If family businesses are to prosper what are the key issues/problems that need to be addressed?
Many of the issues faced by FBs are similar to non-FBs ie succession, governance, employees, or business growth and profitability.
However, these issues and more are unique to FBs because to deal with them, you need to deal with the family component and the balancing act of maintaining family loyalty and managing their expectations.
“How do I get my kids to step up?” versus “how do I get dad to retire?” are questions often asked at the same time.
These are questions raised when the issue of succession and how the business is going to transition between the generations is not dealt with.
For a FB to prosper, communication about succession is imperative. Succession is not just a process of paperwork and tax related issues; it involves trust, a way of thinking, and loads of open and often conflicting communication.
From a “thinking” perspective, business is changing at such a rapid pace today, and it is likely that 3rd generation owners and a founder won’t recognise each other’s business activities.
It is more than likely, that next generation owners will not be able to “continue” the business of their parents.
They will need to be innovators and entrepreneurs as their parents were, when they first founded the business.
In this regard, it means thinking about transition in terms of passing on the leadership essentials and business acumen rather than passing on a business.
It is also important to acknowledge the emotional undertaking of the older generation and what they are going through when making these decisions.
So often they have avoided the issue because they either, don’t know where to start, are concerned about creating conflict, they may be concerned over competencies of successors, and merely hope over time that their concerns and uncertainties are resolved over time.
So many of the issues in FB are a consequence of lack of open and honest communication, and decisions are made around the dining table rather than the board room table. These include:
Conflicting goals and values:
• Future generations may struggle to understand where they fit in.
• Respecting the past and embracing the future; stick with what we know (stable current gen) versus strategically changing the direction (risk and entrepreneurial future gen).
• Tradition versus making own statement; we have always relied on each other versus advisory board and external advisor input.
Expectations:
• Family members have different expectations.
• Expectations with respect to employment, management, ownership, compensation, job functions, training and use of business assets.
• These expectations need to be managed otherwise it significantly risks the business and its ultimate longer term survival.
Employment:
• Who gets a job? Spouses, in-laws, direct blood line?
• Is it based on what the family wants (bloodline), or what the business needs (competencies)?
• How are these decisions made and who can make them?
• Again, if not addressed , the competitive advantage of a loyal, flexible multigenerational labour pool can dissipate very quickly.
Compensation:
• This is an area of potentially the greatest conflict.
• How do you balance the desires of the family with the business needs; expectations of being fair are often in conflict with the desire to treat family members equally.
• In this regard it is imperative that distinctions are made between compensation for work done in the business, and returns that are paid to family owners/shareholders.
• Even in this regard, it is important to have the appropriate decision making process in place (such as a third party assessment) of the appropriate remuneration for a particular management position, and an advisory board or board of directors (that includes independent participants) that can determine an appropriate return to owners and manage their expectations.
Reluctance to plan:
• Given the significant corporate failures of the past ie Enron and WorldCom, you would expect significantly increased governance, robust strategic planning processes and greater accountability to shareholders.
• In non FBs, there has been increased adoption of such changes, however in the FB space the uptake is severely lacking.
Many FBs do not having functioning boards with independent directors (understandably so from a personal liability perspective, and if the owner can override any board recommendation, their input is wasted), however an advisory board is wonderful alternative.
An advisory board won’t necessarily have the legal exposure, senior management may sit on the board as well as independent outsiders, and they can be structured to the needs of the particular business.
Feedback as to why FBs have not adopted such a board include fear about losing control, confidentiality and lengthening the time it takes to make decisions.
Such boards, governance and business planning processes are also viewed by some as an ineffective use of time instead of “rolling the sleeves up” in the business.
Statistics have shown, that such an attitude is to the detriment to the business; opportunities or new strategic initiatives are missed, lack of articulation of strategic priorities risks lack of focus and direction of the business and ultimately significant succession issues as the next generation have no idea about where they fit, how they are to get there, and lose confidence in the business and its future.
Other structures that also assist in this regard include family councils, family constitutions, and family business rules.
In a FB conflict is inevitable. It is however, also healthy, and the success of a FB is significantly dependant on their ability to proactively and collaboratively manage the conflict; they need to openly and honestly discuss the un-discussable.
Can you describe the negative aspects that the over shadowing effect can have on children of the founder?
Next generation want to work in the family business because of a sense of history, pride and tradition.
They have a passion for the work itself, pride of ownership and see it as an opportunity for a good livelihood and a desire to contribute to the growth of the family business.
However, when the founder consistently overshadows and doesn’t allow them to make their own mark, they leave for reasons such as “a need for a new challenge, difficult family dynamics and lack of career opportunities”.
