Who selects the successor?

Who should choose the next-generation leader or leaders of a family business? The shareholders? The board? Is it simply the senior leaderÕs call? Should the family council get involved? Or maybe members of the next generation themselves should choose, since itÕs they who will have to live with the new leader. Family Business asked a half-dozen family business leaders from different companies who they thought should make the final choice. We heard a variety of thoughtfulÑthough sometimes ambivalentÑresponses.

By Jayne Pearl

ItÕs a business decision for the board

Marion Wilson
AllTech Data Systems
Bensenville, IL

ÒSuccession should be a business, not a personal, decision, and should be made at the board of directors level,Ó says Marion Wilson, 57, co-owner with her husband, Jim, 53, of AllTech Data Systems, a computer networking services company.

Marion is executive vice president, and Jim is president. The Wilsons own 75 percent of the stock in the $46 million (1998 revenue) company, and four of their six children work in the business, which has 130 employees. The payroll includes 15 nonfamily members who had worked with Jim and Marion at another company; all 15 of them quit in late 1993 to help the Wilsons start AllTech. Many of those Òteam members,Ó as AllTech calls them, pooled their life savings to raise $500,000 for the launch.

Marion has two sons from a previous marriage working in the company. The WilsonsÕ son, Jay, works as an engineer, and their daughter, Stacy Wilson Dillow, is marketing manager.

Marion and Jim donÕt expect any of their children to succeed them. The companyÕs rapid growth and requirements for strong financial leadership make the children less likely successors. ÒThey know what their expertise is,Ó Marion explains. ÒIf they felt they had the experience and it was the best thing for AllTech, I know they would be coming forward.Ó

The board currently consists of the Wilsons plus a director of sales operations, but the plan is to bring in outside directors. Marion says that will help ensure that succession, as well as other decisions, will be based purely on business considerations. Barring unforeseen developments, when she and Jim retire they Òprobably will turn over control to employees in an employee stock ownership plan.Ó


Let the kids decide...well, maybe

Dan Nigito
The Legacy Planning Network
Bethlehem, PA

Dan Nigito, 45, founder and owner of the Legacy Planning Network, wants his five offspring and son-in-law, currently 11 to 25 years old, to choose among themselves who will ultimately lead his wealth-transfer consulting firm. ÒTheyÕre going to be the ones inheriting the business, so they should be the ones to decide.Ó But, Òobviously, as founder, I will nudge to the top the one who should run the business, and the one who should be CFO, and so on.Ó

So far only the oldest, Courtney Weikert, 25, and her spouse, Dave, 24, work in the company. Courtney does part-time bookkeeping, and Dave is manager of client services. Nigito says he hopes his four other kids will eventually join the business, which employs 10 people.

As for the nudging, it comes from parents recognizing the strengths and weaknesses of their kids. Says Nigito: ÒBefore they get to the point of transferring the business, parents should have their kids positioned in the right departmentsÑwho is the best inside guy, who will watch the books, and who will work in marketing. If the next generation is lacking in any of those areas, you find outside people.Ó Or, if possible, you help them acquire the needed skills.

ÒWhen IÕm older and my kids are trained,Ó Nigito adds, ÒI want to let them run the business on their own. As long as I have a vested interest, I will have a say. At the same time, IÕm willing to listen and let them learn by their mistakes. IÕve been wrong before. If these six kids think theyÕve made the right choice [of a leader], maybe I can learn from them.

ÒOf course, IÕm a 45-year-old control freak. How will I feel at 75, when IÕve got money, am comfortable, and, hopefully, have transferred the business to the kids? Then I will have to get out of the way.Ó


The board is key in the third generation

Ann Lawing
The Cape Fear Companies
Fayetteville, NC

The board should decide, says Cape Fear CompaniesÕ chairwoman, Ann Lawing, 46. The composition of the boardÑand the division of ownershipÑwill be crucial in determining succession in this third-generation company, which owns a group of radio stations and an interest in an electronic paging firm. Currently the board consists of Ann (as chair), six other members of the third generation, and AnnÕs aunt, the only second-generation member.

