by Laura Bachle, Contributing Editor
Bureau of National Affairs, ADR Report
Volume 5, Number 6
Here’s a potential new series of episodes for “Dallas”: Imagine John Ross (Jock) and Elly Ewing are planning their estate. As you know, every one of the family members is financially savvy, with their own legal representation and estates. Of course, Elly wants to consult the entire family about the disposal of their estate, which includes the family ranch business, the original Ewing homestead and thoroughbred horse operation, a number of properties, an investment corporation, and, the mother of all, Ewing Oil. J.R. is currently CEO of Ewing Oil, with Bobby, his brother, Executive Vice-President. Various other siblings are involved in other parts of the family business, including a long-lost brother who ran the cattle operation until recently.
Pamela, Bobby’s wife, is caretaker for Elly, who suffered a stroke recently. With Pamela’s help, Elly calls a family meeting to discuss the estate. She asks the children to tell her and Jock what they want. The meeting is a disaster, with estranged brother Gary showing up from Knots Landing, J.R. and Bobby throwing punches, and Jock having a seizure. By the time a mediator is called in, Sue Ellen has filed for divorce from J.R. and Bobby has moved out of the house. No one, (except for the viewing audience) has the complete picture–not the attorneys, the spouses or the characters.
The mediator steps in. He talks to every one of the parties confidentially. He finds out Bobby hates his job. He’d rather “work the land.” J.R. is only interested in Ewing Oil. The other stuff, he says, “Is just a bunch a peanuts.” And so it goes, episode by episode, the mediator starts to piece together a solution, conflict de-escalates, Sue Ellen comes back to J.R., Ewing Oil turns solar (well, maybe not), viewership plummets (definitely).
Does the above scenario seem unlikely? John Gromala, a practitioner in the newly establishing niche of estate planning mediation may disagree. He says that the use of mediation in estate planning can improve client satisfaction, reduce the probability of litigation, and help estate-planning attorneys avoid malpractice claims. He ought to know. He was the managing partner of the Harland & Gromala law firm in Eureka and Fortuna, California for twenty years. His law practice concentrated on estate planning and advising small businesses. Some of his former positions include: Fellow – American College of Trust and Estate Counsel; Member – executive committee of the Estate Planning, Trust and Probate Law Section, California State Bar; President – Humboldt County Bar Association; and Board Chair of a Northern California Community Bank.
In 1988 he left his law firm to accept a position as executive vice president and general counsel with a private holding company. Its subsidiaries were engaged in publishing, printing, construction, aircraft charter, and other ventures in California and New England. During three and one half years of reorganization he became acutely aware of the frustrating and debilitating impacts the adversary process has on a business. Upon completing the reorganization he resigned and established his mediation service.
One of Gromala’s current specialties is using mediation during the formation or reorganization of a business and during estate planning to minimize potential for future conflict. He recently returned from a conference in Austria at the University of Klagenfurt, at which he conducted a workshop on partnership charters. The workshop was attended by nearly 300 people from around Europe.
Mr. Gromala has benefited from working on a number of cases with David Gage, a mediator and clinical psychologist in Washington, D.C. After witnessing too many family and non-family business partners go through horrendous legal battles to try to iron out their differences, Dr. Gage founded BMC Associates, a team of mediators with backgrounds in law, finance, business, and psychology. The firm, which works nationwide, specializes in preventing and resolving disputes that arise in what he calls “intimate business groups”—partners, boards of directors, co-inheritors, and of course, family owned businesses. Dr. Gage is author of a book that will be published in 2003 entitled Partners in Paradise: Who Said Having Partners Has to Be Hell?
The benefits of using mediation for estate planning and disputes arising from a family business are many. Key among them is the usefulness of confidentiality, as illustrated in the “Dallas” example–a factor usually not present in estate or business planning. Only mediation holds a promise of reconciliation. Only a mediator is impartial and non-judgmental. Only mediation provides for self-determination. So why isn’t it common practice? Mr. Gromala says, “It’s very difficult to get estate planning attorneys to recognize its usefulness. The attorneys say, ‘What is the problem? Why do we need a mediator? We are their counsel and their advisors.’ The referrals I have gotten have been mostly from accountants, not attorneys.” Yet the use of a mediator is patently obvious when one reflects on the unique nature of “conflict of interest” concerns and the emotional complexity involved in these cases.
Conflict of Interest Concerns
The probability of a conflict of interest is present in all estate planning and business partnerships. Often, spouses are advised to have separate attorneys and individual financial advisors. If they use the same attorney, they may be required to sign a “consent to joint representation” which means the attorney cannot have separate confidential discussions with each of them. Second marriages and children from combined households further complicate matters. Put these factors on top of our natural reluctance to “muddy still waters” and you get litigation stew: a brewing pot that sits and simmers for years until it finally blows up.
