Transferring to the next generation

Transcription

1 INSEAD discussion Transferring to the next generation Transferring the entity to the next generation is one of the greatest challenges faced by family businesses. Our panel of leading academics met at INSEAD business school in Fontainebleau, France, to tackle this issue and bring insight into how succession, governance and philanthropy can be managed to ensure a smooth transition. Introduction All family businesses begin as entrepreneurial ventures. By the time the founder nears retirement, they have often expanded and mutated beyond recognition, making succession even more complex. Transferring control to the next generation marks the first step in establishing an enduring family business, but without proper planning, that transition can have damaging consequences for the company. A major concern is that the entrepreneurial business model does not automatically translate into a wider family-owned structure. One reason for this incompatibility is the psychological makeup of entrepreneurs themselves, who tend to display a strong desire to take and retain control, and a reduced need for social support. These characteristics, which are themselves major contributors to early business success, can prevent the smooth handover of control to junior family members and expose fundamental challenges for the owner. The panel discussed at some length the range of challenges experienced in the transition of entrepreneurial structure to a family-owned business, the potential means by which any adverse effects can be amelioriated, and what lessons had been learnt, either empirically or in practice. 12 insead discussion

2 Leadership and next generation The Panel Moderator Christine Blondel Adjunct Professor of Entrepreneurship and Family Enterprise Co-director of The Family Enterprise Challenge (FAME) programme Professors Morten Bennedsen Academic Director Professor of Economics and Political Science The André and Rosalie Hoffmann Chaired Professor of Family Enterprise The desire of founding entrepreneurs to see their business methods and leadership style imitated by future generations is a potential problem, says Morten Bennedsen. A lack of respect for formal business structures by entrepreneurs from the outset, he goes on to explain, can hamper success 30 or 40 years down the line. By then, the original company might be part of a larger organisation, seeking to expand overseas, or can have morphed into a different type of business that calls for a more rigid corporate structure. Whatever the nature of these changes, the next generation needs a different set of skills. Preparing the new leaders for their future responsibilities is a vital part of the succession process. Apprenticeship succession is the most traditional method of handing over control; the second generation simply learns its skills from the founder. Research by INSEAD shows that this can result in a management team with less education, board-level experience, and expertise in running companies than one appointed through more structured succession planning. Even at the second generation you have to recreate or you re dead Ludo Van der Heyden Grooming successors is the more professional model. This is where the children of the founder gain management experience outside the business, or the founder selects non-family members with skills the company needs to secure future success. Although the transition process may not be straightforward, a family business has an important advantage over other companies: emotional capital. Christine Blondel, believes the emotional investment family members have in the company pays dividends when they succeed, a reward corporate bodies find hard to deliver. Randel Carlock Berghmans Lhoist Chaired Professor in Entrepreneurial Leadership Co-director of FAME Xiaowei Rose Luo Associate Professor in Entrepreneurship and Family Business Filipe Santos Associate Professor of Entrepreneurship Director for the Maag International Centre for Entrepreneurship Academic director of the INSEAD Social Entrepreneurship Initiative Ludo Van der Heyden Professor of Technology Management Mubadala Chairholder in Corporate Governance and Strategy First holder of the Wendel Chair for Large Family Firms insead discussion 13

