Recently at a seminar a well-respected advisor proclaimed that any succession plan that allows stock to pass to those not working in the business is a bad succession plan. For anyone who has experienced family dissension or destruction over conflict between those in and outside of the business, this certainly will sound like sage advice. But, while this may seem sound advice for a smaller business where there is little chance for significant reward beyond that which can support a single owner or that owner’s family, the issue is a bit more complex where larger assets are involved.
If the business is successful over time and grows large enough, there is an opportunity for building an enduring enterprise that creates both career paths for those working in the business, and returns (in the form of investment appreciation and dividends) for those who are not working in the business. Furthermore, an aligned ownership group can support growth models with the patient capital approach that is a competitive advantage for family firms. When combined with a liquidity policy that allows for the voluntary buyback of a small percentage of shares on an annual basis, the shareholder tree can be slowly pruned over time, increasing the likelihood of a unified shareholder group.
If we think of a family business in terms of a snapshot in time, it does seem logical to keep the family business in the hands of only those employed in the enterprise. But if we take a longer-term perspective, this decision may exclude the possibility of a family enterprise that ends up being governed by owners with independent directors serving along non family executives in building the business. Or, we may open ourselves up to the possibility that a next generation leader will come from one of the branches that might otherwise been prevented from ever owning the business.
One size does not fit all when it comes to family businesses. Each family must decide what path to pursue in terms of who can own the business, and all options should be considered in the decision-making process.
Leadership is not confined to an individual’s set of attributes and skills; leadership can be a process that is shared within a group. It is extremely rare that a single person will have all the attributes necessary to provide leadership in every possible circumstance. Leadership groups are able to depend upon the various abilities of their members to provide the right leadership needed at the right time.
Owning a family business implies leadership no matter what your role in the business or even if you don’t work in the business. Being a member of the owning family group carries the responsibility to provide leadership – not in day-to-day direction of the business but in vision, values and strategy.
The ownership group needs leaders in the form of a chairman of the board and other directors who bring the needs of the business together with the wishes of the owners and the values of the family. The leadership of family directors moves the assets of the family forward in relation to moving the family forward. It has a foot in both arenas—family and business—and needs to have a great deal of understanding about both of those systems. On the family side, the board’s leadership is related more to the values and the goals of the family for the business than on relationships within the family. On the business side, it means translating family goals and values into forms that management can respond to and that represent the best interests of the owners. Management’s job is to meet the goals of the owners.
The chairperson of the board should be a real job and a real leadership challenge. It shouldn’t be used as a means of putting an aging CEO out to pasture. Frequently, family businesses combine the roles of chairman and CEO, but there is wisdom in separating the two responsibilities. For one thing, the CEO already has his or her hands full running the business. A separate individual serving as chairman can give full attention to the leadership of an active board representing the interests of owners in a way that a CEO cannot.
One of the most valuable leadership roles the chairman and the board can play is to build shareholder loyalty, awareness, and cooperation, and to encourage the notion of “patient capital”—that is, family owners’ willingness to leave their funds invested in the company so that long-term business goals can be met.
After the founding generation has passed from leadership of the family and the business, no sibling or cousin is likely to have the same “moral” authority. It requires the commitment of the entire ownership group to provide the full range of leadership necessary to take both the family and the business to the next level.
In a yesterday’s post, I shared a lesson from a study of large, old, successful family businesses – innovation is a key to success. But, while companies in this study demonstrated an ability to innovate, they also clearly recognize their core competencies and stick to them. So, we uncover another family business paradox – trying new things vs. sticking to your knitting. How do we resolve this paradox? As with all paradoxes, the answer is “both and” not “either or”.
Successful family businesses are willing and able to try new things, but they select carefully when they branch out. They choose new business areas that leverage prior knowledge and skills. Sure, occasionally the businesses in the study branched out well beyond their comfort zone. But, when they did they often did it with a partner (more on that in a future post). And, many of the businesses were currently in the mode of paring back their portfolio to focus on what they do best, then innovating around that core.
The key to successfully executing this strategy is to clearly understand what your competencies are, the ones that clearly differentiate you from your competitors, and how you might use them to take you to new places. The fact that family business owners provide patient capital creates the opportunity to build and leverage these core competencies to their greatest potential.