Succession planning takes time; firms plan it for multiple years after taking into account the vision for the company’s future, says Douglas Shackelford, 60, dean of University of North Carolina’s Kenan-Flagler Business School. In an interview to Forbes India, the award-winning researcher and professor of taxes and business strategy speaks about the importance of clear communication in family-owned businesses and respecting their socio-emotional goals. Edited excerpts:
Q. What are the distinct advantages that family-owned companies have over others?
The advantages can include long-term orientation, strong family culture, agile decision-making, efficient leadership, strong customer and supplier relationships, and a deep commitment to the firm’s mission. Family businesses that have a clear, shared vision of the future can take complete benefit from these advantages and outperform their management-controlled counterparts.
Q. Family-owned companies are invariably in the news for reasons such as filial disputes, generational differences or corporate governance tiffs between founders, boards and management. What lies at the core of these problems?
Many conflicts that family firms face arise from a lack of open, transparent communication. Differences in perspective can create misunderstandings and conflict. Frequent, honest communication can help build trust.
Q. What is the ideal way of settling a dispute among stakeholders of a family-led business?
There is no one ideal way to settle a dispute, but in most instances, it is critical to take time to listen to the various points of view of each of the parties involved and understand the core of the conflict. Ideally, the parties should work together and take into account the differing views to arrive at a mutually satisfying conclusion—a “win-win” solution—rather than one in which only one party “wins”.
Q. Each family business has a unique culture of operations and values. How can an outside professional blend harmoniously into a family-owned management structure?
Non-family executives need to take time to understand the unique culture of the family and the firm with which they work. Often there are unwritten rules based on tradition and the family’s preferences that the outside professional will need to learn.
Families frequently have motivations that are not purely financial, and they will make decisions based on non-financial goals—often referred to as socio-emotional goals—such as preservation of family reputation, commitment to the community or a desire for multi-generational transfer. An outside professional who honours the firm’s unique culture and values is more likely to be successful.
Q. In an age of diverse opportunities, why do some businesses tend to remain single family firms, that is, stick to one business by integrating forward or backward?
Some firms choose to invest in a particular field and not expand to other businesses. This type of focus can allow them to benefit from efficiency, deep expertise and long-term relationships with customers and suppliers. However, firms need to be cognisant of the changes in the market that would make their current business or strategy obsolete or uncompetitive.
Q. What is the greatest challenge for a next-generation member trying to steer a traditional family business to a different course?
One of the primary challenges for next-generation leaders is balancing the tradition of the past with the innovation that is needed to succeed in the future. For instance, at UNC Kenan-Flagler’s Family Enterprise Center, we encourage young leaders to be students of their firm’s history and learn from the successes and failures of the leaders before them. They need to honour the firm’s culture and success, while looking ahead to strategic shifts that might need to occur as the industry changes or the firm matures.
Next-generation leaders face a set of challenges that are unique to family-owned businesses.
Q. What are the key areas that one needs to consider for succession planning, to ensure smooth transition of ownership and management at a family business?
Families need to recognise that succession planning is a process that takes time. Ideally, firms will plan over multiple years for both ownership and leadership succession.
Within the family and ownership group, it is important to address how, when, and how much ownership transfer will occur. As part of this planning, families need to consider applicable tax laws and the vision for the future of the family and the business. Shareholder agreements and meetings are important for bringing clarity and building trust and engagement.
Leadership succession of the business should be designed in light of the vision for the future of the firm. This will inform strategy and, in turn, the leadership that will be required. The key questions to consider include: How will the firm’s successor be identified? Who will decide that? What is the process and timeline for the transfer of power? How can the firm attract outside professionals to the leadership team? What role might the incumbent leader play in future? What organisational structures would be helpful?
An important aspect of succession planning is preparing the next generation. Next-generation leaders face a set of challenges unique to family-owned businesses. Not only must they meet the challenges of sustaining a successful business, but also negotiate the complexities of family and ownership systems that are integral components of family enterprises, often while living in the shadow of a successful entrepreneur who happens to be a father, mother or other close relative.
Research by UNC Kenan-Flagler Professor Stephen Miller has identified the factors that promote next-generation leader development. A key finding in his research shows that the degree to which next-generation leaders assume personal responsibility for their actions and decisions is strongly related to their display of emotional and social intelligence competencies, which, in turn, is the major driver of their leadership effectiveness. It is also strongly related to the degree to which they are held accountable by others, which positively affects their engagement with work in the family firm.