When it is Time to Transition the Family Business

starting pointThe problem – Poor Talent Management I have a growing number of clients (privately held and controlled businesses) that have begun the transition to the next generation. In a recent Harvard Business Review a great article appeared that looks at the issues involved in succession of the family business. In research conducted by Fernández-Aráos, Iqbal, and Ritter (2015) it is clear that family owned and controlled businesses play a critical role in the global economy.[1]  However, because of poor talent management and inadequate succession planning many fail to thrive or survive.  In fact only 30% of family owned businesses last into the second generation and only 12% are viable into the third generation.[2]

The Best Led Companies

The best family-led companies do four things well: they establish a baseline of good governance, preserve family gravity, identify future leaders from within and without, and bring discipline to their CEO succession.

Governance Baseline

Managing a family business successfully over the long haul requires a clear separation between family and business – a separation that ensures that the professionals hired by the business can clearly settle their hesitations about joining a family business namely: uncertainty about levels of autonomy, hidden agendas, lack of dynamism, and the potential for nepotism and irrational decisions.  Professionals frankly want to be sure a level playing field exists in terms of future possibilities, growth, and advancement.  94% of the family owned companies surveyed by Fernández-Aráos, Iqbal, and Ritter were controlled by a supervisory or advisory board of about nine members on average.  Family representation on these boards averaged 46% in Europe, 28% in the Americas, and 26% in Asia. Good governance appears to be the first hurdle for family businesses that want to hire and retain the best people and remain competitive over the long haul.

Issues to consider.  Owning a Mom and Pop operation does not need the formal governance structure larger family owned and run businesses need.  They do need outside mentors and advisors to remain competitive. If the objective of the Mom and Pop business is to grow into a significant player in their market then a good governance baseline is a critical component.  I have seen Mom and Pop businesses grow only to provide a divestiture of businesses for their children to run – reproducing Mom and Pop businesses. The model works but not as a foundation for creating a large family run and controlled business.  What may be difficult in the divestiture model is retaining the talent that grew the business in the first place.

Family Gravity

The researchers concluded that while family owned and operated businesses need independent governance structures they also must be careful not to lose that makes them unique in their market niche.  This uniqueness is what the researchers called “family gravity.”  Every successful family owned and operated business in the research pool had one key family member (sometimes up to three) who stood at the center of the organization personifying the corporate identity and aligning differing interests around clearly defined values and a common vision. The key family members all had a common view i.e., the next generation not just the next quarter. Each of these key family members embraced strategies that put customers and employees first while also emphasizing social responsibility. It is interesting to note that these are elements of servant leadership.  While the researchers did not make servant leadership a subject of their project, they never-the-less uncovered critical attributes that differentiate servant leadership from other leadership approaches. The significance of this correlation rests in the fact that leaders who practice servant leadership out perform their peers in almost every business metric.   Fernández-Aráos, Iqbal, and Ritter contend that,

When a single family member (or a few who are completely in sync) maintains the right presence in a family business, recruitment, retention, and results clearly benefit.[3]

Issues to consider. The leadership team needs to answer six fundamental questions that will then eliminate even small discrepancies in their thinking. Realize that none of these questions can be addressed in isolation; they must be answered together. To fail to answer these questions clearly is to fail in becoming a healthy organization. Remember don’t use jargon or buzz phrases.[4]

Why do we exist?

How do we behave?

What do we do?

How will we succeed?

What is most important, right now?

Who must do what?

Finding Future Leaders

It is generally understood that the person who is right for the highest-level positions in a firm must possess competencies including: strategic orientation, market insight, results orientation, customer impact, collaboration and influence, organizational development, team leadership, and change leadership. But what Fernández-Aráos, Iqbal, and Ritter found in their research adds another important dimension – one that differentiates family businesses – values served as the acid test.  95% of the businesses interviewed by Fernández-Aráos, Iqbal, and Ritter overlapped in language used to describe their corporate ethos e.g., respect, integrity, quality, humility, passion, modesty, and ambition.  This commonality in the values held by these firms contributes to a shared vision and trust of each other. Family members evaluated executive candidates based on cultural fit above all else. So important is the concept of cultural fit that it drove a significant part of each company’s definition of development. 40% of the companies in the study included members of the next generation in their boards and committees in order to nurture their business and management skills.

