Family succession dramas are bankable “popcorn viewing” for TV, film and the media as seen with Succession, Yellowstone, Game of Thrones and real life drama in the Murdoch, Gucci and Guinness families.
When the cameras turn on you and your family though, it’s uncomfortable being part of a succession battle.
Emotions run hotter when the stakes are high. It’s not just the financial survival of the business that matters; family relationships, community reputation and your responsibility to the next generation are all on the line.
This drama could be closer to all of us than we might think as an estimated 173,000 enterprises, or 70 per cent of all Irish companies, are family-owned.
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Family businesses contribute significantly to the Irish economy, representing about 50 per cent of GDP and contributing €19 billion to the exchequer annually while also accounting for nearly one million jobs.
More people work for family-run firms than all foreign businesses and the State combined according to Family Business Network Ireland.
Unlike multinationals and large organisations, family-owned businesses are not clustered around our bigger cities and airports. They’re spread out geographically, making them important for regional development. Because they’re deeply embedded in the communities in which they operate, they tend to take a long-term view of success and have a deep sense of responsibility toward their employees and customers.
Although family businesses are significant for our domestic economy, the failure rate is high.
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An often quoted statistic is that around 30 per cent of family-owned businesses don’t make it to the second generation and only one in 10 makes it to the third. Many businesses either fail once the founder passes or they are sold on.
The key reasons for failure include: breakdown in communication and trust among family members; poor long-term strategic planning; and employing family members without the skills and ability to sustain the business.
To survive over the long haul, family businesses need to professionalise by adopting formal policies about how to balance the interests of family and the business, and develop metrics around how to employ and who to promote. Just because you’re a family member shouldn’t mean you’re entitled to a lifelong job in the family business.
Like companies, family business owners needs to define their purpose and establish the structures, strategies and skills they need to accomplish their goals.
The Four Room Model
Succession battles are not a foregone conclusion. Most family businesses will seek to address at least some of the most common problems that might bankrupt the business, ruin reputations or destroy family relationships.
In the long run though, is it as black and white as choosing business over family or family over business?
“The ongoing dilemma for a family that owns a business is to make decisions that positively affect the business without harming the family,” write Harvard Business Review Family Business Handbook authors Josh Baron and Rob Lachenauer.
“The decisions a family business leader makes about employment of family members or sharing profits and perks are about more than just business. The business leader feels the pull of loved ones and wants to take care of them, and sometimes that makes it hard to also make sound business decisions.”
Striking that balance isn’t easy.
To help families have discussions in a structured way, so that emotions and family loyalties are less likely to sabotage the business, the two men developed the Four Room Model.
The analogy helps the family understand their different relationships and roles specific to the business and to each other. “Successful family businesses build out and furnish four rooms: the owner room, the board room, the management room and the family room,” they say.
“In the family business house, these four rooms are interconnected, each having a different purpose and function. On the left side of the house lie the three rooms designated for owners, board, and management, with each room conducting activities related to the business. Adjoining these three business rooms is a huge family room. It is connected to the business rooms, but family members only enter those rooms if and when they are conducting business related to that room.”
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During discussions, the different rooms help family members be more conscious of the context in which they’re operating.
Where parents are still running the business an adult child might ask something of their mother or father in the family room but in the management room they’re asking their boss. The parent’s responsibility and reply to you in the family room will be different when they are wearing their CEO hat in the management room or boardroom or even the owner’s room where they have strict legal and financial responsibilities to the business.
Intergenerational strategy
Leaders in family businesses tend to stay in place for 20-25 years whereas public company CEOs serve around six years on average.
People are living longer so it is not unusual nowadays to see the older generation engaged in the family business well into their 80s and even 90s. That can mean there are sometimes three or even four generations waiting their turn to step up.
Long leadership transitions can have a negative impact on business growth and may take their toll on younger family members who, despite their ambition and drive, might feel they’re not fulfilling their potential. This leadership gap may also create difficulties in adapting quickly to changes in technology, business models and consumer behaviours.
Leadership transitions in every business must be well planned and executed. So, even though handing over some control to the next generation is hard, delaying the discussion might mean the demise of the business or the loss of key players.
If the business wants to remain family-led, an intergenerational strategy should be developed to provide deserving members of succeeding generations meaningful roles.
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The elder members’ long-term contribution to the business should be recognised and respected. But, once the right family members and external team members are in place, long-term family leaders might consider transitioning over time from operational leaders to strategic mentors and resources for the next generation.
“While the business can offer employment to qualified family members, it is the responsibility of the family – not the business – to prepare young family members for working there” say Baron and Lachenauer.
Family businesses should not guarantee jobs for every member of the next generation and should always have a mix of family and non-family expertise on the team.
All jobs should be filled through open competition with family members who are interested encouraged to apply if they meet the criteria and have the relevant skill sets.
Younger members should work outside the business for many years before being considered for the family firm. This brings in new thinking, different ways or working and shows them the clear lines between employee and management.
It also helps their transition into the family business as it avoids the “nepo-baby” label as staff members will see they have outside experience and bring relevant skills and insights.
Clarity around governance, decision-making structures, roles and responsibilities help reduce confusion around multiple roles and increase the chances that the business will be passed down to future generations.
Margaret E Ward is chief executive of Clear Eye, a leadership consultancy. margaret@cleareye.ie
