Succession planning doesn’t start with people it starts with the requirements of the job, this is according to professor of business David Ulrich from the University of Michigan.
Prof. Ulrich makes the point that establishing clear job descriptions is a fundamental part of recruitment practice. Firms find people to fill roles and not the other way around.
When businesses search for new candidates the job specification is defined and agreed before the advert is sent out. Employers know what they are looking for and the applicant understands what is expected.
In family businesses these boundaries may not be so easily understood. Often successive generations are in a role simply by virtue of inheritance. There has been no interview, no vetting and often no indication that the incumbent family member is equipped for the job.
It is this lack of process – imperative in non-family businesses – that can create a generational wealth trap.
As Simon Bloom explores in his book Passing the Buck: How to Avoid the Third Generation Wealth Trap, successful family businesses ensure that anyone employed in the company is there through merit rather than birth right.
Bloom’s book cites two examples of successful transfers of wealth across the generations showing how the family business only employed ‘skilled and able members from each generation’.
Carols Slim Helu, listed as the world’s second richest man in 2013 by Forbes magazine, passed the family wealth to his descendants with each child receiving an equal share of the business.
Since all members of the family hold common values and share a similar work ethic, Slim’s company has remained successful even after he relinquished control.
Similrly, Bloom points to the Rothschild family which has increased its wealth from generation to generation.
Bloom says: “What the Rothchilds were able to do for almost 200 years, and what the Slim family have done more recently, is dependent on significant contributions from skilled and able members of the family from within each generation.”
Essentially the drive, ambition and ability of generation one has passed, along with the wealth, to generation two, three and beyond.
In the following example we explore the importance of ensuring successive family members are capable and willing to take on the responsibility of running the business.
Gordon and Harry, brothers, are both in their sixties and want to withdraw from their successful courier business to make way for their children to take over.
Gordon was always the more industrious of the pair and had essentially built the business with limited input from Harry. However, the brothers had an equal share in the business, and to preserve the peace, the issue of Harry’s idleness was never raised.
Like their father, Harry’s two sons are equally lazy but since they have enjoyed a relatively luxurious upbringing with all the trappings of wealth, they are also entitled .
Gordon’s children, too, are like their father: hard-working, ambitious and desperate for the business to thrive.
The family now finds itself in a situation where each of the four children has an equal share of the business but there is not an equal division of labour.
The two sons are exploiting the business, drawing a significant salary for which they are not doing the requisite work and they are drawing significant sums from the expense account.
Meanwhile Gordon’s children are cutting costs, working long hours and, as a result, starting to feel resentful at their cousins’ sense of entitlement.
The industrious pair have no greater say in board decisions than the feckless two, since each child has an equal share of the business, leaving them unable to remove them from the firm.
The brothers refuse to acknowledge their lack of interest in the business since they receive a large salary for little work; a situation that clearly suits them well.
And so the family finds itself at stalemate. Gordon’s children want to expand the business by hiring capable, skilled people from outside the business but they also need to end Harry’s children’s employee status.
Harry’s children have no intention of relinquishing their salaries, which leaves the business in limbo and under threat of collapse.
Gordon and Harry could have avoided this difficult situation if they had engaged in an honest conversation about their offspring from the outset. The brothers needed to accept their own failings and those of their children.
The lines of communication needed to be open so that the best decisions could be made for the future of the business and for the family.
Only in acknowledging that Gordon’s children had the requisite skills and motivation to run the business, while Harry’s did not, could the right appointments be made.
All children could have remained equal shareholders in the business, but only Gordon’s children would have been employees. They would receive a salary for which they were entitled while Harry’s children would receive a dividend as and when the business was able to pay one.
Taking such an approach would leave only those children with the aptitude and skill in charge of the company, leaving the others free to pursue alternative careers.
Of course, this requires the family to have difficult conversations, to face up to some of their faults and take decisive action, which may not prove universally popular. Yet this is the same action employed by non-family businesses; if an employees is not up to the job they are fired since that is in the business’s best interest.
While no one likes to hear criticism, it is a parent’s role to help their child to succeed and be happy. Coasting through life on the family business meal ticket does not create a sense of achievement nor promote self-esteem in a child; two of the fundamental factors need to achieve happiness.
There are countless examples of entitled children falling into drug and alcohol abuse because they are given no purpose nor sense of direction. Bloom points to the famous example of Hans Rausing, heir to the Tetra Pak fortune, who descended into addiction after he failed to live up to his father’s achievements.
Successful businesses are run by competent and committed individuals. Family businesses, just like any other, cannot survive if their staff is made up of the entitled and unmotivated.
Choosing the best person for the job may be difficult and unpleasant in the short term but it will be for the long-term good of the business and the family.