Sprott School of Business / CAFE Ottawa Family Business Essay Award 2014 Winner

Transcription

1 Sprott School of Business / CAFE Ottawa Family Business Essay Award 2014 Winner FAMILY ENTERPRISE SUCCESSION PLANNING: A CHALLENGING YET REWARDING ENDEAVOR Riaz WARSALEE May 2014 This essay is one of the winners of the 2014 Sprott School of Business / CAFE Ottawa Family Business Essay Award. Established in 2008 by the Canadian Association for Family Enterprise (CAFE) Ottawa Chapter, the purpose of the award is to encourage interest in the unique issues faced by families in business. CAFE is committed to assisting families in business and building their pivotal contribution to the economy of Canada. CAFE is the place where family businesses connect with peers and resources to network, exchange ideas, foster greater understanding of family enterprise and support family members through legacy transitions. 1

2 The essay competition is an integral part of a Sprott MBA course, namely ACCT Financial Corporate Governance and Accountability, with Professor Merridee Bujaki from the Sprott School of Business, Carleton University. The 2014 Sprott School of Business / CAFE Ottawa Family Business Essay Award winners for the best essays by MBA students are: Emma LANDRY White-Collar Financial Crime: Are Family Businesses Exempt? Riaz WARSALEE Family Enterprise Succession Planning: A Challenging yet Rewarding Endeavor The 2013 Sprott School of Business / CAFE Ottawa Family Business Essay Award winners for the best essays by MBA students are: Gregory BELLA Succession Planning in Family Firms Brahim FAKRI Immigrant Family Business: Interaction between Local and Foreign Governance Practices Rahel LIPPERT Corporate Support of LGBT Rights Hakan MUSTAFA Overcoming the Challenges of Conflict in Family Business The 2012 Sprott School of Business / CAFE Ottawa Family Business Essay Award winners for the best essays by MBA students are: Sudipa PAUL and Mohammad REKABDER The Role of Family Bonding in Family Business Kaiser ALAM, Mark KHALIL and Andrew MANIS Using Effective Communication for Managing Conflicts in a Family Business The 2011 Sprott School of Business / CAFE Ottawa Family Business Essay Award winners for the best essays by MBA students are: Shayna MILLER and Andrew WEST Compensation for Non-family Executives in Family Firms Nelson MCDOUGALL and Richard STANTON In Family We Trust: The Family Trust as a Governance and Succession Planning Tool 2

3 ABSTRACT CEO succession planning is one of the most important, yet overlooked, processes within family enterprises. This paper seeks to examine issues surrounding succession planning. In doing so, I will explore the root causes that may allow us to understand why succession planning is so often overlooked. Succession planning is a very crucial process that if not addressed can cause family enterprises to fail in the long run. The paper will also look at why this process is so important for family enterprises. Finally, some findings will be presented regarding characteristics and implementation of an effective mechanism of succession planning. INTRODUCTION A survey of 322 family businesses conducted by KPMG in 2012 showed that only 11% had a succession plan in place for their CEO. This is a damning statistic when we consider the fact that only 30% of family businesses survive to the second generation and only 15% survive to the third generation (Bigliardi & Dormio, 2009). Together, these statistics make it clear that without an effective succession planning process, family enterprises have a low chance of long-term survival and viability. In spite of all the problems that poor succession planning have been shown to bring about, family enterprises are still finding it difficult or even refusing to implement succession planning processes. The period of transition that arises when leadership of the family enterprise is transferred is often characterized by disputes and uncertainty. Many of the explanations which have been proposed as to why succession planning is such a prevalent issue within family enterprises will be explored in the paper. Many of these issues are rooted in the uniqueness of the relationships and decision-making processes that can be observed in family enterprises. Another 3

4 root cause of the issues is that every family enterprise operates differently and the relationships between family members can often be complicated by factors such as culture. I will begin by analyzing why succession planning is an especially important process for ensuring the continuity of the family enterprise. The paper then goes on to explore the reasons why there are so many issues that arise with regards to succession planning and how they can hinder the business s growth. Some of the best practices and observations around effective succession planning will then be discussed. IMPORTANCE OF SUCCESSION PLANNING Much of the literature concerning succession planning and family enterprises looks into what differentiates the family enterprise from the non-family enterprise. One of the things that is often found is that family enterprises often possess valuable intangible processes or know-how which is often closely held and thus difficult to duplicate. This type of knowledge is referred to as tacit knowledge. Tacit knowledge is very difficult to define and can rarely be expressed in a formal manner. It is developed and advanced mainly through interaction and exposure to contextspecific situations (Cabrera-Suárez, Petra De Saá-Pérez & García-Almeida, 2001). When we consider the resource-based view of family business, this can be seen enhancing the human capital aspect of the business. Although this tacit knowledge is seen as difficult to emulate, it is also difficult to transmit. This again stresses the importance of having a defined process of succession planning. The valuable tacit knowledge that the older generation has acquired through the years could easily be 4

