SEMINAR ON CONTEMPORARY ISSUE
ON
TREND IN FAMILY BUSINESS SUCCESSION
SUBMITTED BY
Bunti
MBA 2 SEM
Department of management studies
MODI INSTITUTE OF MANAGEMENT AND TECHNOLOGY
Education complex, Dadabari Kota - 324009 (Raj)
INDEX
Introduction /definition
Definition
Scenarios
Succession
Nature and method of study
Family business examples
Succession planning - an evolving definition
Succession planning - current trends
The case for internal promotions
Career mapping and the use of technology
Succession planning - increase in "self-selection" for career path planning
Succession planning linked to company performance
The future of family business
Conclusion
References
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INTRODUCTION /DEFINATION
A family business is a business in which one or more members of one or
more families have a significant ownership interest and significant commitments
toward the business’ overall well-being.
In some countries, many of the largest publicly listed firms are family-owned. A firm
is said to be family-owned if a person is the controlling shareholder; that is, a
person (rather than a state, corporation, management trust, or mutual fund) can
garner enough shares to assure at least 20% of the voting rights and the highest
percentage of voting rights in comparison to other shareholders
Definition
In a family business, two or more members within the management team are drawn
from the owning family. Family businesses can have owners who are not family
members.
Family businesses may also be managed by individuals who are not members of
the family. However, family members are often involved in the operations of their
family business in some capacity and, in smaller companies, usually one or more
family members are the senior officers and managers. Many businesses that are
now public companies were family businesses.
Family participation as managers and/or owners of a business can strengthen the
company because family members are often loyal and dedicated to the family
enterprise. However, family participation as managers and/or owners of a business
can present unique problems because the dynamics of the family system and the
dynamics of the business systems are often not in balance.
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Scenarios
Balancing competing interests often become difficult in three situations. The first
situation is when the founder wants to change the nature of their involvement in the
business. Usually the founder begins this transition by involving others to manage
the business.
Involving someone else to manage the company requires the founder to be more
conscious and formal in balancing personal interests with the interests of the
business because they can no longer do this alignment automatically—someone
else is involved.
The second situation is when more than one person owns the business and no
single person has the power and support of the other owners to determine
collective interests. For example, if a founder intends to transfer ownership in the
family business to their four children, two of whom work in the business, how do
they balance these unequal differences? The four siblings need a system to do this
themselves when the founder is no longer involved.
The third situation is when there are multiple owners and some or all of the owners
are not in management. Given the situation above, there is a higher chance that the
interests of the two sons not employed in the family business may be different than
the interests of the two sons who are employed in the business.
Their potential for differences does not mean that the interests cannot be aligned, it
just means that there is a greater need for the four owners to have a system in
place that differences can be identified and balanced.
These three scenarios can be mitigated by following the guidelines of TMP, or "The
Maria Principle"
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Succession
There appear to be two main factors affecting the development of family business
and succession process: the size of the family, in relative terms the volume of
business, and suitability to lead the organization, in terms of managerial ability,
technical and commitment (Arieu, 2010). Arieu proposed a model in order to
classify family firms into four scenarios: political, openness, foreign management
and natural succession.
One of the largest trends in family business is the amount of women who are taking
over their family firms. In the past, succession was reserved for the first born son,
then it moved on to any male heir. Now, women account for approx. 11-12% of all
family firm leaders, an increase of close to 40% since 1996. Daughters are now
considered to be one of the most underutilized resources in family businesses.
To encourage the next generation of women to be valuable members of the
business, potential female successors should be nurtured by assimilation into the
family firm, mentoring, sharing of important tacit knowledge and having positive role
models within the business
Most of the family business literature is biased towards perpetuating family
businesses and keeping them family owned and controlled. Perpetuating the family
firm is often accomplished through the gifting of shares to siblings after the
controlling shareholder dies - dangerous according to Every Family's Business
(Deans, 2009).