3 Best practice on succession In the past, family companies tended to reinvent their business model every third generation. These days, says Ludo Van der Heyden, businesses must transform themselves almost every generation to keep pace with changing demands. As a result, the next generation often seeks to impose its vision earlier, cutting the average business lifespan of the founding entrepreneur from 40 to 20 years. There are potentially many roadblocks around the successions Morten Bennedsen sitions. According to Christine Blondel, a prompt handover of power can also benefit the founder. Stepping back well before they turn sixty gives them an opportunity to start a new venture. While this makes intellectual sense, relinquishing control at a relatively young age can be challenging. The reason, says Morten Bennedsen, is that entrepreneurs are driven individuals who thrive when in control. Giving up that control is no easy task. For a successful transition to occur, Bennedsen believes two factors must exist. First, the business founder must genuinely want control to pass to the next generation. Making clear early on their wish to step back guarantees them and their successors a rewarding future. Waiting until the last minute to relinquish control can seriously damage the prospect of a smooth restructuring not least because sentimental attachments to a business can increase as owners grow older. Second, the potential successors must want to take control. Research by INSEAD indicates a significant difference between attitudes of first and subsequent generations of successors. While second, third or fourth generations expect to take over their family business, and may even demand that power be transferred, the situation is very different for children of founding entrepreneurs. Research suggests the most successful transfers of power are planned when the original entrepreneur is in his or her fifties Ludo Van der Heyden Founders often fail to signal their intentions clearly and in good time, making planning for the future impossible. This can result in the next generation of potentially successful entrepreneurs taking their talents elsewhere. For Christine Blondel, junior family members must also be unequivocal. By expressing a wish to run the business while respecting their elders achievements they can help make succession a more positive and profitable process for both sides. Paradoxically, one of the best ways to demonstrate a willingness to run the family company, says Blondel, is for children to prove their commercial worth outside the firm. Gaining experience away from the family can help encourage a strong sense of autonomy an important trait for any entrepreneur and give the current generation an opportunity to judge the business skills of possible successors. An alternative way to achieve the goals of autonomy and appraisal is for the next generation to develop a new subsidiary, conquer new markets or launch a new line of business. This has the added advantage of promoting the continuity necessary for a family company to prosper. For a family business to succeed, succession needs to take place sooner rather than later. Ludo Van der Heyden s research suggests the most successful transfers of power are planned when the original entrepreneur is in his or her fifties. The next generation is not the only beneficiary of such timely tran- 14 insead discussion

4 The role of philanthropy Ensuring fairness Fairness is essential to a successful transfer. By putting this at the core of the decision-making process, a family business can reduce conflict and lay strong foundations for the future. INSEAD identifies five key principles: Give everyone the opportunity to express their opinions and shape the discussions. Agree clear objectives from the start and ensure outcomes are respected later on. Apply the process to everyone in the same way. Make sure all family members acknowledge the need to alter previous agreements to reflect changing family values and business needs. Enshrine a culture of fairness in all aspects of family life it makes business dealings seamless. For Ludo Van der Heyden, a process must not only be fair, it must be seen to be fair. Transparency must, he says, be at the heart of all family dealings. If something is hidden, it destroys the equity of the process. If an entrepreneur fails to disclose his or her plans for instance, the next generation may assume he or she does not trust them to run the business. You can only create an effective framework in the spirit of openness and honesty, argues Ludo Van der Heyden. Keeping an open mind is also key to success. The original owner might want to retain leadership within the family, but if nobody wants the role, the family needs to find an external candidate. Rules don t come before the discussion; they re a consequence of it Christine Blondel Christine Blondel believes good communication is another necessary component for agreeing succession principles. Establishing the rules must, she says, be seen as an all-encompassing process that takes account of the context and values of the business. Any rules need to be based on open discussion not the other way around. Transferring control to family members is not the only concern of today s entrepreneurs. Assigning wealth to good causes is a major preoccupation, says Filipe Santos. In the past, business owners decided how much to pass on to family members and how much to devote to causes. These days, entrepreneurs want philanthropy to be an integral part of what they do as a business. One manifestation of this is the creation of family foundations and offices with a philanthropic component. Entrepreneurs have always wished to create wealth for themselves, but now they also want to decide how much wealth should be kept within the family domain, and how much wealth is legitimate and good to share with society. The issue is therefore how to strike that balance. Entrepreneurs believe in value creation; they want to give back to society Filipe Santos Bennedsen says a philanthropic project requires different skills and involves family members who may not be interested in becoming executives in the corporation. This can benefit the family business by creating a philanthropic operation and keeping family members within the organisation. Xiaowei Rose Luo points out that in Asia, family firms are leading the trend in philanthropy. If you look at corporate philanthropy and quality standards, family firms tend to do a better job than other types of firms, she says. The main reason is that family firms feel their name is associated with their corporate behaviour. INSEAD research shows that the higher the percentage of shares held by a family firm, the more they engage in corporate philanthropy. insead discussion 15

