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Succession concerns hound family-run firms

/ 12:00 AM September 22, 2014
POWER OF THE SUN. The Solar Philippines team on the roof of Central Mall Biñan, the site of the first and largest own-use solar rooftop power plant in Southeast Asia.

POWER OF THE SUN. The Solar Philippines team on the roof of Central Mall Biñan, the site of the first and largest own-use solar rooftop power plant in Southeast Asia.

Dr. Joshua Baron is co-founder and partner of Banyan Family Business Advisors, a Boston-based company specializing in coaching family businesses around the globe.

The graduate of Columbia University is also co-author of the Harvard Business Review blog on family business, helping family businesses establish the economic and emotional roots of multi-generational business success.

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In this interview, Dr. Baron talks about the challenges and opportunities faced by family corporations around the world.

Q: What are some issues confronting family businesses that are usually overlooked by families?

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A: To their credit, most of the family business leaders we meet think a lot about succession. The vast majority are very interested in having what they have built continue into the next generation.

More than anything else, the senior generation tends to focus on who is going to replace them in their current role.

And there is no question that it is essential to find the right person to lead the business in the next generation.

At the same time, that focus on identifying “the one” sometimes gets in the way of addressing other essential issues. For example, one of the most important decisions that each generation makes is about how ownership will be passed to the next generation.

Will it be done equally or will some be given a greater percentage? Will shares be passed down directly or through trust? These decisions fundamentally affect how the family will live and work together in the future, though too often they are either unaddressed or driven mainly by tax planning.

It is also essential for the current generation to think about what kind of organization they want to leave behind. It’s risky to put all of the eggs in one basket by choosing a successor.

Instead, it’s better to focus on making sure that the company has a clear strategy as well as the organizational structure and capabilities to support whoever is in charge.

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Lastly, the succession process tends to focus on passing the baton down to the next generation without thinking through how the senior generation leaders can continue to support the family enterprise.

One of the reasons why succession tends to happen so late is that leaders feel like they have lost their purpose in life once they hand over the reigns. When that happens, it delays succession beyond when it would best benefit the company. It also deprives the family enterprise of someone who can still add tremendous value even when no longer leading the business.

So, think carefully about the role or roles that the senior generation can play once the leadership transition takes place. That may be as an informal advisor to the CEO or on special projects within the company.

Or it might be focused on something outside the core business, like training the next generation, starting something new, or leading the family foundation.

Regardless of what it involves, having a clear place to land will make the transition go far more smoothly.

Q: What should be the management style of family members in contrast to professional managers?

A: Here are a few suggestions. First, be yourself.

If you are following in the footsteps of a previous generation, don’t try to mimic their style. An important part of being a good leader is authenticity and people can tell when someone is playing a role rather than being true to who they are.

Second, be aware of the impact of your status. Employees love to work directly with the owners of a business, so that is a positive.

But everything you say and do will be taken with even more weight than a typical executive. So, for example, if you are having a conversation with someone who is not your direct report, know that whatever you “suggest” is likely to be taken as a directive, even if it contradicts what their supervisor has told them.

Third, get feedback, preferably a “360.” It’s critical to getting better as a leader. Your employees are unlikely to give you honest feedback directly, so consider using an outside firm or asking your board to oversee the process.

Lastly, think about how you can inspire your employees.

As the labor market gets more competitive, the top people are looking for more than a paycheck. They want to know that they are part of something bigger than themselves.

As a family executive, you are uniquely positioned to help people understand why you are in business, since it is almost always not just about the money. Think about how to communicate your passion in a way that fits with your personality.

Q: How can family businesses build a ‘talent machine’ within the family?

A: We use the term “talent machine” with our clients because that is something we believe is essential for family businesses to thrive across generations. The bigger your business and your family get, the more talented people you will need to lead it.

Some of them will be serving as executives, but that is only the beginning. Multi-generational family businesses also need people to serve as leaders of the ownership group, their board(s), their family, their foundation, and so on.

No one person can fill all these roles, no matter how good they are.

So, when you are thinking about creating your talent machine, here are a few suggestions.

First, start early. Build an emotional tie to your family enterprise from an early age. Expose them to what you do and look for age-appropriate ways for them to get involved.

Second, design a formal next generation education program. There are some fantastic examples out there of what business families have done to ensure that family members are developing the skills and capabilities they will need to serve the family enterprise, whether that is by working in the business or in some other way.

Especially if you plan to pass ownership down to the next generation, think about what knowledge and experiences they will need to be effective owners at some point, especially if they do not work for the core family business.

Third, establish a family employment process. Many family businesses have a policy in their Constitution about what criteria need to be met by those who want a job in the company, such as educational degrees and outside work experience.

That’s important, but it’s only a start. You will need to think carefully about not just how family members will get in the door, but what will happen to them once they are inside.

It is critical to think about how they will get feedback, be promoted, or—hopefully rarely —get managed out if they are not performing.

Family members in the business should have development plans and there should be resources in place to help them improve, such as an assigned non-family mentor.

Fourth, don’t judge too early. There’s a tendency in some families to designate someone as a leader too early in life (sometimes at birth!).

I have seen that backfire all too frequently, as either it turns out the “clear winner” did not develop as expected or buckled under the pressure. And I have seen the opposite, where the person no one expected became the leader.

Q: Is there a difference in business performance between families that have common purpose vs those with no authentic corporate social responsibility or CSR vision? How should philanthropy be encouraged and treated?

A: I think an active philanthropy and/or corporate social responsibility program can have an extremely positive impact on business performance for family companies.

Studies have shown that having the opportunity to contribute to others increases job satisfaction, which will help companies to retain their employees.

It also can improve customer loyalty and create some goodwill in case the company makes any public relations missteps.

Those benefits are there for any type of company. But family businesses can gain additional ones.

For instance, social initiatives can help create a common purpose that is beyond only generating wealth, which can keep the family owners together as their interests diverge.

They also provide a way for those who are not interested in the business to do something that benefits the family enterprise.

Additionally, philanthropy and CSR are excellent ways to develop the next generation.

They help make sure that the family does not become too isolated and lose its connection to the reality experienced by most of the country.

They can provide an opportunity for family members to learn to work together in an environment that is less political than the business. And they can provide experience in working on boards and building leadership skills.

For example, in one of our clients there was an extremely talented next generation member who was uninterested in the business but was willing to run the family’s CSR program.

He discovered through that experience that he actually enjoyed leading an organization and saw the positive contributions he could make by bringing some of the long-term investment mindset from the CSR program to the rest of the business.

He is now the lead successor to the CEO and is preparing to take on that role when his father retires.

Lastly, philanthropy can provide an avenue for a smooth transition for leaders out of the business.

A philanthropic role can help those family members find purpose in the next stage of their lives and continue using their talents to advance the family’s legacy.

(The author is chair of marketing training firm Mansmith and Fielders Inc. For the complete interview, please visit www.josiahgo.com).

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