Succession in family businesses: Right, responsibility, or a privilege?

I was asked to deliver a keynote address on a panel on succession in family businesses, and I started by asking this question. This was inspired by a conceptual paper by Wilfrid Laurier University professors Pramodita Sharma and P. Gregory Irving written in 2002, and it provoked a lot of discussion. Subsequently, I was asked about my thoughts on several occasions, in several forums, and since this is a topic of interest, I ventured out to put forth my thoughts here.

Succession has been regarded as one of the most important processes in a family business anywhere. Notice that I said, process, not an event since this requires a lot of planning, during and post the actual event. And this is something which a lot of families forget. Anyway, succession is the process where the management and ownership control pass from one generation to the next. There has been a lot of research and articles on this topic worldwide, of numerous families having mixed results on this process. But amongst all this, there still remains a basic question, which needs to be addressed by all the stakeholders, of how does each one consider succession? As a right, duty, responsibility or privilege? And the answer varies, depending on who you ask.

Succession as a privilege

This arises out of the feeling of pride in the family business which the next generation feels is an honour to take over and run. Hence, qualifications and training for preparing one to handle this responsibility is paramount. There is also the challenge of the next-generation being too worried about ruining the business and hence being not willing to step up to the task, or not wanting to take any risky steps which could drastically affect the business. When the family and more importantly the successor, consider it a privilege, then the attitude is that of reverence and respect for the family business. The successor usually would be appreciative of the work that the generations before him have done, and that she/he would be grateful to be in that position. This usually comes with a strong sense of the values and brings with it a certain level of groundedness. This helps to build in the feeling of stewardship. That is the acceptance of the fact that the business is a legacy that the current generation is now handling in trust, for the future general. This leads to a high degree of willingness and desire to do well, with a clear sense of responsibility as a family business owner.

Succession as a responsibility: This emotion arises more of the family considering it as a mission that one is expected to do, and hence one has to follow tradition as this is expected from them. They do not have a choice, and this is what has always been done, and that there is no reason for anyone to believe that it would not be carried on. This presupposes that the next generation is expected to take over, and usually leads to they considering this as a burden. This is particularly acute, when the next-gen has other ideas and would not want to join the family business, but is usually not able to communicate this to the family elders. There is also the additional pressure from the parents that the business was built with them in mind and who would take over, if not the next-gen? if the next-gen does not rebel against these wishes, they usually concede. This leads to the next generation fulfilling the duties, but with a heavy heart and sometimes with regrets of having missed opportunities. The smart ones use the existing businesses as a platform to launch their desired ventures.

Succession as a right: This arises when one believes that succession is a matter of fact and not subject to any doubt or questioning. This occurs in royalty, where one had assumed that the eldest male scion would ascend the throne. In family businesses, the other successors would also be entitled to enjoy the benefits of the family business. Thus, the family name was an adequate criterion, for qualifying one to these benefits. This thought process can also be held by others in the family, for example, mothers who would want all the siblings also to be beneficiaries of the family business. This is usually arising along with other feelings of entitlement. These feelings compel the next-gen to join the business for the perquisites, and then these family members would be more concerned with the benefits that they can derive and may not be bothered about the duties towards the business. This usually could land up with disastrous results, if not looked into. This could also arise from the realization that one may be unemployable anywhere outside, which further increases the eagerness to join the family firm.

This would be quite similar to the fourth category, which is that the business is seen as a commercial venture, and the investments or rights in there, would be lost, unless one did not participate in it, and hence it makes a lot of sense to join in. This is also seen in joint families where the other family members continue to keep a foot into the joint property, (eg have a family member continue working in that business, even if loss-making, or even a branch family member staying in joint family home just to retain the ownership rights).

I usually try to ascertain the thoughts that one has, while considering succession in family businesses. And this will help clarify a lot of issues which may arise subsequently during the process.

The motivations as described above can play a very important role in how the successors view the family business. And these motivations will determine their behavior and actions towards the family business. It becomes important to ascertain these motivations, so that one can decide on the best person to run the family business. In my work with families, I have encouraged families to dig deeper into their thoughts and express what their attitudes are.

Most business families also face an issue because of the sense of entitlement that the next generation has. This could be because of the messaging that they have been receiving while growing up, of them being the eventual successors of the business. Or they would have observed the elders in the family and modeled their behavior accordingly. These members may not invest time in getting qualifications as they would consider it a waste and would usually believe that they are born with the ability to run the business successfully. This over-optimism could result in negative outcomes for the business, if not backed by abilities or a smart management team who is there to take care of the business.

The family members who consider the business as a responsibility may also look at it as a burden. They would probably not have the courage to say otherwise, and meekly accept the hand that they have been dealt. These manager-owners may do a good job of replicating the actions of the previous generations and may be able to sustain the business for their generation. They may not have the courage to do anything otherwise, as they may not want to rock the boat and displease the elders, who may be still running the business behind the scenes.

Usually, it helps if the family considers the family business as a privilege to be managed carefully. This can be done with the next-generation having feelings of pride and ownership while belonging to the family business. The family will have to work on training the next generation by showing them the business and its impact from a very young age. This will help build the pride and appreciation for the family business. Additionally, it becomes easier to put in qualifying criteria like education, external work experience, training etc. as a pre-requisite before joining the family business and these should be communicated to the successors early. This helps in creating a next generation of managers who are willing, qualified and competent to take on their role at the helm of the family business.

Families are well-advised to consider the role that the next generation will play and their motivations. It makes a lot of sense for the pro-active families to engage with the next generation and seek to ascertain their hopes and aspirations. In case these are outside the business, then some families have created opportunities for them. They have also created structures to enable this, including professionalising the business, and ensuring that the family involvement shifts to the board level as investors. The others have created a path for those desiring to join with usually good results. This ensures unity and continuity of cordial relationships in the family. Usually, an honest response leads to the discussions that families should have. It is time, we started to have these discussions, clearly and honestly. It is the only way we can ensure that both, the family and the business last over multiple generations. Otherwise, disputes, dissatisfaction, and frustrations will tear everyone apart.

Rajiv Agarwal is a professor of strategy, family business and entrepreneurship at the S.P. Jain Institute of Management and Research, Mumbai.