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Keywords

Embezzlement, fiduciary duty, financial controls, privacy, family business conflict, business succession

Abstract

According to the US Census Bureau, 90% of businesses in the U.S. are family-owned or controlled. Unfortunately, the succession rates for family-owned businesses are dismal. Only 30% survive a transfer from the founder to a child and only 11% survive a second transfer to the third generation. Two major factors that contribute to this are lack of succession planning and failure to deal with family conflict, both of which are management failures and are often intertwined. Failure to properly manage the family fosters a sense of unfairness, unequal workload, and perhaps a free-rider problem among family members. This not only causes management issues in the business, but friction among family members, which potentially leads to unethical, and sometimes illegal, actions. This case study details such a very successful family-owned business founded by a father and managed by him and his two sons. However, conflicts appear with the third generation. One grandson does the unthinkable, i.e., embezzles from the family business. Rather than stop him, his brother and father join in. To complicate factors more, 60% of the stock is controlled by the family and 40% is publicly traded. Although there were some red flags, no one notices thereby failing in their duties to the corporation. This case also deals with the issue of succession; should the business be divided by family groups or distributed equally among the third generation? Students are required to identify ethical dilemmas, find the lapses in judgement by each party involved, and recommend managerial actions that should have been taken to prevent this situation.

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