Stonewalling — Hidden Risks in Wealth Succession
Co-authored by Dominik v. Eynern, Family Hippocampus and Doris Sommavilla, Family Hippocampus
Abstract
Stonewalling is one of the four horse men in relationships, indicating the beginning of the end. ‘Stonewallers’ don’t share much about their world with others. When all wisdom about wealth-creation and wealth-preservation is concentrated in one person, this constitutes Key Man Risk with severe implications on successions and business continuity.
In this article, we highlight possible reasons for stonewalling with insights from neuroscience about our decision making and results from studies in behavioural economics. We look at key drivers of decision making in situations of change and think of possible implications and solutions in a succession-context.
Profiling the Typical Entrepreneur
Typically, he or she have a strong preference for self-direction, a high need for achievement and control and tend to exhibit above average narcissistic personality traits according to research[1], which is an essential force that drives them. They also have a clear future vision: themselves as the eternal force and ultimate decision maker[2].
Entrepreneurs are creative and imaginative and are exhibiting high risk appetite in combination with some degree of over-confidence bias and a favorable evaluation of low probabilities of success. Their energy and perseverance move mountains and is inspiring but associated with behavioural risks and costs.
Entrepreneurs can be preoccupied with threats to their autonomy and infringements of their will. They create information asymmetry in the sense that they want to know everything but share only the bare minimum with others and cannot let go and delegate because of their suspicion of authority, for which they scan their environment constantly. The confirmation bias leads to a situation where they actively filter information from the environment for evidence that confirms their belief, that someone or something wants to take control out of her or his hands. In this mind-set of deep distrust, the world tends to be oversimplified by dividing events in black or white, i.e. idealizing and vilifying people around them which provides the illusion of control. This often cerates a soldier mind-set (albeit in form of a General) in which all information is perceived as threat, eliciting avoidance behaviours with consequences for the team, business and the family.
Decision Making — Main Features
All behaviours are outcomes of conscious and unconscious decisions made by the human nervous system in a given context. Mostly, we aren’t even aware of our decision-making processes as very little brain activity reaches consciousness. Cognitive scientists maintain, that 95% — 99% of our decisions are driven by the involuntary parts of our decision-making system and gazillions of unconscious processes underscore whatever is in our awareness. Thus, the conscious and ‘rational’ part of our decision-making process is reportedly only between 1% and 5%[3]. Thus, behaviours are driven mostly by other-than-conscious processes and emotions, of which we tend to be only partly aware of.
Focus on the Emotive Part of Decision-Making
Emotions are firmly in the driving seat in social decision-making. They can be described as complex affective states in which cognitions are intrinsically embedded. Broadly, they function as motivational programs that guide actions, perceptions and responses to social cues.
All decisions are context-dependent and based on our individual mental model of the world, which is constructed from representations of our past experiences. Building blocks of the mental model include attitudes, values and beliefs about self respectively others. It guides emotions and cognitions and is central to the creation of meaning. Thus, it determines the meaning of social signals we receive and send.
Focus on the Cognitive Part of Decision-Making
Decision-making processes are predictive and anticipatory. Our brain seeks to identify and match detected patterns based on information extracted from our mental map of the world. However, the information about the present situation are incomplete and uncertain, plus information from retrieved patterns from memory tend to be incomplete as well, because they are derived from neurally and somatically reconstructed memories.
But we need to make sense of the received signals and create ‘meaning’. So, we fill information-gaps according to the prevailing context by making inferences, applying heuristics as well as intuitions (emotive processes) to complete patterns in an attempt to fit them to our personal mental model of the world.
This makes decisions highly idiosyncratic and affects outcomes of social processes. Because mental models of the world are unique, each individual differs in perceptions and responses to social signals. Thus, interactants createdifferent meanings in response to the same signal. That leads to misunderstandings and undesirable reactions that provoke ‘false‘counter-reactions.
The entrepreneur that fits the description above interprets social signals from his private or professional environment on the basis of his mental model of the world which facilitates a soldier mind-set. Based on incomplete information, he makes inferences, jumps to conclusions, engages in motivational reasoning and judges. Accordingly, he tends to feel constantly threatened by his environment and feels compelled to fight and defend.
Behavioural Neuroscience
To simplify things, neuroscientists created the triadic model of decision-making[4]. The model postulates, that decisions are motivated by anticipated rewards and by the fear of punishment (emotive processes), balanced by the CONTROL CENTRE, the cognitive part.
The CONTROL CENTER (Prefrontal Cortex) performs executive functions: it neutrally calculates, estimates, predicts, anticipates, reasons, makes inferences and is connected to many parts of the brain. It is responsible for performance optimization and emotional regulation.
