent miscalculation founding CEOs make. Although a minority interest in the business can be a strong incentive, alone it is more likely to be a disincentive. Stock options or forms of synthetic ownership such as Stock Appreciation Rights, or Phantom Stock, may have the same limitations. None of these, alone, create tangible wealth (dollars inan account) or the ability for the

leader to have a voice and impact on the future of the business.

In combination with other incentives, minority ownership can be a powerful motivator. Ownership, when balanced with a deferred compensation plan and a shareholder agreement that protect all partners’ financial interests upon his or her departure, whether at death, disability, or retirement in the firm, can be a strong incentive.

Although a minority interest in the business can be astrong incentive, alone it is more likely to be a disincentive.

64 65

3. PROTECTING PARTNERS’ INTERESTS:THE BUY-SELL AGREEMENT

A partner’s ownership interest will not be emotionally complete until the partners are assured, even in death, that the monetary value of their interest will benefit their loved ones. When ownership of any form is sold or granted to an executive, a funded and well-articulated contingency plan to purchase shares in the event of death or

disability, as well as retirement, anchors trust and demonstrates respect. These events are referred to as “triggering events” because they trigger the buy-sell provisions of the shareholder agreement, provided you have taken the time to establish a thoughtful and sufficient buy-sell shareholders’ agreement.

One of the tools we’ve developed for preparing for a facilitated Buy-Sell Arrangement is the Facilitated Buy-Sell Agreement Questionnaire which can be accessed online at http://www.trustdesign.com/buy-sell-agreement/

A funded and well-articulated buy-sell agreement anchors trust and demonstrates respect.

66 67

BUY-SELL AGREEMENTS: RULES OF THE GAME

As the partners gather a deeper understanding of how their buy-sell agreement works, their sense of security and well-being within the firm will grow as well.

The process of establishing the rules of the game for the departure of a partner is a significant cultural-building opportunity for the firm, reminding me of the board game dynamic. Think of a time when you were with friends learning a board game for the first time. Those with knowledge of the game gravitate right to the table, sit down and start playing while those with little experience stand around the perimeter of the circle attempting to assimilate a sufficient understanding to decide whether they want to join in. It is only when they have gathered a sense for the game that they sit down and join in the fun. The real traction and fun explodes when everyone at the table understands the rules of the game.

There is a similar dynamic with shareholder buy-sell agreements. The agreement is tantamount to the rules of the game. The better the partners understand the rules, the more engaged they become. As the partners gather a deeper understanding of how their buy-sell agreement works, their sense of security and well-being within the firm will grow as well. To fully appreciate the benefits of a buy-sell agreement requires that all of the parties to the agreement master the details of the agreement. Firms that do this well dedicate at least one board meeting a year to carefully review the terms of the buy-sell agreement, the financials of the firm, the firm’s valuation and the performance of the capital assets set aside to fund the buyout provisions.

A buy-sell agreement includes three principal elements:

• The triggering events;

• How shares are valued upon a triggering event; and

• The funding mechanism for each triggering event.

Caring for partners, and, by extension, their families is a fundamental responsibility of any business. When the right scaffolding is built around the contingencies that could place a partner’s financial interest at risk, anxiety about future possible hazards is diminished. The partner can rest assured that he or she is being responsible, as can the firm that is backing the promises. Until all of the triggering events are explicitly addressed and funding secured, minority ownership does not meet its potential as a meaningful financial incentive.

68 69

FUNDING THE PROMISES: A WORD OF CAUTION

Financial incentives are only as good as the capital assets that back them. The promise for any of the financial incentives we have discussed remains incomplete until funding to support these promises is secured. This is an especially acute concern for promises made in connection with future events, and especially those that may not happen during a partner’s tenure at the firm, such as death or disability.

A similar concern arises in connection with deferred compensation. As the deferred income is earned but not paid, it must, to be a real, tangible incentive, be deposited into an

account that the executive can follow.

The funding conversation brings into play capital market tools and corporate finance considerations. Life insurance, annuities, and sinking funds in brokerage accounts must be evaluated as vehicles to support your incentive plans. Here, the conversation shifts from high-level succession strategy and leadership incentive planning to tactical and highly technical details required to implement the funding of your incentive plans. Financial advisors who have investment, life insurance and accounting expertise should be brought in to guide the process.

Additional information on this topic is discussed in our white paper, “Funding Buy-Sell Agreements,” which can be accessed online at http://www.trustdesign.com/funding/

In business, words are words; explanations are explanations, promises

are promises, but only performance is reality.

HAROLD S. GENEEN

The woods are lovely, dark

and deep. But I have promises

to keep, and miles to go

before I sleep.

ROBERT FROST

71

73

CONCLUSIONS

72 73

THREE KEY ELEMENTS

We have explored three big ideas: the creation of a generative culture, embracing necessary change, and anchoring the succession plan with the right financial incentives for the next generation of leaders.

Wolves change rivers and CEOs change culture. Perched on top of the ecosystem, they both have the potential of triggering a trophic cascade. When the influence is positive, it can lead to a self-sustaining system that is naturally inclined to thrive and succeed indefinitely into the future. A culture of this nature, whether it is in Yellowstone National Park or in your business, is generative – productive, fruitful, gracious, creative and life-giving.

