In the late 1960s, John Petersen (a pseudonym) and his brothers inherited a modest pharmaceutical business from their father. Today, it is a multibillion-dollar global company, in great measure thanks to John’s relentless entrepreneurial drive. Although he is the middle brother, John emerged as the lead partner after demonstrating time and again that they would all be better off financially letting him drive the strategy and implementation of the fundamental decisions. Now, with 15 adult cousins in the third generation, the Petersen family has built an elaborate governance structure that includes an independent board of directors, shareholder and family assemblies, a family council, a family office and a philanthropic foundation.
While John retains his undisputed leadership as the head of the family enterprise, the brothers, the cousins and their spouses all participate actively in the governance structure. Right from the start, John understood and supported the need for governance architecture. Today, however, he faces a new dilemma. The structure has empowered the family to make choices that at times challenge John’s priorities and wishes. In these instances, he expects a certain degree of deference and occasionally balks at the idea of sharing authority with those who haven’t yet quite “earned it.”
The way John sees it, he’s built the business and made everyone wealthy and, when opinions are not in alignment, his judgment should predominate. Yet he also understands that when he exerts his influence arbitrarily, he perpetuates a reliance on him that may well compromise the maturation of the governance process and ultimately the continuity of the enterprise.
Paradoxically, things would be easier if John weren’t such an effective leader. His track record of making the right calls is impressive indeed. Sometimes he wonders whether it was in fact a good idea to support the development of a structure. As he asked me in a recent conversation, “Have I been hoisted on my own petard by encouraging such bureaucracy?” Particularly, he wonders how to act while the family is in the thick of a generational transition. As he put it succinctly, “When should I rule and when should I govern?”
Systems aren’t panaceas
When family enterprises evolve into a partnership of siblings or a network of cousin shareholders in subsequent generations, developing mechanisms for sustaining continuity in ownership becomes a fundamental challenge. Much of the writing in the field (including my own) suggests that the remedy for ownership complexity is governance — mainly the structures and policies that allow for rational decision making among multiple owners who must learn to articulate, prioritize and coordinate their shared objectives.
However, experience over the past 20 years has taught me that while structural solutions are often the correct intervention with families transitioning to complexity, they are not panaceas. Indeed, there are certain assumptions about the attitudes and behaviors needed from shareholders to make these structures work that are simply not present (or even possible) in many family enterprises. For example, just as democratic societies require an educated and engaged citizenry, effective governance structures call for shareholders who are interested, and willing and able to govern themselves. But even well-designed and effective governance structures staffed with “enlightened” owners have embedded costs; they are expensive to maintain, time-consuming and labor-intensive — often fatiguing or even burning out the very shareholders they aim to unite.
Moreover, the notion that structure is always the remedy for complexity is simply not supported by the evidence. I have in fact witnessed many complex business families (even some with hundreds of cousin shareholders) that are held together effectively not through an elaborate governance structure, but through the sheer charisma and force of personality of a single leader. These systems violate my own original prescription about the need for structure as the appropriate response to complexity. Indeed, in several cultures around the world, including many Latin American and Middle Eastern countries, family business shareholders often do not behave in accordance with the assumptions underlying the model of “enlightened stewardship.” There, individuals and shareholders mistrust “systems” but latch on tightly to “personalities” — that is, to an individual whom they trust to take care of them.
Autocracies’ drawbacks
Needless to say, while effective under certain conditions, relying on a charismatic leader to coalesce a complex group of shareholders can be (and often is) risky. While this solution to the governance conundrum can buy a family enterprise several decades of stability, it ultimately can sow the seeds of its own destruction. Single leaders can be narcissistic, autocratic and destructive. They often threaten continuity by acting in secrecy, brokering private deals with stakeholders that can compromise the trust of the group.
