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Next-generation owners represent the future of any family business. Without their motivation to continue adding value to the family business, no future can be envisioned. Family-business owners want the next generation to be involved in the business to maintain it as a source of family pride, to safely preserve the legacy of founders and better maintain the family’s values and image.
But only a rough third of family businesses survive the transition from first- to second-generation ownership. Those that make it beyond the third generation are much fewer – at this stage only 10-15% of the original firms remain in family hands.
"Only only a rough third of family businesses survive the transition from first- to second-generation ownership"
What we’ve found, in our experience of working with and researching family firms, is that a targeted and structured approach to developing the next generation is lacking in the vast majority of family firms. Even the largest, most successful family firms with very sophisticated governance systems tend to fall short here.
Conducting generational transitions is tricky business. This holds true both for newer businesses and for those that have survived as long as seven generations. The reason for this is that transitions are complex affairs, with emotional as well as technical ingredients. A recent global survey by McKinsey that the author participated in, found that engaging, motivating, and developing next-generation leaders was consistently the number one topic of concern. This is a strong indication that developing a next generation of family leaders is the biggest challenge for family firms.
A number of factors conspire to create this challenge. For a start, families are informal, while businesses are mostly formal. It is difficult to make the step-change from the informal interactions between elder and young family members so as to match business formality. Parents and children may want to hold on to the informal relationship but this often translates into no systematic or coherent effort to develop the younger generations. What’s more, knowing when to begin generational transfer is challenging, since it has no clear starting point – it is always ongoing. On a deeper psychological level, it is also something that most families prefer to avoid, since the change and loss associated with transitions are difficult.
Added to this is the challenge of upholding values across generations whose life experiences can vary widely. The international MBA experience of younger generations can be very different from the more local-focused “home-grown” experience that some elder generations have – and this can give rise to different languages being spoken by the generations.
Attracting next-generation talent to the business is also difficult when interests differ and competing job proposals emerge. This becomes compounded by unexpressed expectations. In one UK family business, the son had expected for 20 years that he would take over the business from his father. His father had expected him not to, for the same length of time. It wasn’t until a friend suggested to the son over a drink that he simply speak to his father, that this occurred to him. Luckily, it was not too late, and his father was delighted that the business would carry on under his son’s leadership. Families can be spectacularly poor at communicating – but the good news is that communication is a skill that can be taught.
To address these challenges, here are three tips for family businesses wishing to engage the next generation:
New family executives need support to manage their careers. But this isn’t enough in and of itself. Most next-generationers will be owners, not executives. In addition, there are many different roles to take on in a family business system: chair of the family council, main board member, trustee for the family foundation, investment committee member of the family office, to mention a few. With the basic attitude that ownership is a job you prepare and train for, family firms are tasked with creating their own education systems – as, typically, most universities do not offer “owner courses” that suit their needs.
Next-generation members are often willing to take on more responsibility but lack the confidence to do so. Two-thirds of next-generation respondents would like to have more responsibility in their ownership role, yet only 30% feel confident in making decisions involving the family business. Just 30% of next-generation family members feel they display active ownership – encompassing elements such as a willingness to take risks for the business, taking an active part in firm decision-making and feeling confident that they have sufficient knowledge to make decisions for the family firm – compared with 94% of family members already working in the business.
Developing responsible shareholders is a top priority for family leaders wanting to maintain traditions and increase value for the next generation. “It is essential that the next generation understand the importance of our legacy,” says the chairman of one family conglomerate.
Clear guidelines for family members wanting to join the family business are necessary. This includes clear rules around meritocracy, explicit entry and exit requirements and development conditions, such as feedback from managers and coaching. One family recognised the challenge that next gen members often do not receive honest and open feedback – largely due to their family name – and thus instituted a committee that would ensure regular 360s, career pathing and coaching, working closely with the line managers.
On entry rules, a dilemma that family business owners face is that there is no right or wrong – the decision of whether to have an “all are welcome” attitude versus the other extreme of “no family in management” is purely based on family values and how these are interpreted. For example, the value of togetherness might for one firm mean not excluding any interested next gen from working in the business – but for another family it might mean very strict entry barriers, since togetherness might be threatened if a family member ends up performing poorly and is advised to leave. Does your family have the honest and soul-sought ability to let a family member go – or indeed, the willingness to provide space for family members who aren’t willing or able to climb the career ladder?
Families will do well to remind the next gen that leadership positions in the organization are not the only role available for them. It is critical to create awareness around the various paths available and show how to embark on each one, with guidance.
We’ve coined the term “emotional ownership” (EO) to denote a person’s degree of identification with and attachment to the family business. EO is the critical pathway between the next generation (NxG) and the family business, contributing greatly to its family capital and thus competitive advantage. A whopping 81% of the next generation respondents felt EO strongly or very strongly.
More recent research also revealed high levels of emotional ownership in the presiding family group and the next generation. However, when asked if the older generation was very responsive to the needs of the younger generation, and if it took a close interest in the activities of the younger generation, 36% and 30% of next-generation respondents disagree or are neutral. “Communication is difficult, especially across generations and borders,” says one younger family executive. “We live in quite different worlds.”
The gap highlights the need for more active, clearer communication on the part of older leaders. Holding regular meetings and promoting family rituals are good starting points – but the task of preparing the next generation to engage more deeply in family business goes beyond having a sound communications strategy to engage younger family members. Family newsletters and assemblies are great, but not enough.
The best advances are made when the next generationers are given a platform to take charge of their personal development. In one family business, the next generation shaped their own shareholder education programme and hired professionals to help them run it – with the seniors’ blessing, of course.
The highest level of engagement is made when people work together, and for next gen members, it has to be informal and relaxed. Another family focuses on creating mechanisms to help make the best decisions for the broad family group. In another case, family leaders created a venture fund where next-generation family members can learn how to make business decisions together.
With these three factors in mind, enabling the next generation to flourish and become responsible as owners and leaders is as much technical as it is an emotional task. On the emotional side, this means developing self-awareness and coming to know your strengths and purpose in life – and that of your relatives. This knowledge is a fundamental building block to the team that is made up of siblings and cousins. Knowing their strengths makes it easier for them to not only delegate to each other where needed in a trusting way. It also means shaping the roles of individual family members, so that they can bring their unique gifts into the world and thereby flourish. On the technical side, there is understanding of the business and how the family-owner-business interfaces are organized through governance.
It paves the way for crafting a life and career that is satisfying to the individual. We know that life satisfaction is positively associated with emotional ownership. Well-adjusted individuals are better owners and leaders, plain and simple.
This is a long game to play but family businesses are uniquely positioned to succeed at it. So many owners have grown up in a stewardship model that calls them to hand over to the next generation something improved from the time when they received it. With the right investments to support the next generation, attentive owners can make the very best of their budding next generation talent, sowing the seeds early and making sure they have fertile ground to grow in.
As the Chinese proverb goes: “When is the right time to plant a tree? The best time is 20 years ago. The second best time is now.”
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