Family business succession

Only 3% of all family businesses worldwide remain in business for more than three generations.

Darren White

To those family businesses approaching the cross-roads of a generational change, we therefore offer congratulations that they have come this far. However, such businesses face unique and complex challenges in continuing further, and these are the subject of an upcoming ADLS forum on family business succession, taking place on Tuesday 5 September 2017 (further details below).

In the EY global survey, “Staying power: how do family businesses create lasting success?”, it was found that family businesses account for more than two-thirds of all companies around the world and 50% to 80% of employment in most countries.

In New Zealand, privately-owned enterprises are a critical part of the economy where 97% of our 515,000 enterprises are SMEs (small to medium enterprises). A large percentage of these private enterprises are family-founded businesses with fewer than 20 people.

With this sort of economic impact, it is important that we help families that own and run businesses to manage themselves effectively – for the benefit of both the family and the business. A number of factors are relevant here, and the key elements are succession planning and good governance.

From a global perspective, the EY survey indicates most family businesses are in good shape. A total of 87% have identified who is responsible for succession planning, 70% are considering a woman as their next CEO, 90% have boards of directors, 90% have regular family or shareholder meetings to discuss business issues and 76% refer to themselves as a family business in their branding.

Succession planning is arguably the most critical issue a family business has to face. Disagreement, in-fighting and open conflict, can also mean it can be the most difficult issue to resolve. Put bluntly, if the business does not get it right, it is unlikely to survive beyond the first generation, let alone the third.

It is frequently cited, but no less true, that succession should be considered as a process, not an endpoint. This process is best served by an evolving perspective which takes in succession of management, succession of governance and succession of ownership.

The world’s most successful family businesses clearly define who is responsible for succession and work steadily to prepare the next generation for leadership. Training and educating the next generation are critical when preparing successors for both leadership and ownership and in successful family businesses, the process starts early – sometimes in childhood.

Respondents to the EY survey found work ethic, leadership and entrepreneurship to be the most important attributes to nurture in young people, with many successful businesses requiring family members to have at least three years of outside management experience before being allowed to take up management positions inside the business. As part of that preparation, many opt for post-graduate study at overseas universities (EY itself offers the acclaimed “NextGen” programme through affiliated universities around the world).

Good governance is the other key requirement for successful family businesses. For the business itself, it would be best practice to have a functioning board with both family and independent directors to which management will be accountable. Regrettably, the owners of many family businesses do not take this path.

Some simply cross their fingers and hope governance issues like management, ownership and succession will somehow work themselves out, while others, particularly businesses driven by strong entrepreneurs, are reluctant to relinquish control and submit to the scrutiny of a board.

But, as the EY survey notes, “A strong board, along with a family that is continuously focused on family governance documents and practices, reduces the risk of nepotism, internal conflict, inequitable allocation of ownership shares and succession woes … [Directors] are expected to provide more than business intelligence. They serve as coach, counsellor and peer advisor, and they must consider how strategic and operational recommendations, such as succession planning and dividend policy, will affect family dynamics.”

Having a formal structure and the usual board disciplines can also help avert crisis if the person heading the business was to pass away suddenly or become permanently incapacitated, without his or her future intentions for the company being made clear and with no process in place to appoint a successor.

In many cases, the patriarch or matriarch of a family will chair the business board with perhaps only one or two other family members involved. To enable broader family participation and to provide for good governance of the family itself, we would commend the establishment of a formal family council and family charter.

Most respondents to the EY survey reported that family unity is high. Family pride and cohesion are important to 84% of families – a key ingredient in generating better financial returns in the business. But conflict is inevitable in business, particularly in a family situation where complicated relationship dynamics may be in play.

A degree of conflict can be positive if families are resolving the issues behind those conflicts. Those doing so are considered healthier than those who either ignore or simply do not recognise their differences. New conflicts often arise at times of change when family members disagree on what to do next. The disagreements are often based on different experiences, values, willingness to change and risk tolerance.

Introducing some well-documented processes and systems in the form of a family council and family charter is a proven approach toward helping families reach consensus on such matters as strategy, family participation and remuneration, education and philanthropy.

Family businesses create jobs, invest in their communities and give back to society. It is therefore in all our interests that they prosper and good governance and succession planning are the foundations with which we can help family businesses to succeed for generations.

ADLS’ forum “Family Business Succession: Asking the Right Questions” is taking place on Tuesday 5 September 2017. As well as Darren White, presenters include Dr Deborah Shepherd (Senior Lecturer, University of Auckland) and Atul Mehta (Director, Moore Stephens Markhams). The forum will be chaired by Catherine Atchison (Partner, Martelli McKegg). For more information or to register for this event, click here.

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