In my work with sibling or cousin shareholder groups, I often encounter unprepared, or “sudden” shareholders. These individuals come into ownership of their family’s business as a result of a gift or the death of a parent with little to no preparation for the role of owner. As these shareholder groups come together to align for the future, a challenge they face is that some of the shareholders who now have decision-making powers have not been equipped with the knowledge on how to effectively manage this responsibility.
Often the “sudden” shareholder becomes dazed and confused about what being a shareholder means. Questions like: “What are my responsibilities?”; “How much time do I have to commit?”; “Do I have to do real work if I am a shareholder?” “What if I really don’t want to be an owner – what are my options?” arise in their minds. They don’t really understand what ownership of the family business means to them or the broader family.
This situation can bog down the governance process and lead to ineffective decisions as the shareholder group seeks a threshold level of knowledge to “get up to speed.” In addition to the time each individual shareholder may need to wrap their mind around their rights and responsibilities, the group of shareholders also has to learn to collaborate as a team of owners – something that doesn’t just happen by virtue of kinship! The governance process tends to slow to the pace of the family shareholder with the least knowledge.
A critical component of multi-generational family business continuity is a cohesive shareholder group. The better prepared the family is for transition of ownership from one generation to the next the smoother the transition will go. A key part is preparation of all potential next generation shareholders through a deliberate next generation shareholder development effort. By learning about being an effective shareholder well in advance of a triggering event, the family and the business will be better equipped for continuity and will not run into the unnecessary burden of power without knowledge.
Are you developing a successor for your position, with the objective of transitioning out in the foreseeable future? If so, you have likely experienced the apprehension and emotion associated with that process. We have worked with leaders who identify a transition date and others who have not, with successful outcomes in both scenarios. That said, we encourage you to think about identifying a specific transition date for a number of reasons:
It sends a message to your successor, your employees and other stakeholders that you are serious about the transition;
It motivates you to develop key milestones in the process that need to be met in advance of that date;
It prompts your board to set expectations for progress reports along the way, and provides you with a source of feedback on that progress;
It helps you envision and plan for your role beyond that date – perhaps as board chair, as a retiree, as a leader in a new capacity;
It sets in motion a variety of other decisions throughout the organization that help prepare for the transition.
Setting a transition date is definitive, and makes it very real, and perhaps a bit scary. Yet if it doesn’t feel real to those around you, the energy invested in the transition might be insufficient to meet your expected outcomes. This might be the biggest business decision you ever make; setting a transition date is one of many steps in ensuring transition success.
Stewardship is a term often used when describing the perspective of family business owners. As many owners of family businesses seek to pass their business on to future generations, the term stewardship is an accurate one. The dictionary definition of stewardship is “the careful and responsible management of something entrusted to one’s care.” This is quite different from the term ownership, defined as “the legal right of possession, full claim, authority or dominion.”
I see stewardship and ownership as two sides of the same coin – the former emphasizes responsibility, the latter emphasizes rights. In truth, ownership implies both rights and responsibilities. Too often, owners are concerned about their rights – to a dividend, to a say in how the company is managed – but pay less attention to their responsibilities. Yet, if they seek to pass on their business to future generations, owners should be equally or perhaps even more concerned with responsibilities. What are the responsibilities of owners? They include:
Ensuring the business is well-run, ideally by electing a qualified board of directors who oversee a capable management;
Planning for the orderly transition of ownership across generations;
Staying informed about the business and its operating environment;
Representing the business and family well to employees and the community
Investing time in education to ensure one is prepared to make big decisions around the business.
As the old adage goes – to whom much is given, much is expected. An emphasis on stewardship responsibilities will help to ensure that the aspiration to pass the business will be achieved.
Junior generation family members sometimes tell us that they believe no decision-making authority will come to them before senior generation family members either exit the business or die. And in some cases, they’re right. That is somewhat discouraging, and also a deterrent for next generation engagement.
We have found that decisions are difficult for the next generation to manage when their “transition” goes from making no decisions to making all decisions.
Why not provide the next generation with opportunities to make decisions (either related to the business or the family) before you make your exit? You might not want to start with key strategic decisions, or life-altering decisions on behalf of the family, but there are many options. Here are some examples:
Planning the next family meeting (location, social time, draft agenda);
Making a hiring decision without your stamp of approval;
Designing a family website or newsletter;
Selecting his own mentor in the business;
Choosing recipients of philanthropic donations;
Setting up a pilot project for a new product or service;
Identifying development workshops/conferences that are most appropriate for her generation;
Make some investment decisions with other members of the junior generation with a fixed sum of money;
There are many opportunities to build confidence and establish credibility among the next generation through increased decision-making. What decisions can you identify in your family that might engage them, while developing decision-making competence?
Classically, families transitioning from sibling parents to successor cousins face the challenge of transferring wealth and power by common rules shared by all the branches or by each parent deciding what’s best for their children. The questions where parent/branches could disagree:
At what age should next generation receive dividends, income?
At what age should next generation receive stock and voting rights?
At what age should next generation attend board meetings as observers?
Parents, of course, have the right to disagree on what’s best for their children. On the other hand, equivalency facilitates transparency and goodwill among the families.
As with all dilemmas, what to do is a matter of respectful balance. One family said it well:
“We coordinate and set uniform policy as much as possible
respect that parental privilege comes first.”
That reminds us of a family seeking to balance the family-first or business-first dilemma. They speak to it in a paradoxical way:
“The business always comes first – but for the family.”
