“For any entrepreneur who has a family or may work with one, these are important questions,” he says Matt Allenclinical professor at Kellogg and its Executive Director John L. Ward Center for Family Enterprises.
According to some estimates, ninety percent of businesses are family-owned. And while few are as firmly Shakespearean as HBO’s fictional Roy family Successionmany must navigate complex family dynamics in the immediate future to prepare for success in the distant future.
“Family businesses need to focus on long-term resilience, which means preparing the next generation,” says Allen. “That’s a different time horizon than quarterly earnings.”
Allen offers four tips on how family businesses can build and maintain multigenerational resilience.
1. Cultivate emotional ties, not just credentials
When it comes to preparing the next generation for leadership positions, family firms tend to emphasize ability and academic credentials over experience within the organization. Some even have policies that require children and grandchildren to earn at least a master’s degree and work for a certain number of years outside the business before they are eligible for a management position.
These are reasonable expectations, but they come with the risk that these now qualified young people may drift away from the family organization and not feel compelled to return.
“If they’re gone that many years, they won’t have an emotional attachment to the business,” says Allen. “Often they will go work somewhere else.”
To avoid this, families should make sure they cultivate emotional ties to the business from a young age. Maybe that means family retreats, factory tours, or other events where future leaders can learn the essence and impact of business. Summer jobs or internships are another opportunity to make deeper connections.
“It’s the difference between explicit knowledge—knowing how to read a financial situation or how the market works—and tacit knowledge, which is more experiential and emotional,” says Allen. “If you want to build that tacit knowledge, it’s really about experience and emotional commitment.”
2. Don’t delay planning for a leadership transition
When it comes to succession, timing is everything. And here, it is worth planning. If everyone knows a decade in advance who will take the helm, the entire organization can prepare accordingly.
“What works terribly is saying, ‘We have three kids and we’re not sure who’s going to take over,'” says Allen.
In addition to transparency and a measure of continuity, the value of early selection is that the new leader will have time to build his own relationship with employees and customers.
“When you have a date already set and a ten-year window to work with, that puts everyone at ease.”
3. Don’t delay the actual transition either
If the next generation is ready to take on leadership roles in their thirties, but opportunities don’t open up until their fifties or sixties, they will feel left behind, especially if their peers have already spent years in top positions. Therefore, the right timing of succession is key.
“Many family leaders hang on until it’s too late, and that can be a major source of frustration for future leaders,” says Allen.
It is also important for family members who have stepped down from leadership roles to know what their new roles are and are not. Ambiguity in this transition can be frustrating for the next generation of leaders and can create confusion throughout the organization about who is really in charge.
The best way to minimize these risks is to establish clear governance rules for the transition and post-transition periods. Mandatory retirement age is one possible solution — and even then, it would be wise to clarify what “retirement” means in practice. This may mean that a leader will step away from the company entirely or move into an “emeritus” position that includes a board seat but no real voting power. But leaving the situation to chance can cause confusion.
This can be more difficult than it sounds, given the tangle of ownership and management structures that characterize the typical family business. For example, if one parent steps down but keeps all their shares, this can lead to intergenerational tension down the road.
“You have to think about handing over both ownership and leadership, recognizing that both come with some degree of influence. And whatever you do, it has to be clear throughout the organization,” says Allen.
4. Avoid inactivity
One of the biggest challenges for family businesses that last beyond the second generation is the problem of inertia. With so many new shareholders, many of whom may simply want to protect legacy assets, it can be difficult to stay innovative.
But there are ways to maintain that initial appetite for risk. For example, a family may leave more of the day-to-day decision-making powers in the hands of the management team, whose members are closer to the flow of operations. Formalizing a board that does not include family can also help ensure that the business remains strong over time.
And while there is value in continuity, leadership transitions are another opportunity to adapt to major market developments—because, in some cases, the next generation may need to push the company in a new direction entirely.
Allen describes an old-fashioned manufacturing business that is languishing because of changes in technology that have reduced demand for its products. In that case, the son approached his father with a separate business idea involving the new technology, and the father responded that that’s not what the company does, Allen says. After a long stalemate, the son and his mother combined their voting rights to oust the father as CEO. They then worked together to convince the father to leverage the core business in order to invest in the new technology.
“It was a push for a decade, but eventually the new business became even more successful and the family was able to get everyone back on board,” Allen says. “I wouldn’t recommend this path for most families, but this is a very strong example of spinning the next generation.”
Of course, the next generation of leaders is only able to make these changes if they are given some responsibilities. Starting small is fine.
“Full responsibility for small things is better than partial responsibility for big things,” he says. “You don’t have to bring your daughter into the C-suite right away. She might be better off in an operational leadership position or as head of one of the company’s regional offices. From a motivational standpoint, it gives her more opportunities to figure things out in her own time.”