5 lost if a process is not in place to transfer the knowledge to the younger generation. The failure to have a plan in place to allow the seamless transfer of management responsibilities and the resulting tacit knowledge may account for the high failure rate of second and third generation family enterprises. Additionally, since this knowledge is so difficult to articulate, the succession planning process and more specifically the early stages should be well thought-out. ISSUES The succession planning within many family enterprises is also plagued by nepotism. This will occur in some instances because there is often an expectation that the business will remain in the control of the family and that operations will continue to be run by family members regardless of whether they possess the necessary skills. In many instances, the younger generation does not want to inherit the responsibilities of owning and managing the business, but they may feel obligated to do so. By definition, nepotism is the unfair practice by a powerful person of giving jobs and other favors to relatives (Merriam-Webster, 2014), but this unfair practice often permeates within the family as well. In other words, certain family members may be preferred as successors over others for reasons unrelated to business. This can be due to cultural factors (i.e. desire for oldest son to be the successor), familial factors (i.e. maintaining family legacy), and cases of excessive and dysfunctional altruism (i.e. nepotism, biases in evaluating performance, etc.) (Jaskiewicz, Uhlenbruck, Balkin & Reay, 2013). In this sense, we can see how nepotism or the desire to maintain control and management within the family can lead to the torch being passed to someone who is both unqualified and unwilling to carry on the business. 5

6 The process of succession is inevitable and must therefore be addressed early on. The strategic vision and future plans can create conflict and disagreement among family members. A phenomenon that has been observed is that the younger generation will often want to steer the business in a new direction which is not consistent with the view of the older generation (PriceWaterhouseCoopers, 2013). Additionally, there is also disagreement among the next generation as to whether or not to cut the family ties to the business by selling it or by employing outsiders. The very issue of succession is something that many family businesses are reluctant to discuss because of the many issues that it raises. The older generation will have the tendency to assume that the younger generation will continue to manage the business in the same manner without making any changes. They may also be reluctant to discuss succession for fear that it may create conflict among family members. The business processes and organizational structure within family enterprises is also often very informal. Attempting to make these processes more formal is often a difficult task because family members tend to trust one another and therefore do not see the need for formal agreements. To make matters worse, attempts to formalize processes within the family enterprise can often trigger sentiments of mistrust and hurt feelings (Hubler, 2014). Finally, the older generation will often feel the need to postpone any discussions concerning succession because they may be fearful and unwilling to face their own retirement and mortality. 6

7 FINDINGS RELATED TO EFFECTIVE SUCCESSION PLANNING Up until this point, succession planning has been constantly referred to as a process. Most researchers are in agreement that succession planning is indeed a process rather than a simple act of passing the business off to the younger generation (Walsh, 2011). Within this process, there are several phases that should be traversed in order to ensure that conflicts do not arise during succession and that the younger generation is successful in maintaining the business. First, succession planning should begin as early as possible. This is because the successor will need to acquire the knowledge and skills necessary to be able to run the business when the time comes. In addition, identifying a most likely successor as early as possible will decrease the chances of arguments developing over who should succeed when the older generation is set to step down. Beginning the grooming process at an early age will also in many cases solidify the younger generations commitment to the business and also facilitate the transfer of tacit knowledge. Another one of the first steps that should be taken in the succession planning process is to establish an agreement regarding the long-term vision of the business. This is to ensure that conflict will not arise when the younger generation is set to inherit the business. Clearly articulating the vision in a written and formal statement is also recommended as it will ensure that the younger generation will not be confused about the long-term strategy. Getting the younger generation engaged is only the starting point in an effective succession planning process. The successors education and involvement in the business should in theory 7

