Insights on succession to the next generation in the family business

Originally published on KPMG’s Family Business blog by Filipe Santos, Associate Professor of Entrepreneurship at INSEAD.

The Spring 2012 report of Pictet & Cie, the Swiss Private Bank, included two interesting articles on succession in the family business. One brings an academic perspective from INSEAD on the topic, while the other offers a practitioner view from Pictet itself.

The INSEAD article from Professor Morten Bennedsen, director of INSEAD’s Centre for Family Enterprise, summarizes his insights from research on more than 10,000 successions covering a period of 30 years. He explains that the traditional model of succession is changing.

Business preparation for the next generation

In the past, succession in the family business was very patriarchal, with the entrepreneurial founder expecting his children to succeed him in the family business. There was little discussion of alternative careers, particularly for the older sons. The induction into the business was made through an apprenticeship model, in which the preparation of the next generation was based on observation of and direct learning from their father.

Successful business founders saw the transfer of their expertise as the best mechanism to train the next generation of leaders. Yet, despite the strengths of the apprenticeship model, studies show that successions on average reduce the performance of the family business during the transition years compared to giving the reigns to professional managers.

Yet research also finds that family successors who do better compared to their peers are ones who had a chance to get outside business experience, benefited from advanced education in a top business school, had international business exposure, and were engaged in board level responsibilities prior to taking the helm of the family business.

Traditional model of succession

This traditional model of succession has been undergoing transformation in the past decades, as the business and family become more clearly separated, the stability of families becomes challenged by societal changes, and the next generation is much better educated and independent.

Succession is no longer taken for granted and leaders need to “sell” the idea of succession to their children, as the concept of taking over the helm of the family business may not be as attractive for the younger generation compared to finding their own independent career path.

This problem is made more acute when the headquarters of the family business is located in a secondary city or more rural area, as large cities are becoming a pole of attraction for young couples.

Educating the next generation

In the modern model of educating the next generation, succession is not taken for granted. Family business leaders consider alternative options such as placing the family business under a foundation to support the family wellbeing while bringing in professional managers, selling the business to employees, or selling to an outside acquirer that aims to consolidate the industry.

The next generation often assumes that they will not lead the family business. While they may have had short-term internships in the business, they then embark on their own careers and pursue their passions.

The ones that choose a business career often gain experience in large corporations and international assignments. They may then follow with an MBA from a top business school. To further build their knowledge and networks. If and when they eventually return “home” to the family business, hopefully on the back of a successful career, they often feel this is the path they chose. By then, they bring a valuable external perspective and a well-rounded experience and education.

Successful next generation leaders

The more successful next generation leaders couple this external perspective with the leveraging of the family business assets. One of the most important of these is the family values that helped build the business. These values support continuity and often facilitate long-term thinking.

This model of transition also helps to generate passion for the business as the successors feel that they are there by their own choice and merit.

The very personal story of succession at Pictet, a 200 year old Swiss private bank with a tight partnership model and strong family values, illustrates well the above ideas on succession.

The apprenticeship model

Jacques de Saussure, now senior partner at the bank, says that there is no right for family members to join the bank without the agreement of all active partners. He himself only considered joining at the age of 29. When he told his father that he intended to join Goldman Sachs, after a science and a business degree and experience in the asset management industry. At Pictet, he build a large and successful asset management business drawing from his experience in the industry.

Jacques de Saussure argues that a key difficulty with succession is the often large age difference between the founder and the next generation, which makes the apprenticeship model and succession harder. At Pictet, a model of partner succession every five years guarantees diversity of ages among the partners, facilitating the apprenticeship model.

To find out more, and for further reading references, download Filipe’s Insights on Succession in the Family Business on the KPMG Family Business blog.
David Okwara

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