Succession and the Family Dynamic

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Succession & The Family DynamicHow Family Structure Affects Family Business


Last week, we looked at the characteristics and factors that make up what we call a family business

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Our Working Definition of Family Business Ownership control (15% or higher) by two or more members

of a family or a partnership of families Strategic influence by family members on the management of

the firm, whether by being active in management, by continuing to shape the culture, by serving as advisors or board members, or by being active shareholders

Concern for family relationships The dream (or possibility) of continuity across generations


Characteristics that Define a Family Business The presence of the family The overlap of family, management, and ownership, with its

zero sum (win-lose) proposition, which in the absence of growth of the firm, render the family business vulnerable during succession

The unique source of competitive advantage derived from the interaction of family, management, and ownership, especially when family unity is high

The owner’s dream of keeping the business in the family (the objective of business continuity from generation to generation)


Characteristics that Define a Family Business The fact that the family business managers are dealing with

their own money and the inheritance of their children and are not as subject to the quarterly whims of Wall Street allows for more patient capital

They will act intelligently but boldly at critical junctures, knowing that the benefit or loss will directly affect the family

That knowledge keeps family managers making decisions that steadily contribute to the family’s incremental and long-term wealth

The goal is for each generation to grow the company’s value leaving behind a stronger and better than the one they inherited

This makes them more imaginative, innovative and progressive in their decision making


I gave you a definition of family business based on those characteristics…


Our Definition of a Family BusinessA Family Business is any enterprise in which an entrepreneur or next generation CEO and one or more family members significantly influence the firm.

The influence can be managerial or Board of Directors participation, ownership control, the strategic preference of shareholders, and the culture and values family shareholders impart to the enterprise.


I also left you with a number of slides that showed you the worldwide impact of family businesses on the global economy


Some Family Businesses


I hope you went through those slides…


Which gives us the introduction into this week’s lecture…


This Week’s Lecture


Understanding the massive impact that family owned businesses have had on the global economy, we can now move forward to understand the dynamics that run these businesses


While many people would like to tell you that family-owned businesses are all in one structure, they would be wrong!


The family-owned business can take many forms of operation and many of those forms depend heavily on the structure and vision of the family elders and founders of the business


I have mentioned a document called a Family Constitution a couple times in class – so let’s take a minute to understand what it is and it’s impact


A Family Constitution sets the foundation of how the business is and will be run. This includes succession, family members and non-family members employment, and Board of Directors activities.


A badly written Family Constitution can create problems for generations to come. A well written one will be the basis for the success that the business achieves today, tomorrow and in the future.


Family Constitution


A Family Constitution provides the complete structure of how the founders want the company to be run, grown and carried forward – even after they are no longer involved in the decision making process


Since competitive success, family harmony and ownership returns are all at stake at the same time in the firm, having a carefully drafted document to guide generations is essential for founders


One of the most crucial items covered in a Family Constitution is the concept of succession.


While there are hundreds of reasons why organizations fail, in family-owned and family-controlled businesses, the most common reason is succession planning.


Whether the reason is incompetency or unprepared successors, unclear succession plans, a tired strategy that is unable to contain competitors or family rivalries and attempts are power grabs, if the business is going to survive, it must successfully craft the succession process.


What is succession?


There are 3 types of ineffective succession that you must assure do not happen


Type 1 – Conservative

Even though the founder, or previous leader, has exited the business, the shadow remains and the firm and its strategies are locked in the past.


Type 2 – Rebellious

In an over-reaction to the previous generation’s leadership, the next generation launches a “clean slate” approach to the organization.


Type 3 – Wavering

The next generation is paralyzed by indecisiveness, unable to adapt the business to current competitive conditions


Whether it be Conservative, Rebellious or Wavering, they all lead down the same road – the destruction of the company’s traditions, legacies, and “secret to success” – ending in the closure of the company.


So how do we get it right?


Building Family Businesses That Last


Without vision and leadership from members of 2 generations & the use of select family, management and governance practices, the future is bleak for family-controlled enterprises


When you blur the boundaries among family membership, family management, and family ownership, it subjects the business to the potential for confusion, slow decision making, or even corporate paralysis


Add to that, the inability to adapt to changes in the competitive marketplace or powerless to govern the relationship between family and business will ultimately undermine the enterprise


So, family businesses that lack multi-generational leadership and vision have difficulty positioning to retain the competitive advantages that made it successful in the first place


How to we get past this?


