Family business and road to succession

Family business and road to succession

“From rice paddy to rice paddy in three generation” in Japan;

“Shirtsleeves to Shirtsleeves in Three Generations” in western world;

“The father buys, the son builds, the grandchild sells, and his son begs.” in Scotland and

“Wealth never survives three generations.” in China.

Different expressions but with the same meaning, that a family business does not last long and the cycle turns a full circle within three generations.

Table of Contents

1.  Prologue

2.  Planning of Continuity

3.  Stages of succession and continuity planning

4.  Patterns in change in leadership

5.  Key areas where the young generations need to develop

6.  Key to being a successful successor

Proloque

Hardly 30% of family business survives past the second generation while only 3 % survive the fourth.

During a survey by Kennesaw State University’s Cox Family Enterprise Center and EY’s Global Family Business Center of Excellence some interesting facts were noticed that has been the key to success for family business across many generations:

• They recognize the importance of succession.
• They start thinking about succession as early as possible.
• They clearly define who is responsible for handling the succession process.
• They foster effective communication and family cohesion through regular board and family meetings to discuss business issues.
• They develop contingency plans in case of unexpected events.
• They recognize the need for innovation in order to secure the future of the business for the long term.”

The above is an extract from “The Keys To Effective Succession In Family Business” available at http://coles.kennesaw.edu/news/stories/06-22-2015-the-keys-to-effective-succesion-in-family-business.php

Planning the Continuity

Continuity planning plays a very important role in a smooth and successful transition from one generation to next.

Difference between Change and Transition

While change is related to a new role, technology, methodology, process, location etc and is typically external, transition is the psychological process people go through to come to terms with a new situation.

William Bridges, in ‘Managing Transitions: Making the Most of Change’ says on managing change and transition, that “it isn't the changes that do you in, it's the transitions”.

Change is part of normal affairs of the business but transition can make or break an organization.

Stages of succession and continuity planning

Succession is not an event but a plan, which should be given importance from years before the succession takes place.  A family need to plan and be suitably prepared.

Stage 1 – Preparation

a.   Its first importance should be given to education of the next generation. All capable candidates should be provided with equal opportunities for education. While it is generally advocated that the line of study should be directly aligned with the business of the family, it is essential for candidates to pursue other streams related to the business as a whole. A family into production of electronics may prefer electronic engineering while finance and management are equally important for continuity and growth. Choice should be best left to the next generation.

b.   Whenever possible the candidate should undergo short term training to understand the nitty-gritty and get exposure of the family business.  It is beneficial if he/she works on non-managerial internship.

c.  Post education and most important, should be gathering of relevant experience, preferably working outside the family. It is the time when young minds need to translate their education into competency and capabilities. The next generation benefits greatly by leaving the protected life and prepares them to take independent decisions, something which is difficult or even dangerous if they work within the family business directly. The biggest counter productivity of joining straight with the family business is that new entrants are safeguarded from making mistakes because of reluctance by family elders to give real responsibility; hence they fail to learn or prove their capability. If they start outside and achieve success then they gain respect and are able to show their competency. While this has become a trend for people to work for 2 to 3 years outside their family business, some families have even extended it to more than 5 years.

Stage 2 – Entry

Next stage is the entry into the family business.

a.   Some family has made it mandatory for people from their own family to work outside and gain experience and some even ask to submit a proper resume to join their family business, as they would in any other organization.  

b.   It is imperative to give entry into an area which the family perceive as most critical to the business and let them work around.

c.   Real responsibility plays a vital role in demonstrating their competency and gives them an opportunity to discover or sharpen their talent and skills and contribute towards growth of the family business.

Stage 3 - Working with elders

a.   The core of success of a family is working together with same goals and objectives. The third stage requires new member to work together with the older generation. It adds to confusion when the new generation come in with all guns blazing and wants to make changes in whatever they determine as critical and gets stumped by the more matured older generation. Working under the guidance of and with elders gives the new generation a platform to plan new approaches and strategies.

