It’s the stuff of legend and literature, from King Lear to The Godfather. As the founder of the family enterprise ages, younger family members jockey for position, hoping to prove their worth and step into a leadership role in due course.
But with business leaders living decades longer than they used to, second-generation heirs are at risk of missing out. Succession planning is still an afterthought for many CEOs, and family assumptions about who will lead the business may not always favour the best candidates.
So where does this leave the highly qualified younger sons and daughters, especially those who want to play a significant role in the business in mid-career, as much as two or three decades before the expected retirement of their parent?
“A lot of traditional succession plans are tied around two generations. Now we’re seeing a lot of three-generation businesses,” says Daniel Trimarchi, director of the KPMG Family Office in Toronto. “With people living longer, the 100-year life is very much possible, leading to this issue of that second generation potentially being quite delayed.”
A “binary” view of succession is a common issue, he says, in the sense that the heir is expected to step in only when the CEO retires or dies. To prevent transition shock, he says, “people have moved away from succession planning and they talk about continuity planning, because it’s more about peoples’ roles evolving.”
The longer that the successor-apparent is on the sidelines, the less opportunity they have to develop leadership skills.Douglas Byblow, independent family office executive
But 70 per cent of family business leaders have no succession plan at all, according to KPMG’s STEP 2019 Global Family Business Survey, although 80 per cent predict that the next CEO will likely be a family member. Furthermore, while 48 per cent say they’ll choose a family successor based on their level of interest in the business, only 23 per cent said they would choose based on qualification for the role.
No matter how the choice is made, a delayed transition can be harmful both to the individual and the business, says Douglas Byblow, an independent family office executive in Calgary.
“There is no substitute in terms of family business leadership that is better than gaining actual hands-on experience making decisions, and the longer that the successor-apparent is on the sidelines, the less opportunity they have to develop those leadership skills,” he says.
“Other challenges may involve tangible issues associated with finances and remuneration and expectations as to living styles and entitlements,” Byblow says. “And often overlooked by the successor and their parents are the more intangible challenges: So often we are judged by the title that we hold, and that can especially be true in families of substantial wealth.”
How to frame the discussion
The heir-in-waiting or underappreciated younger child faces an awkward conversation when requesting more responsibility within the family enterprise – not least because no one wants to address their parents’ eventual passing.
“In the very early years, a way to frame the conversation would be talking about what they learned in business school. Basically they’re ‘blaming’ someone else for putting these ideas in their head,” says Steve Ivacko, a principal with CV TrustCo in Vancouver, which provides trust and family-office services to high-net-worth families.
“The other way to frame it is: It isn’t about me and it isn’t you, it’s about the business. Is it expected to be a family-run business forever? … If it is intended to be a family legacy, then there has to be a deeper conversation about the leadership and the intent,” he says.
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KPMG research has shown that both business leaders and their heirs-in-waiting may be avoiding the serious discussions because neither wishes to put pressure on the other, Trimarchi says. He recommends asking practical questions and discussing options. “If I know that you want to retire at 60, I can do this; if you want to retire at 80, then I can do that.”
He recommends creating forums within which these discussions can take place, such as family councils, shareholder boards, family constitutions or shareholder agreements.
But what if, despite aptitude and interest, second- or third-generation family members realize they’re not in the line of succession?
Starting their own ventures
Byblow says, “An effective approach is for a family member to resist the urge to define themselves by the successful family and family business, but recognize that they have skills and talents, and develop those. In that case, the family business is an option, but not the only option.”
“Intrepreneurship,” the pursuit of an entrepreneurial project that leverages family resources, is a potentially fruitful course, whether that means developing a new business stream within the existing family enterprise or starting a separate venture, perhaps based on an outside interest such as real estate or art collection.
“We’re seeing examples like that all the time, and it’s amazing to see the energy of that rising family member, and frankly watch the respect that often the parents and older generation have for them,” Byblow says.
“Remember that business founders were entrepreneurs and risk-takers typically, but they try to protect the rising generation from hardships and heartaches. I’ve had wonderful conversations with family business leaders who are tickled pink that one of their children is following in the family footsteps – not by joining the family business, but starting a venture of their own.”
Trimarchi says, “Another aspect, especially with a transition from first to second generation, is that you’re often dealing with a senior family member who has for many years worn multiple hats. Succession maybe doesn’t mean taking all three hats at once.”
“We may have to do this incrementally, because as humans, change is hard. A big part of any of these discussions is getting each generation to look at the perspective of the other.”