Success in Succession Planning - Family Business
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Success in Succession Planning

By Dana Telford

Article Date: 03-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

It's about so much more than just filling your shoes - use these four key principles to help guide decisions about transferring ownership to the best hands.

My most successful client has created several billion dollars of personal net worth in roughly 70 years. He claims that he’s been successful because of a few guiding principles that he has followed steadfastly for many years. One of them has to do with what I define as meritocracy.

During our most recent meeting, our conversation turned to China. He does a great deal of business in China, so I asked him what he thought of recent factory closings and economic turmoil there.

He replied, “The key to China’s success is their pragmatism. In a way, they are run like GE. They find the best people to solve the biggest problems and they focus on results. That’s why they will continue to grow and succeed.”

The concept of meritocracy, a system in which the talented are chosen and moved ahead on the basis of their achievements, is perhaps the most essential element found in family businesses that have been successful over many generations. Too often, this straightforward and time-tested principle is overlooked in favor of more traditional ideas of primogeniture (favoring the eldest male child) or nepotism (a prioritized system of favoring relatives). These habits, created over generations, only delay the inevitable: the defeat of the family business at the hands of a meritocratic competitor.

In mid-October 2001 I stood on the shores of the Persian Gulf at Jumeirah Beach in Dubai, UAE with my colleagues Henry Foley and John Davis. The sun was just beginning to shine its first rays of the day on the Straits of Hormuz. I had risen early, awakened by a combination of jet lag and mental gymnastics related to the family I was advising. Now, walking in solitude in the soft beach sand, I was able to think clearly about my client’s dilemma.

An Emiriti entrepreneur (we’ll call him Ibrahim) had worked industriously his entire life to provide a valuable business to pass to his sons. Through shrewd trading, adherence to conservative financial management principles and hard work, and aided by an outgoing personality and endless energy, Ibrahim had amassed a network of enterprises that generated many millions of dollars in annual sales. Now in his mid-60s, he faced the challenge of passing the mantel of leadership and the responsibility of ownership of the company to his children.

Two of Ibrahim’s nine sons worked in the business with him, each managing a separate company. His eldest son, Salem, ran the smallest of the companies and his second eldest son, Hassan, ran the largest. Salem was a devout Muslim and a mediocre businessman. He was content to run his company so as not to lose anything and to maintain his comfortable lifestyle. Hassan was the opposite, lukewarm in his religious convictions but naturally charming and filled with the fire of commerce.

The traditions of Ibrahim’s culture and belief system suggested that he pass the torch of his legacy and leadership to his eldest son. But Ibrahim feared the inertia of Salem’s natural complacency would cause him to simply stand still. He would focus his time on merely protecting the torch flame from the gathering winds of competition. Hassan, on the other hand, would carry the torch forward courageously, using his talents and entrepreneurial drive to take the company into new markets, create fresh ideas and earn higher gross margins.

As the sun rose behind me, warming the shoreline air, I remembered why Ibrahim had hired us. He needed someone to help him think through this pending generational transition, identify possible options for dividing responsibility and ownership, analyze those options according to the guiding principles of the family and suggest the best possible solution.

I watched an apparently exhausted sea snake struggle to swim through the constant crash of the small waves near the shoreline and thought of what I would do in Ibrahim’s place.

The Successful Family Business
Families rule the world of business. Their firms make up more than two out of three companies across the globe and employ over half of the world’s industrialized workforce. They produce 65 percent of the Gross National Product in the U.S. Their names are some of the world’s most famous brands: Marriott, Disney, Ford, Nestle, Anheuser Busch, Ferrari, and Levi Strauss.

Family businesses are leaders in their particular industry (think Washington Post, Dell, Johnson & Johnson). When compared to their nonfamily competitors, they are more than 5 percent more profitable, achieve higher annual revenue and income growth, provide higher annual shareholder returns and are valued 10 percent higher by the equities markets.

Family business leaders are often the best and brightest executives in their industries. They run professional, innovative, aggressive companies that expand the horizons of productivity and efficiency. J. W. Marriott, Jr. for instance, succeeded his father as CEO of the Marriott Company in 1972 when revenues were nearing US $200 million. Today, in the twilight of his career, Bill Jr. leads the US $9 billion, 140,000-employee international company. Under “Junior’s” guidance, the company grew to 45 times the size of the company his father passed on to him.

Family businesses are also known by many to be a minefield of complex relationships and competing norms. Employee/manager relationships in any company are difficult. Add to the mix a manager who is your father, or aunt, or owner’s son, and going to work becomes more complicated. Family norms often run headfirst into the demands of the business. Issues related to fairness between siblings can easily spill over into the workplace, increasing tension and anxiety among employees and family members. The challenge of passing the business to the next generation in a fair and logical manner can cause immense tension and stress.

Based on these challenges then, it is not surprising that seven out of 10 family businesses fail to make the transition to the second generation. And only one of 10 makes it to the third generation. That’s a discouraging 60-plus percent failure rate per generation that leads to a number of perplexing questions: Why do so few survive the transition from one generation to the next? And when they survive, how is it that family businesses outperform their nonfamily competitors? What principles do the successful ones follow to help them overcome family business challenges?

Four Principles of Succession Planning
Based on my research and experience in working with hundreds of families from six continents, I believe four straightforward principles will benefit any leader who wishes to pass a healthy business to the next generation.

