Continuity vs. Succession: The BIG Question for Family Business (Part 1)

Otis Baskin

Otis Baskin

The most frequent issue that brings new clients to my practice in family business consulting is “SUCCESSION.” This is often viewed as the big question in a family business because so many are asking about it.  Key non-family executives want to know who will be their next boss.  Bankers want to know who will be responsible if something happens to the current leader.  Customers and suppliers want to know who will be in charge in the future.  Children working in the business want to know who is expected to step into mom or dad’s shoes.  Other owners, both family and outside investors, want to know who will be responsible for decisions about how their capital/inheritance will be deployed.

As important as this question is, it really isn’t the biggest question for a family businesses.  It is possible to do a great job of succession planning and miss the bigger point of Continuity Planning.  I worked with a very successful and thoughtful family business leader who did a comprehensive job of succession planning.  He involved all significant stakeholders in the decision including family, key executives, and outside advisory board members.  While all four children had MBA degrees and excellent work experience, the search quickly narrowed to the two sons who worked in the business.  When the next president was finally selected everyone, even the finalist not chosen, understood that the process was fair and based upon a set of objective criteria.

All went well for the new president through his first year at the helm of his family business.  By the end of that year the business was booming and the factory was working double shifts trying to fill end-of-year orders.  The new president had also promised his wife and four children that they could visit her parents for the Christmas holidays.  As his wife pressed him for a firm date when he could leave for their holiday frustration grew because all the pressures at work made it difficult to set a date.  One day his father was in the office and the new president shared his frustration.  “I don’t understand your problem” was his father’s reply, “the company jet is at the airport and the pilot is on call – take it; that is what I would do.”

When the new president returned home from his holiday he had emails from his three siblings which read:  “When it was dad’s company it was dad’s airplane but now it is our company and it is our airplane.  (A good estate plan had gifted 80% of the shares to the four children.)  And you owe us money for the private use of a corporate asset.”  The new president understood, he was a CPA who knew corporate tax law.  But his siblings were upset with him and his father was upset with the other children.

The real issue was that while their father had done an excellent job of succession planning, he had failed to address the deeper issues of how his children and grandchildren could own the business together and make decisions about the deployment of their jointly owned capital together?  Addressing these deeper issues is what Continuity Planning is all about.

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Communication and the Family Council

Steve McClure

Steve McClure

“What is the dividing line between what goes on in a Family Council meeting and what gets shared with family members?” This was the question recently asked by a Family Council Chair.

He was getting criticism from some in the family for not sharing enough, and at the same time cautioned against sharing too much by those on the Family Council. Further, the Chair relied upon selected members of the senior generation to get advice on tricky matters; so some selected family members were privy to more details than others. The Family Council communication protocol was murky and the Chairman worried about getting caught taking advice some might see as biased.

In our experience there are no hard and fast rules for communications that work for every Family Council and the constituent families they serve. Each family has a culture which helps determine communications, privacy and transparency practices. That said, rules that have worked for more than a few are the following guidelines for Family Council communications:

  • Assume all discussions throughout a meeting are private and will not be shared with anyone – then, at the end of the meeting everyone will participate to agree and decide what will be communicated, how, by whom and when (also, even if an individual disagrees with what the Family Council decides to communicate, each individual will support the group decision);
  • When getting advice from specific family members (e.g., mentoring advice and seeking wisdom) it is not necessary to report such to the Family Council or to the family. Family Council members and the Family Council Chair should be free to consult whomever they wish without restrictions. However, in keeping with each Family Council members’ role of representing the whole family, we all agree we will try to balance solicited input by listening to the views of those known to have alternative perspectives;
  • Topics that are controversial and do not yet have conclusions or closure will not be communicated to the family without full Family Council consensus on what to communicate, how, by whom and when;
  • It is never okay to tell anyone outside a Family Council meeting who said what in a meeting; and,
  • If a family member outside the Family Council is asking for information that makes a member uncomfortable because there are no guidelines to cover it, Family Council members will get the topic on the Family Council agenda so guidelines can be established before proceeding. In some cases, it may be sufficient to get an interpretation from the Family Council Chair.

