The below article originally appeared on The Economist (“Reluctant heirs”).
Politicians like them because they provide lots of relatively secure jobs. And the public like them because they think such firms are more in touch with local communities than ones owned by anonymous shareholders.
This chorus of praise has some notable absentees, however: the next-generation family members who are supposed to inherit these businesses. Whenever the heads of family businesses gather, they complain about the difficulty of getting their children to take over from them. A recent survey by Peking University found that 80% of potential Chinese heirs were reluctant to follow in their fathers’ footsteps.
There are some good reasons for the younger generation to be hesitant. A successful patriarch or matriarch can be a hard act to follow—and may be a bothersome back-seat driver long after relinquishing the steering-wheel. Even an heir who lifts the business to new heights may still suffer sniping that he got where he is simply by belonging to the “lucky sperm club”, as Warren Buffett calls it. In other cases the heirs may genuinely not be right for the job: they may be more extensively and expensively educated than their parents, but lack the managerial skills to command a big organisation. Joachim Schwass of IMD, a Swiss business school, argues that the most common characteristic of failed successions is that the family marks out the eldest son for the top job from an early age, and hands it to him regardless of ability.
The list of companies that have ended up being sold, or handed over to professional managers, for want of a suitable family member willing or able to take over, include two of the world’s biggest hotel chains, Hilton and Marriott; and one of its biggest toymakers, Lego. To avoid this fate, and increase the chances of producing a strong successor, business families need to grasp two things. The first is that inheritance is a process, not an event. That process involves giving potential heirs a chance to prove their worth. Bernard Arnault, the boss of LVMH, and Rupert Murdoch, the boss of News Corp, have both given their children bits of their empires to run. Samsung created the role of “chief customer officer” for Jay Lee, the son of its boss, Lee Kun-hee, to give him experience in handling all-important partnerships with other tech firms, such as Apple. Another Lee family, which owns Lee Kum Kee, a Hong Kong-based maker of sauces, have created a “family learning and development centre” to prepare the next generation to take over.
Another way to ensure that heirs are ready for the jobs they inherit is to make them prove themselves outside the family firm. This can broaden their experience, boost their self-confidence and prove to doubters that they are more than just daddy’s pet. George Stalk of the Boston Consulting Group says he knows of one company that refuses to interview members of its founding family unless they have earned a master’s degree in business or engineering and have won two promotions within five years while working for a non-family firm. In the meantime a firm could hire a CEO from outside the family but still keep open the option of some day going back to having a family member run the show—as seems possible, for example, at Pictet, a Swiss bank. An alternative is to have a non-family CEO and give the chosen heir the job of chairman. This is Mr Buffett’s plan for Berkshire Hathaway when he eventually retires.
The second thing that business founders must grasp is that behind a successful family firm lies a successful family. A striking proportion of businesses spring from minorities which have had to rely on strong and cohesive families to survive in a sometimes unfriendly climate: the Jews in Europe; the Parsis in India; the Chinese in South-East Asia. Successful business dynasties work hard at reinforcing family ties. They hold regular gatherings; and they prepare for disagreements by creating family constitutions, including such things as guidelines on when and how family members may be hired by the firm. Business families need to persuade the younger generation that taking over the company is an opportunity, not a burden. Mr Schwass notes that successful families tend to have “informal curriculums” which are designed to teach younger members not just about how the family firm works but about why it matters.
No amount of sugar-coating will work unless the retirement problem is solved. A striking number of patriarchs suffer from “sticky-baton syndrome”. Melvin Gordon, boss of Tootsie Roll, an American confectioner, died in office in January, aged 95. Serge Dassault, boss of Dassault Group, a French conglomerate, is 90. Viacom, a media conglomerate, is floundering in part because Sumner Redstone, aged 92 and in poor health, has resisted handing over to his daughter, Shari. Christophe Bernard of KPMG, a consulting firm, says families need to devote as much thought to getting the former boss to move on as they do to training his successor. One “golden rule”, he says, is to give the retiring patriarch something big to fill his days, such as running a family charity.
There are signs that business families are getting better at all this. More of them are drawing up formal family constitutions. More of them are seeking outside advice on managing a generational transition. There is now quite an industry of providing family firms’ heirs with training and networking opportunities. IMD has a course that mixes members of European family dynasties with Chinese princelings. Loyola University in Chicago has a Next Generation Leadership Institute. Family capitalists like to proclaim that “A family business is not a business you inherit from your parents, it is a business you borrow from your children”. But making a reality of this charming adage requires hard work, careful planning and a willingness to let go.