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Company constitution draws lines around family, business

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Dan Schwab, left, and Michael Schwab, are co-presidents of D&H Distributing Co. Inc. in Harrisburg. Under the tenets of a company constitution drafted by their father, Izzy Schwab, the two brothers worked outside the family business before coming to work there.
Dan Schwab, left, and Michael Schwab, are co-presidents of D&H Distributing Co. Inc. in Harrisburg. Under the tenets of a company constitution drafted by their father, Izzy Schwab, the two brothers worked outside the family business before coming to work there. - (Photo / )

The owners of D&H Distributing Co. Inc. have made plenty of decisions over the company's 100 years of operation, but at least one stands out for second-generation owner Izzy Schwab.

It was the decision to draft a family constitution for the company, a Harrisburg-based distributor and one of the region’s largest privately held companies.

The family constitution is a document that lays out how the family and company interact.

“Fundamental to the constitution is the concept that to run an effective family business, you must focus on running it like a business,” Schwab said. “There must be clear delineation between work matters and family matters.”

Schwab wrote the initial draft of the constitution after working in the business with a large group of family members for 60 years. The company was originally owned by four families that eventually consolidated into one. The goal of the document, according to Schwab, was to “prevent or solve many future family decisions and issues before they ever surface.”

One part of the constitution dictates that family members who work in the business may not be paid more than a non-family member in an equal position. Also, family members who want to work in the business must go to college and work outside the business first.

“We were raised to believe the business wasn’t even there,” said Dan Schwab, son of Izzy Schwab and current co-president of the company alongside his older brother, Michael. Both brothers pursued careers outside D&H business before being invited to apply for entry-level positions in the company.

The necessity of working one’s way up from entry level is also outlined in the constitution.

“Most family businesses encourage that,” said Michael Mitchell, executive director of The High Center for Family Business at Elizabethtown College. “In fact, a lot of them have family employment policies that have a requirement that you work outside of the family business before you come back into the business.”

At D&H, the philosophy behind the constitution is to avoid giving family members any unfair advantages over other employees. “In fact family members have the additional responsibility of always earning the respect of their peers, independent of their last name or ownership interest,” Izzy Schwab said.

D&H’s track record as a family business — it has $3.6 billion in annual revenue and 781 employees — has prompted organizations like the High Center to use the Schwabs as a model for other businesses. The Schwabs mentor members of the High Center in an effort to fill a void in the industry.

Colleges and universities have been adding programs and classes for would-be entrepreneurs but education tailored to family businesses is fairly limited. A study by Cornell University found over 4,000 entrepreneurship courses offered at universities nationally compared to roughly 100 courses on family business.

“We talk a lot about starting a business, [but] we don’t usually educate students well enough about succession,” said Mitchell, a former owner of New Holland-based Amelia’s Grocery Outlets, which was sold to Grocery Outlet Inc. in 2012.

Family businesses must focus on three main stress areas that can contribute to failure: running a profitable business, structuring ownership guidelines for family members that may or may not work in the business, and balancing the added level of nuance that comes from working with family.

Mitchell said the numbers only reinforce the need for education surrounding family business: 30 percent of family businesses make it to the second generation, 15 percent make it to the third generation and only 4 percent make it to the fourth generation.

According to Mitchell, the typical transition from the first to second generation is from a parent to a child or children. The transition from second to third generation include the offspring of those siblings.

“Every generation gets a little more complex and needs a little more organized governance,” Mitchell said.

The drop-off in businesses lasting three or more generations also can be attributed to owners deciding to sell or, in some cases, younger generations showing less interest in the family business.

According to Mitchell, millennials like to find their own path. They look for opportunities that align with their values. “Not that the family business can’t be that way,” he said. “Sometimes [it’s] just not one of those things.”

The complexities have triggered an increased interest in family business education, a topic that did not garner much attention in the past. Now, Mitchell said there are as many as 50 family business centers nationally that meet annually to discuss trends and share resources. Many universities, including Elizabethtown, are offering courses, and in some cases minors, in family business.

When discussing the dynamics of running a successful family business, Mitchell and the Schwab family emphasized communication as the single-most important part of the equation. For instance, with D & H, the family constitution extends to spouses, children and other family members who do not have an active role in the operations of the business.

“It is about transparency and communication, and a very important word is ‘inclusiveness,’” Dan Schwab said. “Family members are introduced to the family constitution when they become teenagers.”

Recently, a fourth-generation Schwab joined the company. Brandon Schwab followed a similar path to his father, Michael, and uncle, Dan: He went to college and began working in sales and marketing in the music industry. He was later contacted by the sales department at D&H and asked to apply for a field sales position in the New York City region, where he lived. He’s since been promoted to territory sales manager.

It’s hard not to imagine Brandon Schwab, and future generations of Schwabs, taking leadership roles in the company. However, as history has shown, and as outlined in the constitution, they’ll have earn it.

“From my perspective, that is what a family business is all about,” Izzy Schwab said. “Passing the opportunity onto the next generation while instilling the work ethic and structure that will preserve the business for the long-term.”

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