In the family business, it is rare that all the owners or partners think that any of the company’s regular advisors are neutral. One family member almost always has more contact with the advisors than other family members. The advisors themselves may also have a conflict of interest in working out different agendas among their clients. Furthermore, lawyers in particular are trained to vigorously represent one individual against another, a different mindset from working for the good of the entire group.
Conflicting needs and hidden agendas
There are also socio-emotional complexities in estate planning and family businesses. Heirs are not usually active participants in estate planning. Children who inherit a business with siblings as partners may be unwilling to raise emotionally laden issues. People about to married are often in a state of euphoria. They may view their prenuptial agreement as a means to show how much they care about their partner, rather than a frank statement of clarity. One spouse may not raise an issue they know to be distasteful to the other one in their presence.
Similarly, parents may make assumptions concerning their adult children’s desires that have little relation to what the children actually want. Children make their assumptions based on their emotions toward their parents and their siblings. (One can easily imagine the tenderhearted Bobby not wanting his father to know that he wants no part of the family business.) The result is a plan based in part on flawed assumptions.
Dr. Gage claims that one of the biggest complaints people have about partners is unmet expectations. Often, discussions about expectations of each other never take place. Partners need to talk about many different types of expectations, like what each person is going to do, how hard they are going to work, and how they will handle differences.
Even when these issues are discussed, a whole layer of usually hidden expectations often exists. Lurking in that layer may be the expectations of those who have gone before, i.e., mothers, fathers, grandparents, and the ever-present founder, no matter how many generations ago he or she started the company. Even though founders die or retire from their businesses, their presence can remain alive in the form of their stated or unstated expectations for their offspring.
Lack of Fairness
According to Mr. Gromala and Dr. Gage, partners constantly, and perhaps unconsciously, monitor what they put into the partnership and what they get out of it, and make comparisons with their partners in this regard. This is not just about money. It is about the expertise each person brings, the ability each has to control his or her own work life, how hard each is working, and how much each contributes to realizing the company’s goals. What results from these comparisons is tantamount to an interpersonal balance sheet, which is based more on emotion than money, and more on perception than reality.
When partners feel they get more out than they put in, they usually feel highly motivated. When the converse is true, they say a state of partnership distress exists. Partnership distress is eventually relieved in one of five ways: The disadvantaged partner puts in less time or effort; finds a way to create more “equity” by taking more sick days or vacation or perks; sabotages the partnership; tries to end the partnership or his or her role in it; or notifies the other partners that the partnership deal must be re-negotiated. Obviously, only the last option is healthy, but it is usually the one least taken.
Similarly in marriages and family estate planning, there is also emotional accounting. The siblings may argue that there is “a favorite.” Children from a previous marriage may feel that they are not treated equally. A spouse may feel slighted. (One can easily envision Bobby’s wife, due to her self-sacrificing care of Elly, may expect a larger share of the estate.) If the emotions persist, it creates a climate for litigation after death. Relations between executors or trustees and beneficiaries can immediately degenerate into a protracted battle that leaves family relationships in tatters.
Tools and Techniques
What are the tools that an estate planning and family business mediator uses? For business partnerships and estate planning mediations, Mr. Gromala uses a variation of the tried-and-true “single text” technique perfected in international affairs. A memorandum of understanding is used in estate planning, and a “partnership charter” is used in business partnerships.
In an estate planning mediation, the mediator communicates with everyone on an individual basis. The process is explained to each spouse. There are also small and large group meetings. Others are interviewed only with the client and attorney approval. The mediator helps the parties face and resolve important subjective issues that would otherwise become “landmines.” There is further consultation with the clients’ attorneys and accountants.
A draft MOU is executed and signed by all parties. This MOU is then turned over to the parents’ attorney who prepares an estate plan that satisfies the desires, interests, and needs of the family as detailed in their MOU.
Using mediation during the estate planning process increases the likelihood of full disclosure since each person knows he or she can meet with the mediator in strict confidence. The whole process is also expedited since the mediation helps eliminate the tendency for parties to drag their feet when they cannot live with a proposal but don’t want to be viewed as obstructionist. Although the mediator does not have to be an expert in estate planning, he or she should be familiar with its basic principles and terminology. A mediator is ideally one member of an estate planning team. The mediators help the parties bring their conflicting interests to the table and help resolve them; the estate planners use their expertise to integrate the information with the other data in developing the plan.
For business partnerships, a “partnership charter” fulfills a similar role. The program calls for the partners to prepare a written document that gives them confidence and clarity about how they will operate and how the future will play out. The process of creating a partnership charter involves a series of meetings in which all of the partners, or potential partners, talk explicitly about their thoughts on specific topics. Four to six half-day meetings spread over a number of weeks or a 2- to 3-day retreat are usually required.
