Requiring family members to work outside the family firm is a hotly debated topic. While family business advisers have long recommended outside employment as the “best way” to prepare the next generation, there is no research to support this claim.
With the help of colleagues from six family business centers around the country, we asked 37 members of 11 successful and sizeable U.S. family businesses what their experiences were. Some had the requirement, others did not. We also looked at the benefits and problems experienced by families who had a requirement and by families who did not have one. Participating families were members of the third or later generations. The CEO of each company was interviewed, as well as at least one other family member and a non-family member who works closely with the CEO.
Based on our research, we conclude that work experience outside the family business, while preferred by a majority of advisers — and, in our casual observations, increasingly by many owners — is definitely not necessary for the next generation to succeed. Our sample focused on the CEO level and included successful leaders who had worked outside as well as those who had spent their entire career in the family business. We found that success had less to do with outside or inside experience and more to do with the family’s ability to have open conversations as well as the individual’s motivation and talents.
Disadvantages of outside work experience
On the problematic side of requiring outside experience, long tenures outside the family business can be a constraint for the succession process. For example, if a next-generation member graduates with an MBA degree at 30, spends seven years outside the company and then enters the family business, they likely will need 10 additional years to gain mastery of the organization and prepare to take over the family firm. This means the average NextGen CEO successor would be ready by age 47, at the earliest. By requiring extended outside experience, business families delay the NextGens’ ability to gain industry- and business-specific knowledge necessary to successfully manage a family enterprise. Also, for many people, mental energy is at its peak in their 30s and 40s, which is a prime time to learn, establish credibility and recover from mistakes. Finally, there is an opportunity cost for NextGens who work outside the family firm to build their credibility with employees (family and non-family) inside the family firm during the years that they are away.
Another challenge of requiring outside work is that NextGens may experience new opportunities that can shift their interests outside of the family business. For example, one family business owner required his daughters to work outside the family company. To fulfill this requirement, both daughters moved far from home, applied for and earned positions in a non-related industry and fell in love with their new location, consequently deciding not to return to the family business. Their father now regrets having had that requirement because he forced them to try new environments and they found new opportunities and experiences that they would otherwise not even have sought.
Some NextGens work for a few years at non-competing firms in the same industry and then return to the family firm. Others gain outside experience in vastly different industries and fall in love with their careers, such as one lawyer who chose to run an international firm rather than return to the family business. With each such “defection,” great opportunities for a business and family are lost.
Yet another challenge is a cultural one. People who succeed in other work environments often become enculturated to another style of leadership, management and strategic orientation. Bringing that back to the family business can create cultural upheavals that may lead to significant conflict in both family and business. This can also create a challenging relationship between the prior and successor generations when the “older” ways of doing business, all the way down to values and culture, are being challenged. That’s particularly noteworthy when the NextGens bring back innovations learned from their outside experience. They are not always educated about the culture of the family business and can have difficulty introducing the new ideas into the family firm.
We also found that working inside the family business gives NextGen family leaders important skills and insights regarding how the family and business operate. Inside work provides tacit knowledge about the business and builds the next generation’s credibility among family business employees, particularly non-family members. Finally, we also found that it can create a stronger social fabric within the family and among employees — a social fabric that can contribute to the family business’ resilience.
The case for outside work experience: A closer look
Where did the original advice to spend time outside the firm come from? To the best of our knowledge, it is closely connected with the founding leaders of the family business field. At that time a preponderance of psychologists understood that to develop self-confidence and emotional differentiation (emotional non-reactivity), being separate from one’s family was necessary, even though no one had shown that to be the case in a scientific manner. But contrary to this viewpoint, Murray Bowen, who coined the term “emotional differentiation,” writes extensively about his development within the family context. In short, sometimes it is easier to become an adult and develop an adult relationship with parents when you interact with them on a very frequent basis.
Other arguments made for outside work experience include, as one entrepreneur said, “Let my kid make mistakes in someone else’s business.” Downsides of a career spent entirely inside the family business include a smaller network and fewer external support systems, though presumably there can be easy remedies for these. Some maintain that it is easier to gain credibility outside the family business where there are no questions of nepotism and that credibility is transferable from one place to another. This is another unchallenged assumption. It may be that when family support and functioning are less than optimal, external work experience helps develop perspective and personal maturity. However, we must ask, how can a NextGen succeed at all when family support and functioning are not helpful and perhaps harmful? In such cases, families have more to worry about than how the successor gains early work experience!