The best family firms find their future leaders early and invest in them – whether they are cousins and grandchildren, existing nonfamily employees who show promise, or outsiders with no previous connection to the firm. Likely prospects are carefully brought up through the business so that when they’re ready for more-senior roles, the values and competencies match is a sure thing.[5]

Issues to consider.  Have you done the work to identify the components that make up competencies such as: strategic orientation, market insight, results orientation, customer impact, collaboration and influence, organizational development, team leadership, and change leadership? What other competencies may be needed in your unique industry. The clearer you are on what is needed in a future CEO the easier it is to create a development plan. In addition to competencies it helps to have an assessment of leadership and personality style. Often it is personality conflicts more than lack of competence that drives a leader over the precipice of failure. A good assessment helps a leader gain self awareness and assists him or her in working with people who are different.  The best led companies searched among family, internally, and then externally for future leaders.  However, they all followed the pattern outlined above in the three phases.

In my own field research I observed family owned and controlled businesses that require their sons/daughters to earn college degrees and then find employment and success outside of the family business before they are considered for executive candidacy inside. In one particular firm I looked at family members recruited into the business served in a variety of roles designed to prepare them for senior management and groomed them as potential successor CEOs.

Disciplined CEO Succession

The greatest threat to any company is a failed CEO succession. Jim Collins found that all but one of the companies in decline he studied had experience a problematic transition at the top. In one family owned and operated business I studied the CEO (son of the founder) explained one day how he had nearly driven the highly successful company he inherited into the ground.  Why?  He equated entitlement with success.  He arrived, put his feet up on the desk and commanded others like they didn’t know what they were doing. Instead of learning about the business he utilized the servers of the company over the employee lunch break to play online video games. On the verge of bankruptcy he had to come to terms with his own lack of competencies. The succession event that put him in the driver’s seat had none of the characteristics described so far by Fernández-Aráos, Iqbal, and Ritter. In contrast a disciplined succession process possesses three phases.

Phase 1: Discussion and commitment by the Shareholders.  In this phase the owner family and/or board provides a briefing on succession and an analysis of possible scenarios with the shareholders.  A shareholder workshop is held to strategize about the future and design succession processes.  The result is the creation of an ideal successor profile based on strategic goals, values, and desired competencies.

Phase 2: Candidate Selection. In this phase a list of suitable internal and external candidates is identified and evaluated.  This progresses to a short-listing and obtaining references for a select group of qualified candidates.  The desired outcome is agreement on one or two finalists and contract negotiations with the chosen successor.

Phase 3: Integration and Development of the Successor. Once a candidate is selected an agenda for the first six to 12 months is established and the top management team is selected.  After 12 months, a 360˚ feedback is conducted and, if needed, a development plan is made to meet strategic and business targets after roughly two years. This leads to a discussion and decision about renewing the CEO’s contract t when due.

The process is a highly personal one. As one of the subject companies explained,

“When we get someone in, we accompany him like a personal scout,” one family CEO explained. “A director or board member introduces him, helps him, and talks to him regularly. The know-how is transferred personally.”[6]

Issues to consider. If your company does not have a formal process it should consider creating one. In the subject companies some did find new leadership through inspiration or chance. However the research showed that CEO appointments were far more successful when they followed a disciplined search involving multiple candidates. What does this mean to a company preparing to hand off the CEO role to a son of the current CEO?  Help the son through the process outlined. Further, it is not a bad idea to have a second candidate or to be ready to search for one should the son not succeed in the role.  Too many retirement nest eggs, depending on the sale of the company to the son or daughter, disappear because of poor succession planning.

Conclusion

The conclusion of the researchers is that not-with-standing the minefield leadership decisions can be, a family business can thrive for generations if they establish good governance, preserve family gravity, identify and develop high-potential executives within the family and outside it, and bring the right discipline to their CEO succession and integration processes.  Other research by Ernst & Young, the Family Business Network, and Credit Suisse shows that large, long-standing, publicly traded family businesses grow faster than nonfamily companies, are more resilient, and outperform market returns by several percentage points. There is no reason why smaller non-publicly traded companies cannot mirror similar results if they apply the same disciplines.  Part of the question business owners have to answer is to determine what the horizon of their vision for their company will be. This is not an easy question.  It deals with issues of ultimate contribution and is determined by the degree to which owners are willing to grow their own capacity as leaders.

[1] Claudio Fernández-Aráos, Sonny Iqbal, and Jörg Ritter. “Leadership Lessons from Great Family Businesses” Harvard Business Review. April 2015: 82-88.

[2] Fernández-Aráos, Iqbal, and Ritter, 85.

[3] Fernández-Aráos, Iqbal, and Ritter, 86.

[4] Patrick Lencioni. The Advantage (San Francisco, CA: Jossey-Bass, 2012). Lencioni’s discussion of clarity in values and communication is must read for all family owned and controlled businesses.

[5] Fernández-Aráos, Iqbal, and Ritter, 87.

[6] Fernández-Aráos, Iqbal, and Ritter, 88.