The Next Generation’s formula for a successful transition
The succession of any family business is as unique as the family itself. That said, moving a family business from the ownership and control of one generation to the next is always a seminal event for both the business and family concerned. Indeed, it’s this generational transition that distinguishes a true ‘family business’ from one that’s merely owned and managed by a single family.
The majority of family businesses fail to succeed past the third generation. The factors that determine the success or failure of intergenerational transition of a business are complex, yet overwhelmingly the outcomes depend upon the attitudes and attributes of the individuals involved.
Understanding this next generation (or ‘Next Gen’) of family business is becoming increasingly more critical to ensuring successful transitions as well as helping those transitions be executed with as little disruption as possible.
Transition to the next generation
In an effort to better understand the dynamics of generational succession in family businesses, in 2010, Family Business Australia and KPMG’s Australian member firm surveyed 60 members of the next generation currently working in family businesses, either as owners and managers in their own right or preparing to take on that role.
Below we discuss the four key findings that emerged from their survey:
- Preparing for succession
- Forging new directions
- Governance as a priority
- Measuring performance
The focus group participants held robust discussions on the role education plays in a family business today. It was generally agreed that further education is essential for the ongoing development of an existing business, and that the increasing complexities of business these days add to this prerequisite. Sixty percent had an undergraduate or postgraduate degree under their belts.
Preparing for succession
The value of external business experience was generally thought to provide a broader and more balanced perspective on business matters. As one Next Gen participant put it,
“working outside the family business taught me how people were prepared to rip off a company if an opportunity arose and how blasé they could be in dealing with other people’s money”.
All focus group participants agreed that working in a family business makes you much more cost conscious because the money you are spending is “more or less your own”. Overall our focus group participants agreed that entry rules into the family business regarding education and experience should be encouraged and even written up formally for future generations.
More than a third of respondents said that when taking over the position of leadership from their incumbent, business strategy would be their priority for change. Each of the focus group sessions held a colourful conversation about whether the focus on changing business strategy was due to the life stage of the business or a function of the environment. However, in both cases it was agreed that diversification and growth cannot be achieved without a more comprehensive strategy, and a solid foundation.
Forging new directions
“Our business has grown organically over time and is still quite informal,” said one participant. “I am hoping to professionalise it and bring it up to the next level.”
It was also agreed that many Next Gens are likely to become more conservative managers than their parents. According to one participant, “businesses are becoming more risk averse and will be less entrepreneurial than in the past because the business climate no longer supports those behaviours. Things such as reporting requirements have destroyed this and in the future entrepreneurship will be more conservative.”
Others see their role in the family business to be more of a custodian of their respective businesses. “When I go to work,” explained one, “I’m building a business for the future of my family. I’m sure that’s not the way my father thought.” They agree that this has also affected their adversity to risk. “When you’re a custodian, you do have to play by more rules. Our business has a reputation and brand to uphold now.”
Governance as a priority
Yet, to many, the same role as a custodian means they are expected to continue progression and keep the business strategy moving forward through necessity. An overwhelming 96 percent of survey respondents believe governance is an important element in the future of the family business. When asked whether they plan to embrace the existing governance structure, more than 60 percent said they would be implementing changes (major or minor).
The increased prioritisation of governance reflects the evolving business structures that are unavoidably becoming more complex and uncertain, not to mention litigious. Family business will most often have the added dimension of how to accommodate new family members into the business such as the next generation and new in-laws.
Additionally, there are complexities surrounding ownership and management structures and how these interact or overlap with appointments to the board. One thing that became clear from the focus groups was that governance concerns extend beyond the business to the family itself.
Measuring performance
Because the interests of individual family members are not always well aligned with the needs of the business, the development of formal mechanisms to discuss and resolve internal family difference vis-à-vis the business can head off a lot of intra-family disputation and animosity. These mechanisms can take various forms, including family councils and/or family constitutions. Sometimes these structures involve external moderators or facilitators.
Of interest is the fact that only 15 percent of family businesses have a formal process in place for dealing with conflict. In a business where relationships are central to its operations, this is a concerning figure. The survey found that the remuneration and performance assessment of family members working in the business often lacks the transparency of this process in a non-family business.
Fifty five percent of respondents said they were not satisfied with their performance review process and a further 50 percent said their salaries were not benchmarked with similar roles outside the family business. When asked about performance assessments, one focus group participant said that “being performance assessed by my dad seems like a realty strange way of doing things”.
Formula for a successful transition
There are no simple answers here. An across-the-board policy of openness and honesty in workplace communications is a good starting point. Where possible, avoid a family member being directly assessed by another family member, and if this isn’t possible, perhaps consider the inclusion of an independent third party in the process.
Assessing performance on the basis of hard, numeric key performance indicators (KPIs) can also help to keep reviews as impersonal as is possible. And of course both the performance assessment and the remuneration of family members ought as a general rule to adhere to the same standards as those that apply to non-family employees.
At the end of the day, all participants agreed that their greatest competitive advantage was the fact that they are a family business. The survey has shown that going forward this advantage will be augmented by a Next Gen of more educated and experienced leaders. Professional management structures will be enhanced by a greater appreciation of the role of governance, and business strategy will be challenged from a solid foundation.
by Christophe Bernard (KPMGFamilyBusiness.com)
