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