BILLINGS, Mont. -- To understand the complexity of transferring a family business to all the children, cousins and in-laws, you need to know the odds.
Just 30 percent of entrepreneurs successfully pass on the family business to their kids. And only 12 percent to 30 percent of those kids are successful in handing off the business to the third generation.
The process is rife with trouble.
Founders often don't relinquish control or train a replacement in time. Different branches of the clan can feud over money, policies or whose children best deserve to lead the company.
Often, the children or grandchildren aren't interested in the business as a profession, or simply want to cash out. Experts advise families considering succession to start planning 15 years in advance.
These are the challenges the Scott family is wrestling with as it charts the future of the family business dynasty, which includes the First Interstate Bank System, with its 72 banks across Montana, Wyoming and South Dakota, and the Padlock Ranch, a king-size cattle operation spanning the plains of northern Wyoming and Montana.
The succession challenges of the late Homer Scott Sr.'s descendants were featured in a 2004 case study and in a follow-up study conducted by Professor John Ward at the Kellogg School of Management at Northwestern University in Chicago.
Family patriarch Homer Scott Sr. grew up poor on a Nebraska chicken farm and worked his way up from a 1930s day laborer to become a key player in Peter Kewit & Sons, now one of the largest U.S. construction companies. After building his fortune constructing roads across the West, Homer Scott Sr. started the Padlock Ranch near Dayton, now one of the country's top cow-calf operations.
In 1968, Scott bought his first bank in Sheridan and moved into the Billings banking community two years later by buying Security Trust and Savings Bank. Homer and Mildred Scott's five children and their offspring now help run Montana's largest bank and the second-largest in Wyoming.
As the family tackles numerous and complex succession issues, one goal of giving back to the communities it serves remains intact.
Last year, the bank's foundation contributed $2.28 million to charitable causes, or 2.8 percent of First Interstate's pre-tax profits.
"If you are part of a place, take care of it," Homer Scott said before his death at age 89 in 1993.
Chickens to checks
The Scott's children, Dan, Homer "Scotty" Scott Jr., Tom, Jim and Susan Scott Heyneman, grew up in the Sheridan area and often spent weekends throwing hay bales at the nearby Padlock Ranch. According to the Kellogg study, they grew up with largely the same values and made key decisions informally by talking issues out and reaching a consensus.
Now, with 74 third- and fourth-generation descendents, that approach no longer works. Only three Scotts work at the bank.
"The family started meeting in 1991, coincidental with the death of our dad" said Jim Scott, vice chairman of First Interstate's board. "With cousins, you need structure and process and transparency, and that's how we've been successful."
There was one family dust-up in 2003 when the siblings nominated three, instead of two, cousins to serve on the board, contrary to a family agreement on guidelines and qualifications.
"What has recently transpired has the real potential to move us apart," a third-generation Scott family member wrote to the second generation that year, a letter found in the case study. The writer was not identified.
To help heal the breach, the Scotts refined their family council to improve communications and help train younger relatives, a process detailed in the Kellogg study.
"The second-generation siblings were learning the bittersweet experience of releasing control, yet were proud of their accomplishments and the capabilities of their children," Ward wrote.
At stake is the future of one of the largest privately held U.S. banks, which could start selling public stock for the first time this year.
Do you make decisions by one share, one vote, which gives family branches with more stock more power? Or should it be one person one vote, favoring larger families? Do those who have sold off much of their stock lose power to those who held on?
The Scott family controls 75 percent of the bank's stock either by voting their own shares or, in some cases, voting the shares of others who have ceded control. Bank employees and directors own the remainder.
"The third generation has to trust that the second generation will not do anything to their detriment," Tom Scott, the current board chairman, said in the study.
In 2000, the family created Scott Family Services to help the siblings plan their estates and finances and to work on succession issues. The family also set up a "fair process" for selecting cousins to serve on First Interstate's board. Of the 17 current bank board members, seven are Scotts, including five from the third generation. Other Scotts serve on the ranch or two foundation boards.
With the help of outside consultants, the family wrote a value and mission statement, fair process guidelines and a constitution that starts, "Like a river, a family flows across time."
The Scott family elects representatives to sit on the Family Council, which replaced the informal sibling meetings.
At age 65, the Scott relatives join the Council of Elders, whose duties include keeping the family history and mentoring the coming generations. The third group is the Family Assembly, made up of anyone age 15 and older who is a direct descendent of Homer and Mildred Scott or has married into the family.
Jim Scott, called "the conscience of the family," led the move to develop "family unity, development, and good governance practices," Ward wrote in his study.
In 2004, the family selected Lyle R. Knight as the first outside chief executive. According to family rules, when Knight retires by March 2012, his successor will be the best candidate, family or not.
"Our biggest achievement will be the successful transition in generational leadership," Jim Scott said.