Truth & Consequences
How to Avoid Costly Mistakes in your Family Business
Sackler Family & Opiods
The pitfalls of poor family business governance:
Loss of $4.5 billion
(34% of net worth)
Reputation and long term legacy which took multiple generations to build.
Scrutiny of gifts by charities, education, and research organizations. Reduced impact.
into non-related organizations owned/controlled
by the family.
People’s lives broken or ended as result of the business’s pursuit of profits.
What role did governance play in the bankruptcy of Purdue Pharma, the destroyed reputation of the Sackler family, not to mention the impact on individual family member wealth?
Multiple conflicts of interest existed without clear checks and balances.
Shareholder ROI was the measure of success with probably minimal consideration of consequences.
Values of the board and family were likely not clearly articulated in a governing document.
Lack of transparency coupled with ambiguous guidelines likely led to detrimental decision making.
Focus on short-term gains permanently eliminated Purdue's ability for long-term growth.
The Ramifications of Poor Family Business Governance
While the Sackler’s situation is extreme, the business decisions and investments families make have potential irreversible ramifications – both positive and negative. So, what role did governance play in the bankruptcy of Purdue Pharma, the destroyed reputation of the Sackler family, and the impact on individual family member wealth?
Governance is the underlying system of rules, practices and processes used to direct and control a company. Governance balances the interests of stakeholders including shareholders, management, employees, suppliers, customers, financiers, government, and the community. It facilitates major decisions, advances strategic vision, and drives stakeholder value.
In the case of Purdue Pharma – at its most simplistic level – the demand for shareholder ROI took precedence and dramatically overshadowed the long-term interest of all stakeholders. The decision makers within this family business blatantly overlooked the research and knowingly neglected the documented risks of OxyContin use, not to mention the long-term health of their customers. If family members opposed the aggressive pursuit of revenue, despite the known consequences, their voices were ignored.
While I am not privy to the precise governance practices of Purdue Pharma or the Sackler Family, I do know that family businesses often lack transparency and have ambiguous guidelines with respect to to management and board decision making. Additionally, employee shareholders within the family unit may view risk very differently from non-employee family shareholders.
Family members who are employees typically want to reinvest and continue to grow the company. Non-employee family members typically want dividends. As successive generations become owners, the probability that some family members will want to sell grows over time. Family members wonder: “What is management’s priority – their individual wealth as managers and owners or the family’s total wealth?” A governing system of values and decision making agreed upon and used by management and the board of directors can help to minimize the potential for fraud, scandal, bankruptcy and severing of family ties.
In the next installment of Truth & Consequences, we’ll talk about what a Board of Directors does.