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Nature and Method of studyThis study was undertaken over a period of eight years commencing in December
2000. Senior students who were registered for the financial statements analysis
course, a core requirement for the Bachelor of Business Administration at the
American University of Sharjah, conducted the field work. Prior to any field work
taking place, several focus group discussions were held with students outlining the
purpose of the study, the methodology and the nature of interviewing.
Moreover, preliminary discussions with the students revealed certain
misconceptions and thoughts surrounding succession issues in Arab societies.
Although 102 students volunteered to be the fieldworkers only 57 became the
fieldworkers. The student fieldworkers were all indigenous to the Gulf States and
some have continued to collect data over the period of eight years communicating
them electronically.
The data collection included, inter alia, the monitoring, if any, of the process of
succession in the six Gulf States over the period and this becomes a further study
in this area. Data were obtained from 251 incumbent entrepreneurs. However, 29
were not suitable for use.
Since the data required were of a somewhat sensitive nature, the fieldworkers
needed to be indigenous to the area, know the culture of the region very well and
were well advised to form a very close relationships with the incumbent in order that
the monitoring process of succession could be obtained. Moreover, the fieldworkers
were advised by other students not to devalue the worth of the incumbent by
ridiculing any practices that are not consistent with modern practices.
Fieldworkers were sensitive to several issues and were advised to win the trust and
confidence of the incumbent.
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Data constantly coming through from a large number of fieldworkers suggest that
many fieldworkers have enlisted the incumbents as clients.
Family business examples
Tata Group
Aditya Birla Group
Samsung
Trump Organization
Wal-Mart
Ford
Dillard's
Raymond
Panda Energy International
Succession Planning - An Evolving Definition"Succession Planning" as a formal concept initially related to family businesses . . .
how would the management of the business be passed down from generation to
generation? As the corporate world began focusing on the topic, it narrowly focused
on the CEO position. As time went on, corporations began realizing that the
ongoing stability of their entire senior management teams was just as important as
ensuring a plan for the CEO role.
More recently "succession planning" has expanded yet again. Enlightened
corporations are integrating succession planning in to their strategic planning
processes and corporate policies. No longer just for the upper ranks, succession
planning is the proactive management of the corporation's entire talent pool.
Integrating with talent management, leadership development and career
development programs, succession planning has gone beyond the reactionary
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replacement of exiting employees. Effective succession planning enables the
deployment of an organization's talent, on demand, as needed, now and in the
future.
Succession Planning - Current TrendsAs seen in the statistics above, executive turnover is poised to increase significantly
over the next few years as baby boomers retire. So what has been happening
recently? Consider the following:
57% of executives are in transition, and the ranks of executives who are
"employed and actively in a job search" increased to 28% (up from 22% in
2004 and 14% in 2003) (ExecuNet)
Turnover of chief financial officers at Fortune 500 companies increased by
23% from 2003 to 2004 (Russell Reynolds Associates, 2005)
The top 100 branded companies have new chief marketers every 23
months on average (Spencer Stuart)
Some of the world's leading companies stand to lose more than 30% of their
top employees (Best Practices, LLC research)
How Many Companies Have Succession Plans?Although empirical research on this question isn't abundant, the following
information is available:
67% of organizations do not currently have any formal succession planning
process (Cutting Edge Information)
45% of the world's largest corporations have no meaningful approach in
place for developing their CEO (Cutting Edge Information)
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Only 24% of organizations are confident in their ability to staff leadership
positions during the next five years (Watson-Wyatt)
Although most companies recognize the importance of succession planning
in attracting and retaining excellent employees, few companies successfully
establish a process for doing so (Best Practices, LLC)
So, what is the hold up? The demographics are compelling. Why aren't more
companies utilizing succession planning?
Challenges for Organizations Implementing Succession PlanningTime and resources are the prominent challenges cited by organizations
considering succession planning. Typically the day-to-day challenges of running the
organization overpower the organization's ability to proactively engage in
succession planning. Other challenges often occur when managers feel threatened
as they are asked to groom their successors. Predicting future needs of the
organization is another challenge.
