The Evolution of Family Business and the Need for Succession Planning

The Evolution of Corporate Governance

As a family grows in size and complexity and their business operations grow in size and complexity, their governance needs to keep pace. So what does good governance look like in a family firm?

Now more than ever, family businesses need good governance as it supports near-term stability, long-term continuity, practical and prudent decision making, and effective risk management. Governance will be unique to every business or family enterprise, depending on where they are in the evolution of their business and where they are in their family’s growth. Governance does not happen overnight. Mature governance models do not just magically appear from out of a vacuum. Each family business will experience maturity over time.

Because a governance structure needs to be appropriate, manageable, and executable, being too rigid at the onset could prove to be too time-consuming and cumbersome, leading to the governance process’s abandonment. Moving too fast, too soon, can be problematic for family businesses, resulting in family businesses that go from over-governance to no-governance. Since governance must be adhered to at all levels, and since most growing companies become involved with many moving parts, a well thought out strategy to lead the governance evolution must occur over time. Many facets of good governance will happen somewhat organically with good leadership; however, taking a blasé approach to governance can be equally disruptive to the family business’s evolution.

The Common Stages of Corporate Evolution

So, what are some of the common elements in the evolution of family business governance? Typically, family businesses begin with a patriarch or matriarch, and the board room table is often the kitchen table rather than a corporate table. Later, as the company grows, there may be a need for additional seats at the table, and things will typically become more formal in nature. Usually, it becomes necessary for family businesses to invite expert advisors and board members from the outside at this growth stage. Typically these additions begin in an advisory capacity but may move to more formal roles as the business and the family begin to run parallel to each other. Finally, we see that many of these family enterprises will move to form an independent led or independent only board as they reach that final stage of growth where they begin to professionalize their board and the family leaders begin to step out of the mundane, daily task of managing, and take on a less active role in the governance of the business.

The most typical challenge is building strong lines of communication with family members and board members. Good corporate governance will be symbiotic between the board and the family. In the ideal scenario, the family is an integral part of the business, knowledgeable, involved, not unlinked in any way, but not overly involved in the daily affairs, and yet, still operating in a parallel fashion as their business’s legacy evolves to be more productive than ever before.

Standing In the Way of Progress

The natural tendency for family businesses is growth. As the business grows, the need for outside support becomes more apparent. In many cases, the founders of the company or other leaders and managers from within the family may lack the skills and experience necessary to meet the rigors of growth. Scenarios like this are evident in recent days with COVID-19, where traditionally brick and mortar businesses have had to go online, and owners who lack technical prowess have found themselves woefully out of their league.

Rob Ferguson, of Ferguson Interests, recounts some anecdotal evidence of how succession planning is an essential part of the business evolution.

“I had a client that was a very successful 100-year-old business. The fifth-generation tried to run the company with family members in executive positions that were not qualified. It’s economic successes from the past started to fail. I was ultimately called in to stabilize the business and sell it so their family members could divest themselves of their problem. If the prior generations had been more thoughtful about succession, the company most likely would still be thriving today as a standalone family owned business.”

He went on to add,

“I have another client that worked with me on a multigenerational long-term succession plan. The second generation had declared a mandatory date to retire from their executive positions that were 7 to 10 years in the future respectively for the leaders. With careful planning, thoughtful assessments, and career path development, the generation transition has been executed smoothly to a very qualified third generation of leaders.”

As a family company evolves, it will always prove to be more effective for these businesses to consider the long-term succession of the companies they conceived. Like a proud parent, it is incumbent upon the first generation to secure the future for its subsequent generations by ensuring a succession plan is in order. As these companies continue to evolve, founding members of the business will begin taking on a more benign role, one of oversight or even branding, instead of struggling to wear the many hats necessary to operate a successful business. Instead of being in the daily grind, the family is freed from the monotony of details and can focus more on the legacy’s longevity.

Passing the Torch

Most entrepreneurial owners tend to want to maintain tight control of the business they created. Those who genuinely want to empower their business to continue long after they are gone will need to entrust their businesses to others. The goal of succession planning, to pass on leadership to a subsequent generation of leaders, ensures that the business runs smoothly after its most essential employees retire and leave the company. As you and your family business age, the world around us will continue in a constant state of change. New ideas, new technologies, and new experiences will always be at the forefront of advancement in any industry. Because of this, the leaders of family businesses must adapt. In some cases, the adaptation will be to step out of the way of progress to ensure your business continues unimpeded.

Family Business Newsletter November 2020