An emotive issue

Succession planning by external professionals is the key to managing this transition as, unlike a publicly-owned business, there is such a range of emotions involved with a family business. Frictions that may have simmered for years will undoubtedly surface either during the process or as a result of the conclusions made or not made.  Worst of all for a family business is no plan at all – look at the Ambani brothers for example.

In considering a succession plan, families and heads of families need to consider(1):

-    The founder's(2) transition
-    The business' transition
-    The family transition

The founder's transition

As the head of family business, the "founder" may find the transitional phase extremely hard given the time and effort they have no doubt put into the business. The danger if this process is not carefully managed is that a founders "tight grip" can become a stranglehold for the next generation of leaders. The example provided by Henry and Edsel Ford (featured later in this article) is a good illustration of this. Leaders have to come to terms with the fact that a day will come when they are no longer in charge.

Business Transition

From a business point of view, the transition has to be engineered and timed correctly. A well managed transition can take many years as the next leader of the business is selected and groomed to take over the founder’s role. This transition does not necessarily have to be based on the age of the founder. Retirement age provides a logical point to step down but that is not to say that any time before then, as long as the candidate is up to it, may be suitable.

The father-son combination of Lakshmi and Aditya Mittal provides a good example of a family business head inviting his son into the business and giving him considerable responsibility at a very young age. Aditya (born 1976(3)) joined the family business in January 1997(4) at the age of 20 after a brief stint at Credit Suisse. In 1999 at the age of 22 he was made head of M&A and after presiding over the $38 billion takeover of Arcellor(5) he is now the CFO of ArcelorMittal.

Conversely, the founder of Marriott International (JW Marriott senior) handed over the business to his son, Bill Marriott, when he was 72 years old.  Of note is that Bill Marriott grew the business after that time at an astonishing rate, changing it from a business with revenues of $200 million to one with revenues of over $9 billion and 140,000 employees.

Both cases highlight the importance of involving the next generation at the appropriate time.  Despite his age, Aditya Mittal is hugely respected for his grasp of numbers and for being a highly intelligent dealmaker. A lesser person would not have achieved this status so quickly. In the case of the Marriotts, the success of Bill Marriott may be attributed to the longevity of William Marriott’s CEO role.

Family Transition

The complex and emotional differences between one generation and another also require close management.  Grievances that have existed between siblings will need to be resolved before the succession process can take place – when one is favoured over the other there is the potential for long-terms rifts to form.

Family relationships may be so fractious that there is concern for the ongoing business itself. The question of whether to split the business up to maintain family relationships should also be considered.

The best a family can do to prepare for transition is communicate – to employees, to family and to management already in place. If the groundwork can be laid many years in advance through a well documented "succession plan", many of the issues and problems that will be faced can be worked through in a professional and, hopefully, seamless manner.

Governance

Corporate (and family) governance ties in with a succession plan and can also help in encouraging entrepreneurship. Without a documented framework within which family members can operate, there is the potential for different parts of the family to believe they have different rights in operating the business.

As businesses continue to grow and are passed down to future generations, the number of families and family members that are working in the business or are connected to it also increases. Parts of the family will be involved in the day-to-day running of the company while other parts may view the company as a cash cow to be milked to support their lifestyle.  As the family tree evolves and the numbers increase, who is to say who is right or wrong?  

Governance is vital to ensure that family members know what they can and cannot do in relation to the business. A businessman cannot focus on strategic decision making if family members are pressuring him into making decisions to suit them and not the business.  Without the proper governance procedures in place, how far can the situation go?  And at what point does a family decide that perhaps "the family" is not right for the job.

Though governance procedures should allow for the continuation of a family business, some notable Indian groups have resorted to external professional managers. The Sanmar and Murrugappa families resorted to professionalising the management of their businesses. By doing this, family members have vacated posts relating to the day-to-day management in favour of monitoring the group of companies at board level.  Though this may be the correct way for some family businesses to continue, many entrepreneurs and founders would almost certainly like to be in control and retain the business under their management, handing over to external managers only as a last resort.

Having a well documented and thorough system of governance will help families trust one another and allow the leaders to continue to grow the business. By creating such an environment, future generations will be inspired and the entrepreneurial spirit will thrive.

Notes:

1 Concept from Guide to the family business, Peter Leach and Tony Bogod (1999)
2 In this context "founders" are also taken to mean the present head of the family business.
3 Business Week, "Mittal and Son" (April 2007)
4 From Forbes
5 Business Week, ibid