Forbes India 15th Anniversary Special

4 Tips for managing the succession challenge

Generational transitions can be bumpy for family firms. They can also be an opportunity to grow

Published: May 29, 2024 10:43:40 AM IST
Updated: May 29, 2024 10:59:11 AM IST

4 Tips for managing the succession challengeWhen it comes to succession, timing is everything. And here, it pays to plan. If everyone knows a decade in advance who will take the helm, the entire organization can prepare accordingly. Image: Shutterstock

How does a family business survive for generations? And as the economy continues to change, what can it do to stay competitive?

“For any business leader who has a family or might work with one, these are important questions,” says Matt Allen, a clinical professor at Kellogg and Executive Director of the John L. Ward Center for Family Enterprises.

By some estimates, ninety percent of businesses are family-owned. And while few are as consistently Shakespearean as the fictional Roy family of HBO’s Succession, many have to navigate complex family dynamics in the immediate term to set themselves up for success in the distant future.

“Family businesses need to focus on long-term resilience, which means preparing the next generation,” says Allen. “That’s a different time horizon than quarterly earnings.”

Allen offers four tips on how family enterprises can build and preserve multigenerational resilience.

1. Cultivate emotional ties, not just credentials

When it comes to preparing the next generation for leadership positions, family-owned companies tend to emphasize competence and academic credentials over experience within the organization. Some even have policies that require children and grandchildren to earn at least a master’s degree and to work for a certain number of years outside the business before they are eligible for a management position.

These are sensible expectations, but they come with the risk that these now-qualified young people will drift away from the family organization and not feel compelled to return.

“If they’ve been away for so many years, they’ll have no emotional attachment to the business,” Allen says. “They’ll often go work somewhere else.”

To avoid this, families should make sure they’re cultivating emotional ties to the business from an early age. Maybe that means family retreats, factory tours, or other events where future leaders can learn the essence and impact of the business. Summer jobs or internships are another opportunity to establish deeper connections.

“It’s the difference between explicit knowledge—knowing how to read a financial statement or how the market works—and implicit knowledge, which is more experiential and emotional,” Allen says. “If you want to build that implicit knowledge, it’s really about experience and emotional engagement.”

2. Don’t delay planning for a leadership transition

When it comes to succession, timing is everything. And here, it pays to plan. If everyone knows a decade in advance who will take the helm, the entire organization can prepare accordingly.

“What works terribly is saying, ‘We’ve got three kids and we’re not quite sure who will be taking over,’” Allen says.

In addition to transparency and a measure of continuity, the value of choosing early is that the new leader will have time to build their own relationship with employees and customers.

“When you have a date already set and a ten-year window to work with, that makes everyone comfortable.”

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3. Don’t delay the actual transition, either

If the next generation is ready to take on leadership roles in their thirties, but opportunities don’t open until they are in their fifties or sixties, they are going to feel left behind, especially if their peers have already spent years in top positions. So getting the timing of succession right is key.

“Too many family leaders hold on until it’s too late, and this can be a major source of frustration to subsequent leaders,” Allen says.

It’s also important for family members who have stepped down from leadership roles to know what their new roles are—and aren’t. Ambiguity in this transition can be frustrating for the next generation of leaders and can create confusion across the organization about who is actually in charge.

The best way to minimize these risks is to establish clear governance rules for the transition and post-transition periods. A mandatory retirement age is one potential solution—and even then, it might be wise to clarify what “retirement” means in practice. That may mean a leader stepping away from the company altogether or transitioning to an “emeritus” position that involves a seat on the board but no actual voting power. But leaving the situation to chance can invite meddling.

This can be trickier than it sounds, given the tangle of ownership and management structures that characterize the typical family business. For example, if a parent steps down but holds on to all their shares, that might lead to intergenerational tension down the road.

“You need to think about transferring both ownership and leadership, recognizing that both come with a certain measure of influence. And whatever you do, it has to be clear to the whole organization,” Allen says.

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4. Avoid inertia

One of the biggest challenges for family firms that last beyond the second generation is the problem of inertia. With so many new shareholders, many of whom may simply want to protect inherited assets, it can be hard to stay innovative.

But there are ways to maintain that initial appetite for risk. For example, a family might put more of the day-to-day decision-making powers into the hands of the management team, whose members are closer to the flow of operations. Formalizing a board of directors that doesn’t include family can also help ensure the business stays robust over time.

And while there’s value in continuity, leadership transitions are another chance to adapt to significant evolutions in the market—because, in some cases, the next generation might have to push the company in a new direction altogether.

Allen describes a legacy manufacturing business that was languishing due to shifts in technology that lowered demand for its products. In this case, the son approached his father with a separate business idea involving new technology, and the father replied that it isn’t what the company does, says Allen. After a long stalemate, the son and his mother combined their voting rights to oust the father as CEO. They then worked together to persuade the father to leverage the core business in order to invest in the new technology.

“It was touch-and-go for a decade, but eventually the new business grew even more successful, and the family was able to bring everyone back on board,” Allen says. “I would not suggest that path for most families, but that is a pretty powerful example of next gen pivoting.”

Of course, the next generation of leaders is only in a position to make these changes if it has been given some responsibilities. Starting small is fine.

“Full responsibility over small things is better than partial responsibility over big things,” he says. “You don’t have to bring your daughter into the C-suite immediately. She might be better off as a functional leader or as head of one of the company’s regional offices. From a motivational perspective, that gives her more opportunity to figure things out on her own time.”

[This article has been republished, with permission, from Kellogg Insight, the faculty research & ideas magazine of Kellogg School of Management at Northwestern University]