The CONTROL CENTER is linked to emotive brain regions, namely the REWARD CENTRE (Ventral Striatum) and the FEAR CENTRE (Amygdala). The REWARD CENTRE is stimulated by the anticipation of reward, the FEAR CENTRE is stimulated by the anticipation of punishment (threat), which elicits survival strategies like freeze, fight and flight. The FEAR CENTRE impairs the CONTROL CENTRE, because this brain region absorbs too much energy required to enact survival strategies. The temporarily impaired CONTROL CENTRE increases our propensity to behave ‘irrationally’, which behavioural economists call ‘behavioural biases’.
Therefore, any human being including our entrepreneur tends to act more irrational under conditions that are perceived as threatening. Impulsive flights to action should mask own anxiety of being out of control and the associated vulnerable to other people in order to maintain self-image and self-esteem. It also leads to a profound resistance to change, which is cyclical in business families. Successions are reoccurring changes in family businesses that are initiated by retirement, crisis or death. This change is predictable but often resisted by the one who is to be succeeded: the patriarch or matriarch.
What are possible reasons for that resistance?
The (Behavioural) Economy of Social Change
Any change can be interpreted as trade-off between meanings: we lose one thing and gain another. We ask ourselves: What does ‘lose’ mean to me in terms of my current ‘being’? And, what does ‘win’ mean in terms of ‘becoming’?
The CONTROL CENTRE predicts outcomes by conducting neural calculations of expectation values in terms of what we probably lose and win in the change process. The emotional system evaluates what it means to us and biases expectation values with information from the FEAR and REWARD CENTRE.
Nobel price-winner Prof. Daniel Kahneman[5] researched how we respond when we stand to win or lose money and found, that we are risk averse and we exhibit loss-aversion. From a set a reference point R = 0, imagine you win $100 (R+$100). Now imagine you lose $100 from the same reference point R (R-$100). The study revealed, that R+$100 gives us 1 unit of reward, but R-$100 means 2 units of punishment to us! Both outcomes are symmetrical, but we create meaning of outcomes asymmetrically.
Thus, we hate to lose way more than we appreciate to win!
Decisions about how to deal with proposed change are based on the same principal of risk-and loss aversion: is the expectation value of losing greater than the expectation value of winning with higher ‘emotional weighting’ attached to the expectation value of ‘losing’, we tend to resist the proposed change!
Decision-Making Biases in Situations of Change
Let’s look what we can learn from research in Change Management and if the assumptions above are reflected in the real world. Four behavioural biases have been identified[6] that have been exhibited by mangers and staff confronted with change proposals:
1. Negativity Bias: the brain’s main function is to keep us alive, so we rather err on the wrong side, assume the worst (anticipation of punishment) and seek self-protection.
2. Availability Effect: to make decisions, we prioritize the easiest available representation of information, so we don’t ask the next explorative question. This makes us think fast and is lifesaving in threatening situations, but it also prevents us from considering additional information that would enable us to make better decisions.
3. Attribution Bias: we know ourselves better than others and need to find the cause and the source for change. We are theorising about motives of others to fit our mental model of the world (motivated reasoning), looking for accountability in the form of real or imaginary persons or, moral frameworks to justify the proposed change. Faced with our short comings, we externalize internal problems onto someone or something else which may well end in a blame game.
4. Confirmation Bias: once we hold a belief, we prefer to process information that confirm the belief as we want to find evidence that we are right! Thus, we tend to ignore information that challenge our belief. It gives us a sense of self, especially when we feel vindicated. But it limits our options and encourages self-fulfilling prophecies. If we take a negative stand towards the proposed change, benefits are hard to imagine. Hence, we resist change even more to avoid PUNISHMENT and but seek REWRAD for being ‘right’.
When these reactions are typical for employees including management, we can safely assume, that our entrepreneur who became patriarch in the meanwhile, exhibits similar behavioural patterns and resists changes, let alone initiating change by planning successions and educate potential successors.
Succession issues are often addressed and initiated by the next generation. Imagine, the next generation stands before the patriarch, ‘suddenly’ asking critical questions, wanting to know more about the business with aspirations to take over one day! That is a proposed change to the status quo which the patriarch holds so dear!
Being constantly alert, screening the environment for potential threats in combination with the negativity bias and a digital black or white world view, he is likely to predict only bad outcomes rather than seeing opportunities in the proposed change. To justify his judgement, he uses the readily available information about the little children he remembers form 30 years ago who must be still in their mental nappies (jumping to conclusions). They may have good grades but they are not street smart, so they cannot possibly know how to run a business quite as successful as he does. Based on that assumption, he does not inquire about the new capabilities the next generation could bring to the table.
This eerie interest in the business may be interpreted as mistrust in the capabilities of the patriarch. The patriarch may not have enough trust in his abilities to handle the next generation and projects this on to them. Thus, he may think they should be ashamed of their mistrust in him. He beliefs, they should rather have faith in the key-man and encourage him to carry on.