Although there is no one-charter-fits-all design, partnership charters usually include agreements on most or all of 10 topics: interpersonal styles, values, interpersonal equity (fairness), ownership, employment and compensation, governance, management, expectations, communication and dispute resolution, and creating guidelines for the future (including partners leaving the partnership). Once the process is finished, the partnership charter becomes a product–a document that is signed by all partners.
Gromala and Gage use a variety of techniques to structure the process so that partners actually deal with the issues that they often avoid, such as personality differences and planning for the future. For example, they use a set of exercises to help partners create guidelines for how they will deal with the unexpected if it happens They have each person separately create a list of all the crucial decision points they think the team could face. Then the whole group comes together, combines their individual lists, brainstorms about other possibilities they missed, and begins to create guidelines for how they would deal with those events if they came to pass.
This type of scenario planning is particularly useful for partners who are just coming together and have little experience and knowledge of each other–the two building blocks of trust essential to a healthy partnership. However, even partners who have known each other for years usually gain new insight into one another’s judgment. The exercise helps build partner trust and confidence by helping partners learn a lot about how each would operate in difficult circumstances, and minimizes the likelihood of surprises and future conflict.
A partnership charter is not the same as a partnership agreement. A partnership agreement is a legal document drafted by lawyers, with minimal input from the partners on matters considered non-legal. Its purpose is strictly to serve as a legally binding contract about rights and duties related to specific items such as ownership shares. These documents are used to drive and adjudicate specific ownership and control issues.
Partnership charters, in contrast, are concerned with the partners’ intentions for their partnership, including how they will work with each other, run the business, and maintain their partnership. They are not meant to be legally binding or to replace partnership agreements. In fact, attorneys will often review a partnership charter and use it to guide their drafting of a partnership agreement and ancillary legal documents.
There are four primary objectives for creating a partnership charter: to achieve clarity about all issues that affect the partnership; to heighten understanding about the people involved; to strengthen the internal capacity for communication, planning, and decision making; and to resolve issues that commonly produce conflict among partners, such as misperceptions and false expectations.
In addition partnership charters cover issues in more depth than partnership agreements. For example, a partnership agreement must spell out who will have which titles and how much equity each person will have, but it will typically contain only the details that are legally necessary. In the process of creating a partnership charter, the partners will talk about what each title means, including the responsibilities and authority that go with each title. Also, the charter language will usually include some way of measuring whether people are living up to their duties, and what will happen if they are not.
Similarly, while a partnership agreement may simply state that the equity in a company is held by the partners equally, in the process of creating a partnership charter, the partners will discuss such things as how this equal division was that decided upon? Was it because each person was agreeing tacitly to work as hard as the other? When and under what circumstances could that change? Is there agreement that new partners could be brought on board and under what circumstances? What are the implications of 50-50 ownership for managing the business? For resolving disputes?
In both estate-planning mediation and partnership agreements, the purpose of the mediation is largely conflict prevention. It works not so much because of the document itself, but because of the process partners use to create it. The process is challenging because it demands that people think about the future in ways that they probably never have before. Throughout the process, the mediators work to bridge communication gaps by carefully scheduling individual and joint sessions, asking tough questions, and challenging rigidly held views. These actions are necessary so that months or years later, the partners are not shocked when they find that some critical information was never raised.
Often, getting everyone involved is not easy. Five partners may think a charter is exactly what they need while a sixth may oppose the idea. One spouse may prefer mediation, while the other doesn’t see why they can’t just talk frankly to each other.
Rick Maurer, who wrote the book Beyond the Wall of Resistance (Bards Books, 1996), observed that people who are opposed to sitting down with family members are likely to wish to retain the status quo, particularly if they happen to hold the most power. They may talk about the time and expense of creating a charter or say that such preventative work is unnecessary. But deep down, Maurer says, the problem is often an unspoken fear. “Most people fear change, so any serious discussion about expectations for the future can feel threatening.” He also points out, “When the need for change is greatest, the resistance to planning is strongest.”
To understand what may be behind a person’s rational objections, Maurer recommends imagining what it is like for the person who does not want to talk. He suggests asking oneself: “If I were sitting in that person’s seat, what would I be afraid of? Why would I be hesitant to try such a process?” Once the resistance is understood, he says, then reassurance often will bring that person around.
Another impediment to candid discussion among family members is the desire “not to hurt the feelings of those whom we love and respect.” Families that appear to be happy can be avoiding sensitive topics. Left alone, matters fester until some unexpected event produces a gut-wrenching explosion.
Unlike J.R. Ewing in Dallas, controversy arises among families and business owners more often as a result of misunderstanding than malevolent motives. When people get beyond the resistance and begin working together on an estate plan MOU or partnership charter, they discover that openly dealing with issues lessens the likelihood of misperception, builds trust and confidence, and improves their chances for long-term success.