It is the number one issue when it comes to family governance: how to equip the next generation to take the reins of the business. And rightly so, the ‘rule of 92’ holds that 92% of a family’s wealth is lost by the third generation. So you know you need a viable succession plan but what is the best way of protecting the business?
The latest STEP research conducted by the University of East Anglia sheds some light on this. Dr Zografia Bika, Dr Fahri Karakas and Prof Peter Rosa researched three generations of the same Scottish family. The findings provide workable guidance for families and family offices.
They posit that in today’s world, family members must be prepared for "the unexpected, the erratic and the external". Brexit is cited as one such occurrence. Preparation for unknown events should be prioritised over traditional factors such as the pursuit of longevity or harmonious internal relationships.
So how best to anticipate these unknown social and economic - and often rapid - changes? The case study points to greater collaboration with the outside world and for non-family members to play senior and active roles in the family business. The next generation will succeed by eliciting external help.
A modern take on succession planning involves the next generation going to work for a different company, maybe even in a different industry. The Campden Global Family Office Report (2018) reveals that 45% of the next generation train in external organisations. But the evidence suggests this should be far higher. In fact, simply staying within the family and learning the ropes could be detrimental. Dr Bika states: "The younger generation can teach the older family members what they need to know and do in the new business context. Indeed, in times of rapid change, attitudes, knowledge and skills of the older generation, conscientiously passed on to their children, may be active contributors to business failure.”
Consequently, there are major implications for ongoing training and development for family members. It’s not just about older generations transferring their values and wisdom down or even younger family members imparting their knowledge gained from outside. People outside the successor team should play a part in training, whether these are professional advisors, non-family managers, monetary shareholders, peers or even mentors.
Dr Bika highlights some other practicable solutions from the case study: “a fast-moving board of family and non-family directors, a less self-sufficient growth strategy, a proactive approach to the creation of entrepreneurial opportunities, such as a new induction and other tailored programmes for apprentices, and adoption of new 'modern' managerial practices, such as new open-plan offices”.
Yet, the Campden Global Family Office Report (2018) revealed that just 43% of family offices actually have a succession plan (with only a quarter having a formal, written plan). So the biggest takeaway here is: get a plan in place and one that is fit for purpose.
You can read the full report in Family Business Review