Spring 2008 Openers

Survey: Family firms in U.S. lack plans for resolving conflict

PricewaterhouseCoopers interviewed senior managers from 89 midsized U.S. family companies in 2007 as part of its global Family Business Survey. The study found that 26% planned to change leadership within five years. Among the respondents who said they anticipate a change in ownership within or beyond the next five years, almost three-fourths (72%) expected ownership to pass to the next generation of the family. Nonetheless, the survey found that 44% of all responding companies lack a succession plan.

On the other hand, the vast majority (84%) reported having established plans for dealing with both business and family issues should a key manager or shareholder become incapacitated. This figure is significantly higher than the percentage of the global sample that reported having such plans (67%). “One reason for the high percentage may be that the future of the estate tax has been a leading topic of political debate in the U.S.,” the survey report noted, “forcing companies to plan ahead to minimize the tax consequences of passing the business to the next generation if the founder should die prematurely.” The report’s authors added a cautionary note: “Based on our experience in working with numerous family businesses, many of these provisions are likely to be informal plans that the owner has in mind but has not necessarily documented.”

Surprisingly, few U.S. respondents reported a significant level of tension resulting from the involvement of family members in the business. But the executives did recognize some contentious issues:

Nearly four out of five U.S. respondents (79%) said their companies have not established conflict resolution procedures. The survey report recommended that companies engage an objective third party or advisory board to help family members prevent or resolve conflicts.

Ask the Experts: A father seeks help with successor training

I was wondering if you could give me some direction or help in setting up a plan for progression of learning and taking over the business. I have two sons (ages 23 and 25) who are working in the business now. They have spent a year on the floor doing hourly work and hopefully getting a feel for the labor aspect of our business. They both have college degrees and are capable of doing whatever they put their minds to. (There is still some added degree of commitment or desire to be developed from my point of view; maybe I’m expecting too much too soon.)

We are an 85-years-young parts manufacturer with 180 employees. All the parts we supply are uniquely engineered, so there is a lot to learn—technical, management, financial, people skills, sales and what else? Is there a better place to start? A process? A sequence? An entrepreneurial class or study course available? Should they have an internal or external overseer/adviser/mentor? Me or someone else? I’m sure there is a way to get better results, quicker and with minimal stress, and to build a better working relationship between everyone. Any help would be greatly appreciated.

Experts’ replies:

These youngsters probably have never worked anywhere else. Dad should encourage them to leave the family business and seek other employment in the parts and engineering industry for at least three years. Assuming they return, they’ll have gained valuable skills and confidence, and Dad will have had a chance to map out an integration plan that provides for classroom and experiential training, performance evaluation and improvement, mentoring, communication and the other intangible things required to successfully run a closely held enterprise.

If the family isn’t willing to take this step, the place to start is Dad’s timeline. The sons’ ages imply that Dad is about 50 years old. The number of employees implies the business has about $15 million in sales and is likely at a developmental crossroads. How much longer does Dad want to run the business? At what point—objectively—will growth outstrip Dad’s ability to manage?

A potential solution is to bring in outside management (ideally from companies that have successfully been where Dad wants to go). This approach has lots of advantages. The executive(s) could be a tremendous help to Dad, will help mentor the sons, will add valuable executive leadership so the business can become more systems-rich, and can serve as a buffer between the generations. However, this requires Dad to delegate authority and to trust someone with his baby (the business), something many entrepreneurs are not ready, willing or able to do.

A third alternative is for Dad to continue to personally operate the company for the next 15 years until his sons mature. During that time he should engage in periodic discussions with the boys to chart their futures. This should be done in a collaborative setting, but given the boys’ current ages, Dad will have to be the architect of the integration plan at first.

Their discussions must cover mutual expectations (maybe Dad is expecting too much; how does he measure commitment and desire?), timelines for the boys to spend in their current roles and the roles they will assume in the near future, what the roles will be (avoid overlap—it doesn’t make sense to have two product engineers but no sales or accounting executives), outside training and development, assessment (psychological, intelligence, aptitudes, etc.), compensation, future ownership (supported by a 21st-century buy-sell agreement), what special projects the sons might expect to undertake, how they’ll be evaluated and by whom, and what the rewards or consequences are for their individual performances. Objectivity is crucial, and the best tool for delivering that is a board of advisers with outside, risk-taking peers in the majority.

