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An unsavory succession plan

What should you do if there are no next-generation family members to take over your business? Many business owners sell their companies. Others appoint non-family successors and continue as passive investors after their retirement. But a Japanese business owner appears to have found an offbeat approach.

Phuket Wan Tourism News, a website that reports on tourism, property, restaurants, nightlife and employment on the island of Phuket in Thailand, reported that the man apparently fathered nine surrogate children born within six months of each other “to create a group of youngsters who can take over his business.”

The report did not give the name of the man or his business, nor did it say what type of business it was.

According to the report, military police and welfare workers raided a condominium in Bangkok and found the babies, ranging from one month to six months old, with Thai and Japanese nannies. Also found in the condo was a woman who was about four months pregnant, who said she was a surrogate mother. A Japanese woman said the was planning to travel with the babies to Japan.

Two of the babies had fevers and were taken to a hospital, the article said.

A lawyer for the man said the father plans to sue for the return of the children, according to the report.

This man’s desire for family successors apparently has led him to develop a plan that seems disturbingly close to sex trafficking.

Someone should tell him that, even if the court awards him custody of the children, there’s no guarantee that they will grow up to become a competent, harmonious successor team -- or have any interest in working for his company.

Loving your kids and setting them free

In 2010, billionaire investor Warren Buffett proclaimed that he plans to give more than 99% of his wealth to philanthropic causes. He famously said, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.”

In a recent interview with the Daily Mail, Sting -- the bass player and singer who first became famous with his band the Police and then grew more wealthy as a solo artist and film actor -- also publicly proclaimed that his kids shouldn’t expect a large inheritance. Sting, 62, who was born Gordon Sumner and is the father of six children ranging in age from 18 to 37, told the Daily Mail:

“I told [my children] there won’t be much money left because we are spending it! We have a lot of commitments. What comes in we spend, and there isn’t much left. I certainly don’t want to leave them trust funds that are albatrosses round their necks. They have to work. All my kids know that and they rarely ask me for anything, which I really respect and appreciate…. They have this work ethic that makes them want to succeed on their own merit. People make assumptions, that they were born with a silver spoon in their mouth, but they have not been given a lot.”

You may not agree with what the rock star is doing with his fortune, but his frank conversations with his children are undeniably admirable. As Jayne Pearl and Richard Morris -- co-authors of Kids, Wealth and Consequences: Ensuring a Responsible Financial Future for the Next Generation -- wrote in Family Business Magazine in 2010:

"It’s important to communicate with your children so they don’t base their own decisions -- about spending, education and career -- on what may be false assumptions. Otherwise, they will be not only surprised (and probably resentful) to learn they’re not destined for Easy Street, but also unprepared to support themselves and their own families at anywhere near the level they expected."

Sting also said in the Daily Mail interview:

“With my children there is great wealth, success -- a great shadow over them -- so it’s no picnic at all being my child. I discuss that with them, it’s tough for them.”

Family business advisers recommend that senior-generation members of prominent families talk to their kids about how to respond to their peers’ comments, questions and speculations about the family’s wealth. Pearl and Morris wrote, “Many parents also emphasize that the family is fortunate in ways that have nothing to do with money: We are lucky to be healthy, to have a close family, to have such an interesting history, etc.”

Our Transitions West 2014 conference -- taking place November 12-14, 2014, in Marina del Rey, Calif. -- will include a session entitled “Raising Kids Successfully in a Successful Family Business.” Panelists in this session will discuss how parents can help their children earn credibility, appreciate the family legacy and understand the value of wealth.

One essential lesson the panelists will impart is the importance of open and honest communication between parents and children. Next-generation members who aren’t prepared to function independently are likely to be stung by life’s consequences.

Enterprise longevity vs. business survival

A recent article in The Practitioner -- an online publication of the Family Firm Institute, an organization for professionals who advise and study family enterprises -- pointed out the difference between "firm survival over time" (continuity of a family business through the years) and "longevity of a family enterprise" (a family's ability to create wealth and value over generations).

