Succession and the Transfer of Power

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Succession & Transfer of Power What Happens When The Founder Leaves

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Review of Last Few Weeks Ø

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Over the past few weeks, we have set the stage for helping you to understand how family based businesses operated We have discussed the impact of different organizaEonal structures We have discussed the difference between different types of management structures In the last lecture, we set the stage for how family influence impacts business In this week’s lecture, we are going to look at the impact of succession on a family business and the different roles that we can expect to emerge

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But first… The Course Project

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As you all know, the first submission was due on the 8th of November...

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Many of you missed the submission

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If I don’t have your project submission by midnight Thursday – that’s 12 am Thursday – you lose half the points for the submission.

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If I don’t have it by midnight Saturday – 12 am Saturday – you lose all the points for the first submission and I will not consider your project throughout the semester

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So in essence, you will fail the enEre course project if you miss this submission on Saturday midnight

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QuesEons?

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Succession & the Transfer of Power This Week’s Lecture

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A CEO has a mandate to drive the success of a business – that is first and foremost.

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They also have the responsibility of keeping the family company compeEEve.

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But in family businesses, they have the problem (or challenge) to fulfill the long-­‐ term mandate of insEtuEonalizing the enterprise

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What does that mean – insEtuEonalizing the enterprise?

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It means building great companies that will thrive from generaEon to generaEon.

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CEO as Governance

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The blurred boundaries that we discussed in lectures 2 and 3 are the biggest reason for the need to build insEtuEons to govern the relaEonships between family, ownership and management.

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If family rules become business rules, conflict is avoided, but problem solving is diminished and costs are incurred

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If the pa^ern conEnues, no amount of succession can ensure the conEnuaEon of the business for the next generaEon.

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Do you understand what I just said?

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Business is not about family rules. It’s about developing systems that work in good Emes and bad Emes.

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Sadly, this is the one thing that most CEOs don’t focus on – the building of insEtuEons of governance

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Family CEOs perceive the business in a significantly more posiEve light than do other family members

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They are also more interested in business/succession planning, communicaEon, growth strategies, career opportuniEes and effecEveness in boards

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But when everything is going well, they are not interested in building the insEtuEon that the business should become just in case they are gone tomorrow

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CEOs believe that there is clarity and understanding among family members of succession requirements and the manner that it will be transferred

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The Transfer of Power

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CEOs preparing to transfer power do not, single-­‐handedly, have to make succession happen

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They may also not be one of those who want it to happen

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Studies show that CEOs in family-­‐ controlled enterprises are prone to long tenures and even entrenchment

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By not making way for the future generaEons, these CEOs tend to seriously weaken the company’s ability to conEnue across generaEons

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But we have to understand that the transfer of power is not easy in any sebng – whether corporate or family

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For many, the drive for power is as much a life force as the needs to achieve and to be loved

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In a family business, transfer of power is further complicated by the demands of family relaEonships and the sheer potency of ownership

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So in a family business, it’s not just passing the management to the next generaEon, it’s also a ma^er of passing on the family leadership and ownership control

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I’ll take you back to the example I gave you with the Louisville Courier-­‐Journal and the Binghams

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Barry Bingham Jr had been appointed President of the Louisville Courier-­‐ Journal, but his father Barry Bingham Sr sEll retained majority control

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He had voted his daughters on the board and decided to sell the company without consulEng Barry Jr.

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In other cases, significant ownership stakes have been passed on to the next generaEon without passing on any real voEng power or control

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When this happens – controlling ownership and top management posts being kept by the previous generaEon – make a mockery of the transfers of power

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Also, since future generaEons are not trained or prepared for company leadership many problems can occur

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My reason for telling you all of this…

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The transfer of power needs to be uniquely designed for each family and business in such a way that family leadership, ownership control and company management are part of it

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CEO as an Architect of Succession

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CEOs who have developed a winning succession in a business do not fit the profile of the hero portrayed in Hollywood movies

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Instead, they are modest, substanEve entrepreneurs or serious professionals with a mission

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They care more about doing the right thing for the company and its conEnuity that about promoEng their own egos or agendas

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CEOs of family businesses are building companies to last, so they can’t afford to be narcissisEc, spotlight-­‐hungry performers

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They are stewards of a legacy that has a life of its own with a value beyond that of the individual CEO

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They typically take the role of an architect as they transfer their vision into reality

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They must enlist the right people and then execute the right strategies to ensure both sustainability and conEnuity

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Samuel CurEs Johnson III, the 4th generaEon CEO of SC Johnson, came into the realizaEon that he had to be the architect of the transiEon

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Herbert Fisk Johnson, the 2nd generaEon President of SC Johnson, died suddenly in 1928 without leaving a will

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A ba^le started between siblings ulEmately gave 60-­‐40 majority control to Herbert Fisk Johnson Jr, Samuel CurEs’s father

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Samuel III sEll remembers the 10 long years that it took his father to se^le his grandfather’s estate

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As a result, his father vowed not to do that to his son, and Samuel CurEs vowed not to do that to his sons and daughters either

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Once the right people were in place, the strategies for the various divisions were working and the insEtuEons for governing the relaEonship between business and family were in place

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Samuel CurEs Johnson III decided it was Eme to reEre

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CEO Exit Styles and the Transfer of Power

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There are 6 styles that are most common when a CEO exits a company

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They are: The Monarch, The General, The Ambassador, The Governor, The Inventor and The TransiEonal Czar

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The Monarch

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Kings and queens rule for life – they have no reErement provision in the law

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They have no expectaEon of early departure to compensate them for years and years of presiding over wars, social unrest and leading visible and demanding socio-­‐poliEcal lives

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Since succession can not take place while the Monarch is alive, palace revolts and death by poisoning are common

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Monarch operate with the assumpEon that they will die with their crowns on

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Many business owners are guided by the same principle. Years aler the reErement age of 65, they show up daily at work to read the mail, make calls and…

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To reverse decisions made over the past 24 hours they disagree with

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EffecEvely, they rule the company during a 3 – 4 hour workday

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Monarchs hire and fire a whole series of aspiring general managers, presidents and Chief OperaEng Officers

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The be^er they are, the faster they go because monarchs don’t imagine anyone could ever replace them.

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They definitely don’t talk about succession, nor do they set a date for departure or a deadline for change in responsibility

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They genuinely seem to believe that illness and death are things that happen only to others

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