Empowering new leaders in the midst of a storm

Hard times put pressure on family companies to stop procrastinating and get on with succession.

By Peter Davis

Not All Family businesses have done poorly in this recession. Business has never been better in the past two years for a number of lean-and-mean, market-driven, quality firms, and coming out of the economic slump these "winners" will continue to dominate.

For numerous others, however, the recession has been a sudden wake-up call. Families are learning that traditional strengths and strategies can no longer carry them through hard times. They must act now, before it is too late, to achieve a fundamental change in leadership and direction.

In a family business this requires that the generations work together to bring about change and to deal with the emotions of change. Both of these issues are usually linked to succession. What has happened is that the economy has narrowed the window of time in which the process must take place.

Consider the case of a family owned manufacturing firm that for 45 years had been a leader in its industry. In 1986 the three brothers who were the second-generation leaders began to see that the company was losing ground and needed to be modernized. Costs were rising and margins were falling.

To rescue the business from this slide, the family leaders hired two outside executives, for production and for finance. The managers brought with them innovative ideas; their mandate was to implement those ideas in the family firm.

The more the new managers learned about the firm's condition, the worse it looked to them. The company's production methods were archaic, deriving from practices of the founder. The only financial reporting was cash reporting needed for tax returns, a method akin to checkbook balancing that yielded little information on how money was spent. Even more important, the middle managers were not managing — they had never been expected to.

When the two new managers started to demand changes, they found that the commitment of an important group of family owners to progress was less than 100 percent. In frustration, the new managers pushed harder. They insisted that the non-performing managers be fired. But the owners refused. Finding little support from anyone else, the pair formed a powerful clique within the company with the other reform-minded managers whom they had hired.

The company polarized between the Young Turks and the Old Guard, with family members lined up on different sides. The cousins working in the business who were leaders of the third generation became important members of the Young Turks. Though the second-generation leaders had themselves called for modernization, they were afraid of the younger technocrats, and were caught in a web of ancient loyalties to the Old Guard; they were thus put on the defensive. Even the non-family executives were divided.

The extent of change that is still needed in this company is daunting. The number of production facilities, for example, has to be halved. The distribution network has to be reworked. A new accounting and control system has to be built from the ground up.

The family desperately wants the company to survive as a family business. They want changes to be made, but they can't agree on how to make them. They are caught up in political battles, and, as in so many family businesses, the issues have become terribly personal. In a letter to me, the heir-apparent in the third generation expressed his frustration:

"I believe we have no marketing plan....My uncle has disdain and thinly veiled contempt for the cantankerous and feisty independent reps with whom he has struggled for 30 years....Curiously absent from our company are any measurements beyond volume and overall profitability or lack of profit. My father bristles when I speculate as to WHY we have never installed a cost-accounting system...Pricing has always been 'to market,' without regard to cost..."

In the current recession all of the company's debilitating weaknesses suddenly threaten its very existence. To survive, the family must act decisively.

There is a need for a marketing plan. There is a need to jump the production process into the era of just-in-time manufacturing and total quality management. There is a need to develop financial mechanisms so the managers can control product costs and manage inventories. Above all, there is a need for leadership. The elders have to deal with their own personal doubts about letting go and being less active in the business. The choice of a successor is clear; they have to give him strong support.

At this point, the successor has his best chance of mobilizing the constructive elements in the company to turn things around. There will be a lot of difficulty and pain in the process, but if he has learned his lessons well and is capable, the company will at last change.

The family asked me to facilitate a strategic planning conference at which key family and nonfamily managers would survey their options. The stated aim was to collect more information from management and deepen the family's insight into such questions as whether they should drop some traditional product lines and whether they should get rid of some sales reps and do more direct selling.

From the outside, the family's motives in organizing the conference appeared ambiguous. They truly wanted to involve the top management team in the planning process. But the top managers suspected that the idea of holding an exploratory meeting in the midst of a crisis was a delaying tactic; the older generation had a long history of holding meetings and then failing to follow through.

The more we discussed the agenda, the more family members realized they had enough information and insight. What was needed was a commitment to vigorous new leadership.

I proposed a meeting with a different format, and the family agreed. We asked the next-generation leaders to develop a clear, focused statement of the company's goals and direction and to propose action steps to implement those goals. The plan was to be presented for the family's approval at a meeting of a board created especially for this purpose.

By asking the younger generation to prepare the plan, the family was, in effect, empowering them to lead the company out of its stalemate. The leaders in the new generation presented their ideas, and after a few hours of debate, the family approved the plan and authorized them to put it into action.

There were some risks in the way the plan was developed. Since key nonfamily managers had not been involved in formulating the plan, they might challenge its assumptions. The successors had to meet with top management to explain the plan, defend it, and build a consensus around its implementation. The plan was modified in response to the top managers' suggestions, but the meeting ended with a clear vote of confidence, an enthused "Let's do it." Strong new leadership in this company has finally asserted itself, perhaps in the nick of time.


Peter Davis is Family Business's chief advisor and the director of the Division of Family Business Studies at the Wharton School.