by Ernesto J. Poza
Succession is a Transition in Ownership and Management
Research conducted by Louis Barnes at Harvard indicates that when transition occurs only in management or ownership and not concurrently in both, tensions are amplified. I have experienced these tensions, for example, in successors who have assumed CEO responsibilities, but still do not own significant equity. I have also observed these tensions in families where a younger daughter, for instance, and not the oldest son becomes CEO. This “inverted hierarchy”, as Barnes calls it, means that in the transition, the management and owning family roles are reversed, posing adaptation challenges to the successor, the siblings and other family members. More…
by Ernesto J. Poza
Three brothers run a retail chain catering to a well-defined market niche. The business is people intensive, and customer service is very important. Competition is fierce in their industry. As a rule, profit margins are low. New products and product/service combinations do offer opportunities for healthier profit margins. The brothers have grown the business four-fold in their twenty years of leadership and are now preparing for the transition to a third generation of owner-managers.
The next generation is better educated and has worked outside the family business in well-regarded Fortune 500 companies. Motivation to professionalize the firm, update its managerial practices and ramp-up the growth curve is high. The third generation is ready to use organizational and human resource systems to support increased teamwork, delegation with accountability as well as a more strategic approach to the business’ market niche.
The family is now larger. Each of the brothers has three children, expanding the potential pool of successors to nine. To prune the owning family tree, the brothers entered into a buy-sell agreement funded by life insurance. It specifically states that next generation family members need to be full-time employee/managers to qualify for ownership. This is, briefly, the business and family context in which succession is presently taking place in many family-owned businesses. More…