5 An Asian perspective In emerging markets, family governance plays an even greater role than in more mature markets, according to Luo. In Europe and the US, private entrepreneurs often depend on the banks or venture capital market for financing, and a sophisticated legal system to ensure contracts are honoured. In Asia, raising capital and enforcing agreements can prove impossible. It is therefore common for people to rely on family members and pool resources to start their businesses. Family relationships serve as the substitute for the market institutions that you typically see in mature markets, Luo says. That s why family entrepreneurship is probably even more important than individual entrepreneurship. As a result, says Luo, entrepreneurs rely far more on family members to help build up their businesses. When the business expands, founders often start up more companies with family members placed in charge to encourage the sharing of resources, and provide each other with a network of loyal suppliers and creditors. For this reason it is very common to see family business groups in Asia, rather than individual family firms. Family relationships serve as the substitute for the market institutions; entrepreneurs are teaching their children about how to do business Xiaowei Rose Luo In China, this strong family system even fills the knowledge gap created by Communism. With no business schools or private sector operating in the country for over four decades, the new generation of Chinese entrepreneurs learned its skills from family enterprises. The success of this model is reflected in the great strides that Chinese familyowned businesses have made in recent years. A Chinese family automobile firm, Zhejiang Geely Holding Group Co, this year acquired Volvo from Ford for $1.8bn. This demonstrates how powerful family leverage can be both in financial and familial terms. The downside to a constantly expanding network of family companies frequently becomes apparent at the time of succession when the sheer number of vested interests, often adding up to over thirty family members, can be overwhelming, making the management unworkable when the founder dies. One example of a business damaged by its convoluted family structure is Formosa Plastics of Taiwan, whose founder Wang Yung-ching passed away in 2008 aged 91 without leaving a will. Although he had handed over management control to a committee of seven family members in 2006, he had not made clear how ownership would be divided between three wives and their several children. The result was a protracted and costly court case. Luo claims that lack of proper succession planning is a recurrent theme, often leaving the younger generations with no clear understanding of what the future holds. Bennedsen says that one reason the founder-run firm does so well is that power rests with one person. When you are the entrepreneur, when you are the family head, you have much more authority. To overcome the problems of family hegemony, a new breed of Chinese entrepreneurs is funding business schools across the country. As with more mature markets, research shows those who do best after succession have a better education and more experience of management techniques and corporate governance; knowledge and experience gained outside the family business. 16 insead discussion

6 Conclusions from INSEAD The family business is one of the most successful corporate models. Those who run this type of business face a different set of challenges; they need to extract the benefits that family ownership can bring and minimise the internal conflicts it can present. They must also manage the process of succession and ensure that one generation passes on its skills to the next without seeking to exert too much control. The INSEAD discussion highlighted several important lessons. Family businesses need to apply clear rules consistently across generations. Evidence shows that the professional model of succession, where the next generation gains experience outside the family firm, is often better than the apprenticeship model. A commitment to fairness both in the way the firm is run and in the way succession is planned is critical. Good communication gives everyone involved a voice. By taking these lessons on board, family firms equip themselves with the tools to ensure they preserve the existing value of the business and create new wealth that can be passed down the generations. INSEAD business school As one of the world s leading and largest graduate business schools, INSEAD brings together people, cultures and ideas from around the world to change lives and transform organisations. This global perspective and cultural diversity is reflected in all aspects of its research and teaching. With campuses in Europe (France), Asia (Singapore) and the Middle East (Abu Dhabi), a research centre in Israel and an office in New York, INSEAD extends the reach of its business education and research across three continents. 145 renowned faculty members from 36 countries inspire more than 1,000 degree participants in MBA, Executive MBA and PhD programmes. This is an abstract of the Pictet Report, Focus on entrepreneurs, issued October For further information please contact Ninja Struye de Swielande, nstruyedeswielande@pictet.com. insead discussion 17