Many organizations don't have internal career development programs in place, or
career pathways defined. Being able to quickly and easily identify internal
candidates with the necessary skills, experience and competencies to fill various
needs is a common challenge.
Automating the collection and retrieval of such data enables the implementation of
succession planning activities. By identifying skills and abilities needed for various
positions, and by communicating them to the workforce, companies have the
opportunity to proactively source internal talent, and employees are enabled to
proactively manage their careers. These actions boost employee retention.
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"CEO Succession Planning in Freestanding U.S. Hospitals"
(American College of Healthcare Executives, October 27, 2004) offers a detailed list
of challenges typically faced by organizations considering and/or implementing
Companies - Beginning to Understand the Need for Succession Planning
More and more organizations are beginning to understand the need for developing
some type of succession planning strategy. This is mainly prompted by the
demographic statistics cited above, and the upcoming need to have new managers
ready to step in for the massive numbers of upcoming retirees. "Replacement
Planning," the reactionary steps of replacing an exiting employee, is being replaced
by "Succession Planning" in forward-thinking organizations. Additionally, the
Sarbanes-Oxley legislation has also highlighted the need for organizations to have
succession plans in place for senior management.
Some organizations are beginning to require senior managers to have formal
succession plans in place for their areas within the organization.
The Case for Internal PromotionsWhen considering the potential benefits of succession planning activities,
organizations should consider the following:
66% of senior managers hired from the outside usually fail within the first 18
months (Center for Creative Leadership)
Companies with a succession plan that results in an internal hire "are less
likely to experience this negative effect on employee morale" ("Making
Transitions Work," Canadian Center for Management Development)
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So, what can organizations do to ramp up their internal mobility options for
employees?
Career Mapping and the Use of TechnologyProviding employees with information on internal career options enables them to
better prepare themselves for job changes that will benefit themselves and the
organization. Such information often consists of job descriptions, job families and
required skills/competencies. Internal job changes are no longer limited to
promotions, but many organizations are realizing the benefits of defining lateral
moves as well.
Interestingly though, many organizations are unable to easily provide this type of
information to their employees. Research conducted in more than 50 large
corporations, indicated that most corporations are not able to provide a clear
rationale or template for job moves ("Roadmaps for Developing General Managers:
the Experience of a Healthcare Giant")
The use of technology to automate this information is increasingly being used, and
provides the backbone data for succession planning activities. Additionally,
employee assessments and career development planning, along with training and
leadership development activities can be aligned with this data, enabling the
organization to identify talent from within and deepen their succession planning
activities.
When this data is aggregated, the organization is able to learn about various levels
of capability in the organization, compared to what may be needed in the future.
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Succession Planning - Increase in "Self-Selection" for Career Path PlanningRecent research findings from more than 30 leading organizations conducted by
research firm Best Practices, LLC reported the following in August 2005:
Organizations are increasingly relying on "self-selection" to not only identify
potential candidates, but to also encourage individual employee ownership
of their career paths
Best-in-class organization's succession plans are more than 2-3 levels deep
and incorporate employee value to the organization, employee market value
and predictors of exit risk
When employees take more active roles in their own career development, and
organizations define employee development and advancement opportunities, the
stage is set for succession planning activities.
Succession Planning Linked to Company PerformanceSo what are the benefits of succession planning? Employee retention is an obvious
one, along with an empowered workforce. Research does suggest that the
existence of formal employee advancement plans is linked to business
performance. Consider the following:
A study of more than 100 companies found that organizations consistently
using a formal process to help workers advance, are also consistency high-
performing firms, as measured by total shareholder return. (Hewitt
Associates, November 2003).
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Clearly challenges exist for companies attempting to plan the workforce of their
future. No one has a corporate crystal ball. But, the demographic facts do bring
some unsettling clarity to the picture. For those corporations paying attention,
strategically planning for the proactive management of their talent pool, AND
engaging their employees in the process, will result in successful succession
planning and a more secure future.
