Today’s world values a quick turnaround more and more – businesses that used to take decades to build can now pop up in a few years and brands that have been around for seemingly forever can suddenly vanish. The dynamics of maintaining a family business brand over multiple generations in this environment are even more complex and come at you much faster – how do firms manage to successfully make the transition and continue to succeed?
“I don’t like the word ‘dynasty,’ but that’s what it is. It’s not just a business. There’s a lot going on in the background.” – Jake Dyson, heir apparent to James Dyson of Dyson vacuums – December 2016
According to the Harvard Business Review, almost 80% of businesses globally are family-owned. Of these, only about 30% successfully make the transition from founders to descendants and continue to operate successfully into the second generation.
Given the vast number of family-owned businesses out there and the tremendous reliance the global economy has on them to support employment, these odds don’t seem very comforting for the millions of individuals employed by these businesses.
These odds were at the front of my mind a few years ago as I took over as second-generation management of our family business, Masterclock, Inc.
When I made the decision to pursue a role in the family business, I initially did it out of an expectation and hope that I could build from the foundation my parents had laid for the organization. Growing up, most of the business lessons I learned in school were put in context by the dinner-time conversations my family always had regarding the business and how it was going.
“This is John – he’s the heir apparent for Masterclock” …I got so used to hearing this introduction to vendors and customers during my first few years at Masterclock that I almost became numb to what it actually meant. In my own mind, I was supporting the family business and trying to learn as much as I could as quickly as I could from my aging parents. To many of those working around me, I was (probably) their future boss and was under many watchful eyes to determine if I had the required capabilities, capacity, and most importantly – commitment.
The same Harvard Business Review study referenced above surveyed executives at both family-owned businesses (FOB) as well as non-family owned businesses (NFOB) and found that the FOB’s were lagging behind NFOB’s on a variety of succession planning factors:
- – Lack of governance and implementation of best practices.
At Masterclock, we held a yearly Board of Directors meeting where we would look to discuss the current activities of the business and review our priorities for the upcoming year. For the most part, these meetings were extremely short and were done primarily to maintain compliance with the requirements of our governing documents. As our family was in constant communication, the meetings became mostly symbolic and were not used for thorough review and laying out priorities.
In an NFOB environment, there’s less room for assumptions and more focus on the function of the Board of Directors meetings than just ensuring the form is adequate. The Harvard Business Review study found that NFOBs were more thorough in their review and application of best practices and good governance, and laid out performance expectations that were practically non-existent within our firm.
- Less succession planning for CEOs.
An aging founder or management team without a succession plan in place can lead to a lot of questions and anxiety for both staff and partners alike. Conversely, when a relative or descendant at a FOB is named as the likely successor solely because of the genetic link, those same staff members and partners can be just as worried.
I’ve seen companies flounder for years while the next generation takes their time deciding whether to be involved and committed to the goals of the organization or pursue their own paths. The family component can prevent an objective decision from being made in the best interest of the business and can lead to a lack of alignment of organizational goals and family dynamics. These scenarios can eat up organizational focus and cause tension within the group – staff isn’t sure who to listen to or what to expect and the organization is not actively identifying other individuals who could potentially fulfill organizational responsibilities and continue to drive the business forward.
Without a clear, structured succession plan, families with multiple potential successors can end up with inter-family squabbling that can distract from the thorough, objective review required to identify who’s the best candidate.
- Even less succession planning for director positions.
At Masterclock, our Board of Directors was my parents and myself. The hope of “keeping it in the family” led us to exclude outside advisors and experts who could have provided valuable guidance and review of our practices and expectations. Without these auxiliary inputs to the conversation, our ideas and perspectives were limited to our own outlooks and we were not learning from the mistakes other companies have made.
NFOBs are more likely to utilize their directors for the guidance of the business and ensure they are properly organized, resourced, and aligned with the needs of the business. Alongside the superior utilization of directors, the succession planning for director positions creates more continuity of the operations of the business and ensures the management team will continue to be supported by relevant and knowledgeable directors.
“Tradition is like a bow. The more we stretch the bowstring, the farther we can throw the arrows of modernity and innovation.” – Giovanni Ferrero, third generation CEO of Italian chocolate maker Ferrero International SA – August 2016
Four of the most common triggers that can lead to the failure of a family business transition can be summarized by the four D’s –
Alone, any of these factors can drive a wedge into proper decision making – in combination, they can be disastrous for the business and those affected by it. While there’s no way to predict when any of these will occur, the data shows that FOB’s who acknowledge the risks and apply best practices and governance to properly prepare are more successful than those who don’t. Even when things don’t go as planned, uniting as a family to keep focused and stay the course can drive success out of any scenario.
Working together as a family to overcome these hurdles can have tremendous rewards for the family and those employed by them.
“It has been a long ride to get to the point we are today. I am extremely proud that my son, John Clark, has chosen to be President and CEO of the company. Working with family members can be challenging but it has brought us forward in the marketplace as well as in our mother/son relationship. I wouldn’t want it any other way.” – Mary Clark, Chairwoman of the Board of Masterclock, Inc. July 2017
While keeping the business in the family can be a daunting and challenging task, the upside is tremendous. Families around the world continue to beat the odds and keep their organizations ticking even during changing times. We hope to do the same!