Ensuring the solvency of a family business
Note that succession planning is not about just sending the second and third generation to the top schools. It’s about careful career planning and skill development, and more importantly, it is about making sure that the core processes in the company, including governance, communications and decision making, are such that they support succession planning. Key areas that often are in the center of this are intra-company communication routines, decision-making processes, documentation, and sharing of information.
Corporate governance, growing pains, and your family business
Instilling corporate governance into the business model is more of a mandatory thing, rather than just a benefit. Without proper governance, a company (be it family-owned or not), can simply not survive.
The growing pains are that usually switching from the first generation “entrepreneurial” style to proper professional grade succession planning requires a major change in mindset. Sometimes this is only possible in conjunction with the actual generation shift. However, it is much better if succession planning and governance are already addressed within the time of the first generation. This way the process is smoother and has a better likelihood of success, success including also preserving good relationships across the family members throughout the process.
While some initiatives in my previous article including the list below are instinctively noble, Family Business author Dr. Fan refers to these leader aspirations as “wishful thinking”.
a. Family gene pool is limited but Patriarch is not keen on hiring Non Family professionals
b. Typical of founders, they would express their desire to retire but the patriarchal shadow continues to cloud the next generation members’ decision-making
c. They apportion their wealth equally resulting to a divisive and disunited next generation shareholder group where decisions are stalled
d. Patriarch will delay succession plans because of the fear of losing control
In most cases, family members who have been sheltered often want to sell the business and move on right after the death of the patriarch or matriarch.
Similarly, some leaders (especially the conservative owners) even pass away without making a will. This leads to bitter feuds and will be even more complicated and severe if the founder has several wives.
Flying Away from the Nest
Finally, with the patriarch gone, the untrained and entitled next generation members will end up clashing amongst themselves.
Limited decision making and the lack of any form of hardship experience while growing up under the shadows of their overprotective parents will take its toll on the business.
With their roles undefined for years, there is the likelihood that heirs will be confused amplified by an unproven management skills set.
Compounding the lack of preparation is when they discover that the business has liabilities (debt load) and a looming creditor intervention to exact pressure on the new leadership.
With all the problems besetting the enterprise, the natural option for heirs will be to opt out by selling their shares, effectively absolving them of any form of “hard work”. In the end, the preference to just “live the good life”becomes insatiable.
Can the bleak situation still be reversed?
This scenario is repeated many times, thus it is no secret that business owners go through many sleepless nights blaming themselves for creating entitled children.
I consider this pervasive problem one of the biggest dangers faced by family businesses in Asia where owners attempt to self-medicate by way of offering more perks to family members hoping to motivate them. The problem is in the manner the perks are equally distributed whether to the deserving, capable or inept. The other problem is whether the perks should be given in the first place.
This practice will certainly guarantee failure after failure as the incentive will translate to more entitlement for the next generation of untrained family members.
It now becomes a vicious cycle of generational tension and sibling rivalries. In the end, the business owner will end up struggling with governance, leadership transitions, ownership conflicts and even survival.
At this juncture when the patriarch or matriarch, by reason of age, rushes the process of turning over the business to the next generation and discovers their ineffective or feeble judgements, the parent will end up extending his reign until he succumbs to pressure, old age, stress and death.
There is Still Time to Exact Good Governance
It is absolutely impossible for family businesses to manage internal talent (both family and non-family) and or attract the best non-family professionals without setting up a governance best practices program.
The key is to separate the family and the business and ensure independent oversight from a professional board.
To be continued…