One final consideration: Mom should be brought into this discussion ASAP. The father and sons wouldn’t want to spend countless hours creating a thorough succession plan only to have Mom hit the ceiling if one of her babies is promoted to vice president while the other languishes. That could create unfortunate family ripple effects as well as an adverse effect on company operations.

— Wayne Rivers
Rivers is co-founder and president of the
Family Business Institute Inc. in Raleigh, N.C.
(info@familybusinessinstitute.com).

Two very capable sons have been on the floor “hopefully getting a feel for the labor aspects of the business.” “Hopefully” does not reflect the result of a formalized plan or communication about intergenerational issues; it’s more reflective of your good instinct. Your astute insight and intuition again show through when you mention that “there is still some added degree of commitment or desire to be developed.”

I suggest a customized, on-the-job training program to foster the growth of your two sons. With such a program—which should include benchmarks, progress measurements, feedback and a free flow of conversation—both you and your sons will be able to ascertain progress. This program should be authored by you, your two sons and a third-party consultant if necessary. This implies a timeline as well as the potential that your sons can develop passion and appreciation by virtue of helping to author their own career paths.

Many families, in creating governance policy, feel strongly that the next generation should first have an adequate amount of training outside of a family business so they can come to the family firm with more knowledge, maturity and confidence. For the purposes of this response I’ll presume that this alternative has already been thought through or will be considered.

It’s imperative that your sons learn the technical skills of this business, if they have not already learned them, as a prerequisite for success. If they have not achieved this fundamental knowledge through their college education and on-the-job training, they should receive supplemental education.

Each of the two sons should be encouraged to develop his own strengths so that over time they will be able to respect each other’s contributions and be a stronger team. Your sons should be on rotation programs that allow each of them to become knowledgeable about all aspects of each department within the business. It might be helpful to look at the organization chart in order to help establish each son’s path.

The department heads should have the responsibility of mentoring the sons as they grow within the company. The sons should be invited to attend board meetings; management meetings; and meetings with attorneys, accountants and other outsiders. They should be responsible for preparing for such meetings, and should be asked to attend debriefing sessions afterward so you can discuss the meetings and they can garner more knowledge and seasoning.

By attending trade shows and conventions as well as meeting with vendors and customers, they not only will continue to learn but also will gradually become the voice of the company. Similarly, they should get involved in chamber of commerce or civic activities, and should read business publications.

If your sons are suited for the business, your guidance, encouragement and nurturing should help make their growth within your company a stimulating, exciting and enjoyable process. Lastly, I recommend scheduled periodic meetings among the three of you with a business facilitator to discuss the business, succession and interpersonal issues, freely and safely.

— Paul Rich
Rich is a principal with the Rothstein Kass
Business Consulting Group in New York.
He specializes in assisting closely held and
family-owned businesses (prich@rkco.com).

Congratulations to you and previous generations for building a business that is “85 years young.” As your question implies, however, success in the next generation will be largely dependent on the development of family talent —growing competent, committed and aligned leaders who will serve as managers, as shareholders, as directors and as family council leaders.

Like the parts you supply, your plan must also be “uniquely engineered” to fit the values of your family as well as the culture and strategy of the business. This multiyear process no doubt will include some or all of the following: a university education, outside work experience, job rotation, executive coaching, career assessment, peer groups and mentoring relationships.

But what’s the special role of the family in the development of family talent? Regular family meetings (or family councils) ideally serve as the primary learning laboratory for growing family talent. A strong successor development process is a natural outgrowth of your business family’s commitment to a lifelong journey of personal and professional development for all family members.

In our family business consulting practice, we encourage business families to formalize their commitment to lifelong learning by developing a written Family Learning Policy. These policies vary widely but often encourage “selecting a mentor by the 12th birthday” or group learning activities that foster individual growth and family relationships. (One client takes all of his 17 grandchildren on a learning adventure annually.)