Decision-making has become progressively more formal with each new generation. The founder, who owned a single AM station, made a seat-of-the-pants decision in the 1940s to name his son, Victor Weyher Dawson, as successor. Victor and his sister, Ann Dawson Highsmith, became equal owners after their parentsÕ deaths. Both second-generation leaders are now deceased. All of VictorÕs five adult children and AnnÕs two are owners and sit on the board; five of the seven work for the company.

The board has chosen three third-generation members to head Cape FearÕs three divisions. ÒThe board based its decisions on experience and knowledge of the industry,Ó says Ann. ÒWho would manage and who had what positions was more influenced by who stepped into the business early on, and who came late.Ó In fact, Ann was the last one to come in and, while serving as chairman, works as vice president of sales for her younger cousin, John Dawson.

The balance of ownership among different branches of the family is more of an issue in the third generation than management succession, Ann says. Although VictorÕs two children are leading the main portions of the family business, they and their three siblings each own one-fifth of their fatherÕs half share (one-tenth of the company each), while Ann and her sister, Margaret Highsmith Dickson, 49, control their motherÕs half (one-quarter each). At the board level, the cousins and VictorÕs widow, the second-generation board member, agreed that assets of the paging companies and new stations acquired by their generation would be split equally among them, so future growth would be shared more equitably.

ÒIn the previous generation, the two decision-makers just did what they wanted, and seemed to agree on everything,Ó Ann says. ÒAs the family and business have grown, we are facing harder issues.Ó The cousins are talking about bringing nonfamily blood to the board, and are exploring rules of entry for the fourth generation, which consists of 10 children, ages 7 to 17. ÒWe all live close by, and we are godparents to each otherÕs children,Ó Ann says. ÒEveryone is acutely aware that we must get along.Ó


If the familyÕs divided, rely on advisers

Eric Madsen
Drivetrain Distributors of Alaska
Anchorage, AK

The CEO should pick the companyÕs successor, unless thereÕs contention among families members, says Eric Madsen, 45, president of Drivetrain, a distributor of heavy truck parts and rebuilder of used truck components. Eric bought the business in 1985 with his father, Tom, 69, who serves as secretary and vice president.

If several family members are vying for the top spot, causing dissension in the group, ÒI just wouldnÕt put the family in the position of making the decision,Ó Eric says. Instead, a CEO in this situation should consult with high-ranking nonfamily employees as well as outside advisers, such as the companyÕs banker, accountant, and insurance provider. He or she should weigh their counsel and make the final selection.

So far only one of EricÕs three children, Adam, 21, is involved in the business, as information systems manager and service manager. His 24-year-old daughter seems uninterested in working for Drivetrain. And itÕs too soon to know how his 15-year-old stepson will feel about coming into it. His sisterÕs husband also works in the business, as a warehouseman.

Since Eric is only 45, a lot can change before he has to think about succession. The business has been going through some painful downsizing, and Eric says, ÒSome days I feel like I donÕt want to give my kids this millstone. But if the company were to expand, as it has in the past, there might be room for nieces and nephews.Ó

For now Eric and his dad have a contingency plan that would install the nonfamily general manager as head of the company if both of them became incapacitated. ÒMy wife and mother would sit on the board of directors, and a buy-sell agreement would give them full control. It seemed like the logical thing to do, to look at succession a little less emotionally while IÕm not yet faced with incapacitation or retirement. When IÕm old and crotchety, everyone will have this paper to show me.Ó


ItÕs the ownersÕ call

Ralph Stayer Jr.
Johnsonville Sausage Co.
Sheboygan Falls, WI

ÒIn my business, my sister and I are making the call,Ó says Ralph Stayer Jr., second-generation leader of Johnsonville Sausage. He controls two-thirds of the company shares, and his sister, Launa, who developed and oversees the companyÕs sales force, owns the other third.