The Practitioner article -- by Pramodita Sharma, the Sanders Professor for Family Business at the University of Vermont's School of Business Administration and a visiting scholar at Babson College -- argued that family enterprise success can be defined in ways other than leadership transfer from one generation to the next. "Both the creative destruction of firms and pruning of the enterprising family are integral parts of longevity of an enterprising family ....," Sharma wrote. "Recent reviews of the research on succession, governance, professionalization and performance all point in the same direction -- that one size does not fit all and the overarching numbers of ‘success' are insufficient to capture the complexity and heterogeneity of family enterprises and their pathways to success."

Family Business Magazine's cover subjects for May/June 2014, the Power family, sold J.D. Power and Associates to McGraw-Hill in 2005. The Powers are now working together on investment and philanthropic ventures and have implemented family governance structures. Though they no longer run their company, the family is continuing what Sharma refers to as the "pursuit to create value and wealth over generations."

A legacy business that continues for 100 years or more is truly something to celebrate. But that's not the only road to family enterprise success. Today's researchers make a strong case that we must reorient our thinking.

The family as investors, not managers

How many times have you heard a family business owner say, "We have to sell our company because our kids aren't interested in running it"?

If the family is fielding lucrative offers for their business, the proceeds of a sale provide capital for next-generation members to embark on ventures more in line with their passions, and all family members feel good about the outcome, great. But if the family expresses any regret over having their company fall into someone else's hands, I often wonder if they ever considered an alternative to selling: engaging non-family managers to run the company while the family continues to own it.

Marc Puig, third-generation CEO of Puig, the Spanish prestige fragrance and high-end fashion house, recently told the Financial Times that he doesn't expect his family's fourth generation to run the business. "What we have said is that the next generation will most likely not work in the company," Puig told the FT. "They are groomed to become good shareholders and stewards of this project -- but not its managers." The company has a share of about 9% of the prestige-fragrance market, and its revenues are nearly €1.5 million, the FT article noted.

Over the years, Family Business Magazine has published several profiles of families who have taken the role of owner-investors rather than owner-managers of their legacy businesses. In these cases, the family must make an extra effort to engage the next generation so they remain committed to the company. But under the right circumstances, this strategy can foster family satisfaction and financial success.

Governance for the multifaceted family enterprise

At last month's Private Company Governance Summit, held in Washington, D.C., and presented by Family Business Magazine along with our sister publication, Directors & Boards, Steve Lytle, the former chairman of Columbia Distributing and director of The Agnew Company, a family business holding company, made some interesting points about family business governance.

Lytle, participating in a panel discussion entitled "The Effective Private Board," pointed out that many family enterprises are multifaceted. "When we have family ownership involved, we're really not talking about one business, usually," said Lytle. "There's usually kind of a portfolio of [assets] and roles and definitions.... We've got the family to consider, we've got owners to consider. And then we've got the business and the assets to consider."

Lytle said that family businesses should develop governance systems to address the interconnectedness of the various constituencies. "I think it's one thing to race right down and talk about the board," he said. "But we really need to think about the enterprise itself, and how we're governing the entire enterprise." A family enterprise system can include an operating board, an investment board, a foundation board, a family council and an ownership council, Lytle noted.

Most large family businesses have a diverse array of stakeholders, Lytle said. "There are family members that have emotional equity [but] don't have financial equity, and those that have financial equity and not as much emotional equity."

Lytle said that family business boards should consider four questions: "How's the cohesion of the enterprise? How's the clarity developing in the enterprise? How effective is communication in the enterprise? And how effective is education in the enterprise?"

The board can play an important role in building and maintaining cohesion among the family ownership group, Lytle said. On the issue of communication, he noted, "I think it's vital to recognize that when we're talking about communicating to family owners, we want to communicate in a way that speaks at the maturity level, at the sophistication, and at the literacy level of that family group." Regarding education, Lytle said, "I think boards in family enterprise can do an effective job of being part of the education cycle that really ramps up the literacy and sophistication" of family owners, so that they can function effectively as a shareholder group "and for the enterprise to continually grow and mature along the way."

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