Developing written communications guidelines, which can be shared with all family members, is a good idea and works for many. Those who use written guidelines appreciate that they allow the Family Council to be proactive rather than reactive, and allow all family members knowledge about what to expect.

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A Dialogue on the Role of the Family Council

Steve McClure

Steve McClure

At a recent family meeting of more than fifty shareholders, spouses and future shareholders, an 18 year old asked a question during the Family Council Chairman’s report: “How did you set the priorities of what you worked on during the last year?”

It was a great question and the Chairman was on his game with the answer – it allowed him to remind the family how communication and decision making is supposed to work between multiple family members and a five person Family Council. He said, answering for the Family Council, “We purposely approached family members outside our own family branches and asked each individual what they thought was most important. Then we compared notes in a Family Council meeting and decided as a group for the family.”

A follow-up question quickly emerged, “Why didn’t you let us all vote on the priorities?”

Again, the Chairman, “We view our responsibility to the entire family, as elected representatives, to listen well and then make decisions and plans on behalf of the family. We carefully try to not overstep our authority by bringing our decisions and recommended policy to a vote by the entire family when appropriate. Yet, we must be productive too. Thus, we thought it best to proceed as we did.”

In this case, the Chairman could also refer to the qualifications of Family Council members which were written. One qualification is that individuals must be able to understand the family culture well enough to know when to act as a representative and make informed decisions and when to invite the entire family’s input on a decision.

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Shareholder Director Selection as a Two-Step Process

Amy Schuman

Amy Schuman

In selecting a relatively small number (3 – 5) of family directors from among a relatively large (25 +) shareholder group, a two-step process can be very effective.

Step 1: Identify family members who are qualified to serve as directors.

Step 2: Select from among the qualified family members.

Although this process  appears straightforward, it’s far from simple.

It can be challenging to agree upon a list of qualifications for family directors. To what extent will those qualifications be different from the non-family directors? Who decides the qualifications? And, even more difficult, who makes the judgment as to which family members meet the qualifications, and which fall short?

Once the desired qualifications have been established and qualified family members identified, how is the selection made? Are there term limits to ensure that a variety of qualified family members have the opportunity to serve? Is any consideration made to other factors besides qualifications, i.e. family branch, generation, geography? Is there a regular and robust board evaluation process to keep the focus on performance of directors?

Although best practices call for qualifications to be the determining factor in director selection, be they family or non-family directors, most families find it difficult (if not impossible) to ignore branch and share percentages when selecting directors. An ideal approach can be to acknowledge the desire for branch/share percentage representation, while agreeing that any seated director must meet the established qualifications. Happily, with larger shareholder groups containing experienced and able members, this is often easy to achieve.

In the sibling stage, it is common that all (or nearly all) interested siblings are able to serve as directors. In the cousin stage, this dynamic changes radically. Not all interested family members will automatically have the opportunity to serve as directors, as their parents did. Resolving this issue is one of the most difficult tasks facing the cousin consortium.

Many successful families in the cousin stage have solved this sticky problem by following a variation on the two-step process described above. They find that it answers many of the tough questions quite well. Dear readers, do you have experience – or wisdom – or tough questions – to share in this regard?

For more information, our book Building a Successful Family Business Board by Jennifer Pendergast, Stephanie Brun de Pontet, and John L. Ward can be an invaluable resource.

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Incremental vs. Radical Innovation (“Everything in Moderation”)

Joe Schmieder

Joe Schmieder

Groundbreaking new products—like the iPhone or Viagra—rarely emerge from family businesses. Family-run enterprises tend to prefer smaller-scale, incremental innovation over radical changes, versus the publicly held Apples and Pfizers of the world, which have deep pockets for R&D funding. For most family enterprises, growing by incremental steps is preferable to advancing by giant leaps. This “incrementalist” approach dominates partly because family businesses are averse to taking large risks and taking on large debt. Not surprisingly, then, family businesses tend to be quick followers or quick improvers, rather than original innovators. But we can argue that incrementalism represents a form of innovation, as it focuses on steady improvement of offerings or ways of doing business through meaningful change.

