Transitions in business leadership are inevitable – planning early can help you avoid conflict down the road.
Very few family businesses make it to the third generation. Research from Harvard Business School revealed that nearly 60% of family-owned business directors indicated that they do not have an effective CEO success plan.
Few family businesses make it to the second and third generation
Take for example one company that was all but written off. It was deep into its third generation of family ownership. Plans were being drawn to cease operations and liquidate company assets due to distrust between the three branches of the owning family.
It’s an unfortunate, but common scenario.
In a last ditch effort to repair family relations and maintain ownership, they brought in Northern Trust to serve as the successor trustee.
"The prior trustee and prior management of the company provided little, if any, information to the shareholders / beneficiaries. They seemed to work on a need-to-know basis and determined that the family members didn’t need to know much."
Managing Director of Family Business Group, Northern Trust
Harris and the majority ownership group immediately ramped up shareholder communication, family education and created a formal governance structure. The family’s concerns were eased after thorough education on company cash flows, related tax implications and the company’s dividend policy. Over time, they came to the consensus that liquidation was not the answer. Greater inclusion of family members in the governance structure helped to foster an attitude of shared purpose and a renewed desire to keep the company in the family.
Document a succession plan now… you never know when you’ll need it
“It’s not uncommon for business owners to be reluctant to give up control during their lifetime even if they intend to pass the business to the next generation,” Harris says. “As a result, the transition can occur at the worst possible time — immediately following the death or disability of a key player within the business.”
Establishing a succession plan early, when owners and stakeholders are on good terms, will allow for systematic decision-making and execution in tumultuous times. Here is what a robust succession plan should cover:
a robust succession plan
Identify future company ownership, transition timing and details. (Usually covered in the owner’s estate plan).
Identify the next leader of the business, whether child, other family member, or employee. If the owner’s offspring are too young, it should have a interim leadership plan or a plan to sell the business.
Establish a formal governance structure that includes an advisory board or board of directors. Consider a family council to help foster engagement with the extended family and to convey the family’s shared vision for the company’s future to the board. This is vital for businesses beyond the second generation, where multiple family branches may be either active or passive owners in the business.
Management: Prepare the successor for leadership
Children who are seen as likely leaders of the company stand to benefit from a founder’s foresight. With ample time, the offspring may be introduced to key customers and suppliers, and be placed in situations where they earn the respect of non-family employees and receive mentoring from non-family executives or directors.
In addition to shoring up management skills, the experience can bring clarity to the ultimate choice of tapping one family member for the top spot over another.
Governance: Business and family
Governance structures are required both at the business level and the family. A functioning corporate board can be great tool to help support the generational leadership transition.
A family council can help guide a family’s decision-making around important topics such as a family employment policy, permitted shareholders, dividend policy, family engagement, etc.
When considering how and when family members are employed in the business, it’s important to set a precedent. To strike the right balance and avoid problems down the road, Harris recommends a family employment policy that details requirements like:
- The minimum level of education
- Work experience outside of the company
- Acceptable roles, based on skills and abilities
- A formal hiring process
- Reporting structure (to address one family member reporting to another)
It’s important to keep non-employee family members engaged in the business through newsletters, conference calls, and periodic meetings.
“They need to understand the business, how profits are generated and how you have to invest capital back into the business to allow it to continue, innovate and grow,” Harris says. “Such knowledge makes it easier to understand the context of the company’s dividend policy.”
Working together without the drama
Invariably, conflicts will arise in the management of a family business. Having governance structures in place, as well as an agreed upon process to address conflicts, can help resolve disagreements in a proactive fashion and prevent them from flaring out of control.