Three Traits Working Against Business Owners
Trait 1:
Much has been made of business owners, excluding those in the tech world, being in the age range of 55-60 years. Usually, when this is the subject of an article, the author pontificates about how dire the future is because owners, in whatever industry, will all be soon selling out. This is poppycock! The average age of business owners and farmers has been the same for at least the last 30 years. The sky hasn’t fallen yet because of this, and it won’t fall tomorrow because of it. As owners retire, others take their place, and the average age remains a constant.
However, age 60 is an important number from a different perspective. Considerable research shows that humans’ financial literacy deteriorates quickly after age 60. As reported on MarketWatch (Oct. 27, 2011), research shows that regardless of gender or education, our brains just don’t retain “knowledge of investments, insurance, credit and money basics…” The deterioration amounts to approximately two percent annually. Making the situation worse is that people’s confidence in their “financial decision making abilities rise with age.”
I have personally found completing perpetuation and strategic projects more difficult the older the business owner. Exceptions do exist, but my general observation is that older owners do not make financial decisions as logically as they did when younger. They make financial decisions with more emotion and sometimes those emotions are not straightforward. This makes it difficult to make the right decision.
Additionally, people tend to lose their perspective on the value of money. So for example, sometimes older business owners do not pay their people as well as they think they do. They have lost track of current wages. They think about how much they made 30 years ago.
Another example is that many lose track of what their company is worth. They do not remain current on this and many other issues. Yet, they grow more confident of their knowledge. Then they go to plan for perpetuation or even sell and negotiating a reasonable deal becomes more difficult, and grows more difficult with each passing year.
It has been my experience that beginning around age 62, people begin fearing they will run out of money before they die. This causes them to make worse business decisions with each passing year. Family owned businesses could collectively fill a tanker with all the tears that have been shed between generations when the parent—not as knowledgeable and more scared and more confident each year—insists the children must pay an exceptionally high price. I have sadly witnessed many families breaking apart as a result.
The moral then is to begin making perpetuation plans before age 60 if the owner wants to build a truly successful perpetuation plan. Those who plan to continue as an executive much past 65 will need to teach themselves that younger people’s ideas and suggestions are likely to be valid and possibly more correct than their own, if they want a successful succession.
Trait 2:
Significant new research shows that testosterone plays a huge role in how much risk traders take when trading financial instruments. When their testosterone levels are high, they take far greater risks than they should, and when testosterone levels are low, they take too few risks. This is one reason research is showing women are often better traders.
Similarly, traders under stress for too long find their ability to think rationally is reduced.
So what is the likely result if one takes a testosterone-pumped salesperson who is under a lot of stress? Mayhem.
This explains the morale problems and the major errors/liabilities incurred by many companies that have a rainmaker. If this person is also the business owner, a common situation, the company is likely to experience additional problems. The owner-rainmaker’s status makes rogue behavior more difficult to address, and the rainmaker has access to the company’s money. If a partner tries to rein in the rainmaker, his or her efforts are unlikely to go well without exceptional luck, planning, and, probably, professional participation.
Many partnerships have split apart because one partner was willing to take extraordinary risks without rational thinking. Examples I have seen include hiring people without even getting a resume; making deals without much, if any due diligence or even proper contracts while betting they’ll get the information eventually; making deals with vendors without any real knowledge of their ability to perform or track record of performance; and incurring liability exposures because they believe they are so good no one will ever sue them for the short cuts they take.
I have seen them spend and gamble the firm’s money without talking to their partners. I have seen many take on new projects without any thought of how the company would be able to fulfill the job. Some look at this as a “Build your dream, and they will come” moment, and it might be that, occasionally. Usually, though, it is just hubris.
Trait 3:
Power tends to corrupt. Many new studies, particularly ones published in the Journal of Experimental Social Psychology as reported in The Economist, show that people with power are more corruptible, but people without status but high in power are the most abusive. So if a business owner has high testosterone, high stress, and, especially, has maintained high testosterone with age, odds are high this owner will abuse power to some extent. Depending on underlying personality traits, they may abuse power a lot or a little, and how they abuse it will vary. Some employees may not even recognize the abuse.
An extremely common example of this is an owner who will not invest in quality people who speak their minds and cost money. Another symptom is they often will not adequately invest in infrastructure. The problem for the company is this: If the person running the company is past their prime decision making years and therefore making worse financial decisions, stressed and therefore making less rational decisions, and corrupt because corrupt to varying extent goes with power, just how good will their opinions and decisions be? Even if the decisions are decent, if any of these variables were improved upon, would their decisions be better?
Solution:
The solution is for owners to build systems around themselves that literally protect them from themselves for when they become older and still want to continue to build their companies. This can mean having younger partners. It can mean having a board with power (publicly traded companies with good boards possessing power have been shown to outperform companies with weak boards). It can mean building a system for everyone, including the owners, and then staying within the system no matter what level of confidence the owners may have in their decisions. Sometimes a good solution is to use a strategic coach, but this carries danger. My observation has been that many such coaches take advantage of their clients’ confidence, poor rational thinking, and emotional charges by making them feel good about bad decisions. However, with a coach who does not kowtow, this is a great solution for those wanting to handle this personal situation quietly.
For many normal reasons, many owners are in mental and physical positions that limit their ability to make the best decisions for their companies. These traits affect every human being to some degree. However, solutions exist. The only question is whether these owners will create solutions or continually grow confidence in their increasingly irrational decisions.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.