The Thorny Issue of Succession - Sharing To Create A Legacy
7th October 2016 Tom Hubler
To meet the last challenge of entrepreneurship successfully, a family business needs an active board of directors consisting of some external input.
How do you replace an entrepreneur? Truthfully, you can't. In 30 years of working with family-owned businesses, I have never seen a "replacement entrepreneur." It's an oxymoron, like "jumbo shrimp." But it is possible to develop a system that provides stability and direction for a family business. Here we are going to take a look closer at leadership strategies.
An owner-entrepreneur does not have to leave the company for this to happen. He or she needs to change roles and become the designer to help develop the new system for business leadership and governance.
Leadership prepares the next generation
To produce leadership, the entrepreneur must establish a process that helps next-generation adult children maximize the leverage of their gifts to benefit the company and fulfil themselves. This requires a commitment on the part of both the company and the family to support and develop the younger generation of adults. When more than one adult child is involved, the entrepreneur should establish a leadership team that helps the next generation find an appropriate place in the company, based on their talents. According to Jim Collins' book Good to Great, you need to allow the next generation the chance to "find the right seat on the bus."
Governance requires a board of directors
In my experience, owner-entrepreneur companies have a board of directors, but it is usually inactive or, at best, is a "kitchen cabinet" of senior managers, professionals working with the company, friends of the entrepreneur and sometimes family members.
To meet the last challenge of entrepreneurship successfully, a family business needs an active board of directors consisting of either outside advisers or members. There are good arguments for either, but its purpose is the same: to provide objectivity and strategic wisdom so the business continues to prosper.
In addition, the board of directors can function as an intermediary between the owner-entrepreneur and the younger-generation adult son or daughter who is running the company. Based on our experience, it is much easier for the company's next-generation president to report to a board rather than to Dad.
For the business, a board of directors is good business. Research by Ernesto Poza (Thunderbird - Gavin School of International Management, Phoenix, Arizona) shows that family businesses with active boards of outside advisers are significantly more profitable than family businesses that do not have an active board.
A board needs critical design factors
Several design factors guide the process of developing a board of directors:
- Create a prospectus for prospective board members that describes the company, including an overview of the business, its most important products, the industry, types of customers, size of the company and the nature of ownership.
- Include a board profile that covers the character of the business, stages of the life cycle of the business, strengths and weaknesses of the business, strategic thrust of the business, and plans for growth and market share development.
Define the purpose of the board with tasks that could include:
- Examining and brainstorming strategic directions in the face of market maturity or intensifying competition.
- Stimulating continued management professionalism and organizational development.
- Helping develop the succession process and supporting successors.
- Counseling spouse and successors if the CEO dies or is severely disabled.
- Encouraging and increasing self-discipline and accountability with the president and across the organization.
- Articulating personal criteria and desired background and personal characteristics of outside advisor members of the board. And most important, avoid choosing friends. Instead, select trusted professionals who can add value to the company.
Another aspect of ownership planning is creating an estate plan that corresponds to your plan for the transition of stock to the next generation. The five priorities of estate planning include:
- A decision about whether there will be another generation of the family who will own and run the company. If the decision is yes, this becomes the key component of the succession planning process.
- Economic security for the senior generation. No succession plan will succeed unless the parents' economic security is guaranteed or they retain voting control until they are removed from the personal guarantees.
- Equitable treatment of the adult children. Often the most challenging aspect of succession planning is the equitable treatment of adult children - those working inside and outside the business. It can be difficult for parents who love their adult children equally to implement transition plans that do not treat adult children as exact equals.
- Minimization of estate taxes. After the family clarifies the succession plan, professional advisors can go to work and create the most efficient course of action. It often requires five to ten years to implement the plan, and now is the time to begin.
- Family awareness of the plan before it is finalized. Using the Family Meeting format, it is critically important for the parents to review the plan with the entire family prior to its finalization. This allows the adult children to have their input into the plan and allows parents to take their adult children's preferences into consideration before the documents are finalized. Having this discussion will go a long way toward preventing family disharmony and hurt feelings.
Happiness, gratitude and compassion
Another element of the last challenge of entrepreneurship is focusing on service and philanthropy that arises from happiness, gratitude and compassion. But the greatest significance is not the entrepreneur's act of giving per se, but in leading the family to embrace it. The entrepreneur creates a philanthropic spirit by establishing regular family meetings at which everyone can discuss and evaluate whether the family shares the same values about money and wealth. This is where happiness, gratitude and compassion come in.
What creates happiness? In his outstanding book Finding Flow, Mihaly Csikszentmihalyi sees three things that create flow or fulfilment in people's lives: work, active leisure time and relationships. Entrepreneurs certainly recognize how work can help produce a happy life. For full happiness, however, we need to manifest our calling or spiritual gifts - representing the person we are, the passions we carry.
Parker Palmer touches on this same topic in his book Let Your Life Speak. Palmer writes, "Our deepest calling is to grow into our own authentic selfhood." To me, that means discovering your spiritual gifts. Your gift to the future is also to help your children recognize and "live" their spiritual gifts.
Gratitude is a special gift that stimulates philanthropy. In fact, philanthropy is the antidote to consumption and the thousands of advertisements to buy and consume that experts say our children receive every day. Having regular family meetings focused on philanthropy and getting each member of the family involved at an appropriate age is critical to the development of gratitude.
Educating children about giving: real-world example
In my own family, when my oldest granddaughter, Kailey, was in first grade and six years old, I gave her a "share" check. I told her, "Many kids don't have money to buy books or pencils that they need for school." I said that she could give that check as a present to her school or church.
Kailey immediately asked, "Does this check take the place of my Christmas presents?" "No," I said. "You will always receive your Christmas presents, but from now on, you will also receive a share check."
Fast-forward to second grade. Kailey called me and said, "Grandpa, I need some money." "What for?" I asked. "I'm in the Heart Association Jump-a-thon." I gave her a contribution, and she said, "That's great, Grandpa, now I have $100."
My granddaughter is already philanthropic, developing positive money memories and, most important, gaining a sense of gratitude for her blessings.
Service is "experiential philanthropy." As T. Michael Thompson observes in his book The Congruent Life, "Service is on the outside like prayer is on the inside." Many families we work with involve their children at an early age in service projects. One family helps deliver Thanksgiving Meals on Wheels. Another family hosts a Fourth of July picnic and fireworks celebration for a local children's home. The parents and their adult children, spouses, grandchildren and friends join in serving at these wonderful events. The parents who organize the events are role models who walk their talk. They are living examples for their children and grandchildren. They are living their legacy.
In Success That Lasts, Laura Nash tells us not to wait until we are older to think about our legacy. In my experience, life creates legacy. As you and your clients reach the point in your careers at which the "last challenge" goes on your to-do lists, I trust you will find it to be one of the most exciting parts of your "work" as you harvest the blessing of your life and plant seeds of future success for your family and business.