For sure, the next generations’ desire is to make the key-man obsolete, they are just out to take over control and he sees a plethora of evidence for this. For him, it is obvious and demonstrated by the behaviour the next generation exhibits! Besides, he beliefs they are not capable and every encounter with the next generation seems to confirm that belief.
His thoughts and behaviour is motivated by the economy of change as discussed above. The patriarch fears to lose his comfort zone of control, power, prestige social status. Because he identifies with the business, he’s also fearing of losing his identity, a very deep, neurological level that is most important to maintain and to defend!
Stonewalling
Threats elicit defense strategies to protect the vulnerable ‘self’. In addition to the flight reaction into activity mentioned above, we can augment our defense strategy by putting up a wall, that shields us from attacks from our perceived adversaries.
We can imagine, how a roman soldier uses his Gladius (sword) to approach and kill in defense (increased activity of entrepreneur when under threat) and hides behind his Scutum (shield) to fend off assaults the next moment.
To shield off entire armies, we need to build walls — stonewalls, because they need to be strong and sturdy for effective protection. In a psychological sense, it is about self-protection and we exhibit a self-protection bias in the absence of psychological safety.
By definition, the stonewall is designed to prevent transparency about business events, strategies and conduct. Material information is not shared, requests for information are blocked off. He justifies his behaviour by biased assumptions and myths to mask his vulnerability and reality in order to create the illusion of safety and reduce his cognitive dissonance he otherwise has to deal with.
Challenging the Stonewalling Behaviour
When the next generation challenges the stonewalling-behaviour of the patriarch, he may become stubborn over this. Robert Cialdini[7] found, that humans want to be consistent with their self-image, habits and identity (consistency bias). Thus, just removing the stonewall is tantamount to defeat and self-betrayal!
The state of the patriarch is exacerbated by the endowment effect. He’s endowed to his business, which he values higher than any impartial 3rd party would do. Hence, he cannot simply dissociate and let go. He’s forced to stay associated and manage his resistance by keeping up that stonewall at all costs.
The Costs of Stonewalling
Building, keeping and defending this protective stonewall, consumes a lot of socio-emotional energy and creates stress for everyone involved, in particular for the patriarch.
Stonewalling and irrational, impulsive actionism may alienate business and life partners and even the entire family which exacerbates stress levels through social isolation. This is especially risky during crisis because he is trusting no one to share the emotional burden with and the social isolation prevents him from tapping into collective intelligence and support for navigating the crisis. Stress compounds over time, inhibits performance and is a powerful killer as we shall see in the next paragraph.
The Costs of Stonewalling: Stress
Resisting change, building and keeping up stonewalls is an immensely draining strategy which results in ego-depletion that creates chronic stress! Normally, stress is a short-term response to internal or external stimuli which helps us to overcome obstacles and it temporarily disrupts our homeostasis (i.e. the way our body remains on an even keel). It originates in the FEAR CENTRE (Amygdala)[8] as a response to signals we perceive as threat to our autonomy. Stress responses are driven by actual, historical respectively imagined social processes that leave us with unresolved conflicts or, when we are emotionally constipated and deny ourselves the completion of emotional cycles. Other socio-emotional stressor-examples are the fear of social rejection and social isolation or the fear of being judged by others when we appear to be vulnerable. Other typical stressors are the fear of failure and the fear of losing control!
Behavioural Manifestations of Stress
In general, stress increases behavioural biases, in particular the self-protection bias. Stress reduces our capacity for patience, narrows our mind, reduces empathy and our ability to trust. This downregulation of the social engagement system exacerbates the tendency our entrepreneur already has: distrust each and every one!
Chronically high stress levels make us even more susceptible to minor stressors and over a period of time, this can lead to the collapse of the inner-self and permanent states of social anxiety, a hapless feeling of being out of control creating excessive fears, worry, panic, dread, terror and depression, a pathological sense of loss of control.
Bodily Manifestations of Stress
Sustained stress levels inhibit the return to a homeostatic state. Our mind and bodily functions are inextricably linked through neural pathways and a chemical signaling system. Physiological stress-responses manifest in heart, gut, stomach, pancreas, liver etc. and through the secretion of a stress-hormone cocktail (adrenaline, noradrenaline, cortisol). Sub-optimal concentration levels of this hormones turn into a mix, which makes stress responses an intoxicating experience without any sense of fun!
Toxic stress inhibits regenerative processes and it impairs the immune system, which increases the risk of illnesses. High body tension changes the posture sub-optimally, which can affect joints. Elevated heartrates and increased blood-pressure puts the cardio-vascular system under strain. Heart diseases, heart attacks, strokes, inflammations, cancer and auto-immune diseases become more likely to occur. Without intervention, this negative feed-back loop of stress morphs into a destructive downward spiral, likely to end in severe illnesses and pre-mature death.