Data SourcesCompany visits. We visited each business site on at least one occasion and were
given guided tours of the company premises. We were introduced to key members
of staff and allowed to observe workers and operations. We chatted with company
secretaries and personal assistants to gain a deeper insight into the management
style and general company culture.
Company documentation. We were given access to company reports and
information on company structure and ownership. We also searched for local media
publications with respect to the individual companies. Interviews. We conducted
semi-structured interviews with 9 individuals (7 male and 2 female) from our five
different family businesses.
We sought to embrace the ambiguity of diverse meanings (Bogden and Bilken,
2003) and thus where possible interviewed more than one family business
stakeholder to obtain varying standpoints on successor selection.
In four of the five cases, we have interviews with at least two family members (the
one exception is where we spoke with a daughter, „the successor‟, after the
premature death of her father, „the predecessor‟).
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The interviews varied in length from 45 to 90 minutes and were predominantly
carried out on a face-to-face basis. All interviews were recorded and later
transcribed before being saved in the software programme nVivo for further coding
and analysis.
We believe that these data sources allowed us to have a good understanding of
each business and the family members working there. We gained insight into how
each business functioned, the general atmosphere among the staff and got a sense
of the prevailing company 10 culture. In the paragraphs below we present a brief
overview of each of the five family business cases which we use in this study
The Future of Family BusinessFamily business owners are almost uniformly optimistic about the future, but they
express more worries today than ten years ago over a host of family and business
topics. In predicting the future of family businesses, there are several trends which
appear to be imminent. Some of the great changes in store for family companies
include:
• Only twenty-five percent of family businesses in the future will be led by one family
member who is the top executive and majority shareholder.
• Family factors that affect the business are a far greater concern for the future.
• Keeping up with changes in technology is the number one concern for family
business owners followed closely by the lack of qualified employees (including
executive employees).
The Autumn 1999 issue of Family Business Magazine presented a survey from 339
family businesses. The survey builds on one from ten years prior, and provides a
new benchmark for anticipating the future of change in family companies.
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There are notable increases in the concerns of family business owners about family
factors that affect their companies. The items that showed the greatest increase in
concern for the next ten years are:
(1) the need to create a Family Council to improve family communications and
(2) financial expectations of non-active family members which could place a burden
on the continued successful operation of the family enterprise.
Choosing and preparing successor management, compensation of family
employees, and family conflict are also factors which are expected to be more
problematic in the future then they have been in the past.
Eighty-one percent of survey respondents say there are family successors to
replace the senior generation after retirement. In fact, almost two-thirds of
respondents indicate that there are two or more candidates for leadership in the
next generation. The necessity to pick and choose among multiple successors will
be one of the greatest difficulties families face in succession planning.
The number of sibling and cousin partnerships and the involvement of non-family
management is on the rise. Having multiple leaders in the next generation will
create a need for greater focus on successor selection, building consensus on the
mission of the business and the family, and the creation of new structure and tools
(like the Family Council) to manage family communication and conflict.
Only twenty-five percent of today’s family leaders expect their businesses to have
one individual as the leader of the next generation. Seventy-five percent expect
some sort of ownership structure that includes siblings, cousins, non-family
managers, etc. Seventy-three percent of the respondents indicate that there are
three or more family members active in the business.
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This leads to the practical question of how many hogs can feed at one trough? With
increasing competition and customer loyalty almost a thing of the past, today’s
business structures will have to be radically different in the future to support the
lifestyles of multiple family members involved in the family enterprise.
Even the few respondents who indicated they did not have a qualified family
successor to take over the company recognized the value of a family company as
an investment.
Fully fifty-two percent said that if they did not have a qualified family successor,
they’d turn over the management of the company to non-family professionals but
have family members on the Board of Directors. Only twenty-six percent said they’d
sell their company to outsiders as an alternative.
