Succession & The Family Dynamic How Family Structure Affects Family Business
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Last week, we looked at the characteris>cs and factors that make up what we call a family business
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Our Working Defini>on of Family Business Ø
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Ownership control (15% or higher) by two or more members of a family or a partnership of families Strategic influence by family members on the management of the firm, whether by being ac>ve in management, by con>nuing to shape the culture, by serving as advisors or board members, or by being ac>ve shareholders Concern for family rela>onships The dream (or possibility) of con>nuity across genera>ons
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Characteris>cs that Define a Family Business Ø Ø
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The presence of the family The overlap of family, management, and ownership, with its zero sum (win-‐lose) proposi>on, which in the absence of growth of the firm, render the family business vulnerable during succession The unique source of compe>>ve advantage derived from the interac>on of family, management, and ownership, especially when family unity is high The owner’s dream of keeping the business in the family (the objec>ve of business con>nuity from genera>on to genera>on)
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Characteris>cs that Define a Family Business Ø
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The fact that the family business managers are dealing with their own money and the inheritance of their children and are not as subject to the quarterly whims of Wall Street allows for more pa>ent capital They will act intelligently but boldly at cri>cal junctures, knowing that the benefit or loss will directly affect the family That knowledge keeps family managers making decisions that steadily contribute to the family’s incremental and long-‐term wealth The goal is for each genera>on to grow the company’s value leaving behind a stronger and beSer than the one they inherited This makes them more imagina>ve, innova>ve and progressive in their decision making
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I gave you a defini>on of family business based on those characteris>cs…
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Our Defini>on of a Family Business A Family Business is any enterprise in which an entrepreneur or next genera>on CEO and one or more family members significantly influence the firm. The influence can be managerial or Board of Directors par>cipa>on, ownership control, the strategic preference of shareholders, and the culture and values family shareholders impart to the enterprise. HTTP://EMAGINE-GROUP.COM
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I also leY you with a number of slides that showed you the worldwide impact of family businesses on the global economy
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Some Family Businesses
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I hope you went through those slides…
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Which gives us the introduc>on into this week’s lecture…
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This Week’s Lecture
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Understanding the massive impact that family owned businesses have had on the global economy, we can now move forward to understand the dynamics that run these businesses
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While many people would like to tell you that family-‐owned businesses are all in one structure, they would be wrong!
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The family-‐owned business can take many forms of opera>on and many of those forms depend heavily on the structure and vision of the family elders and founders of the business
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I have men>oned a document called a Family Cons>tu>on a couple >mes in class – so let’s take a minute to understand what it is and it’s impact
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A Family Cons>tu>on sets the founda>on of how the business is and will be run. This includes succession, family members and non-‐family members employment, and Board of Directors ac>vi>es.
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A badly wriSen Family Cons>tu>on can create problems for genera>ons to come. A well wriSen one will be the basis for the success that the business achieves today, tomorrow and in the future.
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Family Cons7tu7on
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A Family Cons>tu>on provides the complete structure of how the founders want the company to be run, grown and carried forward – even aYer they are no longer involved in the decision making process
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Since compe>>ve success, family harmony and ownership returns are all at stake at the same >me in the firm, having a carefully draYed document to guide genera>ons is essen>al for founders
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One of the most crucial items covered in a Family Cons>tu>on is the concept of succession.
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While there are hundreds of reasons why organiza>ons fail, in family-‐owned and family-‐controlled businesses, the most common reason is succession planning.
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Whether the reason is incompetency or unprepared successors, unclear succession plans, a >red strategy that is unable to contain compe>tors or family rivalries and aSempts are power grabs, if the business is going to survive, it must successfully craY the succession process.
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What is succession?
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There are 3 types of ineffec>ve succession that you must assure do not happen
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Type 1 – Conserva7ve Even though the founder, or previous leader, has exited the business, the shadow remains and the firm and its strategies are locked in the past.
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Type 2 – Rebellious In an over-‐reac>on to the previous genera>on’s leadership, the next genera>on launches a “clean slate” approach to the organiza>on.
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Type 3 – Wavering The next genera>on is paralyzed by indecisiveness, unable to adapt the business to current compe>>ve condi>ons
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Whether it be Conserva>ve, Rebellious or Wavering, they all lead down the same road – the destruc>on of the company’s tradi>ons, legacies, and “secret to success” – ending in the closure of the company.
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So how do we get it right?
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Building Family Businesses That Last
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Without vision and leadership from members of 2 genera>ons & the use of select family, management and governance prac>ces, the future is bleak for family-‐controlled enterprises
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When you blur the boundaries among family membership, family management, and family ownership, it subjects the business to the poten>al for confusion, slow decision making, or even corporate paralysis
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Add to that, the inability to adapt to changes in the compe>>ve marketplace or powerless to govern the rela>onship between family and business will ul>mately undermine the enterprise
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So, family businesses that lack mul>-‐ genera>onal leadership and vision have difficulty posi>oning to retain the compe>>ve advantages that made it successful in the first place
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How to we get past this?
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With ongoing discussions across genera>ons with owners about their vision for the company to build a business that withstands and excels across challenges
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Businesses that have been built to last understand the tension between preserving & protec>ng the core of what made it successful, and promo>ng growth and adapta>on to changing compe>>ve dynamics
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Systems Theory
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The Systems Theory says that family business is modeled with 3 overlapping, interac>ng and interdependent subsystems of family, management and ownership
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The Systems Theory
According to the Systems Theory model, each subsystem maintains boundaries that separate it from the other subsystem and the general external environment that the business operates. HTTP://EMAGINE-GROUP.COM
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The Systems Theory
For the business to perform op>mally, the subsystem must be integrated so that the en>re system func>ons in a unified way.