Based on our research, perhaps the best reason for requiring outside work experience is that it saves families from the need to have an open confrontation around someone’s abilities and value. However, we believe that having effective family and business governance in place, such as regular family meetings and honest conversations, is generally a more productive way of dealing with such uncomfortable situations. For family governance, establishing protocols to facilitate robust and healthy discussions can help families to be more cohesive as they consider NextGen development policies that identify goals and accountability. For business governance, having outside directors to identify best industry practices offers an independent view of development and succession policies that is helpful for family firms as they negotiate difficult decisions such as successor training, evaluation and selection processes.
One of the reasons for negative outcomes regardless of the path chosen is that our research found that business families often create a requirement without having thought through how successors will be introduced to, educated about and integrated into the business. If the NextGens are asked to just go “out there” for two to seven years without a way to help connect what they are learning with the necessities of the family business, they will likely grow apart from the family.
Thus, it seems that focusing on working inside or outside the family business can misdirect the real objective when preparing the next generation of family employees: Do they have what it takes to succeed within the family firm, and are the systems and process in place to keep all informed and connected to the business?
What does the next generation need to know to succeed?
As Claudia Binz Astrachan pointed out in her article “Developing Competent Owners and Stewards for a Lasting Family Business” (familybusiness.org, April 12, 2022), we find that to succeed, future family leaders must possess a combination of knowledge, skills, abilities and other qualifications in four competency areas: business, family, ownership and personal.
- Business competencies encompass task (i.e., how to do the job) and social (i.e., how to interact with others in a work environment) capabilities that help family members perform well within the business system. Examples include knowledge about the operations, strategy, finances and culture of the family business. Business area competencies ensure that the next generation is able to competently run the business in ways that can facilitate its continuity.
- Family competencies describe the task (i.e., how to manage the family system) and social (i.e., how to relate with all family members) capabilities needed within the family system to help the family remain together and functional as a decision-making unit. Family competencies help family leaders understand the inner workings of the family and prepare them to skillfully navigate the variety of goals of different family groups.
- Ownership competencies are those that help next generation members understand the ownership side of the family business and contribute to the family continuity through decisions and actions as an owner in the firm. These generally include knowledge and skills about the formal and informal governance of the family and the business and how they can fit the goals and desires of a particular family.
- Personal competencies combine the knowledge, skills, abilities and other characteristics that help the next-generation members understand their environment and use this information to navigate the family and business contexts. These competencies include skills and knowledge related to decision making, critical thinking, communication, working with others and managing personal conflicts.
Participants in our study highlighted the importance of helping the next generation acquire these capabilities to help them succeed in their family business role. However, it seems that the discussion of whether external experience is needed often prevails over what business families want their next generation to learn. An important insight from our project is that families should pay close attention to what the next generation needs to learn.
How can NextGens gain these competencies?
A final aspect that we explored in our study was how the NextGens gained the competencies that made them successful. Requiring the next generation to work outside the family business implicitly assumes that outside work experience is the best way to gain these competencies. However, our research findings show that there are many ways to gain the competencies necessary to succeed in the family firm. For example, next-generation members can gain some competencies through education or membership in NextGen roundtables. They can learn from mentoring, from volunteer work in professional organizations, and from their social and professional network.
Taken together, the results from the study support our conclusion that working outside the family firm is not the only or the best way to prepare the next generation to be an active part of the family business. Instead, our findings suggest that it is important for business families to identify the competencies that they want to enhance in their next generation and then create a set of activities that will help the NextGens become competent in those areas.
In summary, what the next generation needs to learn, the areas in which they need to build credibility, and their introduction to and integration into the business are far more important than the manner in which this is achieved. Working outside the business is clearly not a panacea for the next generation. We find that there is no substitute for a healthy family and a healthy business, which require discipline, open communication, preparedness and vigilance to face the future.