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Case in Point: The Case of the Day of Reckoning

Our Case in Point series is a monthly blog written by David Shlagbaum, Senior Counsel/Facilitator and the Head of Pallett Valo’s Family Business Law Group. His series presents case studies focused on real life challenges faced by Family Businesses and Private Enterprises. While David regularly deals with these types of issues in his practice, all names, businesses, events and incidents are used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.

The Enterprise

Steele Architects was founded by Charles (Chuck), and his younger brother, Stewart, 45 years ago. The firm handles midsize commercial and industrial projects and has also undertaken high profile retail and residential work. Most of its work is centered in Canada but they have also been engaged on projects in the US, Mexico and South America.

The Players

Chuck passed away 3 years ago, leaving Stewart as the Managing Partner. Over the years, Chuck’s children, Brad and Sue, and later, Stewart’s daughter, Amanda, joined the firm as architects and are now junior partners in the firm

The Challenge

Amanda is a rising star in the architectural community. Brad and Sue believe that has more to do with how projects are distributed in the firm than Amanda’s talents, which they believe are no better than their own. Project distribution has always been under the control of the firm’s Managing Partner. When their father, Chuck, was Managing Partner, project distribution was under Chuck’s control. After Chuck’s passing, that responsibility fell to Stewart.  Brad and Sue feel that, when Chuck was around, the work flow was evenly balanced. Now that Stewart is in control, Brad and Sue suspect that Stewart is sending all the plum assignments to his daughter, Amanda, and have become increasingly resentful of her and her father.

A number of years ago, the firm started a compensation system that provides for a draw based on achieving a partner-wide individual billing target and a bonus plan based on exceeding those targets. Amanda has consistently met the minimum targets and put herself into bonus territory. Brad and Sue have struggled to meet the minimum targets and have often fallen short. While Chuck was alive, he made sure that Brad and Sue got their draws even when they fell short of their targets. Stewart was resentful of Chuck’s approach, feeling that Chuck’s children should be held accountable along with the other partners, but Chuck had the higher public profile in the firm and Stewart practiced in Chuck’s shadow, so he let it go. Since Chuck’s passing, Stewart has been reluctant to confront Brad and Sue about it. However, Amanda has started to become very vocal and is putting pressure on Stewart to force Brad and Sue to toe the line.

The atmosphere in the firm had grown increasingly toxic and rumours among the firm’s younger architects and staff were rife that the firm was going to break up and their jobs were in jeopardy. Kerry, one of the firm’s project managers, is a hockey coach and decides to share his concerns with Michael, a father of one of the kids on his team, who he knows is a family business lawyer specializing in dispute resolution. Michael says he is happy to meet with the partners to see what can be done. Kerry sets up a meeting between Michael and Stewart. After meeting with Michael, Stewart, who is very concerned about the future of the firm, calls a meeting of the partners and they agree to retain Michael.

A Resolution

Michael starts the process by having a meeting with all the partners in which he explains his intention to meet individually with them, identify the issues and then work with the partners towards finding a resolution.

And so it began. The rancour and bitterness among the partners dominated the meeting and spilled over into the individual sessions, and there were many. The sessions were filled with accusations of favouritism, entitlement, lack of accountability, lack of fairness, lack of trust and on it went.

It soon became clear that the firm suffered from a lack of transparency and process. There were no apparent criteria on how projects were to be distributed, no regular reports on what projects came in and to whom they were assigned or why, or the relative values of those projects. In addition, it had been some time since the firm’s compensation system was reviewed and tested against the firm’s revenue history and projections. Amanda was resentful of what she felt was the ‘free ride’ that Brad and Sue were enjoying. Brad and Sue felt that forcing them to adhere to the firm’s compensation rules was unfair because of the inequitable manner in which Stewart was managing the project distribution.

Michael also discovered that, notwithstanding all of the differences among the partners, the firm was profitable, so much so that breaking up the firm was not an option that the partners were prepared to consider.

So what to do?

After much hand-wringing and gnashing of teeth, a system was devised in which the firm would establish a project distribution committee that would be responsible for allocating new projects. Each month, a report would be produced for the partners showing how new projects were distributed and the relative value of each project. The compensation system was reviewed by the firm’s accountants and a number of adjustments agreed to. A phase-in period was agreed to under which any partner who’s production was below the minimum target had a certain time period within which to achieve full compliance. Brad, Sue and Amanda would take turns representing the firm at international architectural conferences, in an effort to enhance the public profile of each of them. Finally, Stewart agreed to relinquish his role as managing partner and the firm would move to a management by committee governance model.

Passions have subsided. There are still lingering resentments. The new rules and committee structures are being followed – generally speaking – and egos are still at play. But the lack of trust and accusations of inequality seem to have been largely addressed by a system designed to provide full transparency and apparent fairness.

The resolution was notable for its simplicity and yet was difficult to achieve because positions had become so entrenched, and the lack of trust so deeply engrained that it took some time for people to allow themselves to be open to a fresh view of things. Strother Martin’s iconic line in the movie Cool Hand Luke comes to mind. In essence, what we had here was a “failure to communicate”.

Tune in next month when the Case in Point will be The Case of the Blind Shoulder

Pallett Valo LLP has earned my trust and loyalty based on their extensive legal knowledge and expertise, further enhanced by their prompt service and attention to detail.
Mark Hallink