Free will distinguishes the CEO from the wolf. The CEO can reason, gather a sense of self, and, with a conscious effort, become increasingly self-aware. Indeed, this defines a great leader – one who can adapt for the benefit of the whole. Kegan and Lahey’s technology makes this process of self-actualization and self-improvement even more accessible. If your succession is stalled, take heart. The trajectory can change, provided you are willing to earnestly peer into the mirror, take inventory and methodically go about personal change.

If your succession is stalled, take heart. The trajectory can change, provided you are willing to earnestly peer into the mirror, take inventory and methodically go about personal change.

74

REGENERATION

The generative concept provides rich soil for cultivating new leadership skills. From the generative concept, the stewardship model for leadership becomes evident. It expands and deepens how we imagine leadership and its possibilities in the workplace. Stewardship helps us to raise our gaze, from the purely bottom-line approach to business, to one which is more holistic and embraces the humanity that gives life to our organizations.

“Work,” in the words of David Whyte, becomes “an opportunity for discovery and shaping; the place where the self meets the world.” As you begin to integrate this view of culture, your leadership model and your role in the business will evolve, demanding new behaviors from you.

Personal change is never easy. Reaching out for a helping hand along the way can be the difference between successfully adapting to new behaviors and remaining stuck. A professional executive coach and a peer group are two of the more

obvious and potent tools to support you as you attempt to adapt your role and shift the culture.

Increased discipline and focus on the task of passing on leadership skills and responsibilities to the next generation of leaders is a hallmark of progress in the right direction. Governance will change. It will take on a more fluid and formal role as a vehicle to disperse voice and influence throughout the organization, and especially to the next generation of leaders. A succession board, or other formal processes to involve leaders in the creation and execution of the strategy of the firm, will emerge. With the new policies, a change in tone and attitude in the culture should follow. Increased responsibilities invariably excite and engage leaders who have the instinct to lead. This excitement is exponential and cascading in the culture of your firm because it emanates from leaders – it is contagious. Passing on voice and influence holds great promise for your business.

Stewardship helps us to raise our gaze, from the purely bottom-line approach to business, to one which is more holistic and embraces the humanity that gives life to our organizations.

77

RECOGNITION AND REWARD

The enthusiasm from increased responsibility will have a short fuse if it is not accompanied by increased recognition and financial reward. The final anchor of your succession plan is the tethering of the financial success of the business to the financial success of your leaders. This piece of the puzzle has a different feel. It is tangible and technical; it involves money and represents a technical challenge from a corporate finance and taxation perspective. As a result, it requires sustained attention and assistance from a number of different experts. These may include accountants, lawyers, valuation experts and financial services experts, particularly a life insurance professional who is acquainted with the

funding requirements of deferred compensation plans and buy-sell shareholder agreements.

The emotional connection to the business, and hence the opportunity to capture the heart and mind of your leadership, will not be complete until they know that their financial interest in the firm is secure and will benefit their families, even in death. Having a thorough, well-drafted buy-sell agreement that has the financial backing to fulfil its promises is the anchor to your succession plan. In addition to being a functional and necessary document, your buy-sell shareholders’ agreement and deferred compensation structure is a symbol of completeness for your succession plan.

The emotional connection to the business, and hence the opportunity to capture the heart and mind of your leadership, will not be complete until they know that their financial interest in the firm is secure.

78

REMEMBER THE BEGINNING

Remember where you come from. The memory can be a powerful ally as you prepare to finish what you started. Think about the early days in the business. Why did you take the risk, and how did you feel back then? Can you bring back the sense of adventure and the connection to the world? David Whyte, borrowing a phrase from William Blake, refers to this as a firm persuasion. “To have a firm persuasion in our work – to feel that what we are doing is right for ourselves and good for the world at exactly the same time – is one of

the greatest triumphs of human existence.”

Failing to complete your “firm persuasion,” failing to pass it forward cannot be an option. A dying of old ways for the sake of rebirth is a natural part of the cycle of life; a key to which you hold in your vaulted position at the top of the org chart. In deep and careful self-reflection, please take this moment to see yourself starting your very own, generative cascade for the sake of what you started in the first place.

See yourself starting your very own, generative cascade for the sake of what you started in the first place.

81

About the Author

Dan has a life-long professional passion for helping business owners and their families achieve their dreams and finish well. In his determination to improve the value transfer between business owners and the community of advisors who serve them, he founded the Exit Planning Exchange and the Owners’ Academy – currently in six east coast metropolitan centers and expanding across the U.S. He also is an advisor and coach for business owners, as well as a CEO peer advisory group chair for Vistage International.

Dan began his professional career at the Securities and Exchange Commission (SEC) as a Finance Attorney. He later became a tax attorney, earning a reputation for his holistic and creative approach to strategic wealth transfer planning. He received a Bachelor of Arts degree from Colorado College and a Juris Doctorate from Arizona State College of Law where his focus was on business law and taxation.

Dan is the founder and CEO of TrustDesign, a private wealth-planning and process-consulting firm. Coming from three generations

of business owners, Dan draws upon his personal experience and insight to help entrepreneurs tie their values to family and business strategic financial planning. This includes tax-efficient retirement strategies designed to provide for the family’s security, retain key employees, and arrange for a timely and efficient succession of the business.

Dan is an experienced and sought-after speaker who enjoys addressing topics related to leadership and how it impacts wealth creation and business succession.

You may reach Dan at Dan@TrustDesign.com508.520.6778 www.TrustDesign.com

83

WOLVES CHANGE RIVERSDANIEL A. GUGLIELMO