September/October 2012 Openers

A recent survey of Canadian family businesses found that although about half the respondents expect a generational transition in the next five years, few have plans or governance structures in place to smooth the handoff. But the good news uncovered by the study is that next-generation members are aware of the challenges they face—and they have insightful suggestions about how their elders can help them.

The study, entitled “Family Ties: Canadian Business in the Family Way,” was conducted by KPMG Enterprise, a unit of the giant professional services network, in cooperation with the Canadian Association of Family Enterprise (CAFE), a national non-profit organization. There were two phases to the project, both conducted via online surveys. In the first phase, completed in June 2011, 322 family business members were polled; 43% of these respondents said their companies have revenues greater than C$10 million, and 38% have been in business more than 40 years. Survey participants’ companies had an average of four shareholding family members with an active role in the business.

In the second phase of the study, completed in January 2012, 195 next-generation members were questioned; two-thirds of these respondents represented the second generation of their business families.

Planning is overlooked

Half the survey participants predicted their next CEO will be recruited from the business, and 42% said the new leader will be a member of the owner’s or major shareholder’s family. Yet only 11% of respondents have developed a formal plan for CEO succession; one-third of those surveyed said they are in the process of creating one.

According to the survey report, a majority of respondents said their family firm had not developed formal policies to cover family employment, conflict resolution or mentoring, training and development of family members.

Participants’ responses indicated that few were devoting much attention to governance issues. Only 28% of respondents said their company has a formal board of directors that convenes for reasons other than meeting corporate legal requirements. More than half said their boards or governing bodies have had no training to perform their roles. Three-quarters said their board was not subject to formal assessment.

Only 12% of the respondents said they have a formal family council, and a mere 7% said they have a formal family constitution. One-quarter of the participants said they hold formal shareholder meetings; another 25% said their shareholder meetings were informal.

Respondents who left their family’s business were asked why they did. Among their reasons were a desire for new challenges, difficult family dynamics and no announced successor to the current owner/manager.

Canada’s economic engine

CAFE chairman Allen S. Taylor says that helping family business owners succeed in passing their companies to the next generation is essential from a national perspective. “The business family community is very much an engine of the Canadian economy,” Taylor tells Family Business Magazine. “Much of the innovation, much of the job growth, much of the GDP and much of the philanthropy is rooted in business families. There’s a risk to the economy if we’re not more diligent and professional in planning that transition.”

While family business centers in the U.S. tend to be regionally oriented, CAFE is a national organization devoted to family business best practices, Taylor notes. “CAFE is a connective association where ideas can be discussed,” he says. His organization’s effort to build a family business community “is going to encourage that conversation.”

The survey results, Taylor says, confirm family business observers’ suspicion that generational transition is imminent in many Canadian family firms. “The message is: There’s a big wave coming, and there’s going to be a lot of work to do,” he says. “We need to get on with the business of planning good transitions.”

Next-generation sophistication

Beverly J. Johnson, partner and Canadian national chair of the Family Business Committee at KPMG Enterprise, says the next-generation members’ comments abounded with good ideas. The study’s most encouraging finding, she says, was “the ability of the next generation to say, ‘Here’s what we really need to help the transition move forward.’”

Both Johnson and Taylor note that resources for family business stakeholders have become more widely available since the 1980s, and many universities now include family business courses in their business school curricula. Younger-generation members are using the Internet to find information on family business ownership, Taylor says. “There is a lot more awareness,” he notes.

Next-generation mem-bers who participated in the survey were asked about the biggest obstacles to their success in the family business. Second- through fourth-generation members were targeted in this phase of the study. These re-spondents cited the following challenges:

• Gaining experience by working outside the family firm.

• Acquiring skills needed in their family business or expertise that complements the skills of current family members or employees.

• Gaining business knowledge.

• Acquiring vision and leadership capabilities.

>• Overcoming entitlement issues by developing a strong work ethic and recognizing that success in the family business must be earned.

The next-generation respondents also proposed ways that business families can help develop young members, including better communication, formal education and training, a requirement for experience outside the family business, openness to new ideas, clarity of vision and future plans, and a mentoring program. “Survey responses show that future generations clearly want more mentoring from senior family members,” the survey report states.

CAFE’s Taylor notes that responses from next-generation business owners indicate that they want to be involved in transition planning. “There’s a risk in not engaging them early on in the process,” he says. “They want to see their views and visions incorporated.”

The findings from the first phase of the survey indicate that many senior business owners address planning issues on an ad hoc basis. But, Taylor says, when it comes to transition planning, “The next generation wants to embrace a formal approach. They’re looking to the family and their advisers to develop a plan that they can participate in.”

The next-generation portion of the survey, Johnson says, highlights the need for intergenerational dialogue in business families. “When you read the comments in the next generation’s responses,” she notes, “communication comes up a lot.” Fear of conflict keeps business families from starting conversations, she says. But the impending management and ownership transition in so many Canadian firms will require serious discussion.

“I see it as a challenge,” Johnson says, “but it’s really an opportunity to get communication going.”

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Quotable

“It’s remarkable that so much name-calling has been made in public. It shows that there’s a great amount of tension in the family.”

— Seoul-based business consultant Thomas Coyner, discussing the feud between Samsung Electronics chairman Lee Kun Hee and his siblings (Bloomberg Businessweek, June 7, 2012).

“I would have preferred for my sons to be interested in joining the family business, but it doesn’t bother me that they didn’t. They’re all very creative, and I think it’s most important that they pursue something that they love, like I did.”

— Cheesecake Factory CEO David Overton (Los Angeles Times, June 24, 2012).

“There are more than 27 million businesses in the United States. About a thousand are huge conglomerates seeking to increase profits. Another several thousand are small or medium-size companies seeking their big score. A vast majority, however, are what economists call lifestyle businesses. They are owned by people whose goal is to do what they like and to cover their nut. These surviving proprietors hadn’t merely been lucky. They loved their businesses so much that they found a way to hold on to them, even if it meant making bad business decisions. It’s a remarkable accomplishment in its own right.”

— Adam Davidson,“Can Mom-and-Pop Shops Survive Extreme Gentrification?,” New York Times Magazine, June 10, 2012.

“Imagine we did sell the company and they [the shareholders] collected several billion euros in return. What would they do with the money? Who could they trust to look after it for them? There’s no reason for anyone to want to leave [being a shareholder] in Freudenberg, which is becoming more valuable by the day.”

— Peter Bettermann, retiring CEO of Freudenberg, a large textile and chemical firm in Weinheim, Germany, that is owned by 320 descendants of Carl Johann Freudenberg, who founded the business in 1849 (Financial Times, June 14, 2012).