The Buck Stops Here on Your Toughest Decision

By Leon Danco

Though outsiders can provide perspective on the choice of a successor, only the family leader can makethe decision stick.

At some point in their lives business owners have to close their eyes and start having a few new dreams. By age 40 or so, parents need to look around at their children and ask, “For whom am I building this business? Who will become my successors in time?” And if they truly dream that their children will one day own and manage the company, they must ask a corollary question, “How will I know which among them will make the best leaders for the future?”

The nice thing about monarchies is that children of the king are known as princes and princesses from the moment they are born. They're expected to learn over time everything they need to know to fulfill their future roles, and these roles are clearly stated. The biggest failing of first-generation business owners is that they don't realize that they will get old and have to turn over leadership ofthe company to a successor before the business starts to falter, and sale or liquidation becomesinevitable. In successor-generation businesses, the problem is exacerbated by the proliferation ofshareholdings among siblings and cousins, all with spouses and all with strong ideas, rights, andadvocates.

The qualities necessary for leadership—integrity, courage, vision, personal magnetism, commitment,compromise, and accommodation—usually em-erge early in life. By watching their children at play and atwork, by seeing how they carry out assigned tasks at home and in school, by encouraging leaders inother fields to appraise their potential, parents can begin to sort out the talents and capa- bilitiesof the next generation. Between the age of 15, when children are almost adults, and 40, when theyshould be ready to take charge of the business, there are a total of only 300 months. Parents shoulduse this precious time to observe their offspring and develop leaders. Unfortunately, too many parentsdo not begin the process until late in the game, when they are facing their own retirement—and allthat entails—as well as the urgent need to choose a new leadership.

This indecision can lead to a variety of cop-outs. I have known of owners who have refused to choose asuccessor themselves and, instead, put the decision in the hands of their board. I have known ofothers who have simply walked away and let members of the next generation decide among themselves whowill lead and who will follow. In both cases, the surrender of responsibility for the explosivesuccession issue risks a factional fight among the offspring and their spouses.

Even so eminent a management thinker as Peter Drucker maintains that family businesses best accomplishthe job of picking a successor by entrusting it to an outsider who is “neither part of the family norpart of the business.” In a column in a Wall StreetJournal column entitled “How to Save the Family Business” (Aug.19, 1994), Drucker wrote: “Family-managed companies should try to find the right outside arbitratorlong before the decision itself has to be made.”

I disagree. The job of choosing, training, and installing a qualified successor is the ultimateresponsibility of the seniors in charge of the business. They can get all kinds of help in trying tomake a wise choice. But only the family business leaders can make the final decision. And then it istheir job to unify the family and build a community of agreement among siblings, cousins, spouses, andwhomever.

Hiring a consultant—or asking others to get involved in the process of selecting a successor—can be bea handy way to duck the issues. Surely they can provide assistance and perspective, but no collectionof outsiders alone can make the ultimate choices stick. The rest of the family, the management, andthe other shareholders have to buy in, and only those family leaders who are most knowledgeable aboutwhat the business requires can persuade them to accept these choices.

New leaders, are not hard to spot. They are the kind of people that others flock to; they inspireeager followers. Take, for example, Edgar Bronfman Jr., the current CEO of Seagram's. Edgar Jr. was arebellious youth who participated in street demonstrations during the 1960s and after college plungedinto a career in show business. His brother, Sam, followed in the footsteps of their father, EdgarSr., and entered the family liquor business. When Edgar Jr. finally joined the company at his father'sinvitation, however, it was clear which of the brothers was the leader. As one Seagram's insidernoted: “When the two brothers entered a room, Sam would walk around greeting everybody, very friendly,but Edgar retreated into a corner and let everyone come to him.”

Can there be two or three leaders in the same business? Of course, yes. When there are more or lessequally talented siblings, no parent in his or her right mind is going to make this into a zero sumgame. Perhaps Brother A can be chairman and Brother B, president; I know of many companies in whichtwo brothers and their wives have been very content with this arrangement. Perhaps the company can bereorganized into independent units of a holding company, with review and direction by an outsideboard. There are always creative solutions, so long as people are willing to cooperate, and grandioseegos don't get in the way.

In second- and third-generation family businesses, the ultimate choice becomes more difficult becauseusually more than one branch of the family is involved. Few parents are willing to admit, “Mybrother's kids are better than my kids and should be the leaders.”

If there is any doubt about whose kids should lead, the candidates should be tested throughexperience. They should have had managerial jobs both inside and outside the company that clearlyallowed them to succeed or fail. Review by outsiders is, as I've always said, invaluable in suchsituations. Unfortunately, long-term board members are hesitant to offer a candid opinion on thequalifications of successors. They are reluctant to offend the family. When asked their opinion aboutthe candidates, they too often offer a lame, “They're coming along great.” Other board members,especially those who are there as window dressing, are simply spectators to the process. They may havemet the candidates casually or at shareholder meetings, but haven't spent much time getting to know orevaluating them.

Both kinds of board members don't seem to realize that measuring successors is part of theirresponsibility as directors of a family firm. When their viewpoint is specifically requested, theywill, I hope, be willing to spend some time getting to know the candidates and forming an opinion.

Still, the final choice must be made by the senior leaders. While business owners cannot always beobjective about their own children, they must at least be responsible in how they reach decisionsabout those who will be entrusted with the business. Too many go to great lengths to avoid making achoice, either because they can't bring themselves to elevate one offspring above another or becausenone of the kids are capable of doing the job and the parents cannot face the truth. Instead, theyturn to outsiders to make the choice, hoping someone will tell them that one of the kids really is a leader.

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Autumn 1995