While the family provides the fertile soil for growth (Family Learning Policy, financial underwriting, etc.), we believe successors should “own” and take the lead in their own personal and professional development before they assume major responsibilities in management and ownership. (If you can’t manage yourself, you won’t be able to manage other people.)

Many of our clients use a simple tool we developed to help families “grow people”; we call it a Personal and Professional Development Plan. This one-page worksheet, to be completed annually, asks each adult family member (from the chairman to the stay-at-home parent) to:

• Credit and acknowledge accomplishments of the past year. Begin this annual planning process with thoughtful reflection on progress and achievements. Often other family members can help, noting things that may be invisible to us.

• Commit to work goals (“no kidding” outcomes/results) to be achieved in the coming year. These should be challenging yet achievable targets.

• Define and commit to specific professional development goals—the skills, experiences and knowledge that will help meet current as well as future responsibilities. (Stephen Covey, author of The Seven Habits of Highly Effective People, calls this “sharpening the saw.”)

• Set annual personal goals: family, marriage, health, recreation.

The annual review and discussion of Personal and Professional Development Plans is one effective way to keep the family directly involved in the development of family talent. This important family work should, of course, be complementary to the management development provided through the business.

Indeed, there is much to learn in preparing your sons for another generation of success … values, skills, discipline, self-awareness and teamwork. If your family commits to learning and to the growth of each family member, the family can provide significant competitive advantage in the marketplace.

— Henry D. Landes
Landes is founder and president of the
Delaware Valley Family Business Center
in Telford, Pa. (henry@dvfbc.com).
E-mail him for a sample Family Learning Policy or
Personal and Professional Development Plan.

Think of successor preparation as strategic planning. You’ll formulate goals, lay out a sequence of steps toward these goals, calculate a timeline and allocate resources, and recognize the positive and negative variables that will affect the plan’s success. Your strategic successor preparation plan should be developed and implemented by the people most affected by it—you and your sons—so that all of you understand it and are committed to its outcome.

I suggest you begin by identifying all the reasons for your company’s success and then describing the kind of leadership and management it will need to sustain that success in the future. You’ve noted several concrete business and technical areas in which your sons must build knowledge and skills to meet those needs. In addition, look at the success implications of the business and family values reflected in how the company relates to employees, customers, suppliers, lenders, its industry and its community.

Think about what role each son is likely to play in the company. Both should have good overviews of the business, but it might not be realistic to expect both of them to know every detail of its operation.

Consider their individual talents and preferences. One of your sons, for example, might have a natural ability and inclination for design and production, while the other might be a better salesman or financial manager. Sorting this matter out early could help them develop as managers and executives.

Then structure a systematic, strategic apprenticeship program that moves your sons through those crucial areas. Look around your company for in-house experts. Let your sons learn beside your most accomplished people in sales, finance, human resources, estimating, production, general management and other functions. Another degree isn’t necessary, but their apprenticeship can be supplemented with business school and trade association short courses in specialized topics like information management and emerging technologies.

I’m glad you mentioned mentoring, but the best mentors—those who not only help young people to understand what companies do and why but also encourage their commitment—are usually not their parents. (See The Family Business Mentoring Handbook for insight and guidance on this subject.) Throughout, talk honestly and often with your sons about how you’ve made both good and not-so-good management decisions, and don’t insist that they always do things the way things have always been done.

Keep the process on track with milestones and progress reviews, but don’t try to rush it. It won’t be completed in only a few years. And remember that getting your sons ready to run the family business shouldn’t be a boot camp but a rewarding growth experience for all of you.

Be strategic. Be analytical. Be systematic. Most of all, be sensitive to your sons’ individual talents and aspirations and how much lasting value they can contribute. Congratulations for giving this matter serious thought. You’re off to a good start toward building a secure future for your sons and your family company.

— James Lea, Ph.D.
Lea, a professor at the University of North Carolina
at Chapel Hill, is a family business speaker and adviser
(james.lea@yourfamilybusiness.net).