How to successfully transition family business to the next generation
This article explains the world of family businesses -what they are, how they are run, how challenges and conflicts arise and can be resolved. Most importantly, professionalizing the family business is crucial for growth, continuity and perpetuity across generations. Likewise, carefully identifying and properly developing the next generation of leaders is an extremely critical decision for any family business and external coaches can be of immense help in this process of leadership development and transition or succession.
I believe that the tradition that follows a family through several generations is extremely powerful, quite tangible and very relevant. The secret is to not let your tradition unreasonably burden you — John Lyman III, eighth-generation executive vice president of Lyman Orchards
Background
Professionalizing the family business is crucial for growth, continuity, and perpetuity across generations.
A family business is one where the ownership is controlled by one or more families and in which family members significantly influence the direction of the business, through their ownership rights or management roles. Besides, in family businesses, the current owners intend to pass on control to the next generation of the family.
While many family-owned businesses (in terms of numbers) are small privately-held enterprises, there are also quite a few that are large, publicly-traded companies. Some of the largest companies in India, and in the world, are family-owned and spread across industries. Nearly 60% of the top 500 companies in India are family businesses.
Family business management is a discipline that has evolved from an art into a science. There is growing recognition by family-run companies that stakeholders are demanding greater clarity on issues ranging from succession to the management of wealth and the distribution of profits — Sanjaya Baru
Performance
There is a common belief that family businesses tend not to survive beyond the third generation. To be fair, the performance of owner-managed businesses compares quite favorably to non-family-run businesses. Over the last 15 years, the largest Indian family businesses have shown higher revenue growth when compared to similar non-family businesses in almost every industry where they are both present. They also have lower profitability and have taken on more debt in most industries compared to non-family- owned businesses. All these points towards a strong bias for growth and an appetite for taking on risk. A recent study found that family member CEOs outperformed their professional CEO peers, in delivering total returns to shareholders over a five-year period.
Running a family business
Once a business is established by the founder, the business becomes the wealth as well as an occupation for the family. Family members can choose between being passive owners, activist investors sitting on the Board of their companies, or being active owner-managers. The dominant choice in India is for families to be owner-managers of their businesses. It is imperative for a family to address and agree from among these choices.
In some owner-managed family businesses, there is a head selected for a predefined time in a predefined manner (primogeniture, selected by an outside body or family council) with established decision rights. Other family members could also be in the business, but the chain of command is clear. Family heads may also consider splitting the business between siblings.
If they intend to act as owner-managers, then they must create rules on how they select managers and how they ensure fair wealth sharing to the full family. Selecting managers from within the family, and the control that goes with it, requires well-established processes for successor identification. Offspring who are not chosen to run the business must also receive their fair share of wealth, to avoid conflicts.
If they intend to manage collectively by their presence on the Board, again, they need to put in place clear policies on capital allocation, dividend distribution etc.
Addressing challenges
Family businesses do face their own challenges. Interests start to diverge among the children, and conflicts arise on account of wealth sharing, succession, and capital allocation. As families become larger and shareholding gets fragmented, decision rights and shareholdings start to diverge. Unless the family sets in place a family charter and a governance structure before the disputes begin, the challenge of keeping the family business intact becomes harder. Family businesses can survive and succeed over time if the family leaders pay careful attention to how to manage the family with fairness, transparency, and by instilling a meritocratic value structure that distinguishes between management and ownership so that the business can be well-managed.
Conflict resolution
Fights between families that own and run businesses can cause disruption to the business. They are generally predictable, over issues such as succession, sharing of wealth, and decisions related to the business. Conflicts may be intra-generational (such as between siblings or cousins) or inter-generational (such as between uncles and nephews) or a combination of both. It is rare that such disputes within a family escalate suddenly. It typically starts when interests begin to diverge. Initially, they are not large divergences, and members seldom want to highlight the differences to avoid discomfort and friction. Over time, communication between members deteriorates. Of course, conversations at this stage are uncomfortable, but to suppress them in the hope of postponing conflict is the worst strategy. Families then set themselves up for far sharper disagreements in the future.
A family is based on unconditional acceptance. What underpins a family is a love, affection, fairness, and equality of treatment. A family is not a meritocracy. A family which owns and manages a business finds performance issues sometimes in conflict with other filial requirements. Every member of the family desires to be equivalently and fairly treated. They seek roles and want returns from the business for themselves. So, it is even more important for the families to have the structures by which they can agree on the principles and precedents on how decisions are made. They also need to uncover conflicts at an early stage and tackle them before they escalate.
