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There's an old joke about the executive at a family business who goes to the company patriarch to announce his resignation. The patriarch pleads with him not to leave, and asks what he can do to keep this valuable executive within his ranks. The executive replies, "You can adopt me."

Todd Millay, executive director at the Wharton Global Family Alliance, used the joke to illustrate one of the major obstacles to larger family businesses: the need to address family-member executives versus non-family executives.

One of the methods Millay suggested that family businesses can employ to tackle the family versus non-family executive issue is to establish clear criteria for how and when family members can work in the business.

David Lockton, chairman of the board, explained that the firm founded by his brother Jack in 1966 does just that. Family members who want to work within its ranks must first cut their teeth in the outside world. Even David had to. Before joining his brother's company in 1976, Lockton worked at the First National Bank of Kansas City.

Just as big an issue can accompany family members who don't want to work in the company, said Barbara Spector, editor in chief of Family Business magazine.

"If the family has not figured out how to differentiate between the roles of family ownerships and family management, however, that is where you can run into trouble," she said.

Conflict could arise, Spector explained, when shareholders who don't work in the business might want a dividend, but those who work in the business might want to reinvest, for instance.

Again, Lockton seems up to the task, following best practices that Millay has seen with many of the family businesses he's studied.

"All of the family members who are shareholders work for the company," Lockton said. "So we don't have the typical issues that arise out of non-employee shareholders and employee shareholders."

If any family member leaves the company and doesn't have heirs who are employees of the company, he added, their shares would be repurchased by the company.

But we still haven't touched upon what could be the greatest threat to all family businesses: succession.

"Succession planning is critical," Millay stressed.

And according to Millay and research done at Wharton, it's the transition from the first to second generation that's a "very dangerous time"--perhaps the most dangerous.

"We have already transitioned to the second generation," responded Lockton to a question on how the company has navigated, or plans to navigate, those choppy waters.

He pointed to three top younger Locktons, his nephews, who all have been in the business for more than a decade and are on the board of directors. There's Ron, president of the firm's Kansas City property/casualty operation; Steve, an executive vice president in the Denver office; and Don, a producer and vice president out of Kansas City.

And the company is not reliant on just Locktons to succeed at this point, he stressed. Its leadership team is rounded out by non-family executives John Lumelleau, the president and CEO; Chief Operating Officer Mike Frost; and Mike Hammond, chairman of international operations.

"We have a succession plan in place, and I have confidence that if something happens to me, Lockton is in capable hands," the chairman of the board said.

MATTHEW BRODSKY is Web editor/senior editor of Risk & Insurance®.

February 14, 2008

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