The family business of the twentieth century was generally led by a strong
entrepreneur who exercised autocratic management and operational control over
virtually every aspect of his company. This survey indicates that the single,
controlling owner type of family company will be a thing of the past. There is a
definite trend towards sibling partnerships and cousin consortiums as ownership
models in the twenty-first century.
What this trend means for family enterprises is that the next generation of family
business owners will not only need to be strong business leaders, but will also need
to be tactful diplomats capable of managing the challenging family demands on
their firms. The trend also implies a strong need for more structure and coaching in
managing family communications and conflict.
Objectives and Methodology of the Study
Family businesses are a traditional way of conducting business within the private
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sector. However, only recently family businesses have increasingly been attracting
more attention in public and policy discussions, both at a European and a Member
State level. The drivers for this enhanced attention are a greater awareness of the
contributions family businesses make to economic and social/societal development,
increased attention to the issue of business transfer, as well as a higher degree of
academic interest in the issue.
However, the information available on the family business sector stems from
individual research studies and experts’ opinions. As a result, it is quite fragmented
and very difficult to compare due to the different definitions of what constitutes a
family business as well as the methodologies applied. Furthermore, little is so far
known about the existing institutional frameworks and instruments benefiting family
businesses, and about their working methods and effects.
The information compiled in this report was gathered at a national level by
conducting desk research as well as qualitative interviews with relevant
stakeholders. In addition to this consolidated European report, individual Country
Fiches are available for European countries, describing the family business sector
within their national contexts.
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ConclusionEntrepreneurial activity, self-employment and business ownership results in a
significant contribution to economic activity in the GCC States. Succession is
therefore an important long-term strategic consideration in sectors where self-
employment in family business is a dominant form of employment or business
structure.
From a business development perspective, succession can be seen as critical to
the long-term nature of businesses ownership and thus has implications relating to
the form of support that is required in the small business environment.
The decision of an Arab entrepreneur in the GCC to start planning for succession
is likely to be influenced more by the following variables: age of the potential
successor, number of competent successors, number of years the incumbent is in
business, willingness of the successor to step in and the debt to equity ratio which
reflects the financial health of the business.
The conclusion drawn from the study is that succession planning is generally not
being performed. Arab entrepreneurs have fears about their enterprises' future and
have elected not to address these issues. It is likely that many incumbents
participating in this study, will continue to operate on an ad hoc basis until some
major event forces them into making last-minute choices.
Potential successors who have acquired higher education tend not to be willing to
move into the family business. Moreover, the willingness of potential successors to
step in was considerably lower than the willingness of the incumbent to let go. After
ownership changes hands, the responsibility for most aspects of management
ought to pass to the successor.
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However, in patriarchal societies like the GCC States the father is likely to provide
advice and retain a dominating role while he is physically able to do so. The study
noted that this tendency was considered by Arab entrepreneurs as a mechanism
ensuring potential successors’ continuity of the business as well as providing on-
going income for the retiring incumbent.
The key steps in the overall process of succession planning involves the
identification of a potential successor early on, and the development and agreement
of a staged succession process over an apprenticeship period particularly when
career goals of the successor and retirement needs of the incumbent become more
pressing.
Since family inheritance will continue to be the dominant form of succession in the
GCC States, an interesting point for further study would also be the impact of the
higher standard of Western education among Arab families as well as the different
life-style expectations of the younger generation on the family entrepreneurial
values and modus operandi.
An equally important challenge will also entail the development of proper training
and consultancy services rooted in the culture of the region.
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References “Sustaining Entrepreneurship in Family Business”, Mrs. Anju Das and Prof. Amit
Gupta, ISBR, Bangalore.
“Road Blocks in Enhancing Competitiveness in Family-Owned Business In India”,
Dr. Ritu Bhattacharyya.
“Indian Family Businesses: Their Survival Beyond Three Generations”, K.
Ramachadran, Indian School Of Business, Hyderabad.
http://business.outlookindia.com/article.aspx?101413
http://www.familybusinessmagazine.com/
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