The End of Wealth is Neigh
Successful in creating and running the business successfully and protective strategies such as stonewalling, our entrepreneur is the key to success and failure of the business. But the ego-depleted chronically stressed key-man has a higher likelihood of falling ill and dying quicker than everyone expected, including him!
Naturally, his potential incapacitation was never spoken about or planned for. The entrepreneurial mind set prevented the establishment of a sound corporate governance structure or some sort of family governance, including plans for successions in case of his (mental) departure or orderly retirement.
But when the unthinkable happens, the family becomes an extremely fertile ground for conflicts. The power vacuum can be exploited by family members and advisers in pursuit of their own interests which probably never were truly aligned.
The succession is in limbo and affects business performance as well as all stakeholders negatively. If push comes to shove, the legacy can be destroyed in a short period of time. Thus, decades of hard work based on what previous generations may have built, can be destroyed in a matter of weeks!
This is a stunning asymmetry in time at high ‘socio-emotional’ and financial costs to society. It is also doing unjust to the legacy the patriarch intended to build for himself.
To preserve and continue the legacy, business families should introduce a well-documented family governance based on a social-system integration process and introduce a corporate governance structure in proportion to the size of the organization.
Sharing Experience with Hidden Risks in Wealth Succession
One of the business families we work with offers a typical case of what we mean with stonewalling. The grandfather started the family business. The firstborn male took over after the death of the founder and managed to scale up the business.
In the meanwhile, the 3rd generation was growing up in a bubble, leading an exuberant lifestyle beyond their means. The patriarch was absorbed with creating financial wealth, ignoring the elephant in the room: the hidden risk of wealth succession! Attempts of the next generation to get information about the business or even to get involved was walled-off by the patriarch. He was successful, did not want to invite challenge and this is how he has always done it. Thus, he ignored succession-planning of any sort. In response to the behaviour of the patrirach, the members of the 3rdgeneration turned their back on the family-business and pursued other interests.
During the financial crises, the succession-risk materialized: the patriarch passed away, taking all his secrets and knowledge into his grave. He left behind a pampered next generation which was suddenly mandated with the dauting task to navigate the family business out of crises. The business was in deep trouble, the successors had no knowledge of the matters at hand, no formal training and no structure in place that could give orientation. It was an unplanned succession no one was prepared for!
Advisors were quick to offer advice to the next generation: “Sell everything and live happily ever after” whereby they minded only their own interests. The advisers just added to the confusion of the next generation who deep inside, wanted to keep the business. They felt like a ‘talented pianists owning a piano but not able to play it’. This image triggered in them a strong sense of gratitude and belonging to family values, so they decided to keep the business and turn it around during the crises. Not an easy decision, because this implied changing advisors and remaining accountable for their own decisions. After all, it was the right thing to do, because the family managed to turnaround the business successfully and now, it is back on track again. The successors created a new business model, based the business on a solid ground and now, they have the intention to introduce the next generation to the family business early on. They also want to put in place a well-structured succession plan. But they face challenges, because the next generation has a very different set of values and totally different interests, which makes the communication between the current generation and the next generation difficult.
This family successfully managed the business turn around with the support of appropriate advisors, who were willing to consider the purpose of the family above mere numbers of excel spreadsheets and their own business interests. The sale of the business during the crises could have been detrimental for family wealth not, only in economic terms but also in the sense of relationships among family members and individual life perspectives.
More and more, we come across similar cases. They are symptomatic for the lack of ‘hidden succession-risk-awareness’ in business families. Key risk-driver is the lack of open communication and the stonewalling between family-members.
Are you aware of stonewalling in your family?
[1] Family Business on the Couch, Manfred F.R. Kets der Vries, Randel S. Carlock, Elisabeth Florent -Treacy, Wiley
[2] Family Business on the Couch, Manfred F.R. Kets der Vries, Randel S. Carlock, Elisabeth Florent -Treacy, Wiley
[3] McGilchrist in ‘Therapy in the Age of Neuroscience’ by Peter Afford, Routledge
[4] The Neuroscience of Leadership Coaching: Why the Tools and Techniques of Leadership Coaching Work, Patricia Bossons, Patricia Riddell, et al., Bloomsbury Information Ltd
[5] Thinking, Fast and Slow, Daniel Kahneman, Penguin
[6] The Neuroscience of Leadership Coaching: Why the Tools and Techniques of Leadership Coaching Work, Patricia Bossons, Patricia Riddell, et al., Bloomsbury Information Ltd
[7] Influence: The Psychology of Persuasion, Robert Cialdini PhD, Harper Business
[8] Behave, Robert Sapolsky
