Succession progression

By Bill Yoh

As our company, Day & Zimmermann, has evolved over three-plus generations, so has our approach to succession. We offer up some possible best practices to emulate and likely pitfalls to avoid. 

Many of us are aware that more than half of U.S. GDP comes from family-controlled businesses. Yeah, we family business owners are kind of a big deal. We also provide millions of jobs, help give meaning to our family members’ lives, pride ourselves on strong cultures and impact our communities. These things we have in common.

One aspect of business ownership we typically don’t have in common, however, is the transition process between generations. Like snowflakes, no two successions are alike. In some cases, succession may not look like succession at all, but more like distribution (e.g., a third party offers an irresistible sum for the business and the family goes on to co-manage a family office) or evolution (e.g., a first-generation entrepreneur says to her children, “My gift to you is not this business but the gift of entrepreneurship. I’ve built my business. Now go build yours.”).

And, of course, there are those families (like mine) that have participated in the succession of an operating company between generations. Even though each of these transitions is unique, we share many of the same challenges. These challenges are big, and often stubborn. We all deal with concrete topics like succession planning, shareholder agreements and financial training, any of which can foul the well water. But more often it’s the soft stuff that is the hard stuff, like parent-child relations, melding the values systems of families-of-origin and married-ins, and balancing the encouragement of individual pursuits with a sense of collective stewardship for the enterprise.

My family’s journey through three-plus generations has shown that some elements of successful transition have been constant, such as children working in the business during school summers, early-career adults developing a deep passion for the company, and the controlling shareholders running the business like a business. The similarities among successions, however, pretty much end there. The sequencing of events, the leadership and management changes, and — most important — the evolution of governance all vary. Another family business owner and I recently developed an appropriate precept: “There are an infinite number of ways that a succeeding generation can govern the business. The only one of those ways that definitively will not work is the one that the controlling generation develops for them.” The three complete chapters of our family’s journey prove this. Chapter Four (G3 to G4) still has much to be written.

***

Our first chapter features my grandfather, Harold Yoh. A lifelong entrepreneur, he sold pelts from animals he’d trap near the Ohio farm where he was raised, became the first person in his family to attend college (at The Wharton School, no less) and eventually bought into a tool design business just prior to World War II, soon renaming it the Yoh Company. He transformed the business into a temporary technical staffing company, which today is in the top 1% of U.S. staffing firms. He practiced the entrepreneurial principles of growth, diversification and risk taking. Eventually, he acquired Day & Zimmermann, a diversified technical services business focused on engineering, construction and government contracting. Founded in 1901, D&Z was four times the size of Harold’s eponymous company at the time of the merger. Today the Yoh family continues to own and operate D&Z, and the Yoh Company remains one of D&Z’s core operations. Our 117-year-old business employs 43,000 people and has operations throughout the world.

Harold had many children, but only one, Spike — his firstborn and my father — ever joined the business. Spike spent every summer from middle school through college working for the company. He learned to embody the same business principles his father held, and his business acumen advanced. Chapter One had all the elements of the great American success story.

***

Chapter Two was not as auspicious. The father and son had a contentious relationship, spawning in part from Harold’s divorcing Spike’s mother and marrying his secretary when Spike was barely a teenager. During the early years of Spike’s full-time career, he felt that “the old man” never had a good word to say about him. Despite this animosity — or maybe because of it — Spike chose to dedicate his career to Day & Zimmermann, eventually committing to acquire it. Harold, however, provided him with little mentorship and few succession plans.

By the mid-1970s, the company had grown to over $100 million in revenue, with an attractive munitions manufacturing business that caught the eye of two large defense contractors. This attention encouraged Harold to cash out and forced Spike to construct a deal that would beat the outsiders’ offers. The father was not interested in facilitating a deal for his son. In a novel double move, Spike orchestrated both a management buyout (by uniting the other key executives and offering them ownership stakes) and a leveraged buyout (by partnering with a bank willing to collateralize the company’s receivables to finance the purchase). Despite their differences, the Yohs struck a deal, and Chapter Two concluded.

***

Chapter Three, the transition from G2 (Spike) to G3 (my four siblings and me), was an antithesis to the preceding story. In the early 1990s, Spike and Mary, our mom, took us to a Young Presidents’ Organization family business conference, after which we began having routine family meetings to discuss the business. In the mid-1990s, still a few years before Spike would retire, he had the foresight to instruct us children to start meeting formally as a five-some. He knew we would have to get to know each other far better than typical siblings if we were to be an effective ownership group. We recognized a number of metaphorical “hats” that we would wear. At times we would be owners. Sometimes we would be employees. At others we would be just siblings. Of course, the hats frequently overlapped. We also examined our childhood relationships, identified our personality types, and assessed how our individual aspirations jibed with each other’s and with the future needs of the company. The succession soil was tilled.

Still in his early 60s but after two years of deliberation, Spike decided to retire, implementing a succession plan for his oldest son, Hal, to replace him and initiating a stock transfer that would put his five children, with an average age of 33, in control of a $1.1 billion company with 16,000 employees. A main factor in Spike’s decision to hang ’em up at a relatively young age was his observation that too many family business leaders stayed in charge too long, stunting the leadership growth of the next generation. This transition — with many years of deliberate preparation and several best practices implemented — stands in stark contrast to the previous one. In particular, Spike and Hal both consider the succession plan period, during which Hal reported to Spike in a newly created president role, a highlight of their careers. 

