Choosing the right leader for your business is fundamental to its long-term success. So why are so many family firms not planning for succession effectively?
Sharing a business can do much to strengthen the family bond, but passing a business from one generation to the next can be a complicated process.
Succession planning and the introduction of young dynamic leaders is essential to deliver business growth and innovative thinking. But it can be a sensitive subject and needs to be handled accordingly, given the integral role family-owned businesses play in the global economy.
According to statistics cited by the US-based Family Firm Institute, family firms account for two-thirds of all businesses around the world and account for 70%-90% of global GDP every year. Yet, according to the Grant Thornton International Business Report, a third of business owners globally have not even considered the question of who is going to succeed them.
Annika Hall, director of business advisory for Grant Thornton Sweden and author of several books on privately held businesses, says family firms postpone the succession planning conversation for several reasons.
“It’s very easy for children within a family-owned business to feel that if they speak up about succession they are talking about their parents’ death or about them getting old,” she says.
“They need to talk about who is going to own the business, who’s going to run the business and how siblings will evaluate each other’s performance within it. These are all very sensitive issues and represent a big reason why families don’t talk about it.”
As well as the emotionally sensitive aspects of succession planning, there is also the question of how to go about it. Hall says it’s a complex process and that family firms, particularly those under the first or second generation of leadership, often don’t have formal procedures and processes in place to plan for the future in a structured way.
In various cultures, selecting the next CEO can be fairly straightforward. Traditionally, children join the family-owned business with the eldest child taking over. However, this does require a level of change management, as the second generation front the business with fresh ideologies and an innovative approach to business – thus changing the norm.
In the United Arab Emirates, where 90% of businesses are family-owned with the founders coming from across the Gulf Cooperation Council (GCC) and wider region, succession planning can be one of the key challenges that family businesses face.
Shadowing the business founders alone is not sufficient for these young leaders, who are trying to move the business forward in an era of increased competition and regulatory change. The introduction of an external management team and independent advisor are imperative in strategically aligning business growth strategies to market demand and opportunity. The integration with the hereditary management also needs to be handled with care.
“The existing management has built up a wealth of experience which should be drawn on by the younger generation in an open, transparent manner to ensure stability,” says Hisham Farouk, CEO of Grant Thornton in the United Arab Emirates. "The ultimate objective is to guarantee that the business is not damaged during the corporate restructuring and transitioning period. All the stakeholders must agree that productivity and smooth functioning of the company is the ultimate goal.
“The shift in leadership requires a level of change management to ensure that traditional business practices are supported internally and not met with resistance. Otherwise, the transition can prove to be exceptionally challenging and if not handled properly, can have a wider detrimental impact,” he says.
How can family firms get better at choosing their future leaders? Hall says planning should start early and follow a structured approach. She explains: “Step back and ask: what stage is the business at; what do we need to do to develop the business; what kind of leadership would be necessary to do that; and do we have that profile in the family or do we need to look externally?
“Even in traditional cultures, where there is no question that the children will take over, businesses should still plan to promote siblings with the right competences rather than automatically making the eldest sibling the CEO.”
Family business owners should initiate, though not necessarily facilitate, an open and honest discussion with the next generation about their views on the future of the business and their role within it. They should also define what it means to be an owner and a manager so that the children can better understand what those positions entail. “Know where everyone stands and start to do the planning from that discussion,” says Hall. Having a neutral facilitator in the room helps families to broach sensitive topics more easily.
Hisham advises CEOs to review the structures of the business as part of the groundwork for the succession planning process. “Before bringing your children in, you need to ask yourself: if I and none of my children are present, what structure does the business need to continue operating effectively?”
Most importantly, through reflection and discussion, parents need to deal with the emotions that will be triggered by vacating the CEO’s chair. Parents are often reluctant to consider succession because they have no role planned for themselves, but Hall says: “Planning doesn’t mean that you have to leave the business; it just means that you continue to contribute to the business in another, possibly more effective way than you do now. This means that owners are not mentally blocked from talking about succession planning because they think it means starting to talk about their own exit from the business.”
Good succession planning results in a seamless leadership transition, but it also doubles up as good strategic planning. It helps you think about where the business is going in the short, medium and long term, and what management competences you will need. To get it right, however, requires an approach that may not come naturally to all family-owned businesses.
“Succession planning needs to be taken seriously and not as a process which should just happen. It should be planned, organised and have a very solid structure to it, ensuring it promotes growth and protects the longevity of the business for generations to come,” says Hisham.