Heirs and Graces in a Family Business
By Ernesto Poza
There is a widely-held belief that "family business" is an oxymoron, especially when it comes to the kids taking over the business. Recent high-profile family business scandals such as Adelphia and the Pritzker saga, along with the fact that over 85 percent of family businesses don't survive to the third generation, give this view credibility (see BusinessWeek, 7/8/02, "Adelphia's Fall Will Bruise a Crowd" and BusinessWeek, 3/17/03, "The House of Pritzker").
For every well-known failure, however, there are dozens -- if not hundreds -- of successes.
Nearly 40% of family businesses in America will be passing the reins to the next generation over the next five years. How can they know whether the next generation is capable? Successful family business successions show that there is a set of critical criteria. Meeting these criteria is a shared obligation for both the individual who wants to be the leader and the controlling family looking for a leader from within. What follows is a ready reckoner of qualities needed for succession to succeed.
Work Ethic. A strong work ethic is the most influential counterbalance to the advantages of wealth. Next-generation members of business-owning families must not only want to lead, they must be ready to work hard and make the necessary sacrifices. Positive indications of this should be illustrated throughout the person's career in the form of hours worked, flexibility, adaptability, willingness to serve, commitment to a mission larger than themselves, and an overall discipline in both thought and action.
Accountability. Starting early in their development, next-generation executives should work outside the family business to learn how to succeed in an environment where results are more objective, exclusively attributable to performance and unbiased by family influences. Once they join the family enterprise, they should be responsible for a number of challenging assignments, with the outcomes strictly measured. This valuable experience helps prepare for the often conflicting demands of a chief executive, who is ultimately responsible for profit/loss and the creation of long-term shareholder value. In addition, the discipline created by this sort of accountability and focus on the bottom line helps determine the readiness of the successor far more effectively than bloodline.
Respect of Non-Family Employees. Without regard to their qualifications, the passing of the reins to a family member is often viewed as nepotism. A smart leader should acknowledge this perspective. To stop those resentments from growing, next-generation leaders must quickly and effectively establish their own presence within the company, based upon their own expertise -- and not that of his/her predecessor. Through solid performance and interpersonal skills, next-generation leaders must earn the respect of nonfamily employees, suppliers, customers, other family shareholders, and all other constituencies associated with their business.
Formal Education. Growing up in the business is not enough. The pursuit of higher education is a common element in the majority of succession stories. Through college, industry-sponsored programs, and MBA programs, successors gain both the skills and the confidence they need for the top management echelon. Although there is no guaranteed formula to ensure confidence or intelligence, these programs teach managers both the theory behind and the practice of business.
Mentoring. Coaches and mentors, both inside and outside the family, are an important aspect of leadership development. Whether used as a guiding inspiration or a soundboard for bouncing ideas, the majority of business leaders can point to one or more people who have helped shape their careers and, by extension, their lives. For a next-generation leader who has grown up watching and emulating the leadership style of his or her predecessor, a mentor from outside the family can be a valuable tool. Mentors help next generation leaders gain perspective and at the same offer them a new freedom to mold their own leadership style. Jim Furyk and Tiger Woods have had their parents fulfill this role, but a fellow CEO, board member, influential professional friend or trusted teacher may more easily perform this function.
The aforementioned criteria are largely the responsibility of any family member who is interested in running the business one day. However, moreso than most nonfamily businesses, the organization has just as much if not more responsibility for a candidate's growth. Unlike all nonfamily businesses, this responsibility begins long before middle management. Stewardship. Essential to the growth and preservation of a family business is a sense of stewardship among its members. Experienced advisers and family-business owners are adamant that children must start learning about the family business at an early age -- as young as seven or eight years old, in some cases. Through family meetings or special education, the young heirs should receive "de-entitlement training" through stories and anecdotes of the sacrifice and commitment of the founders. This will help them understand that the family business is a responsibility more than a ticket to privilege and wealth. Studies have shown that heirs who approach the family business with a checkbook mentality exponentially increase the probability that the business will be destroyed. The point is not to discourage next-generation leaders from joining the business, but to ensure that they understand that they will have to earn their position.
Equal Treatment. When young, next-generation members come to work in a business, they must move through the ranks like any other employee in order to communicate equity to both the individual and the organization. That means their compensation should be market-based and they should be subject to the standard performance evaluations to assess results against goals and to reinforce a merit rather than entitlement culture. That said, performance reviews are often complicated within a family business. It is difficult for nonfamily managers to objectively evaluate the performance of a subordinate family member due to the possibility that, one day, that employee may become their supervisor. On the other hand, a family member is usually not the person best qualified to review another family member. One solution is to have a nonfamily senior executive who is secure within the company hierarchy perform the review, even if that person isn't the direct supervisor.
Outside Assessment. The process of deciding if the potential successor is right for the job and for the company takes many years. A professional opinion from a third party, such as a psychologist or career coach, can provide a preliminary and objective assessment of the candidate. By coaching the successor through evaluations from peers, supervisors, subordinates, customers, and relatives, the candidate can constructively learn more about his or her strengths and weaknesses. This degree of self-awareness is often hard for next-generation members to achieve because of the large shadow cast by family predecessors.
Ultimate Appointment by Independent Board. A board of directors -- or a committee of that board made up primarily of independent outsiders -- should be very active in assessing the candidate, facilitating difficult conversations, and ultimately appointing the successor. Including a committee of nonfamily members not only ensures more thorough and objective data-gathering, analysis, and decision-making, but also suggests to other candidates, nonfamily executives and shareholders alike, that the decision was independent and objective.
From day one, it is the responsibility of both the individual and the family to take these steps and prepare for succession. Even the strongest family can't overcome a lack of individual accomplishment and motivation in an heir. By the same token, without support and guidance from the family, prospective leaders will have to achieve their business success elsewhere. Only when these two sides come together will the family business find continued success across generations.
Ernesto Poza is Professor for the Practice of Family Business at the Weatherhead School of Management at Case Western Reserve University and author of Family Business, a new book that examines in detail the advantages and challenges faced by family-run companies in today's highly-competitive global economy.