But this chapter was not complete. Even after org charts are updated and financial transactions closed, generational succession continues. As newbie owners, my siblings and I recognized that our work was just beginning. To facilitate the transition to much younger ownership, we developed and implemented three strategies designed to show our employees, particularly our senior managers, that we were committed to their continued involvement and career progression.

The first of these efforts was a phantom stock program, wherein non-family senior executives earned the ability to participate financially in the appreciation of the value of the business just as the shareholders do, thus aligning our interests. The second was the formation of a board of advisers (BOA), which furnished the CEO and leadership team with feedback and advice regarding financial performance, strategy and talent development. It has provided us with the proverbial “gray hair” experience that such advisory bodies can give — although by now we owners have developed plenty of our own gray hair! The final measure we put in place was a “meritocracy” process whereby we assigned the BOA the role of approving any management promotion involving a Yoh family member. Over the years, the BOA has at times recommended against a family member getting a new job, demonstrating the teeth this process has. These nepotism safeguards are still in place today. We have experienced little voluntary turnover in the executive team, and the company has grown tremendously, poised to eclipse $3 billion in revenue in the near future.

Two of my siblings elected to leave the business during our ownership tenure. Both departures were amicable, even though the siblings were required to sell their stock. One of the stipulations Spike included in our shareholders’ agreement was that a family member had to work at the company to own stock. A common practice among early-generation family businesses, “work to own” ensures that the people in control of the business are intimately familiar with it and committed to its wellbeing, perpetuating the objective to run the business like a business. This owner-operator model can also better promote the interests of the entire ownership group (current and future) by taking a longer-term view, as opposed to non-working owners who might, for example, prefer to maximize personal short-term gains at the expense of growth and stability. 

***

Thus ends our third chapter. Chapter Four, the future succession from our generation to our children, will involve a few important and unique dynamics. The first of these is age. The cousins fall into two cohorts, five of them in their 20s and 30s and six who are 18 and younger. The 25-year age gap from oldest to youngest essentially makes our G4s a generation and a half. Another new dynamic is diversity. This generation not only has been raised in multiple households — with the important influence of married-ins — but also has a wide range of interests, skill sets, and political and religious beliefs. From business research it is known that the best teams are diverse and well-managed, while the worst ones are diverse and poorly managed. Our next generation is currently somewhere in the middle, a collection of smart, passionate individuals with elements of both esprit de corps and independence.

Our efforts to inculcate them with a love for the business have been a work-in-progress. All members of G4 above 16 years old have worked at the company, and one member continues to work there full-time. While this professional exposure has helped build familiarity and connectedness, our initial formal education activities had somewhat of the opposite effect. The efforts entailed several years of renting out conference center board rooms, presenting information-rich PowerPoint slides, and arranging briefings from estate attorneys. We talked about death scenarios and the need for life insurance, as well as the always-fun topic of pre-nups. One older member of G4 described these sessions as being like root canal — you know it’s necessary, but that doesn’t mean it’s not painful. Needless to say, these meetings, which lacked recreational activities, service work, facilities tours or meaningful team building, did not do much to ingratiate the next gen to the business.

What we missed initially — and what many successful multigenerational enterprising families emphasize — was creating collective opportunities for fun and bonding. As one family business patriarch said at a recent conference, “If you really want to be a family in business, you have to be friends, and to be friends, you have to spend time together.” This person, along with several other successful business-owning families, participates in endowed vacations, where the company funds opportunities for owners to spend time together with little more than a light touch of business content. We have recently started to model this approach, focusing more on creating cousin bonding opportunities centered on fun exercises, sporting events and summer recreation. We now allow for more optionality regarding attendance, the objective being that if someone shows up, that person is there of his or her own volition, not because the event was dubbed a “command performance.”

The biggest change we have made in preparing for a fourth generation of ownership was removing the “work to own” requirement in our shareholders’ agreement. We did not want to limit our children’s life and career decisions based on whether or not they’d want to own D&Z. However, we still believe, as our father did, that the company should be governed by those shareholders most closely connected to it. So concurrent to removing “work to own,” we contributed all of our voting stock to a new trust, the trustees of which must be family members who are either executives at the company or serving on its board. Perhaps most unique to our situation, should there not be a family shareholder in either of these roles when a trustee seat becomes vacant, that seat will go to a non-family executive or board member. That’s how committed we are to ensuring the long-term success of the business. We are equally committed to allowing our next generation to decide if they want to join the business or not. We now have the opportunity — and the challenge — of imbuing in them the stewardship ethos required to govern the family enterprise when our generation’s time has passed.

Our company has evolved, as has our governance model. Our current chapter continues to be written; our journey continues to unfold. We hope our story helps you and yours along your path. What the world needs is more success in succession. We all are the ones to make that happen.     

Bill Yoh is a third-generation owner of his family’s 43,000-employee, century-old business, Day & Zimmermann, and the chairman of Yoh, D&Z’s multinational staffing company. He is the author of Our Way: The Life Story of Spike Yoh and speaks and writes regularly about his trademarked approach to family business, Familytics (www.ourwaybook.com). 

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Issue: 
September/October 2018

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