What happens during intergenerational transitions in family business?

In our own consulting practice, we are dealing with a number of family businesses as well as RISE being a family business. Leadership transition, especially between generations, is a very critical step in the journey of a company. Change of leadership always brings countless opportunities to take the company to the next level. At the same time, it creates unnecessary friction in a business, especially when the ownership group and/or CEO feels powerless to constructively address these issues. This can become an elephant in the room, bleeding energy from the management team. When this leadership transition takes place within a family business a whole set of additional complexity is introduced.

The challenge for family members in the business

Leaders are often critically observed, which can be increased when involving family members. Employees question whether they are competent enough. This is also a question that family members ask themselves. 

Many family members in the family business have not had to move up the career ladder in other businesses and are not exposed to the different associated cultures and leadership styles. 

It is often said that it is lonely at the top. Leaders rarely receive honest and straight forward feedback. Listening between the lines is one art a leader needs to master. Family members involved in the business have the same problem, regardless of their position in the organisation. This lack of feedback can impede their development, as the best lessons are learnt from mistakes. 

Different people naturally have different leadership styles. Whilst hired professionals are selected for certain personality traits, family members who inherit a company come with their own personality. Even if their style of leadership and personality is a good fit within the organisation, there will always be some that think that family members gained this position as a result of their family status, rather than performance. Hence the pressure on performance is higher for family members, as compared to regular leaders.

The complexity of family dynamics

The relationships between family members bring an additional dimension to the table. The charismatic and passionate leader has already set the tone. The next generation does not want to disappoint. However, does everybody understand, that times have changed and new solutions need to be implemented? How can the next generation find their own way in the shadow of this charismatic family leader? Do they actually have the space to forge their own path? In family companies, the nature of their relationship adds complexity. Intellectually, this is understood by everyone but often emotions, (self) expectations, and potential unspoken fears create conflict and pressure. This is especially difficult in families which pride themselves in having good relations. The fear of breaking this can be an additional load.

The opportunity of intergenerational transition

As companies evolve, they have to adapt the organisation to the growing size of the business. This is often missed. A change of leadership between the first and second generation offers the opportunity to address that issue. The situation between the start of a company between the first generation's reign, and the situation when a company is handed over to the second generation, is very different:

• Founders had to go through resource constraints in the start-up phase. They are mostly front and centre of sales, whether they like it or not and whether they are natural sales people or not. To master this, they are often charismatic, passionate, and the prime force in getting the company charged and moving forward, through the ups and downs of early stage companies. This was plainly a matter of survival.

• By the time the second generation takes over, the company has usually proven itself and established itself in the market. Sales people have been hired. The next generation does not necessarily have to be the front line sales person as the founder was, resulting in a very different situation.

• Sometimes, there may even be a need for a new leadership style, especially if the company has grown to a certain size and has reached its maximum growth in the current market or leadership framework. Whilst the strong, charismatic leader was perfect for the start up phase, the growth stage / mature stage company needs different characters to propel the company into further growth.

Typical traps in family business transitions

Here are some of the traps we have encountered during our support of family businesses during intergenerational transitions:

• If the older generation is still active in the business, they may subconsciously not allow any new leaders to fully develop alongside them. It is not uncommon that existing employees are in that difficult position where they are caught up between the known leadership style of the senior and the yet to be proven style of the junior. It is essential to be clear about the way forward, otherwise confusion will reign and divert attention from growth.

• The lack of honest and straight-forward feedback can cause leaders to think they can handle it all by themselves. Even the best performing athletes use coaches and other support. With the additional pressure on family members, it is not only a matter of responsibility but can also offer substantial relief to hire mentors and/or coaches.

• Not all family members want, nor do they belong in the position of the company successor. A misguided understanding towards responsibility to the staff may lead to unintended consequences: a company gradually going down since it because of being a family member they are put in a job they are simply not suited to. Being honest to oneself and opting to hire professional management may not only benefit the company, but also lead to a more balanced quality of life and better grow the financial asset of the family owners.

Best practice

The goal is to use transition as an opportunity whilst avoiding the pitfalls mentioned above. To achieve this, the best family companies we see often use the following approaches:

• Awareness about the complexity of the situation: the influence one has as the leader, and the awareness that one is a part of the problem is an important pre-requisite to do something about it.
• The next generation has to find its own path in order to be able to lead with clarity and develop an approach for the company and be fair to its employees. This may include consideration in selling (partial or wholly) or keeping as well as self management or hiring professionals. Having clarity on this is an important first step.

• Dividing the topics of family relationships from the strategic development of a company, e.g. through setting up a family council and clear family governance structure helps manage the challenges.

• Defining clear performance metrics by the family council; this will make it easier to evaluate whether family members are fit for the job. The most powerful tool of a leader is their action. Leaders set the tone for their staff in all directions.

It is not necessary for leaders to figure it out all by themselves, especially in times of increased market dynamics and uncertainty. Being conscious about the situation and taking along the key leadership and staff onto the organisational development journey will build trust and strengthen the company overall.