Successful adaptationto the challenges of generational transitions requires a fundamental re-thinking of the governance model that may have functioned effectively in the previous generation – particularly in family companies evolving to sibling or cousin partnerships. In these cases, the structure of ownership and control that worked in the past can become more complex as a result of the transition. When a family enterprise evolves in this direction, the transition calls for a significant redistribution of power and authority among an increasingly large and diverse network of stakeholders. These transitions involve much more than the mere changing of the guard we typically associate with the term 'succession'. They require a transformation of the deeper structure of relationships on which the sustainability and governance of the family enterprise depends. This is what behavioural scientists refer to as 'meta-change'.
Research and experience suggest that a clear vision of the system in the future scenario is necessary (though not sufficient) for the successful management of complex change. However, it is often difficult for business owners and their families to apply past experience to envision an alternative governance model for the enterprise that fits conditions the system will face in the future.
Also, it is hard to argue with success. When a family enterprise has grown and prospered under a certain model of governance, it becomes the cognitive template used to assess the viability of other alternatives. The behavioural assumptions underlying the established model become axiomatic and are often held up as the fundamental truths about how to govern a successful family enterprise. Concepts such as 'there can only be one ultimate leader' or 'all siblings have to be treated equally' or 'boards with independent directors cannot be trusted'are often used to dismiss alternatives to the status quo. Even in those cases where common sense suggests that long held axioms will not be applicable in the future, business owners often persist in trying to retrofit the future into the past.
Models of governance
Even though many controlling owners plan to divide ownership and control equally among their children, they often assume that one of them will be able to replicate their autocratic approach to making decisions. These controlling owners have a difficult time imagining a system of governance where leadership is shared and exercised in a consultative manner. Consultation is an essential requirement for successful leadership in a sibling partnership. Controlling owners are not alone in this tendency. Some of their children often try to govern 'as Dad did'– and fail. Even nonfamily executives, accustomed to the strong leadership of a controlling owner, have a tendency to assume that the offspring whose style most resembles the controlling owner's will be best equipped to lead in the future.
Business owners in sibling partnerships evolving into complex cousin consortiums also get into difficulties when they rely on past experience to inform the model of governance that will exist in the future. The lead siblings may seek out those successors among their children who most resemble their own management styles. Accustomed to informal decision-making processes, they often ignore the extent to which the more complex world of the cousins will require an increasingly formal architecture of governance. As these systems approach the generational transition those leading the change have trouble envisioning a model of governance in which family councils, shareholder assemblies and independent boards of directors are introduced. Shareholder agreements, family constitutions and policies for regulating the entry and exit of relatives to and from the business – all critical ingredients for success at the cousin stage – are viewed as being unnecessarily bureaucratic and cumbersome.
Exploring future options
How can family business owners and their families break away from the past sufficiently to explore their future options? How can they learn to recognise the conditions their heirs will face in the years ahead? Our group has experimented with various methodologies designed to help families articulate a new governance model for the future. These processes are invariably complex and must be customised to a given family, but there are a number of basic suggestions we offer to help those contemplating complex transitions involving meta-change.
Consider letting the next generation explore and pick the future model of governance: Incumbent leaders often feel obliged to define the vision for the family enterprise in the future. In an effort to reveal their own preferences and avoid conflicts with their relatives, they meet with their advisors and make fundamental decisions that shape governance options well beyond their tenure. Such efforts are misguided and this is why so many legal trusts are borne from family mistrust. Those who will be forced to live with consequences of a predetermined governance model should be the ones to determine it. We are not suggesting that incumbent leaders should abdicate their responsibilities completely, but they must create conditions for the next generation to explore future governance options and assess their feasibility.
Create a vehicle for exploration: To define a vision of the future families should appoint a taskforce to canvass the concerns and aspirations of key stakeholders and propose and guide a model of governance for the future. There are certain conditions necessary for such a taskforce to work effectively.
- They must be staffed with opinion leaders – preferably from the next generation – who hold the trust and credibility of their peers and key decision-makers among the seniors.
- The taskforce must be of a manageable size (we recommend 5–10 members).
- It must have a clear and achievable set of objectives to be delivered to a pre-established schedule.
- The taskforce should manage its boundaries carefully -- allowing adequate privacy for the members to carry out the work effectively but enough on-going consultation with key constituencies to avoid any surprises.
- A taskforce requires the necessary resources to be effective, ie sufficient time, budget, and, if necessary, external facilitation to help keep the process on track.
Benchmark with families who have been successful at a similar stage: In this context, benchmarking refers to the practice of visiting other family companies to learn innovative ways for dealing with recurring governance problems and issues. It is important to select the families to visit carefully. Many owners choose to benchmark with families they know best, rather than considering what systems have the most to learn from. For maximum benefit, owners should try to benchmark with families that are at a later stage in their evolution. They are likely to learn more from a family whose leaders are 10–15 years older and have been wrestling with complexity for some time. This will help families to anticipate the issues they are likely to encounter in the future.
Of course, families vary in their candor and in the extent to which they are willing to share experiences with others. Trust must be built between the two parties before a free exchange of views can take place. It is vital to make clear early in the process that the confidentiality of the host family will be respected. The host family may also be interested in learning from you.
Choose carefully who will represent your family. The taskforce already set up to develop a vision of the future is often an ideal vehicle for benchmarking with other families. Benchmarking is not an end in itself. The lessons must be synthesised and referred back to the relevant stakeholders so an action plan can be devised.
Complete a demographic analysis of your system in the future: It is often helpful to systematically examine the ages of all family members in the years ahead. Using a simple matrix you can list on the right hand column the names of all your family members from the oldest living relative to the youngest. Along the top row, write the years, eg 2001 through to 2011. In the body of the table, write everyone's ages and project them forward into the future. Once the table is constructed, study it carefully and ask some basic developmental questions.
- Who will be how old when?
- What issues are you and your family likely to face in the years ahead?
- How can you and your family best prepare itself to face the challenges and opportunities that the future will bring?
- What kind of governance system will the family need in the future?
This analysis can help business owners visualise the future and anticipate the challenges of with a more complex system.
Ultimately families that manage these complex transitions most effectively educate themselves on the future before making any fundamental choices. This involves more than enrolling in occasional seminars on the fundamentals of family enterprise – although good seminars can help – or reading relevant books, magazines or articles on the topic.
Education comes from a fundamental curiosity about family enterprise. It is the spirit of inquiry that provokes an active, livelong exploration of these issues in a wide variety of ways. I have found no better predictor of how well families will succeed in the stress of the generational transition than the time, energy and resources they are willing to invest in educating themselves on the key issues they are likely to encounter on their journey into the future.