Systems held together though an individual are particularly vulnerable when the leader’s physical and mental capacities begin to wane in late adulthood. As the tragic story of C.F. Seabrook (of Seabrook Farms) and of countless others suggest, an arbitrary family enterprise ruler can trample over the dreams of the next generation and squander the promise of continuity. And so the age-old debate between centralized personal authority vs. participative enlightened governance, immortalized in the writings of philosophers like Hobbs and Rousseau (and beautifully articulated in Dostoevsky’s Great Inquisitor), is very much alive and well in the microcosm of family enterprises.
An analysis of the history of family companies that have been around for many generations suggests that these organizations often experience a back-and-forth between periods when the shareholders are integrated through structures (participating actively in assemblies, councils and boards) and periods of minimal structure in which a single leader emerges, consolidates authority and holds the system together. This history also suggests that the transition periods between governing through structure and those in which a leader predominates can be particularly precarious for family companies. This is because, if the emergent (or the outgoing) leader refrains (or, worse, abdicates) from leading while the structure itself is not fully functioning and empowered, no one is making the decisions. The system degenerates into a state of rudderless inertia in which fundamental strategic and operational choices go unattended.
Why and how do these swings between integration through structure or through a leader occur? Under what conditions is one solution for integration more effective than the other? What role does the cultural context play in ensuring the viability of one form of integration or the other? What are the leadership behaviors needed to move the system from one mode to the other? What can families do to manage the downside risks associated with these transitions? These are the questions that preoccupy much of my current thinking on the complexities of sustaining complex family enterprises across generations. How families sustain the integration and commitment of their shareholders over time is very significant, since many family companies here in the U.S. and around the world are transitioning to more complex ownership forms involving siblings and cousins.
A lifelong, evolving process
My sobering conclusion is that no solution is perfect or eternal. Quite the contrary, there are dialectics associated with “governing” (integration through structure) and with ruling (integration through a leader) that must be anticipated and managed. Governance must be approached as a lifelong process rather than as an engineering problem for which there is a lasting “silver bullet” solution. The reality is that families (like their businesses) are continually evolving. Owners and their descendants age, some die, new ones are born, some marry and some divorce, some stay local and many move away. Every effective solution to the governance and integration of owners is but a temporary equilibrium that buys the proprietary family periods of stability in the long-term journey across generations. Inoculating families to this reality and getting them ready for the inevitable periods of transition is critical.
In a way, the challenges associated with the transitions from ruling to governing have been well documented in our field. They typically involve helping departing leaders like John Petersen to honor their commitment to the future and channel their considerable influence through the governance structures that involve their heirs. These leaders must model the patience, restraint and social skills needed to work constructively in organizational arrangements that require building consensus. It is in no small measure a test of their forbearance and capacity to mentor. This transition also requires that the next generation have the empathy to work constructively with the departing leader and the maturity and skills to collaborate with each other within the architecture of governance.
The movement from governing to ruling is less well understood. It requires that the owners recognize that the structures that may have served them well for many years might need to be simplified, streamlined and, in some cases, eliminated altogether. More important, it requires the maturity to embrace and celebrate an emergent leader without entirely abdicating the need for shared oversight and accountability.
If the process of governance from the prior period yielded a deeper understanding and respect for the enterprise and the work of governance, the owners curtail their involvement without relinquishing control altogether. By pruning the former structure while still retaining some of its essential elements, owners can formally continue to represent their interests while broadening the “span of discretion” of the emergent leader. This invariably requires some structured representation of owners not in management through boards and or trusts, and a culture of transparency that can make a renewed governance synthesis sustainable. Most important, it requires that the emergent leader exercise his or her authority constructively and with restraint — never forgetting that trust is, at the end of the day, the essential ingredient for the sustained continuity of family enterprises.
Ivan Lansberg, Ph.D., is a senior partner with Lansberg Gersick & Associates LLC, New Haven, Conn. (www.lgassoc.com), and author of Succeeding Generations: Realizing the Dream of Families in Business, published in 1999 by Harvard Business School Press. He also serves on the faculty of Northwestern University’s Kellogg School of Management.