Intergenerational
transmission in family
owned businesses
Neil Janin
Director Emeritus McKinsey & Co.
Ramallah, November 21, 2011
Neil JANIN
|
Only a minority of wealthy families retain their wealth position over time
Number of those in the top 100 Forbes
list in 1999 and number of those still
on the list in 2009
Actual Number
▪ 2 shocks:
– technological in 2000
– financial in 2008 and
today
100
36
1999
SOURCE: Forbes, Family Business Practice analysis
▪ By 2009, 64% of those in
the top 100 Forbes list in
1999 had lost their
position
2009
▪ 10 years of change:
– Industrial innovations
– Rising global
competition
Neil JANIN
| 11
Many family-owned businesses are unsuccessful in managing
intergenerational transmissions and vanish after the first generation
Survival rate of family-owned businesses,
%
France
Founding
(1st generation)
100
2nd generation
3rd generation
4th generation
Germany
100
30
20
13
U.K.
100
24
14
N/A
37
13
N/A
1 SMEs and large companies
SOURCE: Stoy Hayward and the London Business School (1989); European Commission (1994); Family Business Practice analysis
Neil JANIN
| 22
Case examples of failures in family owned businesses
• Death of leader led to battle among siblings and family members. Lawsuits and
Pritzker
family
▪
accusations led to a public battle and the company was split up
The value of living modestly was not passed on beyond the immediate successor and
the family members resented growing disparity in wealth
▪ The Hunt family lived modestly for their wealth, except for Albert III, who was over $20
Hunt
family
▪
million in debt and could not afford to be disinherited
Conflict led to lawsuits and sale of the company
▪ Conflict led to bankruptcy – cousins were fighting for power – changing directions and
lack of management focus on business issues affected the development the company
Fairfax
family
▪ Sluggish response to market trends and consequent loss of market share to
competitors in the ’20s and ’30s led to disagreements between founder and
incumbent son-president of the company. After the death of the son, the founder
formally took back control as president, only to be ousted by the third generation
Ford
family
▪ Pressure by Murdoch’s current wife led to partial ownership but no voting rights for
Murdoch
family
▪
the two youngest children – Murdoch refused to develop succession policies, creating
uncertainly about future leadership
“Speculation in the market about the Murdoch News Corp: will it be split up?”
Source: Investment News 1999; NYTimes 2005; Family Business Magazine, Autumn 1996; Business Wire 1996; The Age 2003;
Neil JANIN
| 3
Four stakeholders have agendas in succession planning
Owner /
founder
Professional
managers
Family
Successor (s)
Neil JANIN
| 4
The founder’s inaction may work against successful succession
planning
Founder
▪ Leaving a position of
power is like dying a
little.
▪ Personal loss of identity
▪ Fear of losing significant
work activity
▪ Jealousy, rivalry towards
or lack of confidence in
successor
▪ Inability to choose
amongst the children
Owner /
founder
Professional
managers
Family
Successor (s)
Neil JANIN
| 5
The complex dynamic of fathers and sons and the siblings is as old as
the world
Owner /
founder
Professional
managers
Father – Son relationships
▪ Father consciously facilitates son's
entry but subconsciously needs to
be stronger than his son
▪ Son seeks increased responsibility
and authority but finds that his father
refuses to cede authority, or
continues to call the shots from
behind
Successor (s)
Family
Sibling rivalry
▪ Deep desire of children for
exclusive love of their parents
▪ Siblings’ rivalry is extended into
adult life and in the business
context
Neil JANIN
| 6
The family and the spouse may work against successful succession
planning
Spouse
▪ Norms against discussing
family's future beyond
lifetime of parents
▪ Norms against
differentiating siblings
▪ Spouse's reluctance to let
go of her role in business
Owner /
founder
Professional
managers
Successor (s)
Family
Context
▪ Family’s fear of disturbing
the security status quo.
▪ Clients’ connection to the
owner/founder
▪ Cultural values and norms
that discourage
succession planning
▪ Reluctance to involve
daughters or non-blood
family members
Neil JANIN
| 7
Employees often are key to the success of the business and may resist
or choose to leave
Owner /
founder
Key Employees
▪ Reluctance to let go of
personal relationship
with founder
▪ Resistance to change –
fear of loosing power or
even employment
▪ Fears of differentiation
among key managers
Professional
managers
Family
Successor (s)
Neil JANIN
| 8
Why it fails? Aside from owner/manager's unwillingness to address his
own succession
The four most pressing causes of family business failure are:
1
2
Convoluted behavior: Lack of trust and misunderstandings in the family leads
to conflict avoidance, lying, hiding things from each other, one on ones, etc.
