Plan Now for the "Cousin Generation" (1995)
by Shel Horowitz
For a year, speakers have come to the UMass Amherst Family Business Center to say, in one way or another, that a family business thrives when family business members put business concerns ahead of family issues.
But John Ward has other ideas. In order for a business to thrive, he believes, it must incorporate the values and operating structure of the family. "The real issues are family-based issues more than business-based issues.
The family is the most important place to focus our attention."
As an example, Ward, author of Keeping the Family Business Healthy and other books, family business columnist for Nation's Business, and Professor of Private Enterprise at Loyola University in Chicago described a scenario of a business that has several expansion choices. It could add new product lines within its current geographic territory, buy out a competitor in a foreign country, or develop new market penetration by opening up locations on its own in different parts of the country.
For different styles of families, different choices would be right. A close-knit family whose siblings all live in the same neighborhood and have weekly dinners at the parents' home is a natural for expanding the product mix, while a family with two fiercely competitive siblings seeking management responsibility could each be sent to distant locales and open up a new shop. Buying the foreign competitor might be a good match for the family whose senior owners are ready to step down as CEOs but not ready to retire, and who love to travel and speak a foreign language.
Of course, Ward agrees that maintaining a healthy business is also vital. "You've got to do both--at the same time.
"A lot of people would say that building a business and a family are in conflict. What is needed is different. We've got two institutions, family and business, they overlap, and we've got a lot of issues where family meets business and business meets family. Stock ownership, who works for the business, compensation...They can create a lot of friction because family has different orientations and values than business. Families are more socialistic, more emotionally based, less task based.
"How do families solve the family/business interface issues? With four Ps: Power, Politics, Policies, and Purpose."
Power, Ward says, usually lies with the senior generation. Autocratic decision making is probably the most common strategy, but it tends to break down once Mom and dad are out of the picture.
Politics is the art of convincing enough key players to do it your way. "When these issues are dealt with politically, they're being dealt with below the surface: who's with me, against me. It can be consensual, satisfying, and the easiest way to go in a lot of situations."
While most companies address succession and other family issues through one of these two models, for Ward, the other two Ps must be included. Purpose has to do not only with the organizational mission of the business, but also its role in family identity. "From a positive point of view, successful family business families have a sense of family business purpose. They see synergy, energy, positive power to think long term and build for the future."
The trust factor lets a family business move more quickly than a traditionally-organized corporation, and provides the family with a common bond. Family members have an interest in continuing the business not only for financial reasons, but also because it provides a shared experience, something to discuss and identify with, as well as a training ground for family members in the work world.
As for policies, "If we can anticipate the issues where family and business bump together before they become real and say, 'when and if this issue comes up, how are we gong to deal with it?,' I think we can do a lot of good. Successful family businesses develop policies in advance" for two major reasons:
First, "People's egos and situations aren't on the line; we can think about (the future) before it becomes an issue. The policies are less personal and can be more objective." And second, "If you develop policies before the need, many of the needs will not arise. People's expectations will be shaped and the issues don't appear as often.
For instance, it's a good idea to set policies about who is eligible to run the business before the founder's children become adults. One business Ward worked with "developed a policy that kids (who wanted to join the firm) had to interview family members who did or didn't have outside experience (before joining the family business) and also interview two from other families: one with outside experience, and one without."
Many times during his four-hour presentation, Ward brought up the image, "shirtsleeves to shirtsleeves in three generations." In other words, the founding generation works hard to establish the business, and leaves a tidy cushion for the second generation, which is able to coast. But then, as market conditions change and the business equity has to support ever-larger numbers, the third generation must once again work far harder than their parents. And, according to Ward, this is not just an American phenomenon; some expression of this cliche exists in almost every culture. For example, the Chinese say it like this: "First generation builds success, second lives like a gentleman, third has nothing left."
Asked why this might be true, the audience came up with
a number of reasons, which Ward organized into five categories:
- Second-generation successors are less ambitious and less hungry.
- The business is changing as technologies change and markets shift.
- As families grow larger, different family members separate because of different interests.
- Estate taxes.
- Family members are not attracted to the business because of the emotional environment.
Asked to rank these factors, the audience chose the internal factors (the first, third, and fifth) by wide margins over the external (second and fourth), thus reinforcing Ward's point that family issues are ultimately more important than business issues.
And in Ward's view, family issues become even more important as the generations shift control, this is why having policies in place way ahead of time is so important. In fact, even before the founders turn over control to their own children, it's a good idea to have policies in place that address the transition from the founder's children to the "cousin generation."
