Why are family businesses failing to properly plan for succession?
As ultra-high-net-worth families navigate a major global wealth and succession transition, questions are being asked about effective implementation of transparent and communicated succession plans. Especially, as revealed in The 2023 North America Family Business Report from Brightstar Capital and Campden Wealth, as the majority of family businesses (61%) do not have a written, formal succession plan in place - while 44% still need to develop a succession plan or have no plan at all.
The roadblocks for getting successional ducks in a row are reported as discomfort in discussing sensitive topics (29%) and the lack of willing / sufficiently qualified Next Gens to take over the reins (22%).
“Family businesses in the first or even second generation tend to be tightly family controlled. They tend to be very focused on the success of the business and, for some, this can have the unintended effect of making them quite insular,” says Russell Prior, regional head of family governance at HSBC Global Private Banking (pictured right). “There is often no internal or external pressure to build succession in this phase, the next generation can still be young, and communication within the family unit tends to be oral and informal. Whilst G1 is still at the helm, the family relationship is often adult/child in nature.”
“It does not surprise me that many families have no formal or even informal succession plans in place,” says KPMG’s global chair of family business, Tom McGinness. “My advice is that it’s never too early to start and communication is key. The use of discussion forums like family councils is growing and there’s no doubt that the pandemic has accelerated the need to actively manage succession.
The report, which surveyed more than 100 family businesses from the United States and Canada with an average annual revenue of more than $340 million, found that, even though succession plans are not uniformly set in stone, the majority of Next Gens are aiming to focus their efforts on protecting and sustaining the family business (according to 81% of respondents).
“Family members need to develop core skills in leadership as early as possible.”
To achieve this goal, most Next Gens have already assumed leadership roles in one form or another. 37% of respondents report that Next Gens act as board members, and 27% say they hold a senior management / executive role. Other Next Gens, meanwhile, are getting involved on a project-by-project basis (25%) or by engaging in family-led philanthropy (24%).
“Certainly, family members need to develop core skills in leadership as early as possible,” says clinical and consulting psychotherapist Dr. Paul Hokemeyer (pictured left). “Ideally, this training occurs early in their life through sports, the arts or community engagement. Secondly, future family leaders need to understand the business in which they operate. This can occur within the family business or through outside businesses operating in the same industry. The key to success is allowing the family member's journey to be self-directed. When the journey is dictated from above through authoritarian power, it will diminish rather than enhance future generation's motivation and ultimate success.”
“Leadership roles are often seen as control roles particularly by those not assuming those roles,” says Charles A. Lowenhaupt, author of The Chase Continues (pictured right). “So, we often see family members who would prefer to lead a life unburdened by the responsibilities assume those ‘leadership roles’ as a way to ensure that control is not taken away from them as individuals. I see many unhappy leaders who are not living a life of freedom from wealth because they want to feel that they have some control over their own lives. In fact, by assuming leadership, they lose control over how they live and what passions they pursue.”
“Typically, the broader the experience that the Next Gen can obtain, the more rounded they will be and fit to take on the challenges that their family business might pose,” says Russell Prior. “A blended approach of working in the family business, outside the family business and even higher level education can bring benefits. For the Next Gen, demonstrating they are gaining their positions based on merit can help the Next Gen and the other employees in the family business by instilling a culture of fairness and transparency.”
The report, of which 80% of businesses surveyed were established before the 1980s, with 47% founded in the 1950s or earlier, found that despite communication breakdowns between the generations, the vast majority of respondents (91%) can agree that they’re passionate about preserving legacy and pledge no intention of changing the ownership structure. However, that does leave a significant 9% planning to either reduce the family’s stake or sell the business (of which 6% would want to reduce the family’s stake but retain significant interest).
“Retaining the family business as a ‘legacy’ of the family’s success can work well so long as the business is successful,” says Lowenhaupt. “Unfortunately, too many businesses cannot continue their success… Blind loyalty to the family business can be dangerous and needs to be considered carefully.”
“Many of the Next Gen have very different values from the preceding generation.”
“Transition between the generations very often brings challenges even if the intention is to maintain control within the family,” says Prior. “As businesses move from owner managed to sibling and then cousin-based families, the dynamics involved are not straightforward. And this is even harder with larger and more internationally dispersed families.”
“There’s no doubt in my mind that we are entering a very dynamic transformation in how family businesses look at succession,” says McGinness (pictured left). “Many of the Next Gen have very different values from the preceding generation and there is a stronger drive for socially responsible business which can benefit the wider stakeholder communities and not just wealth for the family shareholder.”
As a means of keeping family members abreast of business and governance matters, the report deems a board of directors the most important tool a company can employ to achieve good governance (64% of respondents). Families also rely on a family office (45%), written values and goals for the family business (33%), and / or a family council (31%) when looking to balance family relationships and business interests through governance bodies. Two-thirds of those surveyed think such governance structures are effective when resolving family disputes.
“A good starting point is to understand what the challenge is to which governance is perceived to be the answer – for instance good board governance won’t solve issues involving family members not working in the business,” says Prior. “Family business networks, independent governance advisers, professional service firms, literature are all sources of good information. But it’s important to remember each family is different and standard solutions are unlikely to be the answer.”
“The best place a family should start in their journey towards creating these structures is within their peer networks,” offers Dr. Hokemeyer. “Family leaders should conduct their due diligence by finding families that mirror as closely as possible their idiosyncratic family constellations. For example, a Muslim family that has a generation of clever, ambitious female members should seek out families with the same people who have realised success in providing a place for these women to add value to the family enterprise. Once they have identified a few of these families, they can engage them as mentors to help steward their journey and utilise their network of trusted advisors to help them.”
