Illustration by Ruth Macapagal
The transition of a family business to the next generation is a critical juncture that can determine its longevity and success. With over 83 percent of our clients worldwide being family business owners, my team and I at the Tom Oliver Group frequently encounter the complexities of this process. A common issue is the denial among current leaders about the readiness of their successors to take over the reins.
This denial can lead to significant challenges. However, with the right approach, these hurdles can be navigated successfully.
Facing reality
One frequent oversight is the failure to recognize when successors lack the necessary skills for leadership. This oversight is often compounded by a cognitive bias known as the Dunning-Kruger effect, where individuals with limited ability tend to overestimate their capabilities. Recognizing this gap is crucial, and with the right guidance and training, even those lacking inherent talent can evolve into effective leaders.
Stephen Schwarzman, chair and CEO of the Blackstone Group, famously said, “Great executives are made, not born.” This sentiment resonates deeply with our experiences, where we have equipped individuals worldwide to not only lead their family businesses but also to elevate them to market, regional, or even global leadership statuses.
Your limited gene pool
In larger family-owned conglomerates, it is often recognized that the family gene pool may not provide a viable leader for every key position. This acknowledgment leads to the strategic integration of external executives who can bring essential skills and fresh perspectives. Such a decision underscores a mature approach to business leadership, emphasizing the best interests of the company over familial pride.
The bigger your business becomes, the less you will be able to fill all key executive positions with family members—or you will be doomed to fail. Force-fitting is the wrong approach here. Take wise words of advice from a prominent Asian multi-generational family that has built a multibillion-dollar business empire.
They recognized early on that only the best should lead and put an external evaluation committee in charge that evaluates all potential members of the family. No family member has a say in that—this way it remains neutral and is based on a real meritocracy. The ones who do not make it will get a nice dividend every year but will never set foot in the office.
A global perspective – The cushion of competence
While skills can indeed be taught, instilling motivation is a more challenging endeavor. Placing an unmotivated successor in a leadership role can jeopardize business stability and growth. In some cases, it may be prudent to delegate operational authority to an external leader while allowing the family member to retain a symbolic title. This approach can preserve family honor while safeguarding business performance.
Throughout my tenure as global chair of the Tom Oliver Group, we have mentored numerous next-generation leaders. One illustrative case involved a Southeast Asian conglomerate where the founder’s daughter was distinctly unmotivated. Despite the challenges posed by her reluctance, the founder persisted in her involvement, which inevitably affected the business performance. In such scenarios, introducing an external leader would be the practical and effective solution.
But the Asian tycoon just did not want to publicly admit that his daughter was not equipped to lead—her motivation was utterly lacking. We had to create the “cushion of competence.” This is a tool we have developed where we put a team of seasoned executives around the next gen who are set up in such a way that they complement the weaknesses of the family member. As a result, no one noticed the ugly truth that she was not really contributing anything to the success of the company, and she and the founder “saved face.” A radical measure—but necessary in this case because the owner did not want to remove her.
Acknowledging limitations
The landscape of family business transitions is filled with both successes and failures. A success story can be seen in a well-known European luxury brand that faced a skill gap in its next generation. By incorporating a seasoned external executive, the business not only bridged this gap but also ignited a period of growth and innovation. Conversely, a cautionary tale comes from a prominent Asian family business that faltered significantly under an unprepared heir. The absence of a strategic plan to develop the necessary skills led to a sharp decline in both performance and market share.
One notable success story involves a multibillion-dollar retail chain in North America. The founding family wisely recognized early on that none of their children had the passion or aptitude for retail management. They opted to bring in an external CEO who revitalized the brand and expanded their market significantly, turning what could have been a stagnating enterprise into a robust industry leader.
Conversely, a well-established media company in Europe provides a cautionary tale. Here, the founder’s daughter was thrust into a leadership role despite her lack of interest and business acumen. Her mismanagement led to declining revenues and a tarnished brand reputation. This example highlights the critical need for proper successor planning and the potential consequences of neglecting it.
Practical steps for family businesses
1. Recognize the gap: It’s essential to honestly assess the capabilities and readiness of potential successors. This involves an objective evaluation of their skills and areas for development.
2. Invest in training: Leveraging external expertise through coaches and consultants can provide bespoke leadership training tailored to the unique needs of the next generation.
3. Evaluate motivation: Understanding the true level of interest and commitment of potential successors is vital. An unmotivated leader can cause more harm than an unskilled one.
4. Consider external leadership: If the next generation is not ready to lead, appointing an external executive can ensure the business continues to be managed competently. This can be a temporary or permanent solution, depending on the development of the family member.
5. Learn from others: Examining both successful and unsuccessful leadership transitions in other family businesses can provide valuable insights and inform better decision-making.
By proactively addressing the skill and motivation gaps, family businesses can facilitate a smoother leadership transition, ensuring stability and continued success across generations. This strategic approach not only secures the legacy of the family but also fortifies the business against the unpredictable challenges of the future. INQ
Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email Tom.Oliver@inquirer.com.ph.