With ongoing discussions across generations with owners about their vision for the company to build a business that withstands and excels across challenges


Businesses that have been built to last understand the tension between preserving & protecting the core of what made it successful, and promoting growth and adaptation to changing competitive dynamics


Systems Theory


The Systems Theory says that family business is modeled with 3 overlapping, interacting and interdependent subsystems of family, management and ownership


The Systems Theory

According to the Systems Theory model, each subsystem maintains boundaries that separate it from the other subsystem and the general external environment that the business operates.

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The Systems Theory

For the business to perform optimally, the subsystem must be integrated so that the entire system functions in a unified way.

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The Systems Theory

This model also shows that the family firm is best understood and studied as a complex and dynamic social system where integration is only achieved through reciprocal adjustments among the subsystems.

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The Systems Theory

Put simply – everyone has to give to make the business successful. Each part of the system has a role, but each one must give and take to make the rest of the model successful

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The Systems Theory

The family business will always have adjustments to make, especially when next generation family members join, earlier generations age and the firm sees new periods of growth due to product and/or service innovations.

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The Systems Theory

Issues, priorities and problems will be defined differently by different members of the family in business. The definitions will depend on where the individual stands in the system.

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The Systems Theory

A parent who is CEO and 100% owner of the firm (1) will likely view things differently than a family member who is not active in management and does not own shares in the business (6). Just like a non-family member will have a different perspective (7).

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The Systems Theory

This phenomenon leads to a categorization of family businesses based on their ability to have a family-first, ownership-first, or management-first perspective on issues and their resolution.

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The Family-First Business

In family-first businesses, employment in the business is a birthright. Employment is based solely on the applicant’s last name, merit and other important criteria in the process are devalued or entirely irrelevant.

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Non-family managers with high career aspirations are not usually willing to join family businesses out of concern for their future prospects. High-potential non-family managers will never join a family-owned or family-controlled business.

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Family-First businesses exist primarily for the purposes of the family, perks that transfer from the business to family members are often extensive, financial systems will lack transparency to protect this fact.

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The business becomes part of a lifestyle.

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While well-managed and well-governed family businesses may have sound reasons for paying all members of the family the equal or nearly equal compensation, Family-First businesses tend to equalize compensation regardless of the responsibilities, results, and overall merit.

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The level of commitment of family-first businesses to the continuity of the business across generations depends on the agendas of individual family members and the levels of conflict associated with running the business.

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Family-first businesses are likely to choose continuity only if members of both the current and succeeding generations aspire to this goal and if the current generation has sufficient resources in retirement to make this possible.

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If neither generation dreams of continuing the business, it is likely to be sold at the end of the generation.

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Even if family members want to keep the business running, there is great difficulty because successor selection, strategic renewal and governance between family and business require a strong commitment to sound business management principles, which don’t exist in this model.

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The Management-First Business

Management-First businesses actively discourage family members from working in the business and/or to require work experience outside the family business as a requirement for employment.

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The beauty of this style of family business is that the performance of employed family members is reviewed in the same manner as the performance of non-family members and HR policies generally apply equally to family and non-family employees.

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Compensation is based on the responsibility and performance, not on the position in the family hierarchy.

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The focus is on profitability, return on assets, market share, revenue growth, and return on equity.

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Another difference is that there is no automatic commitment to business continuity because the enterprise is seen as a productive asset. As an asset, it could just as easily be folded into a large company or sold through an employee stock ownership plan.

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The Ownership-First Business

In Ownership-First family businesses, investment time horizons and perceived risk are the most significant issues. Here the shareholders come first.

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Ownership-First businesses have shorter time frames within which financial results are evaluated.

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Just a impatient and greedy investors on Wall Street can pressure well-managed publicly traded companies into short-term thinking, family shareholders who are not active in the business, can get in the way of effective operation of a family-controlled business.

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These family members can cause the business to lose the founding culture, which valued the role of patient capital, or investing in the family business for the long term.

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Patient capital – one of the most significant sources of competitive advantages of many family businesses – disappears at the hands of greedy shareholders.

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Siblings and cousins, caught in the web of high expectations for short-term returns via dividends, distributions, or the creation of shareholder value, are prone to second guessing family members in management.

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If family unity suffers as a result of this pressure by some family members for high returns and short time frames, a loss of will and vision may result. Family business continuity may be abandoned in favor of immediately recapturing the value created by previous generations – even through the sale of the company.

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Succession and the Family Dynamic

Business

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