Kellogg Insight
How do family-owned businesses survive for generations, and what can they do to stay competitive as the economy continues to change?
“These are important questions for business leaders who have families or may work with families.” Matt AllenKellogg Clinical Professor John L. Ward Family Enterprise Center.
By some estimates, 90 percent of businesses are family-owned, and while few are as consistently Shakespearean as the fictional Roy family of HBO's “Succession,” many must navigate complex family dynamics in the short term to achieve success in the distant future.
“Family businesses need to focus on long-term resilience — preparing for the next generation,” Allen said. “That's a different timeline than quarterly earnings.”
Allen offers four tips on how family-owned businesses can build and maintain multigenerational resilience.
1. Cultivate an emotional connection, not just qualifications
When it comes to getting the next generation into leadership positions, family businesses tend to emphasize competency and education over experience within the organization. Some even have policies that require children or grandchildren to earn at least a master's degree and work outside the company for a certain amount of time before they are eligible for management positions.
These are reasonable expectations, but they carry the risk that eligible young people will drift away from family structures and not feel the need to return.
“When people have been away for years, they don't have any emotional attachment to the company,” Allen says. “They usually go and work somewhere else.”
To avoid this, make sure you foster an emotional connection with your company from an early age. That might mean family trips, factory tours, and other events where future leaders can learn about the nature and impact of your company. Summer jobs or internships are another opportunity to build a deeper connection.
“It's the difference between explicit knowledge, like knowing how to read a financial statement or knowing how the markets work, and implicit knowledge, which is more experiential and emotional,” Allen says. “If you want to build implicit knowledge, it's really about experience and emotional engagement.”
2. Don’t delay planning for a leadership transition
Timing is everything when it comes to succession planning, and planning is key here: if everyone knows who their successor will be a decade in advance, the whole organization can prepare accordingly.
“The worst thing is to say, 'We have three kids and we're not sure who's going to take over,'” Allen said.
In addition to the measure of transparency and continuity, the value of choosing early is that new leaders have time to develop their own relationships with employees and customers.
“Having a date already set and a 10-year period gives everyone peace of mind.”
3. Don't delay the actual migration
If the next generation is ready for leadership roles in their 30s but opportunities don't open up until they're in their 50s or 60s, they'll feel left behind, especially if their colleagues have already been in top positions for years. So getting the timing of succession right is key.
“Too many family leaders persist in negotiations until it's too late, which can be a source of great frustration for successor leaders,” Allen said.
It is also important that family members who step down from a leadership role know what their new role is and is not. Any ambiguity in this transition can be a source of frustration for the next generation of leaders and create confusion throughout 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. Retirement is one possible solution, but even then it's wise to be clear about what “retirement” actually means. It could mean a leader leaving the company entirely, or transitioning to an “emeritus” role with a board seat but no actual voting power. But leaving things to chance could invite interference.
This can be harder than it seems, given the complex ownership and management structures that characterize a typical family business – for example, if a parent continues to hold all the shares when they step down, this can lead to intergenerational tensions down the line.
“You need to consider transferring both ownership and leadership, recognizing that both carry some degree of influence, and whatever you do needs to be clearly communicated across the organization,” Allen says.
4. Avoid inertia
One of the biggest challenges for family businesses surviving into the second generation and beyond is the problem of inertia: With so many new shareholders, many of whom may just want to protect their inherited assets, it's hard to stay innovative.
But there are ways to maintain your initial risk tolerance. For example, a family business can choose to leave day-to-day decision-making power to management who are more in touch with the business's operations. Having a formal board of directors that doesn't include family members can also help ensure the business remains strong over the long term.
While continuity is valuable, a leadership transition is also another opportunity to adapt to major changes in the marketplace, because in some cases, the next generation must lead the company in an entirely new direction.
Allen describes a well-established manufacturing business that was in decline because technological change reduced demand for its products. In this case, the son approached his father with an idea for a different business using new technology, but the father responded that that wasn't what the company was doing, Allen says. After a long stalemate, the son and mother pooled their votes to oust the father as CEO. The son and mother then worked together to convince the father to leverage his core business and invest in the new technology.
“It was a close call for 10 years, but ultimately the new business was much more successful and the family was able to bring everyone back into the business,” Allen said. “I wouldn't recommend that most families go down that path, but this is a very powerful example of a next-generation pivot.”
Of course, the next generation of leaders are only in a position to make these changes if they are given some responsibility—even if it means starting small.
“Full responsibility for small things is better than partial responsibility for big things,” he says. “You don't need to promote your daughter to a C-suite role right away. She might be better suited as a functional leader or head of a regional office for the company. From a motivation standpoint, that gives her more opportunity to figure things out on her own time.”
