Evolving governance: the role of structure in third-generation family businesses
San Jose, Costa Rica. Thirty years ago, a modest grocery business was founded by Mario Perez. Throughout the years, his tireless effort turned a small business into a strong organisation led by Mario and his wife. For the past ten years, their offspring Tony, Maria and Luis have been running the company, which employs more than two hundred people with twelve stores across the city. It was a natural step for the Perez children to come to work in their father’s store after they graduated. Even now, in their late fifties, they look back at their choice to join the business with no regret.
From the beginning, the siblings were united in their agreement that they didn’t want to repeat their parent’s mistakes: a blind devotion to the business and nothing but the business. That’s why the second generation decided not to discuss work at home and let their children enjoy their family by keeping their private lives separate from the business and letting them look after their own lives.
This arrangement worked well for many years. But a year ago, Tony began to talk seriously to his siblings about the succession of the company after recovering from a heart attack. However, there was an issue that none of them wanted to bring up: not even one of their children (ages around twenty years old) had ever shown any interest in the family business. In fact, there was little the third generation had done at all in their professional lives. Some were finding it difficult to keep on going with their studies at college or had ever faced real responsibilities. As it turned out, many members of the third generation had been living their lives thinking that their parents’ company would ensure their financial security with no future plans in the horizon.
Family meetings and the role of the facilitator
This is a case based on real-life situations (names, locations and business sector have been disguised), that tries to illustrate a common situation where the lack of communication between family members often enhances the conflicts they face. Attempts to create moments of coherent conversations about the shared heritage often end up in heated discussions between parents and children, who have a different perspective of the same reality. Sometimes, when we try to have a conversation regarding the future we want to share, we are more concerned with expressing what we think and feel ourselves than hearing what others have to say.
One of the main goals when working with or in a family business is to help create conditions that allow effective communication between generations. It is imperative to help them discuss, analyse and propose different scenarios to address the future of the legacy they want to share. The initial conversation should then determine if the family wants to truly continue on with this heritage in the future. That approach will lay out the plans, strategies and projects to be undertaken by the family to achieve their goal: should they go on together or separately? If the family wants to follow through together, they must first of all build spaces, conditions and rules to enable effective conversation between generations, for the sake of balance and harmony.
You do not need to be an entrepreneur to run the family business
Founders of family businesses are usually known for their entrepreneurial drive and spirit. This leads to the members of the following generation experiencing considerable pressure when it comes to the moment of succession as not only are they expected to fill the founders, often rather large, shoes, but they are also supposed to show equal amounts of entrepreneurial zest. This pressure stems from the mistaken assumption, that entrepreneurship is equal to leadership. However, contrary to common belief, it is not necessary for second-generation family members to be entrepreneurs.
Especially when it comes to the transition from the first to the second family generation, there is a great need for family members to show leadership and vision. Whether this manifest itself in entrepreneurial innovation or whether it is expressed through honed managerial skills is not the material point.
One of the main factors that will make or break the second generation in its attempt to take over from the founder is to what extent changes to and consolidation of existing structures can be undertaken in a unified spirit. In an ideal case, each family member of the second generation will find a position in the company that allows him or her to perform at their best and to contribute successfully to the family firm.
Passing the entrepreneurial spirit
After evaluating some offers, an external consultant promised to help them to create conditions that allow effective communication between the second and third generation, through a system of "family governance structures”. The centre of decision-making would be a Family Council, a body of governance where the three siblings would meet to settle their interests related to the preservation, growth and transfer of their shared family wealth (several important assets generated over the last few decades, apart from the shares of the family business).
To regulate these decisions and provide a framework of agreements that would allow them to function properly, the Family Council decided to create a set of rules, named the “Family Constitution”, wherein the siblings agreed to regulate the most important decisions about the assets of the family, the succession planning to the next generation, rules for entering to the company, agreements on economic benefits and wages for family members, the family culture and values recognition, provide development opportunities for members of the family, ensuring the quality of communication and family harmony, and guiding the actions of family philanthropy.
Through their Family Council, the Perez siblings managed to shape a forum adding and separating the functions of the family and the company leadership, which helped to strengthen the role of the Board of Directors of the family business, focusing it efficiently on their responsibilities as administrator of the company strategy, based on the creation of a dedicated space for conversation about family and heritage issues, through effective communication, mutual respect and recognition; with awareness among the second generation that the founder’s inherited leadership was now divided between the three of them.
This work set the plans, strategies and projects to be undertaken by the family to achieve their goals, following the rules and the governance structures they’ve created, letting the effective conversations between generations be a natural part of their lives, for the sake of balance and harmony of their heritage preservation and transmission. Due to the family governance structures the next generation would soon, under the direction of the Family Council, have its own space for development, preparation and dialogue.
Guillermo Salazar is Founder of Exaudi Family Business Consulting and a senior advisor and associate partner at Cambridge Family Enterprise Group. He is a lecturer, educator, author, and expert on family governance, strategic succession planning, generational transition, and conflict resolution. Guillermo is the recipient of the 2015 FFI International Achievement Award and in 2023 he was inducted in The Hall of Fame of Family Business.