Only about 8% of family businesses ever reach the cousin stage. About one in three family businesses disintegrate because of generational conflict, another third transition to a single second owner, and the remaining third are controlled by sibling teams. But only half of those sibling teams successfully co-manage the business.
Why so few? "Sibling partners cannot collaborate for a long period of time together. If you've grown up in the family in of an autocratic entrepreneur, what have you learned about working as a team? How much do they learn about solving conflict together? About how to listen to each other?" Yet the stakes are high. "A huge percentage of our economy depends on family sibling teams being successful," on a massively larger scale than anything the American economy has previously experienced.
Ward identified five characteristics of successful, long-lasting family businesses. They:
- Respect the challenge of family business continuity, understanding the odds are against them, but refusing to let that intimidate them.
- Recognize and understand that most family businesses face similar issues.
- Communicate well, using such mechanisms as an outside advisory board and regular family meetings.
- Firmly believe in planning and strategy, and have ensured the founding generation's financial security, without involving business assets.
- Are committed to the effort and have a strong sense of purpose.
Planning, he notes, is the hard one, because it involves the "un-American" activity of divulging and discussing personal finances. But it's the linchpin without which the rest of the transition will fail.
The ideal family business transition, says Ward sardonically, involves two key points:
- "Please find a protected niche where customers, competitors, and technology won't change
- Please have only one child."
Also, Ward sees a major challenge that compounds family businesses' succession issues: organizational stagnation. "When people have been with you for a long time and you're loyal to them, they become less innovative."
"How old was leader of business last time it went through a sharp growth curve? Typically it will be in the 30s. How old were the people around the leader? The same age. All those people age together. Opportunities to add new people decline because rate of growth slows You end up top heavy with older people and light with younger people. It's natural, but leads to an inevitable consequence: imagine a whole bunch of 50-60 year olds in senior management, not much room for younger people.
"This is a very common path in terms of organizational life cycle. It's all colonels, it's a very strange looking organizational chart. How do you bring in new people? You either have to grow or have turnover. You have to attract such good people that other people want your people! A certain amount of turnover is desirable, and if you're hiring the right people, you will have some turnover. But tell a business owner he needs more turnover and you spoil your dinner."
"Why are you loyal to people? For their contributions or for their longevity? You can tell a lot about a company's culture by their recognitions or ceremonies. Successors have to shift the meaning of loyalty from longevity to performance. and that's a very difficult thing for a successor to do. You have to be willing to accept a redundant organization, that you've got more people than you need. You need to make the bridge between these people who you're not going to throw out the door," and the ones who can make the necessary changes.
"Family businesses need some stimulant to their strategic thinking. Cargill, the largest family business in the world, is very inbred. They hire homogeneously, promote from within, have a culture that is so powerful that everyone starts to look and think the same. They know it's great but they know it makes them vulnerable. So they bring in, every couple of years, three of the most powerful consulting firms, to 'turn us upside down, stretch us.'"
The challenge to successors is to un-stagnate while maintaining the company's identity and traditions. "In books on corporate culture, you'll always see on the first page, the definition (of corporate culture) is 'the way we do things around here.' That's very dangerous. Successors have to take tradition and turn it into an attribute. We say, 'Our tradition is change.'"
"What Dad, Mom, Granddad did that was great was not to make round widgets and paint them green, but to make widgets that no one had made before. We have to break away from the specifics and shift them to the values that we believe in. If our culture is defined as the way we do things, introducing change is going to be very difficult; every change is going to be a blow to tradition and the organization is going to resist it."
"In all those reinventing books, the secret is to throw out the old. Successors can't do it; they have to be evolutionary, not revolutionary. So successors have a real challenge: how do I bring strategic vitality to our thinking process, and how do I create an innovative, flexible organization, and do that evolutionarily, and do that from within."
"It's tricky because much of what has been learned and is being done is precious. But the architects of the last strategy will say they don't want to change any piece of it. Because they're not positive why they were successful. If someone comes and says change the compensation, change the pricing, they say, what if that's the linchpin? That's why you need an outside board."
Stagnation doesn't occur in a vacuum, either. Several other challenges often accompany the drying up of innovation: a mature and soft market cycle, the need to support an ever-larger group of family members, estate tax issues, and founder burnout, an unwillingness to plunge into the trenches and dig out the business one more time, all combine to create financial pressures.
Despite it all, Ward is optimistic. Family businesses that address these issues, develop policies and outside boards of advisors, communicate and plan well, and keep the successful parts of their tradition while adapting to changing market conditions, will succeed. It may be a tall order, but it can be done.