Lack of meritocracy: The inability of next generation participants to cultivate
the requisite skills that match those needed by the current and future business
environment
3
Lack of clarity: The lack of planning and governance at the business, family
and ownership levels .Inadequate estate planning - which is lack of concern for
each other's welfare
4
Weak or misaligned values: Lack of common understanding of what values
the company and the family lives by, and wants to preserve.
Neil JANIN
| 9
Planning starts with the founder / owner manager who must decide what
he wants?
Do
nothing
Appoint a
family
member
Sell the
business
Founder /
Owner
manager
Appoint a
care taker
manager
Liquidate
the
business
Appoint a
professional
manager
Neil JANIN
| 10
The owner manager should keep in mind what makes strong families
Characteristics
Commitments
Appreciation and
communication
Time together
Shared values
Explanation
▪
Importance that family members place on family unity
– Sharing the same goals
– Concern for each other's welfare
– No pursuits that threaten best interest of the family
▪
▪
▪
Ability to recognize each other's positive qualities
Acceptance of differences and respect for personal choice
while working towards shared goals
Shared open and frequent communication
▪
▪
Regular family gatherings
Both quality and quantity
▪
Ethical, spiritual, and religious values of integrity, honesty,
generosity , etc.
Neil JANIN
| 11
Planning the family’s business future is a process
Establish a
family council
to
provide a
discussion
forum
Address critical
issues relating to
family
involvement in the
business
▪
Evaluate the
state of family
and the business
▪
Develop long
term goals for
the business
▪
Determine
policies to
govern familybusiness
relationships
▪
▪
▪
Provide a forum
for family
members to
participate in
policy making
Develop a
family
constitution
which states
family values
and policies
▪
▪
Start tackling the
"forbidden
agenda"
Lay down
ground rules
▪
Spell out families
shared values
and businessrelated policies
Record family
stance on
business, moral,
ethical, and
behavioral
issues
Develop a
succession
plan
▪
Lay out role
changes and a
timetable
▪
Make retirement
timely and
unequivocal
▪
Communicate to
all stakeholders
Spend time
sharing stories
Neil JANIN
| 12
An outside non-executive director, or an advisor can be very useful
▪
Objective and seasonal guidance on business issues
▪
Unbiased sounding board
▪
Mediation in resolving family disagreements
▪
Specialized expertise which may not be available internally
▪
Network of contacts that can be mobilized on behalf of company
AND
▪
A counselor to the owner/manager
Neil JANIN
| 13
Last word of advice to the Owner/Manager
▪
Take care of yourself… and take care of your
family.. and your business
▪
Be patient open, and have the courage to have
difficult conversations, where you understand
and you are understood
▪
Get outside professionals to help you navigate
the legal, business, and psychological issues
▪
Put time on your side: start early, start now by
talking with somebody you trust
Neil JANIN
| 14
This presentation has concentrated on
Transmission and succession
issues
It should be put in the perspective of
Good family business governance
Neil JANIN
| 15
Framework for developing a target model for governance in a family
owned business
▪
How to structure and control a family
governance system to maintain family
unity and sense of purpose, avoiding
potential conflicts not only over financial
issues, but also over personal
relationships/values/behaviors
Family
▪
How to optimize the legal entity
structure to ensure that the
family continues to strongly
influence or have full control
over the business, increasing
overall fiscal/tax effectiveness
▪ How to ensure access to capital
markets if desired or needed
SOURCE: Family Business Practice analysis
Business
Portfolio
& Governance
Ownership
How to design and control boards
and align board relationships
and company management to
protect and grow the business
▪
How to structure business and
financial portfolios to grow family
net wealth and protect it over the
long term
▪
How to manage family net
wealth outside the company’s
core businesses (e.g., private
equity, legacy assets) to ensure
asset preservation
Wealth
management
Foundations
▪
▪
How to provide the means for
the family to funnel resources
into philanthropy, aligned with
the family mission and values
Neil JANIN
| 16
For a family-owned business to be successful
5 dimensions must be working well and in synchronicity
Business
portfolio
&
governance
▪ Shareholders
agreement
▪ Holding structure
▪ Legal documents
A= Aspiration
G= Guidelines
▪ Corporate governance
▪ Professionalization
▪ Dynamic portfolio evolution
– Business portfolio
– Capital composition
and structure
– New business
development
G
Family
A
Ownership
G
Wealth
management
G
▪ Family
charter/constitution
▪ Family forums
▪ Family services
▪ Succession plan
SOURCE: Family Business Practice analysis
▪ Investment office
▪ New opportunistic /
legacy assets
▪ Governance
Foundations
▪ Own foundation (issues of
Management, governance)
▪ Third-party foundations
Neil JANIN
| 17
NEIL JANIN
neil@neiljanin.com
+33673848582
1 BIS rue de Buenos Aires
Paris 75007
France
Neil JANIN
| 18
Neil JANIN
| 19