Form a firm foundation. Forming a firm foundation means answering three questions: (1.) What do we believe is important and right? (2.) What are our objectives? (3.) How do we plan to achieve them? The best organizations make decisions based on what they believe to be important and right. In 1982, seven people in the Chicago area died shortly after taking poisoned Tylenol products. There remained the possibility that more would perish or be seriously injured if the leaders at Tylenol didn’t act fast.
Jim Burke, then CEO of Johnson & Johnson, which produced the painkiller, made the decision to pull the US $150 million brand of Tylenol from the shelves of drugstores and pharmacies across North America because of a J & J guiding principle that named customers their No. 1 priority. Though more than one of his associates told him that the decision would go down as one of the worst in business history, Jim adhered to the principles the company had followed for nearly 100 years. As a result, more than four lives were saved and today Johnson & Johnson sells over US $1 billion of Tylenol at a 20 to 25 percent premium over its competitors.

Family business leaders must identify and prioritize the guiding principles that they want as the foundation of their legacy. Guiding principles are those that (1) you want to teach to your children and grandchildren, (2) will be just as important 100 years from now and (3) you would stick to even at your own financial peril. Most important, their impact must extend beyond linen paper, calligraphy and a nice frame. Leaders must create and follow a plan to make them useful to any family member facing an important question. They should provide guidance and inspire excellence in every aspect of life, whether related to the business or not. Indeed, they become a high-level operating manual for generations of leaders to come.

Make a meritocracy. Seemingly at birth we begin to believe in the “Norm of Equality,” or the idea that our parents should give us gifts, benefits, advantages, opportunities, affection and time in the same allotments as our siblings. The Norm of Equality is deeply ingrained in any sibling, but is completely impossible. No two siblings have ever been treated equally.

Family business leaders must prepare their businesses for successful succession by developing a meritocracy, a system that seeks, recognizes and rewards achievements. If the golden goose is to continue to lay golden eggs for the quickly expanding family, it must be protected and nurtured. As such, talented managers must be identified, hired and retained while underperforming family and nonfamily members alike must be shed or moved into roles more suited for their abilities. So often, multigeneration family companies struggle under the weight of a top-heavy organization chart filled with underachieving family members. In an increasingly competitive global playing field, and a shrinking demand for almost everything, no business can afford the risk of burdening itself with the suffocating overhead of fat salaries for inefficient leaders.

Communicate consistently and constantly. Communication in a family business means two things: Information sharing and openly discussing important issues. Families are generally terrible in both areas.As a generational transition approaches, family leaders often hide important information that is necessary for next generation members to make important decisions about the future. Some family business leaders withhold financial and business related information associated with estate planning and personal assets because they don’t want their children to overestimate their wealth and become indolent. Others, particularly in Latin and Central America, fear that their children could talk too much about their money or become showy and put themselves in jeopardy of being kidnapped. While both are legitimate concerns that warrant careful consideration, secrets and confidentiality breed mistrust in any organization. The effect is magnified in a family business.

Decreasing trust between key stakeholders can lead both generations closer and closer to a succession planning precipice. Fall off the cliff and you may well find yourself hurtling toward the jagged rocks of false accusation, shareholder conflict, legal disputes and eventual bankruptcy.

It is the responsibility of senior family members to identify what information should be shared with children and at what age (I am convinced that children can handle more truth and information than we give them credit for) and then do it! Plan and carry out a one-day, quarterly family council meeting that brings the family together to share relevant information and discuss important issues. This will give them the chance to learn about what’s going on in the business and allows family members to ask the delicate, potentially combustive questions in a safe and predictable environment. Junior generation members cannot lead this effort because their questions about wealth and succession planning in the family are often misconstrued as greed or impatience.

Put a process in place. A few years back, a leader of a well-known American business family suffered through a terrible, expensive, intra-family dispute. As a result, some major assets of the family had been sold to pay off a disgruntled shareholder. As he reflected on the incident, this family business leader identified the key that would likely have helped them avert the crisis.

“Some sort of process to get us to work, communicate, think through issues and make decisions together would have been enormously helpful,” came his heavy-hearted reply. “We had nothing in place to manage the natural tension between family members and family business leaders.”

Beginning a process that is designed to protect the well-being of the family, the success of the business and the education of the shareholders group is a logical thing to do. It happens less often than it should because it means bringing family members together to discuss difficult issues.

So what’s a family to do?

Find and hire someone to help you as a facilitator; someone who is a trusted advisor to the family and is not easily associated with one generation or the other. This person could be an attorney, religious leader, consultant, family friend or distant relative. Explain to them your particular situation and ask them to help you begin a process of understanding future challenges, evaluating options for alleviating them and deciding on a long-term plan for guarding and enhancing the family, its company and the company owners.

Back to Ibrahim
In the end, Ibrahim’s dilemma was solved to the benefit of the whole family. Together my colleagues and I taught his children the unique challenges of family business, opening their eyes to the fact that the financial and social benefits they receive from the business are only available to them because it is growing and profitable. We then included them in a family business governance process with the objective of designing a long-term plan to protect and enhance Ibrahim’s legacy.

Over the course of nine months we met regularly in workshops, family council meetings and individual work sessions with that goal in mind. And in the end, it was not us or Ibrahim who decided that Hassan was his most logical business successor; rather, it was Salem, the eldest son, who said “What is best for the business is also best for the family; that I take over as leader of the family and protector of our father’s legacy and that Hassan lead the family business, even though he is my younger brother.”
Successful succession processes, those that lead to profitable, growing businesses, educated and committed shareholders and a healthy, balanced family, rely on these four time-tested principles for guidance. When correctly integrated into the family and business, they act as a road map, leading the business and family leaders as they work together to improve the well being of the entire system.

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Article Categories:  Human Resources  »  Management