Stayer, 55, says the question of who will succeed him Òis frankly a no-brainer, because we have the right people in the right places.Ó The right people, he says, are two nonfamily managers who exemplify StayerÕs core values, which emphasize caring treatment of the companyÕs 800 employees, whom he calls Òmembers.Ó

Ever since he took the reins from his father in 1978, Ralph Jr. has built the business around these values. Recalling his own succession, he says, ÒThere were only seven people in the factory, plus three retail stores. ItÕs not as if they had to pick me over a bunch of people who stuff sausage. They appreciated the skills I brought to the business and my desire to expand it.Ó

And expand it he has, while changing the business focus. Over the years Ralph Jr. closed the retail stores one by one, and concentrated instead on wholesaling. Sales grew 20-fold during the 1980s, and have steadily climbed ever since, to the current $200 million.

None of his sisterÕs children work in the business. Ralph Jr. had a son in the company, one of his seven children, but discouraged him from pursuing it as a career. ÒOne day I said, ÔYouÕre a great businessman and youÕre really driven and sharp. YouÕll be very successful. Why donÕt you go out and do that on your own?Õ I didnÕt want to deprive him of the joy of building and creating something himself. I also had people ahead of him, and I donÕt think he was patient enough to wait.Ó

Whether or not family members run the business, Stayer believes, Òyou have to have someone from the family at least manage the family business interest.Ó He says his son is the obvious choice. There are no outsiders on JohnsonvilleÕs board, which consists of Stayer, his sister, and their parents. ÒWeÕre the premier company in the industry, but we donÕt do any of that formal stuff.Ó


Everyone gets a shot, but Dad chooses

Dan Kleeberg
Kleeberg Sheet Metal
Ludlow, MA

Kleeberg, one of three sibling candidates for successor at Kleeberg Sheet Metal, agrees with his father that the senior owner should select the successor, with input from employees. ÒHeÕs been in this the longest and knows the environment itÕs in, so he would be the one most qualified to make that decision,Ó says Dan, 31.

But Dan also feels each qualified candidate should be given an opportunity to show he or she can do the job. ThatÕs exactly what his father, Dick, 58, has done. The second-generation owner of the $23 million (sales) company has given each of his children a six-month stint as temporary president, before implementing his plan to hand the reins to one of them when he turns 62.

Dick, who started the company with his father and brother in 1958, had his three grown children pick names out of a hat to decide on the rotation. Dan, who handles the companyÕs accounting, was first; then came Lynne Simeone, 37, who heads KleebergÕs East Hartford, Connecticut, office; now the third, Kenny, 33, a project manager who has been with the business the longestÑ17 yearsÑis finishing his term.

ÒI guess my fatherÕs biggest motive was to show us that [the presidency] is more of a title than anything else,Ó says Dan, who has worked for the company a shorter time than his siblings (10 years) but is the only one with a college degree. ÒThis place runs off of the people who work here. ItÕs not just one person. I think when weÕre all done, heÕll interview some of the key personnel and get their viewpoints. HeÕll probably make his decision based on that.Ó Lynne, who has been in the business almost 14 years, is also president of L.K. Yankee Sheet Metal, her own manufacturing company.

ÒI think itÕs a fair assumption that we would all like to be the one to run the company,Ó Dan admits. ÒMy parents are concerned about what effect that final decision will have on the president and the other two. He wants the family to stay together and doesnÕt want one decision to affect the future of the family.Ó

Which is what happened after the first transition. DickÕs father, Al, came back one day from a doctorÕs appointment and told his two sons that the doctor told him he had a very bad heart. He informed the sons that he would be retiring that Friday. ÒThings didnÕt go well,Ó says Dan. ÒI believe when my grandfather retired, my father and uncle were left as 50-50 partners. It didnÕt work and within a year my father bought his brother out.Ó That may explain why Dick is not fond of equal partnerships. ÒHeÕs always been a proponent of the theory that the company needs one president,Ó says Dan.

 

Jayne Pearl, a former senior editor of Family Business, is a freelance writer in Amherst, MA. Her book, Kids and Money: Giving Them the Savvy to Succeed Financially, has just been published by Bloomberg Press (www.kidsandmoney.com).