Passing on the family business
Published in the Derry Journal ~ Ireland Friday, September 9, 2005
Parents may willingly hand over the burden of management to the next generation, long before they give up the privilege of control. Passing on the key right to vote shares involves "transfers of power, of status and even of identity," says John Ward, who teaches family-business management at two business schools, one on each side of the Atlantic: Kellogg in the United States and IMD in Lausanne.
Of course, the second and subsequent generations have a choice. Keeping the family in the business may mean continuing both to manage and to own it or the family may own the business but play no part in its management. Families in northern Europe seem especially willing to contemplate the second option, says Mr Ward. More than in other parts of the world, Europeans are willing to put professionals in to manage the family firm. Moreover, Mr Ward reckons, more families are now willing to accept the split, as a way to keep the family involved but distance it from the day to day operations.
But where succession replaces a single founder owner with a band of brothers or consortium of cousins, new problems arise. The second generation relatives who run the business may not be as united or as driven as the founder. The cousins who are shareholders may want to get their money out, or may have less faith in the new management than they did in the original owner. And the second generation may enjoy less authority with the rest of the family than the individual who originally created the business.
Corporate succession is always a tricky moment. Many bosses dawdle on the way to the exit. In "The Hero's Farewell", Jeffrey Sonnenfeld of Yale University found that chief executives were significantly less willing to contemplate stepping down than were other senior executives. And, even after retirement, they hung around, 57% of them retained an office at the firm for at least two years (compared with 23% of senior managers).
With corporate founders, reluctance to hand over the reins may be even greater. Founders generally long for their descendants to continue the family firm, a survey by in the late 1990s found that 81% of older owners wanted the business to stay in the family, although 20% were not confident of the next generation's commitment to their business. But many make it hard for the children to do so, the survey found that 25% of older shareholders in family businesses have done no estate planning apart from writing a will. Often that leaves heirs at the mercy of inheritance taxes that can force the sale of the business.
Sometimes, the founder faces a real dilemma, his daughter or nephew may be more astute than the oldest son whom he sees as a natural successor; he may want the shares to pass to one child, in order to retain control in a single set of hands, rather than dividing his inheritance equally among his children; he may trust his children but mistrust their spouses. At such points, the emotions of a parent can interact disastrously with requirements of a secure transition. Yet delay in establishing who inherits the business may discourage the most talented of the next generation from investing time in it.
Being beastly to the heir has a long history. The first Henry Ford bullied his son Edsel for years. Thomas Watson senior, the founder of IBM, refused to pass on the reins until he was 82. In Britain, a television series fronted by Gerry Robinson, a former chief executive, has won viewers by repeatedly exposing the painful tensions that a lingering founder can cause within a family business.
Delays can be disastrous. If a succession isn't done by the time the boss is 65, it becomes very difficult, and once they get to 70-75, it can be hard to let go. If the old do not go, the young may not stay. Instead, they may leave and set up a rival business of their own. It may take the shadow of the Grim Reaper to get things moving: "Nothing helps unblock a stalemate about succession as effectively as a mild coronary," wrote Manfred Kets de Vries, author of a book on succession.
But, even if the owners are willing to pass control to their children, the children may have other plans. A survey of the children of owner managers of British family businesses found that the most commonly cited reasons for not joining the family firm were a lack of interest in a business career; a feeling that "the business would not allow me to use my talents"; and a lack of interest in the particular business. An even clearer explanation seems to be gender. Of the children surveyed, 75% of sons worked in the business, compared with only 35% of daughters; and daughters accounted for 77% of those whose main reason for not joining was a lack of interest in a business career.
Those missing daughters may make a difference. Some family firm advisers think that transition of a family business from father to daughter is easier than from father to son especially to the first born son, viewed by most specialists as the most difficult succession of all. Perhaps if more women went into the family business, more might make the transition.
How can family companies improve their chances of survival? Several studies of firms that have passed successfully down many generations suggest that there are ways to raise the chances of longevity. Heinz-Peter Elstrodt of McKinsey looked at 11 such family businesses in an article in the 'McKinsey Quarterly', the consultancy's house journal. Elstrodt found a clear need for professional management and for a continuing family commitment to owning the business. Some research suggests that firms that switch early to professional management find it easier to survive than firms that wait. Michael Lubatkin of University of Connecticut's business school found that firms surviving to the third generation and beyond were those that had put in place at an early stage formal rules to ensure effective family governance.
Families whose businesses survive seem to operate on a set of agreed principles that pass from one generation to the next, written or unwritten. These should ideally include the creation of a board of directors that must meet at least three times a year; a process of strategic planning that allows everyone to debate and agree upon the broad direction the company is taking; and family meetings, ideally two to four a year, that include as many of the owners as possible.
One of the key decisions when the family retreats mainly to an ownership role is how to constitute the board. Many family businesses have none. Survivors, the McKinsey study found, tend to have strong boards, and usually one that includes a significant proportion of outside directors.
A second vital decision is the circumstances in which family members can join the company. Survivor family businesses often exclude family members entirely, or insist that they work successfully elsewhere before they apply and face an evaluation as rigorous as any outsider before being taken on.
A third key decision is to build an appropriate strategy. Because family-owned businesses have a more restricted access to capital than publicly quoted firms, they tend to concentrate in businesses that require relatively few assets, such as trading, consumer goods and retailing.
If those three decisions the make-up of the board, the terms on which family members can join the firm and the creation of a strategy-are well made, then family businesses stand a good chance of surviving. But there is one further essential-the family must want to continue.
With each generation, the gap between management and ownership widens, as does the gap between the company and shareholders.
So the final essential for successful long-term survival is to keep the family involved and willing to carry on as owners from one generation to the next. Keeping owners on board can entail wielding sticks as well as dangling carrots. If it is difficult to sell the shares in a family business at their true market value, then family owners have a stronger incentive to sit tight.
Many founders who are now bequeathing their businesses to the next generation may find that their children are unwilling to carry the responsibility. Inherited jobs are out of fashion. But, at its best, a family business can take a long-term view, behave with altruism, and care about product quality in a way that quoted companies often find difficult. Society, as well as the economy, would be poorer without them.