Research suggests that successful, long-lasting family firms exercise moderation with regard to most key dimensions: planning, leverage, and innovation, among others. A 2013 research study conducted by Alfredo De Massis, Federico Frattini, Emanuele Pizzurno, and Lucio Cassia entitled “Product Innovation in Family versus Nonfamily Firms: An Exploratory Analysis,” highlighted how family businesses tend to take an incremental approach to new product development, as part of a broader objective of careful resource management. The moderation approach is related to the desire to maintain sufficient resources, financial and otherwise, for family shareholders. Thus, while venture capital firms talk about burn-rate, or the amount of cash a start-up venture plows through in early stages, and how quickly a given innovation can be brought to market and scaled, family businesses tend to talk about less exciting things, like self-funded developments or modifications to existing products. That prompts some to believe that observing family firms innovate is like watching paint dry. In reality, steady progress is the key to success and continuity for many family businesses and non-family firms. The paint may take time to dry, but it sets very well, with deeper, longer-lasting color.

The moderation approach to innovation has served most family businesses well: They evolve at a pace that fits them, based on collaborative thinking among family leaders and non-family executives who understand and adhere to the family’s guiding principles. At the same time, the incrementalist approach may not always be ideal, especially in fast-shifting markets. Family businesses that fail to adapt quickly enough to the changing landscape will struggle to perform. The print media industry, for example, has been a high-profile sector populated by many family-owned firms (such as newspapers). In the new millennium this market has undergone rapid transformation, mainly because of the rising popularity of non-traditional content-delivery channels, especially digital ones. Some family firms have adapted very well to the Digital Age, innovating digitally based strategies and offerings. Others have not adapted nearly as well, and are suffering greatly for it.

The highest-performing family businesses are those that have learned to be just innovative enough, like Goldilocks searching for the “just right” bowl of porridge in the bears’ house. They match their innovation speed to the requirements of their industry and the pace of their competition, moving more deliberately than many non-family peers, in part because they don’t face the same kind of pressure for short-term results.

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The World Cup as Metaphor

Amy Schuman

Amy Schuman

The brightest oranges, whitest whites, deepest navy blues, sun-ray yellows: each World Cup game brings a different color combination to the field but that is just the surface excitement. Are the players tall, long-legged, loping and passing the ball in graceful arcs from toe to toe, using the entire length and breadth of the field? Or are they short and compact, firing the ball in focused staccato bursts shaped like tight triangles that keep mostly to the field just in front of the goal? Does the team wait until the final 5 minutes to unleash the full power of their athleticism, or do they hit the goal, hard, in the first 60 seconds of play? Who flips and flops on the field after the appearance of a foul, and who springs up for more play after being flung to the ground or elbowed in the face? Who lingers to clasp their opponent’s hand, to speak with them face to face, trading jerseys, and who falls to the ground, on their knees, in tears, in private pain?

The World Cup may be one sport, with one objective, but week after week it has served up a rich feast of group dynamics and individual drama. Innumerable variations were played on the themes of strategy and opportunism, physical power and mental command, supremacy and surrender and ultimately, victory.

Many paths to success. A lesson to inspire us all.

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The Family Business Difference: Capitalizing on Family Innovation

Joe Schmieder

Joe Schmieder

Family businesses have unique strengths built on the overlap of family and business, in part because the family running the business has more at stake—including reputation, survival, and security—than the managers and employees of non-family firms do.

Innovation is one such strength at the family-business intersection. Innovation in a family business, like most other features, is different from that in non-family firms. A key dimension of difference is that innovation in family firms is driven and enhanced by several distinct factors that can ultimately yield greater business performance, and family harmony.  Family-business features that serve as innovation drivers include:

  • Personal attachments such as family bonds, customer relationships, and inter-family-business connections—all of which support innovation

  • An incremental approach built on exercising moderation with R&D spending and emphasizing small changes to offerings, rather than giant leaps

  • Longer time horizons that yield greater patience with the development time associated with innovation

  • Shared values including innovation itself, with several supporting elements such as innovation-focused objectives and cross-functional visibility

  • Low leverage, with an emphasis on reinvesting funds back into the business—and into innovation, specifically

  • Experimental tolerance, or a willingness to try new things, even when that means going against the conventional (in a calculated way)

  • Family leadership that supports innovation by generating high-value ideas and speeding the product development process

Family businesses are indeed different from non-family firms, and many of the differences cited above support their ability to innovate, which in turn supports their growth and profits and the family’s well-being.