8 increase as he/she becomes older. An ideal process should institute a career development plan for the potential successors. Doing so will ensure that the successor has had the appropriate amount of exposure to the business in addition to receiving the necessary training and education. By putting the potential successors through this process, the other stakeholders involved in the business will not feel worried that an unprepared and unqualified individual will become the one leading the company. The actual transition process where the younger generation steps in and the older generation steps down should be planned as well. The process should involve several stages where the predecessor slowly loosens his/her involvement in the business while counseling and allowing the successor to take over. Over time, the new leader will be phased in while the predecessor will be phased out. This process is often characterized by multiple role adjustments for both the predecessor and successor. Over time, decision-making can become very informal within family enterprises because of the closeness of the relationships and the high degree of trust. When the younger generation steps into a management role, these informal procedures may not function due to a lack of understanding among those inheriting the business. Consequently, another best practice that will allow for a smoother transition is the establishment of formalized decision-making processes. Developing a family charter is one way of communicating these new, more formal processes. The family charter will contain information such as the new roles, compositions, and functions of family governance institutions (i.e. formal board of directors, family council meetings, periodic 8

9 assemblies of the family) (Yasser, 2011). The charter will also outline the enterprise s core values, vision, and mission. A recent article by Jaskiewicz, Uhlenbruck, Balkin, and Reay (2013) made a distinction between two different types of nepotism entitlement and reciprocal and examined how each affects the family enterprise. They define reciprocal nepotism as nepotism associated with the family conditions of interdependence, previous interactions, and cultural norms that support obligations to family members (Jaskiewicz, Uhlenbruck, Balkin & Reay, 2013). The examples provided in the previous section regarding the issues related to nepotism fall into the category of entitlement nepotism. This type of nepotism will likely have a negative impact on instituting effective succession planning. Reciprocal nepotism is linked to the process of succession planning because it is based on trust, previous interactions and family conditions of interdependence (Jaskiewicz, Uhlenbruck, Balkin & Reay, 2013). The link to succession planning lies in the fact that an effective succession plan will begin the process of grooming future successors early on. By slowly yet steadily exposing the younger generation to the business and its operations, a notion of trust and familiarity will be established among the current executives and the future successors. Furthermore, by involving the younger generation in the business early on, they will be more likely to develop a commitment and attachment to the business and have a desire to see it prosper. The article describes this as being a shift from a normative perspective (I have to) to a stewardship perspective (I want to) on the part of the younger generation. 9

10 CONCLUSION A recent survey by PwC showed that less than 50% of the family businesses surveyed planned on transferring ownership and management responsibilities to the younger generation. One possible explanation for this could be the reluctance of current family enterprise CEOs to deal with the issues that come with succession planning. We have seen, however that there are many benefits to keeping the family enterprise a truly family oriented venture. Although it can be an arduous process, effective succession planning can have many positive impacts which will allow the business to prosper and continue growing. Having a process in place, however, does not eliminate the chance that conflict will occur. It is therefore important for the business to have a strong conflict management system in addition to their succession planning process. This can be implemented in the form of a family council. It is therefore apparent that the succession plan is only one of the tools among many others that is crucial to the success of the family enterprise. 10

11 REFERENCES Cabrera-Suárez, K., Saá-Pérez, P. D., & García-Almeida, D. (2001). The Succession Process from a Resource- and Knowledge-Based View of the Family Firm. Family Business Review. Egon Zehnder International (n.d.). Family Firms and their Governance Creating Tomorrow s Company from Today s. Retrieved February 2, 2014, from Hubler (n.d.). 10 Most Prevalent Obstacles To Family Business Succession Planning Ownership Planning Hubler for Fam. Retrieved February 4, 2014, from ssuccessionplanning.aspx IFC Family Business Governance Handbook (n.d.). IFC Family Business Governance Handbook. Retrieved February 2, 2014, from sgovernance_handbook_english.pdf?mod=ajperes Jaskiewicz, P., Uhlenbruck, K., Balkin, D. B., & Reay, T. (2013). Is Nepotism Good or Bad? Types of Nepotism and Implications for Knowledge Management. Family Business Review. KPMG (n.d.). Family Business Succession Managing the All-Important Family Component. Retrieved February 3, 2014, from KPMG (n.d.). Family Ties Canadian Business in the Family Way. Retrieved February 2, 2014, from 11

12 PriceWaterhousCoopers (n.d.). Family firm: A resilient model for the 21st century. Retrieved February 4, 2014, from PriceWaterhouseCoopers (n.d.). Scale, skills, and succession Tackling the tipping points for family firms. Retrieved February 2, 2014, from Yasser, Q. R. (2011). Challenges in Corporate Governance A Family Controlled Business Prospective. International Journal of Innovation, Management and Technology, 2(1), Retrieved from 12