Management Succession Issues in Family Business (Part I)

Management Succession Issues Cornell University
in Family Business (Part I)

by Bernard L. Erven, Professor and Extension Specialist
Department of Agricultural Economics, Ohio State University

Each family with a business faces the reality that the business will eventually end or have new managers.This reality is independent of the founding and previous managers’ successes in building the business and their current success and stature in the community.This paper focuses on key issues involved in facing this reality of management succession.In particular, the focus is set in the context of assistance to family business managers by extension specialists in the human ecology and agricultural sciences.

The human ecology and agricultural sciences have a rich history in teaching, research and extension designed to assist family businesses.Family has often been separated from business in this work.Serious attention to assisting family businesses with their succession planning and implementation requires that the family and business be fully integrated in analysis and programming.The “building bridges” theme of this conference is consistent with the practical problems of most concern in management succession in family businesses.

The paper first addresses the family business environment within which succession problems are addressed.Business management succession is then addressed in terms of: the role of the founder, the perspective of the next generation, succession as a process and the characterization of effective successions.A set of old and new family business paradigms is then proposed.The paper concludes with identification of fourteen research questions which have the potential of enhancing the cooperative work of the human ecology and agricultural sciences in management succession.

The Family Business Environment

Family business is defined in terms of ownership, authority and responsibility.Majority ownership of a family business is by one or more family members who have the authority and responsibility for its day to day management as well as its mission and strategies.The management team may include some people unrelated to the family business managers.Employees may be family and/or non-family.The terms founder and senior manager, used interchangeably, refer to the top manager in the current generation of the business.The business may or may not be in its first generation.

Family businesses have characteristics contributing directly to the difficulty of transferring management to the next generation.Of particular interest are the characteristics which distinguish the management succession issues of family businesses from those of non-family businesses.Most of these characteristics are related to human interactions among family members and their inability to isolate family issues from business issues.

Family businesses mix business and family.For example, family social occasions can involve more business talk than family talk.Tranquility in a family that is in business together requires acceptance of the double lives everybody is living. (Fritz, p. 46)Family problems and decisions are mixed with business problems and decisions.Solutions to problems are rarely pure business or pure family in nature so attempts at complete separation are counterproductive.

Family businesses may not provide opportunities that fit all family members’ strengths.The current generation but more importantly the next generation may have strengths not applicable to the business.To illustrate, two children of the founder have limited mechanical, financial management and marketing skills and interests–the very keys to success in the next generation of the business.They do have outstanding finish carpentry and trombone skills.However, these skills fail to provide a strong pool of talent for facing the next generation’s problems.

Family businesses typically provide limited career growth opportunities for family members and employees given the small number of top managers and only one to three levels of management.So even a highly motivated and talented 35 year old may have a twenty year wait for a promotion.

Health, marriage, weather and economic calamities can impede even the strongest family businesses.Risk sharing strategies can only provide some of the needed protection.

Business continuity requires generation to generation transition. Timeliness in the transition is essential.However, the parents may be unwilling to give up control and authority at the time the next generation wants it or should have it.On the other hand, the next generation may not be ready for their responsibilities when they have to assume them.

Finally, continuous change in the external and internal environments accompany business management succession.The changes are diverse and pervasive: technology, public policies and regulations, growth and aging of people, and economic opportunities.Change must be managed simultaneously with attention to management succession.

Business Management Succession

The importance of management succession planning and implementation creates many opportunities for research and extension in the human ecology and agricultural sciences.An adaptation of the categories used by Handler (1994) to summarize family business succession research provides a convenient framework to reflect on issues facing integration of work by the human ecology and agricultural sciences: the role of the founder, the perspective of the next generation, succession as a process, and the characterization of effective successions.

In the following discussion, there is an implicit assumption that top managers lead a strategic planning process which incorporates management succession and long-run continuation of the business.The strategic planning includes development of mission, goals, objectivesand tactics for the business.

The Role of the Founder

The founder as the most influential person in the organization sets the tone for management succession, makes the “rules” and more than anyone else determines success or failure of the succession.This paper opened with a reality.Each family business will eventually have a different generation of managers or it will no longer exist.The founder’s acceptance of this reality undergirds and fosters management succession planning.Rejection of this reality stifles the planning.

If the founder does not have a viable business that gives the next generation a chance at success, the issue is transfer of assets to the next generation rather than transfer of management.Understanding and communicating the current status of the business is a primary role for the founder.