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The Systems Theory
This model also shows that the family firm is best understood and studied as a complex and dynamic social system where integra>on is only achieved through reciprocal adjustments among the subsystems. HTTP://EMAGINE-GROUP.COM
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The Systems Theory
Put simply – everyone has to give to make the business successful. Each part of the system has a role, but each one must give and take to make the rest of the model successful HTTP://EMAGINE-GROUP.COM
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The Systems Theory
The family business will always have adjustments to make, especially when next genera>on family members join, earlier genera>ons age and the firm sees new periods of growth due to product and/or service innova>ons. HTTP://EMAGINE-GROUP.COM
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The Systems Theory
Issues, priori>es and problems will be defined differently by different members of the family in business. The defini>ons will depend on where the individual stands in the system. HTTP://EMAGINE-GROUP.COM
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The Systems Theory
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A parent who is CEO and 100% owner of the firm (1) will likely view things differently than a family member who is not ac>ve in management and does not own shares in the business (6). Just like a non-‐family member will have a different perspec>ve (7). HTTP://EMAGINE-GROUP.COM
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The Systems Theory
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This phenomenon leads to a categoriza>on of family businesses based on their ability to have a family-‐first, ownership-‐first, or management-‐first perspec>ve on issues and their resolu>on. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
In family-‐first businesses, employment in the business is a birthright. Employment is based solely on the applicant’s last name, merit and other important criteria in the process are devalued or en>rely irrelevant. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
Non-‐family managers with high career aspira>ons are not usually willing to join family businesses out of concern for their future prospects. High-‐poten>al non-‐family managers will never join a family-‐owned or family-‐controlled business. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
Family-‐First businesses exist primarily for the purposes of the family, perks that transfer from the business to family members are oYen extensive, financial systems will lack transparency to protect this fact. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
The business becomes part of a lifestyle. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
While well-‐managed and well-‐governed family businesses may have sound reasons for paying all members of the family the equal or nearly equal compensa>on, Family-‐First businesses tend to equalize compensa>on regardless of the responsibili>es, results, and overall merit. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
The level of commitment of family-‐first businesses to the con>nuity of the business across genera>ons depends on the agendas of individual family members and the levels of conflict associated with running the business. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
Family-‐first businesses are likely to choose con>nuity only if members of both the current and succeeding genera>ons aspire to this goal and if the current genera>on has sufficient resources in re>rement to make this possible. HTTP://EMAGINE-GROUP.COM
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The Family-‐First Business
If neither genera>on dreams of con>nuing the business, it is likely to be sold at the end of the genera>on.
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The Family-‐First Business
Even if family members want to keep the business running, there is great difficulty because successor selec>on, strategic renewal and governance between family and business require a strong commitment to sound business management principles, which don’t exist in this model. HTTP://EMAGINE-GROUP.COM
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The Management-‐First Business
Management-‐First businesses ac>vely discourage family members from working in the business and/or to require work experience outside the family business as a requirement for employment. HTTP://EMAGINE-GROUP.COM
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The Management-‐First Business
The beauty of this style of family business is that the performance of employed family members is reviewed in the same manner as the performance of non-‐family members and HR policies generally apply equally to family and non-‐family employees. HTTP://EMAGINE-GROUP.COM
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The Management-‐First Business
Compensa>on is based on the responsibility and performance, not on the posi>on in the family hierarchy.
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The Management-‐First Business
The focus is on profitability, return on assets, market share, revenue growth, and return on equity.
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The Management-‐First Business
Another difference is that there is no automa>c commitment to business con>nuity because the enterprise is seen as a produc>ve asset. As an asset, it could just as easily be folded into a large company or sold through an employee stock ownership plan. HTTP://EMAGINE-GROUP.COM
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The Ownership-‐First Business
In Ownership-‐First family businesses, investment >me horizons and perceived risk are the most significant issues. Here the shareholders come first.
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The Ownership-‐First Business
Ownership-‐First businesses have shorter >me frames within which financial results are evaluated.
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The Ownership-‐First Business
Just a impa>ent and greedy investors on Wall Street can pressure well-‐managed publicly traded companies into short-‐term thinking, family shareholders who are not ac>ve in the business, can get in the way of effec>ve opera>on of a family-‐controlled business.
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The Ownership-‐First Business
These family members can cause the business to lose the founding culture, which valued the role of pa>ent capital, or inves>ng in the family business for the long term.
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The Ownership-‐First Business
Pa>ent capital – one of the most significant sources of compe>>ve advantages of many family businesses – disappears at the hands of greedy shareholders.
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The Ownership-‐First Business
Siblings and cousins, caught in the web of high expecta>ons for short-‐term returns via dividends, distribu>ons, or the crea>on of shareholder value, are prone to second guessing family members in management. HTTP://EMAGINE-GROUP.COM
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The Ownership-‐First Business
If family unity suffers as a result of this pressure by some family members for high returns and short >me frames, a loss of will and vision may result. Family business con>nuity may be abandoned in favor of immediately recapturing the value created by previous genera>ons – even through the sale of the company. HTTP://EMAGINE-GROUP.COM
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