An overshadowing founder can stop a business in its tracks. Transition becomes a transaction of selling the business to a third party rather than transitioning in next generation; the next generation feel they have no voice, responsibility and no way to create their own “mark”, and therefore find it easier to do it elsewhere.
They have grown up, being taught to respect their parents and their decisions, and they now find it extremely difficult to challenge those decisions; albeit they are business ones.
They find it difficult to raise new ideas or question authority, as it is easier to keep family harmony than potentially raise conflict.
Questions/statements that often arise are:
• “Am I ‘the one’, or am I just being protected for the bad news to come?”
• “I can’t ask for help because I am supposed to know what to do; I’m having trouble getting respect from the management team as it is?”
• “I don’t feel ready to take over”
• “I don’t think he is ever going to step down, I am better off going somewhere else”.
Often in family, there is an assumed understanding; particularly in older generations ie they know I love them, they know I believe in them.
However, so often without specifically articulating or communicating it, the next generation is completely unaware and assumes their own answers; usually the answer is to leave the business.
The existing generation may feel the appropriate grooming for the successor generation is to have them experience all different aspect of the business and “learn the ropes”.
The successor generation however may feel that they are being moved around because of a lack of confidence in their abilities and “they are just trying to fit me in somewhere”.As in all family issues, communication is essential.
Overshadowing can also stifle the business. Education is different today than what it was for the founder; often they were not formally educated, whereas today, the majority of succeeding generations are more formally and highly educated.
Access to different markets is easier and innovation and technology is changing on a daily (if not hourly) basis. Succeeding generations have different ideas and skills.
To walk in the footsteps of the existing generation and continue down their path would be ignorant to the world of today and show disregard to their skills and competencies.
Increasingly so, family business owners are encouraging their successors to obtain experience outside the family business; gaining exposure to different cultures, processes , management structures and business experience.
This experience can improve not only their ability to contribute to the business, but also their confidence, sense of accomplishment and feelings of self-worth in the business; they have their position in the business because of their skills and competencies, not their bloodline.
To overshadow this, is demotivating and disregards the intent of gaining the experience in the first instance.
Family businesses that have successors with outside experience are more successful businesses.
Founders typically stay leaders in the business longer than their non FB counterparts.This long term leadership can be very stabilising; customers and suppliers value this, however it can also constrain the business unless they take more advantage of the talents and experience of the younger successors.
The younger successors should be part of the leadership team as soon as they have demonstrated the appropriate competencies and experience.
Waiting until the founder steps down almost certainly results in lost opportunities for both the founder and successors.
Also, with the appropriate skills and competencies, the successor has increasingly marketable assets, and if they become disenfranchised with the family business, it almost always leads to them leaving the business; a significant loss of talent for the business and an extremely difficult personal decision for the successor.
It is important for succeeding generations to learn the business, but it is also important that they have the appropriate space to develop their own leadership style and make their own contribution; the founder won’t be here forever and the business market place is changing at a rapid pace.
Family businesses are unique with defined challenges; how to firms like KPMG assist in making them more efficient?
We understand the difference between ownership, management and family and how they inter-relate. We encourage and facilitate communication between all participants.
Communication and understanding of the numerous and varied perspectives is always imperative in the first instance.Conflict is inevitable, and we help the business and family manage it.
At KPMG we can assist to make a business more efficient, however in the family space, we assist the family make their business a better business, by helping them manage the family component and their conflicting responsibilities: to raise competent, independent, self-aware adults (unconditional acceptance), whilst operating a business that grows and generates profits (acceptance is premised on competence, skills and ability to contribute).
We are capable of providing this assistance because we know what needs to be done, by whom, when and how.
This is a hugely daunting task for a family; however we have extensive experience in this regard.
Every business has its own story, but every family business has its own family, and we all know the diversity values and personalities that exist in a single family, let alone multiple families over multiple generations.
Accordingly there is no single solution or product.FB issues are not about a “product solution”, they require time, communication, building of trust and a lot of flexibility and diversity of thought and understanding to resolve.
FBs are unique and they require a unique approach each and every time. At KPMG we have unique individuals with unique and deep expertise in the issues facing FBs.
What makes a good family business great? It depends on who you ask. Is it contribution to the economy or society? Is it work/life balance or the ability to provide future career opportunities or financial rewards to the family? Is it the ability to develop leaders of the future ground in family values?
At KPMG we want our clients to define their own answer and we assist them achieve it.
We do this via gaining a deep understanding of the family and the business and applying our expertise specifically to them, their needs and achievement of their goals.
