Battle of the generations: Family business legacy and passing down the crown

Family businesses are the bedrock of a country’s economy; according to statistics, 70 to 90% of the GDP is created by family businesses globally. These businesses have and continue to propel the economy by creating employment, innovating new products/services and helping new entrepreneurs by providing seed funding. Majority of Sri Lankan businesses in key industries be it large or small are owned by families with the exception of regulated and government owned entities. 

The unique ‘family edge’ gears family businesses to thrive more than its non family counterparts. Josh Baron, adjunct Professor at Columbia Business School predicts the 21st century to be the era of family businesses given the current competition and economic state in the world. 

Yet an often cited statistic is the 30:13:3 principle of family businesses; which means there is 3% or less that survive beyond the third generation.

Sri Lanka has many family businesses that are transitioning from one generation to the next. However, the battle between generations is a global phenomenon, whether it be a large MNC or a small corner shop, Sri Lanka is no exception. Here are a few pain points, among many, that are threatening our family business legacies.

Pain Point 1 – Let’s face it! Communication between parents and children has never been the greatest universally 

The biggest mistake family businesses make is avoiding the conversation on transition of ownership and management! 

Be it parents and children or between siblings; shying away from this conversation is more likely to do more damage than otherwise. No doubt it can be awkward. Yet lack of communication can result in feelings like “I have my own aspirations, I don’t want to work in the business” whilst harbouring a deep longing to join the business. On the flip side “I don’t think my son is ready for this, let him come up on his own” whilst never setting out the expectations. Such cat and mouse games mentality leads to confusion, waste of precious time and energy resulting in disgruntled generational relationships. Why create animosity? Prevention is better than cure!

Poorly structured discussions amongst family members may result in a similar or worse outcome to no discussion at all. In general, with the rare exception, conversations are more emotion driven, creating mistrust, confusion and misunderstandings. Succession and transition conversations are best attempted with care. A few tips to start a family business succession conversation:

• have it when things are positive and before a crisis hits
• talk about the fond memories of the business
• share aspirations and common goals for the future
• use natural conversation starters such as finding inspiration in other success stories 
• avoid bringing up the ‘what ifs’ such as ‘what if I/you am/are not around?” in the initial stage as it may give rise to disruptive emotions
• be constructive, respectful and build trust in the communication. 

Pain Point 2 – The succession process: Fly in or climb up

Which works better for the incoming family successors? Fly in as the director of the business or learning the ropes and climbing up the ranks. Of course climbing up! Gaining trust of the incumbent generation, building individual confidence and gaining the respect of the current workforce is all through a gradual climb up process. Families manage this process in their own unique way. Some expect children to learn the ropes as they work in the business. No guidance, just experience. Whilst some take a more structured effort to mentor, guide, evaluate fairly with no family bias and insist on outside work experience.  

Cabrera-Suárez (2001) and Steier (2001) suggest that the next generation’s performance is likely based on whether the generations have efficiently transferred the tacit knowledge and social networks. Structured succession processes have allowed generations to communicate effectively and clearly.

 Pain Point 3 – Micromanagement melodrama

Family businesses are largely driven by family members who have closely managed the business through the tough economic times and develop it up with passion, devotion and hard work. In contrast, in 2004, Villalonga and Amit reported that family control exhibits specific weaknesses when descendants are involved in top management. There is a risk of micromanagement resulting in employees being more task oriented and less empowered. These family run businesses sometime fail to attract and retain good specialists for management positions. This hinders growth of the business post incumbent and burdens successors in taking over and learning the ropes. 

Family firms have overcome this by structuring a sound board in line with corporate governance best practices. Research has shown that in these family firms the shareholders and professional management are aligned.  

Professionalising might be that magic ingredient for growth and survival over generations. 

Pain Point 4 – Relevant or redundant? 

The world is changing fast with new disruptive technologies. Founders/current generation of family businesses in their desire to leave a legacy can become more risk averse and conservative in the face of the new innovative ideas. Research published suggests that the effects are even stronger when the CEO of the family firm is the firm’s founder. It is not uncommon for employees of such organisations to take a back seat and execute instructions hampering new development. Research suggests that later-generational family management can be more innovative. Tone at the top and culture is very important to ensure staying relevant in this era of disruption and change. While there is no magical solution to surviving, a few tips are:

• leadership mindset to not fear change
• listen and start conversations with younger employees and next generation
• consult experts and create the right culture
• empower next generation and employees to drive business innovation to the next era with newer perspectives, survive, grow and attract the right talent from family and non family. 

Battle continues… 

Battle of the generations is continuous and universal. Yet family firms that have embraced the battle and evolved with the changing environment have outperformed their non family counterparts whilst aligning the family and the business through governance mechanisms and structuring effective transition.

(The writer is an Associate Director of KPMG Sri Lanka Family Business Division and is reading for her PhD in Economics in Family Business.)