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Preparing the next generation

  • Author : Juliette Johnson
  • Date : February 2011
ABOUT THE AUTHOR: Juliette Johnson is Head of Family Business at Coutts & Co

Preparing the next generation for ownership and management is a key task in any family business wishing to succeed and grow from one generation to the next. Too often, however, families fail to invest proper time and resource in preparing responsible family owners and capable family managers. This is a recipe for failure and can be the cause of great distress, both for the business and those family members involved.

Opportunity or birthright?

The first question families need to answer is whether joining the business is seen as an opportunity or a birthright. For most, joining the business is seen as an opportunity and so entry needs to be carefully considered. Families should start early to clarify the qualities, educational requirements, work experience and expectations for family members joining the business. As with everything in a family business, having open discussions to create clarity and manage expectations is essential: under what circumstances can family members work in the company? Should they work outside the family business first? How will their compensation work? Who will they report to? What happens if they’re not up to the job? What sort of support and feedback will be given? Too often family members make assumptions about what involvement with the family business will entail – if these assumptions are misaligned, it is likely to be a source of conflict and strife further down the line.

Outside experience

Experience outside the family business is invaluable for family members that want to work in the business. This allows family members an opportunity to prove themselves and join the business with something to offer, not there just because their name is above the door. Working in another business can give family members confidence and an invaluable opportunity to work in an environment where there are no other family members to support them; where they can make mistakes and learn from them and where they can learn and grow as individuals in their own right.

Formal policies

Once a suitable role has been found, putting in place formal policies and a contract of employment can also help create clarity and avoid assumptions being made, yet these are so often overlooked. Clarifying guidelines around remuneration, holiday entitlement, share options and other details can really help to manage expectations. They can also help to deal with one of the biggest challenges that face family businesses: removing a family member who isn’t performing. A challenge under any circumstances, it is much harder if the basis for the decision is completely subjective. You can end up with the opinion of one family member over another. Having clear targets and feedback mechanisms are vital for dealing with somebody who isn’t performing early on.

Challenges

The next generation often faces particular challenges working for the family business: sibling competition, parental expectations, feelings of unworthiness, and family members are often neglected when it comes to formal feedback or training. While non-family employees in the business typically have an appraisal once or twice a year and career development plans, family working in the business tend to get overlooked here. To make matters worse, family members working in the business become isolated, without colleagues or peers to talk to; other employees often don’t really know how to treat them.

On that basis, a well-considered support network and career development programme is also essential for family members working in the business, particularly if they are ultimately moving into management positions or onto the board. Mentoring and coaching can help support young family members in their development within the family business and with career guidance and personal development.

Responsible ownership

Whilst preparing the next generation for management often affects a few family members, preparing a far wider group of cousins or siblings for responsible ownership is a completely different challenge.

Ownership development tends to be neglected in many family businesses as owners often assume that the next generation somehow naturally understands what it means to be a shareholder. This is rarely the case and successful family businesses work hard to educate each generation so that they understand the business and have the necessary skills and are prepared to act as good owners at the appropriate time.

If done correctly, responsible owners – a group of owners that understands the business, can work together and speak with one voice, and is committed and willing to support the business financially – can be a source of competitive advantage and patient capital for a family business. If the owners are divided in conflict, with differing goals and aspirations, however, the opposite is true.

There are two key tasks that families need to carry out to build an educated, capable and responsible ownership group. First: knowledge building. The next generation needs to learn about the family business, its history, its values and vision, learn about the rights and responsibilities of a shareholder, and a basic understanding of the financial side of the business. Skills-based learning is also essential. Here the focus is on decision making, communication, managing differences of opinion and team building; really getting family members to work together so they are able to speak with one voice and understand each other better.

While the senior generation can provide initial impetus and direction in developing these training programmes, ultimately the next generation need to become actively involved in helping to design their own learning journey.

Participation in the business and its extended activities can be powerful glue drawing the family together. By involving the next generation in the different activities of the business – be it through a family council, a training programme or philanthropy – families help build up the next generation’s commitment to the business, help them learn about the business, and importantly, build relationships with other family members.

This relationship building becomes much more important as the business passes down the generations. By the time you get to the third generation you may have a group of cousins, many of whom have grown up in different households and are often more geographically dispersed and don’t know each other as the previous generation may have. They may have a very different view and vision of the family business, so managing ownership becomes much more of challenge.

Working together

By working together to build and renew family values, articulate and align their vision, the next generation can bond together and grow into a cohesive ownership group. It needs to happen over a period of time and you are often going to be dealing with different ages and levels of knowledge. Succession is a process not an event. It needs to be worked at, not taken for granted.


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