Q&A SERIES: YOUR FAMILY ENTERPRISE QUESTIONS ANSWERED
Our Q&A series is a way for our family enterprise community to connect directly with CFEG’s experts on the topics on your minds. We will publish your question and our answer regularly (you remain anonymous).
Q: Has leadership succession in family businesses changed in today’s turbulent environment?
What are the timeframe and steps for transitioning family business leadership to the next generation in this modern day?
A: The transition of executive leadership of a family business is a gradual process that occurs over multiple years. In the past, it has required a ten-or-more year period, which makes sense when you consider all that needs to be accomplished to prepare for and then make a handoff. At least ten years is needed to identify candidates, develop and test them, prepare the organization and the family for a new leader, prepare the outgoing leader for a new chapter, and steadily hand over authority, responsibilities, and eventually ownership.
Is it reasonable to expect the leadership transition process to continue to operate this way in today’s fast-paced, ever-changing world? Not exactly.
In today’s environment, there are a few dimensions that have changed, which are compressing the timeline for leadership transitions. First, next generation family members are entering the family business later than they once did, opting first for professional experiences or interesting life adventures before committing to a career in the family company. This alone compresses the timing for succession. Second, next generation family members who enter their family business expect greater operating responsibilities sooner. They feel ready earlier, and they are more vocal than previous generations about asking for it. Third, businesses and industries are changing fast, causing the skill sets for effective leadership to change. The next generation’s skill sets and perspective—if properly developed—can be extremely valuable, further incentivizing an earlier transition than in the past. The bottom line is that leadership transitions probably need to happen at younger ages today to keep up with the changing world and the new sets of skills that leaders need.
What does the transition process look like? A typical scenario is for a next generation member to earn an undergraduate degree, gain some work experience outside the family company, and earn a graduate degree in a relevant field (e.g., MBA or Engineering) before joining the family company or family office at 25-29 years of age. As they prove their competence, next gens are given increasing levels of managerial responsibility and authority. Along the way, their behavior as a “nepotistic professional” (family employee) is carefully watched to screen for entitlement or unprofessional behaviors.
In their thirties, next gens are ready to gain some leadership exposure and experience by leading teams, new experiments or new ventures, or being charged with improving a struggling part of the company. These are opportunities to prove themselves, grow, and move up in the organization, with performance feedback and coaching provided along the way. Next gens are invited to show their leadership capabilities in other areas too, such as leading the family council or a philanthropic initiative. Other stakeholders need to gain exposure to them as well, so activities like presenting at board meetings or the annual shareholder meeting are organized for them.
By the time they are in their forties, the most capable next gens will want to advance into senior leadership roles. This is where the generational squeeze begins for some families. The senior family leader likely will have crested seventy years of age. In the past, when retirement at age 65 was the norm, a handoff was assumed. But today, even seventy isn’t considered that old. Senior gens haven’t lost their ability to contribute and may not be ready or willing to step to the sidelines.
What to do?
Senior leaders may still be interested in “playing the game” but there is a time when they must stop being team captain or younger gens may lose interest and go elsewhere. One solution is to organize ways to combine both generations for a while, with senior leaders playing more of a coaching role. That can produce a wonderful blend of great wisdom and new ideas and energy. Another is to give entrepreneurial next gens real authority for a new, future-oriented venture within the company.
A different kind of problem can occur when the senior leader is ready to pass the baton but next gens are too young to transition or they are still out exploring or building their career elsewhere and not ready to join the family business. Instead of a leadership squeeze, you have a leadership gap.
Next gens are far more globally oriented and have more options than previous generations. They may want to be home eventually, but they are staying out there longer. Our advice to senior leaders is to let them explore and stay engaged with them. Hopefully they are gaining valuable experience that can be used in the family enterprise. In the meantime, an interim non-family manager can fill the leadership gap. Seasoned businesspeople in their fifties looking for their last big job are good candidates for interim managers. They have lots of energy and focus but probably will be ready to step down around the time that you estimate the next generation will be ready. Or you can hire a talented younger person who is interested in doing it for five or six years, as a steppingstone to the next phase of their career. In either case, you want them to do two things: run the company well and smoothly transition to the next generation.
With so much focus on the next generation in their twenties, thirties, and forties, it is easy to overlook the rising generation of even younger family members. You can begin to expose children aged six or seven to different aspects of the family enterprise and cultivate a sense of inclusion, teamwork, and pride. There are many ways to do that, as they grow up. One family, for example, planned a vacation at an international location where the children participated in a tour of family business operations and met the beneficiaries of the family’s local philanthropic work. The teenagers were impressed with the scale of the business and its impact on employees and the community. Engaging the youngest generation, in age-appropriate ways, through ongoing activities can be an important feeder into the family business decades later.
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