One of the most dangerous survival tests for family businesses is their succession. It is no surprise therefore that many successors and heirs feel relief and complacency once the transition period is completed. However, the handing down of power and money is not an end point, but a new beginning of an ongoing process —with a new set of challenges.
Perhaps one of the greatest challenges facing business successors concerns clarifying and negotiating the boundaries separating operational responsibilities, the development of strategy and corporate financial decisions. The senior generation usually maintains control of the major strategic and financial issues that affect the business while delegating operational responsibilities and accountability to their direct reports.
On the other hand, successors are frequently involved in day-to-day operational issues without participating in strategic decisions. Successors need well-defined tasks and responsibilities as well as appropriate standards to measure success. They need to learn about strategy early in their careers by defining how their own projects fit into the broader strategy of the business. Instead of simply developing day-to-day tactics in reaction to business circumstances, they must align their projects with the goals of the business.
Based on my research and advisory work, conflicts between the generations are often rooted in two distinct issues.
First, the senior generation will delegate operational responsibilities without defining clear expectations and performance measures, and then step back in to take control when the outcomes don’t meet their undefined expectations. Second, the senior generation is often risk averse, while the successor generation wants to implement strategies to grow the business for the next 20 years.
In one company that I was involved in, with sales declining, the father wanted to cut back to reduce overhead expenses, while his son wanted to hire a marketing and sales manager to build future business opportunities.
The pros and cons of each alternative were presented during the formal strategic planning process that I facilitated, so the entire executive team could determine the best strategy to pursue.
You know what came out of the different approaches?
The father fearing another “round of conflict with the son” requested me to decide with finality…
So I decided in favor of the son and imposed financial targets with dire consequences if the son fails to deliver.
The son, 31, is now running the business and the father happily decided to step back and load the son with more responsibilities while he reports only to sign big ticket investments and as head of Corporate Relations.
In most family businesses, successors are owners by virtue of being gifted non-voting stock. In this respect, they are essentially participating in estate planning tactics, rather than assuming the responsibilities of ownership. Early in a next-generation member’s career, this involves learning how to read financial statements in order to understand how to make good business decisions. He/she should develop relationships with bankers and other trusted advisers, get involved in the financial aspects of the business and be willing to take financial risks. For example, in one family business that acquired a competitor, the bank asked all family members to personally guarantee the loans. Some family managers were unwilling to co-sign such a document, thereby demonstrating their lack of commitment to taking financial risks. The willingness to take on personal financial liability demarcates the difference between management and ownership roles.
Financial risk is often linked with the development of liquidity strategies. Case in point: The eldest son (42 years old) of a company I helped transition in 2009 called me last March and confidently said that he was ready to take on the risk of buying the shares from his father’s siblings. He wanted me to be part of the transition team. I told him to ask for his father’s permission first and with his blessing I advised him to go through the process of meeting with the lawyer and accountants.
With their help, he developed a proposal to purchase the business and presented it to his father and his father’s family.
Father and son worked side by side to present this liquidity strategy to the rest of the family, in order to promote a smooth transition of ownership from one generation to the next during the father’s lifetime.
In my family coaching work, I encourage successors to enrol in Leadership , Management and Finance Courses at the ATENEO Center for Continuing Education. In addition to managerial and financial subjects, a leadership performance review is integrated — an effective tool to identify strengths and weaknesses of successors. Managers, peers and direct reports will rate the successor on several key dimensions of effective leadership. The questionnaires are complied anonymously to pinpoint areas where the successor needs additional mentoring.
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Prof. Soriano is the chairperson of the Marketing Cluster of the Ateneo Graduate School of Business. He is also a Senior Consultant of Wong+Bernstein Business Advisory Group. For comments, send email at [email protected]