The far-reaching consequence is that the next generation is experienced in all aspects of the business before they are ready for managerial position.

Stage 4 – Inclusion of those coming in

a.   The fourth stage relates to inclusion of those marrying in. One who comes into the family by the way of marriage, a wife for a son or a husband of a daughter, should be welcomed. By virtue of their relation they may be in a position to have some influence in family and indirectly in the family business. They have a very important stake both as parents of future generation and as spouse. Care needs to be taken to judge right candidate to involve in the business; not all members may be capable or even willing to join the business. Inclusiveness needs to with borders and in alignment with family established norms.

b.  People who can influence should be given suitable and relevant information to allow them to exert informed influence.

Stage 5 – Handing over to the next generation

a.    A elder who plans to pass on the baton to next generation, needs to find potential engagement once he transfers his responsibility to next generation. Elders with no alternate involvement can cause roadblocks based on a different perceptions on a matter, sometime which can lead to delusion among new leaders of the family business. Complaints of not given enough space and authority by the elders is often heard and should be addressed swiftly.

Another grievance of new generation is the delay in transition even after working in the business for years. This often insinuate years of conflicts while the older generation does not let go and the young ones pretend to be waiting patiently. This leads to stagnation and sometime even causes death of the business.

It is important that once transition takes place the older generation should move out to something else and let the new generation to work independently.

Of-course, the elder generation always wants to see the younger generation grow and be successful; something that would give them pride and justify their decision to hand over charge, while the younger generation are always in a hurry to prove themselves.

Stage 6 – Taking over the charge

a.   New leaders in a business should not only be capable but also willing to take up the responsibility. If the young generation is reluctant to take upon the full responsibility of the job and falls back on elders to take every decision, it may lead to void in decision making and vacuum being created in the organization. It also results in loss of respect among family and non-family members of the business.

The baton is not just passed out; it needs to be accepted too.

Patterns in change in leadership

Patterns	Why it happens	Positive	Negative
Un-anticipated	Happens all of a sudden, say because of medical conditions or death	Full control to successor	Leaves no time for development and mentoring
Delayed	Young generation feels they are ready at an end of a period. But elders feel that they are not	The family enterprise remains in the control of elders till they feel the next generation is ready	Next generation feels frustrated and delusional
Conscientious – owners handover but come back if they feel that the next generation is going wrong	Elders have a strategy and way of running business. If they feel that there is a possibility of damage to image and business, they may come back into controlling operations	Stops ruining the business	Successors feel being cheated of their chance and turn
Gradual transition	Goes as per planned transition stages	Successors are well trained and can always seek help and advice of elders	The best way of succession
Caretaker non-family leader takes over the charge for some time. Second best method of transition after Gradual transition	Elders moves out but feels next generation is not fully ready. The next generation may not be interested or capable enough at the point of time.	Business remains on track without the involvement of elders of the family. The non- family leader continues to guide the next generation for future roles	Young generation may feel neglected during the interim phase

We have till now discussed what the elders should do, the following is on what the young generation should work on.

Key areas where the young generations need to develop:

1. Understanding the business and its components.

2. Understanding enterprise configuration and the shareholders.

3. Self-development and self-management.

4. Communication skills for working together.

Key to being a successful successor

It is expected of the next generation to grow on the foundation developed by the elders, to not only continue the family business but also to take it to greater heights.

A member of next generation to be an achiever needs to have these attributes:

1. Have knowledge and understanding of the industry in which they work;

2. Determined to align the company with current requirements, be it technology or marketing or management style etc;

3. Keep a look out for things needs to change both within their organization and because of external causes;

4. Keep the values of the elders and share visions unchanged;

5. Be comfortable with negative feedback;

6. Respect others in the organization; be patience to give enough time for things to mature; be humble to be able to learn from elders and seniors and above all hard work.

∞∞∞∞∞∞∞∞∞∞∞∞∞∞∞

Vinay Pandey, 13/12/2017

PS : If you have a suggestion or have noticed a mistake, please leave a comment.