Psychology of Succession Planning Guess Who’s (Not) Coming to Dinner Presented by. Dennis I. Blender, Ph.D.

Psychology of Succession Psychology of Succession PlanningPlanning

Guess Who’s (Not) Coming Guess Who’s (Not) Coming to Dinnerto Dinner

Presented by

Dennis I. Blender, Ph.D..

Every family is

unique

Every family is

uniquelythe same

BusinessFamily

Ownership

Family Business Model

2

Family Business Model

1 – Family member

2 – Staff member (non-family, not an owner)

3 – Owner (non-family member, not working in business)

4 – Family member in the business

5 – Family member/owner, not in business

6 – Staff member, owner, not family

7 – Family member, owner, in business

7

1

5 6

31

4

Business

Family

Ownership

Family Business Model

Family

• Structure

• Values, traditions

• Family system dynamics

Business

• Industry, size

• Life cycle

• Strategy, culture

Ownership

• Structure

• Distribution

• Governance

Family Businesses in

the United States

• Family firms comprise 80-90% of all business enterprises in North America.

• Family owned businesses account for;

• 37% of Fortune 500 companies,

• 60% of all public companies,

• 78% of all new jobs,

• 60% of total U.S. employment.

• 30% of family-owned firms survive into the second generation. 12% will survive into the third generation. 3% operate at fourth generation and beyond.

• By 2005, virtually all closely-held and family-owned businesses will lose their primary owner to death or retirement ( post-WWII generation entrepreneurs).

Family Businesses in

the United States

• 3 primary causes of failure of family-owned firms:

• Inadequate estate planning,

• Failure to prepare and provide for transition to the next generation, and

• Lack of funds to pay estate taxes.

• The founder’s death precipitates nearly 50% of family firms to collapse.

• Fewer than 30% of family-owned firms have a written strategic plan.

• 43% of family-owned businesses will have changed leadership hands by 2003.

• More than 25% of family firms expect the next CEO to be a woman.

Family Businesses in

the United States

• 70% of family business owners cite life insurance as their top source of funds to pay for death taxes.

• 25% of senior generation family business shareholders have not completed any estate planning other than writing a will.

• 81% want the business to stay in the family.

• 20% are not confident of the next generation’s commitment to the business.

• Of primary importance among family firm wealth holders is not only transferring their financial wealth but also transferring their values surrounding their wealth.

• The oldest family-owned business operating in the U.S. – Zildjian Cymbal Co. – founded in 1623 in Constantinople (and moved to U.S. in 1929).

Rejuvenation

Maturity

Expansion/Formalization

Start Up

ControllingOwner

SiblingPartnership

CousinConsortium

Young Business Family

Entering theBusiness

Working Together

Passing theBaton

BUSINESSOWNERSHIPFAMILY

Continuing Evolution of the Family, the Business, and

Ownership

Family Axis

Young Business Family• Adults under 40, kids under 18• Creating workable family, marriage• Work-family balanceEntering the Business• Adults between 35-55, kids in teens, twenties• Managing midlife transition• Independence of children• Facilitating a process for initial career

decisionsWorking Together• Adults between 50-65, “kids” between 20-45• Cross-generational cooperation,

communication• Encouraging positive conflict managementPassing the Baton• Adults – 60+• Senior generation disengagement• Generational transfer of leadership

Business Axis

Start-up• Informal organization structure• Simple model (one product, service)• SurvivalExpansion/Formalization• Increasing structure, multiple products lines• Evolving owner role and professionalism• Strategic planning: policies, systems• Cash managementMaturity• Stable (or declining) customer base• Well-established routines• Strategic re-focus, re-investment• Management/ownership commitment -

variable Rejuvenation• New strategic direction• Renewed commitment, leadership• Willing to change, re-direct

Ownership Axis

Controlling Owner• Ownership control in one individual• Generating capital• Balancing control with other

stakeholders• Choosing next generationSibling Partnership• Two or more siblings• Developing shared control• Defining roles of non-employed owners• Retaining capital• Controlling family branchesCousin Consortium• Many cousin shareholders• Mixture of employed and non-employed

owners• Managing complexity of family• Creating family business capital market

Common Transition

Stage

Family - Passing the Baton

• Leadership transfer

• Founder’s willingness to release control

• Next generation’s ability to assume control

• Founder – looking at retirement

• Next generation – looking to make their mark

Business – Maturity

• Examining the current state of the business

• Establishing new strategic direction

• Determining needs of the business (financial, human resources, etc)

Ownership - Controlling Owner

• Passing ownership to others

• Passing control to others

• Understanding needs of different generations

• Psychological readiness to move forward

The Family Dream

Business

Ownership

The Family Dream

• A deeply held vision of the family business in the future

• An imagined possibility that generates excitement and commitment.

• Serves as a beacon.

• Adds meaning, purpose and inspiration.

• Helps rank priorities and guides decision making.

• Individual dreams of the founder are usually connected to aspirations for the family business.

• Not all family members share the same dream

• Place to work

• Place for my children to work

• Source of unlimited income

• Opportunity for a legacy

Clandestine Planning

Common sources of succession conflict• Leadership

– Who will be next leader?• Control

– How to share, empower, distribute?• New vs. old

– Products– Procedures– People

• Sharing between the “ins” and “outs”– Family vs. family– Family vs. non-family

• Transition timing• Black sheep and the prodigal

son/daughter• “Blood” vs. marriage• Compensation

– Internal vs. external equity

The Psychology of Transition

The Psychology of Transition

Family Patterns• Traditions and values• Methods of communication• Enmeshment and disengaged• Degree of triangulation

The Psychology of Transition

Individual Patterns• Personal dreams and aspirations• Developmental stage• Assessment of skills and abilities

Conflict Resolution

Methods of Conflict Resolution - Intrapersonal

• Minority decisions• Majority decisions• Compromise• Consensus/win-win• No deal

Methods of Conflict Resolution - Interpersonal

• Withdrawers• Smoothers• Compromisers• Fighters• Problem solvers

The Psychology of Transition

Promoting Healthy Dialogue• Mutual purpose• Mutual trust and respect• Mutual communication and meaning

The Psychology of Transition

The Psychology of Transition

The Psychology of Transition

Successor Selection

1. Identify future business challenges

2. Define strategic implications

3. Develop leadership requirements

4. Gather information about likely candidatesa) Internal and external

5. Assess candidates’ capabilitiesa) Skills, abilities, personalityb) Strengths and weaknessesc) Perceptions of others

The Psychology of Transition

Successor Selection (continued)

6. Internal candidatesa) Competenceb) Time to develop

7. External candidatesa) Compatibility

8. Proceed with choicea) Implications, consequencesb) Establish time table

9. Make announcement

10. Cross fingers

Business

Ownership

The Psychology of Transition

General Observations

• Succession is a journey. To succeed, the family must keep the ultimate destination in mind.

• Succession is often driven by the biological clock.

• Transitions are normal and predictable.

• Family patterns are easy to identify and extremely hard to change.

• An active, deliberative exploration of all options and implications is critical to successful planning.

• Consider the short-term and long-term interests of the business and family members.

• Continuity planning requires anticipating future challenges and developing strategies to address them before they happen.

BCG Principles and

Approach

• The family business is the client.

• Respect and honor the preservation of the family values.

• Use knowledge, experience and observations to educate and anticipate likely results.

• Facilitate goal setting and implementation strategies without being judgmental.

• Facilitate solutions through dialogue and communication.

• Collaboration amongst professionals through an interdisciplinary approach best serves the clients needs.