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Helping Family Businesses
Prosper Across Generations®

Think As A Clan for Long-Term Success

“Where long-term survival of the extended family is more important than individual influence” is Professor Annelie Karlsson’s insightful and intriguing definition of a “clan.” What especially interests us about the Stockholm (Sweden) School of Economics professor’s definition is its applicability to successful long-term business continuity.

In family-owned firms, a time comes when the best decision for the business and the family is not necessarily the most attractive decision to family members currently in power.

Take succession, for example. Three brothers have built an excellent company together, with the oldest brother really being the driver. He’s made tremendous sacrifices to develop the business and to keep the sibling leadership-ownership team in tact. As the oldest brother approaches retirement, he may naturally wish his own son to succeed him in the CEO role. On the other hand, he recognizes that the daughter of one of the other brothers seems to have the perfect education, talent and disposition to lead the company in its second generation.

Or, consider job performance. Almost inevitably, a family member employed in the business will not be performing satisfactorily someday. For parents and other family members, retaining rather than terminating an incompetent family member is often the more emotionally comfortable choice.

In each instance, however, the more difficult, much less comfortable decision best protects the family business’s future. Unless and until the family is guided by the concept that long-term survival of the “whole” is more important than individual interests and bases its decision making on that belief, the business’s continuity is threatened.

Beware fiefdoms

Sometimes the family business structure is itself the impediment to developing a clan mentality. In second generation sibling partnerships, for example, siblings’ emotional history is often intense because of shared childhoods. Sibling owners may each have a large block of stock that is usually very difficult to redeem in case of a dispute and the exit of one or more siblings. Finally, siblings often choose to suppress conflict and disagreements rather than confront them head on.

These fairly typical circumstances often result in each sibling taking personal leadership responsibility for a different division of the company. Each has his or her own territory or fiefdom; each makes a personal contribution; and each stays out of the others’ way for the most part.

But beware fiefdoms. While such situations may work well for sibling generations, such territorial thinking can be disastrous in the next generation. As cousins enter the business, the aunts/uncles often fight to maintain their sense of power through roles and status for their children.

Problems occur when third generation cousins see their second-generation parents’ divisions as “their” branch of the family’s business. When that view prevails, the children of the division head gravitate to that division for jobs, or the family talks about “your” business unit, not “our” business portfolio.

The natural long-term result is partition – breaking the company into several family businesses. While that strategy often breathes entrepreneurial drive back into the business, more often, we’ve found, partition compromises strategic synergies and financial strength.

When family businesses survive into the fourth generation, odds of continued success dramatically increase. We’ve found one reason to be that when the family is made up of second cousins, issues are more easily resolved in the best interests of the family as a whole rather than its individual members. At that point, the business-owning family thinks like a “clan.”

Lay “clan” mentality groundwork

Given the statistics, we propose a goal for second generation family businesses: Strive to become a clan by the third generation and reinforce that vision with the unselfish sacrifices necessary to put the business and family on the right path for long term continuity.

If you hope succeeding generations will retain a vision of one company owned by one family, we make several suggestions:

  • Children should work for aunts/uncles for an extended period of time. Doing so not only breaks down potential “fiefdoms” but also provides better teaching and mentoring for the next generation.
  • Rotate roles once in a while in the second generation. Change for its own sake can refresh the business and the people.
  • Use an independent board of directors to analyze the strategic issues of each division or subsidiary and seek synergies, combinations or divestitures where appropriate.
  • Put policies in place to take care of sensitive issues like entry rules, compensation, incompetence in job performance.
  • Develop a buy/sell agreement that serves the best interests of both the business and the family (see Developing Family Business Policies, Volume 11 in the Family Business Leadership Series.)

Like so many aspects of family business, what seem to be logical steps in the current generation can have inappropriate and confounding results for the next. Unless partition is the long-term preferred path, business-owning families must guard against the development of family-branch “fiefdoms,” and choose a path which will result in melding an ownership group that believes “the long term survival of the extended family is more important than individual influence” – a clan.

 

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