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

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.

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 automaticallysomeone 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"

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).

Nature and Method of study This 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

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 Trends As 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)

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 Planning Time 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.

"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 Promotions When 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 Technology Providing 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 Planning Recent 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 Performance So 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 highperforming 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 Sources Company 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 Business

Family 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 todays 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, todays 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, theyd 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 theyd 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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Conclusion Entrepreneurial 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 ongoing 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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