Ideally, the founder integrates management succession concerns into strategic planning.The founder has the responsibility of involving all members of the management team in strategic planning.The founder must also deal with the integration of plans for the business and plans for the family because “family issues ultimately shape the business strategy.” (Ward, p. 161)

Updating the mission statement causes the management team to continuously answer the question, Why are we in business?This question can easily be expanded to deal with questions of business and family values, human resources including employees, role in the community and industry, and long-run aspirations.Answering these questions requires careful communication within the family business.Improvement of communication skills may need to precede strategic planning.A family commitment rather than just a founder commitment to improved communication increases the chances of success. (Robinson)

In the absence of strategic planning and written mission statements, each member of the management team is allowed to generate her or his own reasons for being in business.Conflicting strategies for success, misallocation of resources and failure to deal with management succession then characterize the business.The founder’s top management role is thus compromised on critical strategy decisions.

Several states now have management training programs patterned after Cornell’s PRO-DAIRY program. (Young)Attention to value clarification and writing mission statements is an important part of these programs.Founders managing farm businesses can avail themselves of this management training and also take advantage of farm business succession planning materials available in some states. (Polson)Unfortunately, few agricultural economists are working closely with specialists in the human ecology sciences in planning and conducting these programs.

The Perspective of the Next Generation

The next generation’s perspective may at first appear to be little more than the flip side of the founder’s perspective.In fact, the next generation has multiple perspectives owing to its composition: sons and daughters who enter the business, their siblings who do not enter the business, the spouses of the founder’s children and the founder’s employees.For each of these four groups, there are issues of career and financial planning, career opportunity and career satisfaction, fairness of treatment by the founder, and family relations.

Regardless of how the founder may have conducted the affairs of the business, the next generation of managers in agriculture faces the certainty that success of a business is dependent on more than hard work, sacrifice and adoption of new technology.As Rogersargues from the perspective of a financial lender and management consultant, “the era of management focus has finally arrived in agriculture.” (Rogers, p. 24)The next generation’s success after gaining management control depends on a complex milieu of financial, management, interpersonal and external factors.

Assuming that management control over the founder’s resources and personnel assures success may instead leave the next generation poised for failure. Maintaining the business at the founder’s level challenges the new manager.However, matching the founder’s level of operation and expertise probably will be inadequate.A business can not stand still and have long-run success.Changing and growing the business to have a chance at long-run survival is a challenge the new management team may not be able to handle.Competition, inflation, shrinking profit margins, changing technology, and new customers with changing expectations will challenge even the best managers.

More than the capacity to manage the business affects the next generation.Handler (1992) identified the following factors as impacting on the next generation: personal need fulfillment, career interests, personal identity, life stage, personal influence, mutual respect and understanding between generations, sibling accommodation, commitment to family business perpetuation and separation strains due to family involvement.

The mix of management, financial, family and psychological factors affecting the next generation generates need for expertise beyond that occurring in the typical family business.The next generation can be helped greatly by a diverse external advisory committee as well as individual consultants.The narrowness of consultation from a single perspective, e.g., financial planning, estate planning, family relations or business growth is likely to generate a false sense of security in the next generation.

Succession as a Process

Management succession can be a process taking place over many years requiring cooperation of all people on the management team.The succession steps involve planning, selection and preparation of the next generation of managers, transition in management responsibility, gradual decrease in the role of previous managers and finally discontinuation of any input by previous managers.

In contrast to the above process, management succession can be by crisis.The crisis may be brought about by the death or disability of the founder, divorce, threat of departure by the heir apparent, or hiring of an outside manager in an attempt to “finally fix things gone wrong.”In the absence of design and implementation of a process, succession will almost certainly be by crisis.Preferably, management succession is a process not motivated by crisis nor characterized by a single event nor marked by a single date on the calendar.

Whether succession is a process or a crisis depends on several characteristics of the business, senior managers and family.Growing, profitable and successful businesses cause managers to think about expanding opportunities and continuity.Stagnant businesses with disappointing profits cause managers to concentrate on today’s predicaments.An attitude of, “I’ve got to solve today’s problems before I can worry about the future.” makes treating succession as a process difficult if not impossible.

Senior managers garnering the payoff from strategic planning are more likely to see the benefits of succession planning than managers who muddle along day to day.The knowledge and self-discipline to do strategic planning, expansion planning, human resource planning, financial planning and market planning, for example, certainly can extend to succession planning.Optimistic, systematic and business oriented managers are more likely to plan for and follow through on management succession than pessimistic, unsystematic and production oriented managers.

Family characteristics also influence whether management succession will be a process or a crisis.As the number of adult children and their children in the business increases, the complexity of management succession increases.Similarly, difficulty in management succession is likely to increase with an increase in the number of heirs expecting cash from their parents’ estates.Tightly knit families with strong commitment to honoring their parents’ wishes about business continuity should face fewer problems than fragmented contentious families.

For management succession to be a process rather than a crisis, the family business must deal with a wide range of problems.Integration of expertise from the human ecology sciences and agricultural sciences offers great synergistic potential.