This requires family businesses to create special forums where these principles can be agreed upon and disagreements aired. They also need to define the mechanisms to resolve them. It needs agreement from separate family members on what rules they should create for themselves in respect to the family members involved in the business. They also need to agree on what dividends are due to them and how they may exit their share and do something different with their lives. We recommend families in business consider creating:
1. A conflict resolution mechanism should be set up before conflicts have surfaced. Doing so once a conflict is underway skewed the entire process.
2. Establish agreed principles in respect to succession, entry into and exit from the family business, wealth sharing, and other predictable issues on which there may be conflict.
3. The family forum must be seen as fair by family members in its constitution, representation, and decision rights for it to be effective in airing and resolving conflicts.
4. The family forum must always involve a few independent, neutral advisers from outside the family to ensure they can get a truly unbiased opinion.
5. Finally, the family charter must be bespoke and created by the family but be open for discussion and refashioning in every succeeding generation.
Grooming the next generation for the future
It’s hard to have a hereditary system that produces the competencies required to meet the demands of the public and the organization.- J. Mark Baiada, founder of Bayada Home Health Care
Carefully identifying and properly developing the next generation of leaders is an extremely critical decision for any family business founder, owner or leader. This requires a good understanding of each person’s potential, what roles they are prepared and eager to play and their motivation to fill various roles.
There are many methods to prepare the next generation in a family for business. It is easy to instil the values of the family in the next generation, as they grow up in an environment where most conversations are about the business. They have a longer-term view of their business and are more deeply committed to the business than other employees. They can be trained, mentored to understand their industry, taught about their sector, and given lessons on how to manage employees.
In our experience, while the next generation of family members are well educated and have been mentored by the previous generations of family members, hiring an external Leadership Coach can provide the following benefits -
· While inducting Generation Next to take up higher responsibilities, Executive Coaching can provide support to them to Arrive, Survive and Thrive in the competitive corporate world
· Next Generation leaders initiated into coaching would move from Dependence to Independence and Interdependence, by embarking on the coaching journey spread over 6–8 months
· Coaching can promote collaboration and teamwork vs working in groups or factions when there are multiple founders or their families involved in running the business. It can help create effective alignment and decision- making pathways
· It can supplement individual performance development planning for new leaders, identify development opportunities for next-gen leaders while using their skills effectively in the context of the business
· Coaching can help current leaders let go and transition to the next-gen and while doing so think through career development and transition strategies
· The Coach can help family members reframe their thinking and look at the emerging opportunities/possibilities to expand the business multi-fold
Making the family business more professional
There are some characteristics that make some family businesses more successful than others. These include :
a) being inclusive by engaging all stakeholders
b) ensuring consensus as it promotes collaboration, alignment, and productivity
c) creating a level playing field by minimizing rank and hierarchy
d) define clear boundaries — family role vs business role vs owner role; also inter-personal equations
e) Emphasis on communication — over-communication is better than under communication
f) Focus on the future — practice the art of the possible, prepare realistic future plans
Most family businesses do become more professional by the third generation; however, skilled employees can be retained only if the work environment is fair and structured. This calls for guidelines such as well-documented HR policies, good workflow coordination, and definition of priorities, efforts to eliminate favoritism, and a Board of directors to oversee the company. The family’s vision, values, and goals should be well communicated and accompanied by a clear operating philosophy. This helps everyone understand why they choose to stay and work in the business. All this calls for the right mindset, rigorous commitment, and patience to see the journey to professionalism, through.
Family businesses have much to gain by professionalizing their working and an External Coach can play an important role in the transition to a well- managed business by the next generation of leaders, while maintaining the delicate balance between continuity (offered by family values) and change ( through vision, that helps navigate change).
(Main idea sourced from — Janmejaya Sinha, Chairman, BCG India, based on a series of articles on family businesses that appeared in the Hindustan Times)
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Transformational Leadership and Business Coach, with a mission to challenge individuals and organizations to uncover their ikigai and achieve their potential. Engaged in Executive/Corporate, Business and Personal coaching that produces measurable results, make individuals more effective, productive, and successful and helps them lead meaningful, fulfilled, and happy lives.
