The 26 million family businesses in the U.S. account for 50% of the gross national product, 60% of the jobs, and 75% of new job creations. (Astrachan 2009). A large majority (over 90%) of these family firm leaders in the U.S. wish to have their businesses controlled by their families in the future (American Family Business Survey, 1997). Unfortunately the probability of fulfilling that wish is low. Empirical data exists to indicate that the odds of a family business successfully passing from one generation to the next are 30%. Accordingly, fewer than 3% survive into the fourth generation. (Astrachan 2009).
In an attempt to answer the question of how some family businesses have managed to survive intact, over hundreds of years, studies of more than 18,000 companies were performed. The research indicates three keys: strong boards of directors, strategic planning and family meetings.
The research indicates that boards of directors are more effective if they are made up of two outsiders to each family member and if the chairman is someone other than the CEO. The occupations of board members seem to have no bearing on their effectiveness. The board must have the ability to hold management accountable and the discipline to not interfere in operations. Larger boards promote better accountability. Seven to twelve directors seem best. Board members should be carefully selected and regularly evaluated. The board should approve and monitor strategic plans, evaluate executive performance, and approve executive compensation, to name a few major items.
The goal of strategic planning is to anticipate the future so you can develop flexible goals, objectives, and plans of action to fulfill your family’s long term goals. The Company’s strategic plan is subordinate to the family’s strategic plan, since the Company is a means in the family plan. The planning process is actually more important than the plan. The planning process should help family members unify in support of unambiguous goals that can be clearly measured. The family should foster a culture of commitment to the business that increases its’ ability to pursue new opportunities and respond to threats. Strategic planning will not be effective without mutual trust, since without it there is no moral force to harmonize group goals with individual goals; people will focus on justifying decisions rather than on taking initiative. The strategic plan must be infused throughout the organization. Promote those who embrace it and remove those who don’t. Well executed strategic plans should help you constantly improve predictable activities and handle unpredictable events.
The goals of family meetings are to build trust, avoid resentment, improve communication, coordinate and clarify expectations, and encourage thoughtful decision making. This is accomplished by providing mechanisms for orderly conflict resolution, respectful rules of engagement, building a unified family vision, educating family members, developing skills, transferring values and developing family business policies. Families should have business meetings four to six times per year. Trust seems to develop in direct proportion to the depth, frequency and duration of communication. Therefore, frequent communication outside of family meetings is also important. Of course, trust must be earned and no amount of communication can change that. Family business meetings should also include enjoyable activities that provide bonding opportunities.
Studies indicate that family unity is the absolutely essential ingredient and that systems of unity are the key. Theses systems include the strong boards of directors, strategic planning and family meetings.
Business succession planning has been likened to building an arch. An arch cannot be built from one side. It must be built from both sides. Family business succession must also be built by at least two generations fully engaged and committed to the process. If either the current leadership generation or the successor generation is not committed to an orderly succession process the odds are that the arch will fall. Without mutual trust the efforts are likely doomed.
I must caution that there are many pitfalls in family succession planning that cannot be covered in a brief article. The process should be well thought out and deliberate. A qualified objective consultant can be helpful.
The lessons of family business are a dish best served with mother’s milk. So start early, and do not shelter your children from information about your business.