Please share any dilemmas or paradoxes you face as a family in business.
I often get asked this question by business owners who wonder if they should put the burden of owning and running a family business on the shoulders of their children.
They remember the sleepless nights, tough times and challenges they had to face in their own business life. In my opinion, a better way of phrasing the question might be: “Why do I want to pass on the business to my children?”
In a recent seminar this question was asked to the participants all facing succession in the near future. Inner motives characterized most answers from the senior generation: ‘It brings pleasure and is motivating’, ‘It makes us proud if they want to continue the business’, ‘Just ego-driven: the legacy will be continued’ and ‘We want to give them the opportunities we have had’. Some gave an answer by giving advice to their children: ‘If you want to be a business owner then being an owner of your own family business is the best alternative you can imagine’ and ‘You have to work to make a living, so may as well work for yourself’.
An inner motive to pass on the business does raise the question of if you can bother your children with the business – as the desire to transition is coming from you – rather than from them. While having this motivation is fine, it is also important that you encourage and allow your children to discover for themselves their own inner motivations and talents. You will not be ‘bothering them with the journey’ if it is a journey of their own free choosing. If they are eager for the challenge and equally motivated to take over the legacy, then you can really be proud that this brings pleasure to you both that the business will make a successful generational transfer.
Last week’s Presidential election in the United States was a great lesson on the need to have clarity about how decisions are made and what the framework is for implementing those decisions.
Many family businesses have created their own guidelines and rules for how leadership might transition from one leader to the next. Absent some understanding of the decision making framework, passions arise and frequently disagreement result in a divided ownership group.
One thing we learned from last week’s election was that there most certainly will be passion when choosing leaders, but agreeing on a constitutional framework allows everybody to get a good night’s sleep, wake up and function the next day. Such is true in family businesses, and therefore we generally support the implementation of policies, procedures, and even full constitutions for families who seek to keep their enterprising families together for the long run.
Do you have clarity on how transition will work in your family?
In reflecting further about this month’s Family Business Advisor article entitled, “Must the Prince Kill the King?” by Albert Jan Thomassen, I am struck by how easy it sounds to have the senior leader “set a date” for the final transition of leadership to the upcoming leader, and how very difficult it is for so many. Visions of total disconnection from the business certainly will produce anxiety for many senior leaders, and retrenchment is not uncommon.
A leadership transition is spread out over time (sometimes decades), as upcoming leaders cut their teeth and assume greater responsibility. Often a time period occurs when both upcoming and current leaders are capable of doing a great job. A discussion to set a date at that time is likely to cause frustration to both sides.
We see healthy senior/junior generation leaders build clear role descriptions, and then lay out a timeline for when a particular role is passed from one leader to the next. This allows both to see that the transition will take place over time, and may reduce the anxiety that both would otherwise feel about the pace of progress when it is left undefined. It also allows the junior leader to plan for the assumption of greater responsibility and authority, acquiring the experience needed to succeed in each newly acquired role. This clarity also allows both senior and junior leader to see the differences between the senior leader’s management roles, and ownership roles. [Note that typically management responsibilities and authorities are transitioned before ownership responsibilities and authorities.]
Setting a series of dates for transitioning roles will often create more progress than worrying about the final date of all authority transfer. In fact, if Thomassen’s recommendations are headed and the two leaders support and respect each other, the working relationship between the two leaders may be such that the final date becomes more of a celebration than a power shift. The power would have already been transferred by then.
Read the September issue of The Family Business Advisor. Click Here.
For the next 19 years, 10,000 American baby boomers will turn 65 every day. Many of them are family business leaders who are thinking about transitioning leadership to the next generation.
While it is great to start considering the transition to the next generation – sometimes we find ‘action-oriented’ entrepreneurs jump to make changes before they have fully thought through the big picture. We are not advocating delay – just planning and communication.
Too often forward-looking leaders jump into action by developing next generation leaders, creating new reporting structures, revisiting estate plans, and establishing new governance structures. All of which are important. However, sometimes leaders find themselves in active pursuit of a destination that is not only unclear to them, but is interpreted differently by multiple stakeholders in the process.
So before you put the car in drive, be sure to communicate with your passengers and gain alignment on some important questions: What is our ultimate destination? Which roads will get us there while meeting our objectives along the way? If we need to take a detour, what are the best alternatives? What is our arrival date? How will we know we’re there?
A desired outcome, or vision for what future leadership looks like helps ensure alignment and creates the collective energy you need for a very important journey.
A young next generation executive working for the family business her father founded recently told me that lack of accountability among family members in the business was hampering the successful transition of the company to the next generation.
Unfortunately her comments mirrored those of other clients who have had difficult transitions due to apparent lack of accountability. Why is accountability such an elusive issue in many family businesses?
Perhaps it is because accountability is thought to be synonymous with “consequences” and thought of as punishment for failing to accomplish a task. Yet, if we looked at accountability with a different lens, perhaps some of the barriers to its acceptance might be torn down.
Rather than looking at it as a way to impose consequences or punishment for failure, we should be welcoming accountability as a process that offers an opportunity to learn and improve on results that are both positive and/or miss the mark. Clear communication of agreed upon goals and measureable benchmarks to achieving the goals are prerequisites for the successful integration of accountability into a positive culture for the family business. With this positive process in place it will be much easier to establish a meritocracy based on accountability as opposed to an aristocracy.