Succession Planning

By Benjamain Benson

Co-leadership may be equitable, but it's a tough act to pull off

Charley Jones has a problem. He's nearing retirement age and must find a successor in the business that has taken him a lifetime to build. His two children are competent, and each wants to be CEO.

The family has always been close. Charley knows that if he chooses one of his children to lead the company, he will alienate the other and disrupt family harmony. He doesn't want to make the choice. Then again, maybe he doesn't have to, he realized. Why couldn't both run the company together, equally sharing responsibilities, decisions, and equity?

In general, I agree with the Turkish proverb, "a ship with two captains ends up in the desert." The process of transferring leadership to multiple family members who have a track record of getting along has a reasonable chance of running smoothly. Unfortunately, owners like Charley consider the option as an easy alternative to making hard-nosed choices. It takes a special family makeup and a well thought-out plan to pull off this delicate balancing act.

If you are thinking of naming two, or even three, successors, you should first make sure the children (or cousins, in-laws, and so on) meet all of the following criteria:

 

  • The successors must have equal ability, motivation, and commitment. You should not confer equal authority, compensation, and stock ownership to children if their contribution to the business is unequal. Beware if one child is considerably more forceful than the other. Decisions will end up being made by the stronger child, which will ultimately lead to resentment and dissension by the other.

     

  • The children must divide day-to-day job responsibilities according to their individual talents. They can assume comparable inside/outside roles, in which one manager oversees production and another heads up sales, or with or in charge of operations and the other of administration. Division may also be a accomplished by geographical separation For example, a distributor of electrical supplies operates four branches with on sibling responsible for each branch. They run their branches autonomously — with separate budgets — yet they jointly manage the larger business, which benefits from their ability to agree on general policy.

     

  • The successors must share a common philosophy about the direction they want the business to take. For example, they should be inclined to accept similar levels of risk and shoot for the same rate of growth.

     

  • The co-leaders must have a history of resolving conflict constructively. That doesn't mean there won't be conflict. But a fundamental mutual respect shoud enable them to confront each other about sensitive issues, and then resolve those issues amicably. One of two brothers who built a successful lumber business said "It was never worth it to me to win a battle and lose a partner." They approach occasional disagreements by saying, "If that's so important to you, then I'll go along with you." The next time, the other brother will likely be the flexible one.

    If you think your potential successors fulfill these requirements, try to prepare them for the problems that lay ahead. Although everyone may get along well right now, the business environment is sure to change a great deal over the years, putting a strain on the dual successors. Here's what to look out for:

     

  • The successors eventually will lose their referee. Families can delude themselves with a false sense of security while parents, who frequently mediate disputes, are still alive. What will happen when the parents are no longer around?

    Owners can help their children avoid future conflict by gradually delegating decision making. Successors will then be accustomed to resolving differences amongst themselves after the owner-parent dies.

     

  • The business will change. Co-leaders may get along now, under the current size and circumstances of the business. But how will they respond to changes in the industry — if it suddenly grows rapidly, faces new competition, or suffers an economic downturn? And how will they respond if the company itself experiences difficulties? Management by committee in times of stress may bring out the worst in the siblings. Under pressure, they may disagree about how to respond or blame each other about who caused the problem. Such infighting will hinder the company's ability to exploit opportunities and deal with crises.

    This is where an independent board of directors can be indispensible. In fact, I would argue that multiple succession should not be undertaken without a formal outside board.

     

  • The number of successors will increase. The chances of conflict are exponentially increased with the number of players. When only one branch of the family is involved, successors are generally children who grew up in the same household. In subsequent generations, the cast of characters is apt to expand, including cousins who do not share the close relationships enjoyed by siblings. At best, co-leadership is a one-generation solution and is unlikely to continue beyond then with a new and probably expanded cast of characters.

    L. Vaughn Company, a wood-working enterprise in Warwick, Rhode Island, learned that the hard way. It suffered a serious decline in the fourth generation, after four cousins with differing management philosophies inherited minority shares. No one wanted to take the reins, because the other three stockholders could, and probably would, vote down most decisions. The bank froze the firm's credit. The family almost voted to sell out. Two fifth-generation members, who felt their legacy was put on the block, ultimately convinced the family to sell to them and a group of outside investors. One of the outsiders became president.

    Shared leadership should only be considered when there is no single logical successor — and then, only if all the right circumstances exist to give it a reasonable chance of success.

 

Benjamin Benson, co-author of Your Family Business: A Success Guide for Growth and Survival, is a family business consultant based in Boynton Beach, Florida.

 

MAKING IT WORK

Criteria for co-leadership:

 

  • Equal talent, motivation, and commitment.

     

  • Separate job responsibilities.

     

  • Common philosophy about strategy and direction.

Pitfalls to work through:

 

  • Eventual loss of parent as referee.

     

  • Changes in the business environment.

     

  • Expansions of the succession pool.

— B.B.

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November 1990

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