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Family Retreats

Bernie Kliska

Bernie Kliska

A family retreat should be a time to align values and educate each other, while at the same time have some fun. It is usually held in an informal setting where family members can bond and exchange ideas and information.

To handle the flood of material, questions, complaints and accolades, it would be advisable to have a facilitator to help guide the family with their interaction.

What may seem like a good idea at the time, can fall flat or even become an occasion for family flare-ups. So what makes for a good family retreat?

  • Develop a Defined Outcome: It is valuable to have realistic and clearly defined goals and outcomes. The agenda should be distributed to everyone in advance and based on input from the entire family.
  • Be Thoroughly Prepared: There should be no surprises. The single largest cause for why family retreats do not succeed is because of not being prepared. If for example, one person is a “trouble maker,” that should be anticipated in advance. If a family has a hard time sitting for an extended period of time, that has to be factored into the design of the retreat.
  • Bring Solid Content: This is an opportunity to gain family cohesion around certain viewpoints and strategies. This is also a time for families to learn something about themselves as individuals, as well as collectively as a family.
  • Ensure Effective Process: Often family leaders focus on the end result and underestimate the importance of the process involved in the discussions. The process should be fair, open and engaging to ensure full participation from everyone. While content is critical, it is often the process that causes problems and derails communication.

If properly planned, the family retreat should be an opportunity to prevent confusion, dissension and conflict. Having sincere and candid communication will only benefit the family, as well as the business.

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Vision & Mission Statements: What’s the Difference?

Bernie Kliska

Bernie Kliska

Does it matter if you use a Vision Statement when you meant to use a Mission Statement? The answer is yes. As research has shown the importance of a family business having a strategic plan, it is equally important for the plan to include both a clear Vision and Mission Statement. Both statements serve valuable roles as the core element of the strategic plan.

A Vision Statement defines what the business hopes to be in the future. It provides guidance for a five to ten year period. It is written succinctly and in an inspirational manner that is easy for all family members, employees, and customers to understand.

A Mission Statement defines the present purpose of the family business. It usually answers three questions: What it does, who it does it for, and the company’s values and priorities.

The Vision and Mission Statements can be marketing tools as well because it announces your goals and purposes to your employees, suppliers, and customers.

It is never too late for a family business to define its Vision and Mission. In fact, some even reinvent themselves through the strategic planning process, which always should include well defined Vision and Mission proclamations.

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Strategic Planning

Bernie Kliska

Bernie Kliska

In order for a family business to survive beyond the current generation in today’s fast churning economy, a well-developed strategic plan would be greatly beneficial. Conceptually, a strategic plan is relatively long range, from three to five years on average.

The term Strategic Planning typically refers to the process of developing business goals and provides a detailed road map of how to achieve those goals. It facilitates communication among family owners, Board of Directors, management and employees.

Perhaps most importantly, strategic planning provides a framework to help guide decision making and how to make the business profitable and sustainable. It also challenges past business practices and opens the way for choosing new alternatives.

The result should be a well thought out written document that includes a business Vision and Mission Statement. It needs to include a time frame in which goals hope to be accomplished and designated individuals who will be responsible for meeting those goals.

Carlock and Ward (1) discuss the importance of having a parallel process. This means there should be a strategic plan for not only the business itself, but for the family members as well. This parallel planning will help unify the business and the family.

A strategic plan is not set in stone and should be revisited annually and revised according to current circumstances.

Strategic planning can be the key to unlocking the door to making a family business successful. Research has shown it to be one of the three most important factors of family business sustainability. The other two factors are holding regular family meetings and having a Board of Directors.

(1). Carlock and Ward (2001), Strategic Planning for the Family Business, Palgrave Macmillan.

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