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Chaos as a catalyst! for Succession in Family Owned Businesses

Chaos as a catalyst

COVID-19 – is it just what the doctor ordered for succession in family business?

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Chaos as a catalyst

Article by

Pyumi Sumanasekara

 

Family businesses are and have always been the bedrock of the economy and statistics highlight this fact as 70 to 90 percent of GDP is created by family businesses globally. Majority of Sri Lankan businesses in key industries be it small or large are owned by families with the exception of regulated and government owned entities.

In challenging times family owned businesses are even more important in the economic and social context. Their contribution and ability to resist economic turbulence is much higher due to the unique nature of the family ownership and its emotional strength. Yet an often cited statistic of 30:13:3, which means 3% or less survive beyond the third generation shows the direness of generational continuity.

However, companies such as Rémy Cointreau (French), Bonnier(Swedish), Sonepar(French), Henkel AG (Germany), Wipro(Indian), Sabanci Holdings(Turkey), are some great stories of how families in business have managed the succession process successfully for many generations.

Research over years have shown that, transition to the next generation is a fundamental factor to determine their fate, between the 3% and the 97%.

Accordingly managing the ‘passing of the baton’ effectively through a strong succession plan that maintains family harmony and business continuity whilst complex, is central to the success of a family business. Sri Lanka also has many family businesses, from small corner shops to large MNC’s that are transitioning from one generation to the next. The succession journey is challenging as families in business face predictable emotional and business issues. The needs of the business and family diverge as the business life cycle and the family cycle evolves.

To be effective the succession process itself requires very clear communication, a transparent process and a clear managing of expectations. There are unique challenges that successors and incumbents face in the succession journey that breakdown communication and in turn expectations. These could be between family members, between the current leader and the successor, and even with employees. A structured succession process can help in mitigating these breakdowns.

For families who haven’t embarked on this difficult but necessary succession journey amidst COVID-19, the resultant chaos, the uncertainty and darkness may lead to a window of opportunity: a catalyst to assist the pain staking obstacle course of ‘passing on the baton’ in a family owned business?

Unity in Crisis

Let’s face it – parents and children don’t communicate very well! Age old battle of the generations. “I’m in the business to establish myself” vs. “this is my baby and it will go where I believe it should” – the lack of a shared vision and purpose in families disrupt succession, creating an even bigger gap to be bridged in the succession process.

However, during this crisis we have seen a primal instinct uniting generations. It is in the core of the human response system to unite when the family unit or wellbeing is threatened.

Shared purpose of ensuring the survival of the business and protecting family have brought generations closer together. Hence, this is a unique time where interests are simpler and singular, focused on the survival of the business. This provides a window of opportunity to unite successors and current leaders to work together. The converging interests build a bridge between generations with chaos as a catalyst for succession.

TwoWorld’s Unite! (Worlds of “this is how we do things” vs world of “we must evolve”)

“His thoughts are old and redundant, why can’t he see that we must evolve!” in contrast “my children have their head in the clouds, dreaming about the future, they are not ready!” are commonly heard views between generations. Such dynamics create a more ‘tug-o-war of the baton’ than the desired ‘passing of the baton’. The founder's apprehension reflects on the slow potential growth (Gallo, Tàpies, & Cappuyns, 2004) because of the misfit between the perceived values of knowledge that generates a distance between the founder and successor.

Amidst the chaos and the crisis at hand, business survival has demanded agility and innovation whilst simultaneously maintaining a conservative take on evolution. Businesses that are proactive in embracing technology and newer business models are grasping opportunities. However, the need to maintain healthy cash reserves requires patience, caution and foresight.

Family businesses have the perfect recipe that blend these needs together but alas communication and trust whipped up by emotion, disrupt! Families in business who are lucky enough to be in a structured process may experience the harmony between the older generations’ patience, caution and foresight and the complementary, innovation and ‘knack’ for the new, from the next younger generation.

It is an opportunity for the younger generation to provide significant input to the business and contribute to the legacy. This unique time allows both generations to feel that the other has an important perspective and role which is the another element in building a bridge between generations to assist with succession. Again with chaos comes a catalyst for succession!

Breaking Barrier

Another element of the family dynamic in a successful ‘passing of the baton’ is the successor’s integration with the employees.

With chaos in the environment most businesses are working ‘with all hands on deck’. Owners, managers and family members have rolled up their sleeves to keep the engine running. Businesses that have taken a “we, us and ours” approach to business in crisis give successors, an opportunity to work with employees as peers in a high pressure environment building a camaraderie. Breaking through traditional boundaries, hierarchies and allow successors to integrate into the business as leaders, whilst understanding the pulse of the people.

This new work environment removes the divide between the younger generation’s need of acceptance and the older generations need for the newer generation to feel and be part of the people. This in turn is another element that is an opportunity to build a bridge between generations, and the successful ‘passing of the baton’.

Dream Vs Reality

We must appreciate that chaos may not solve all challenges involved in a succession process as it requires planning and carefully navigating through a set of complex levers. But COVID-19 and all its chaos has provided families in business a window of opportunity to unite with a shared interest, shared perspective and value each generation’s contribution.

For those families in business, who are willing to take reality returns, the leap of faith to embark on a structured third party led succession process, the conducive nature of the environment may act as a catalyst.

COVID-19, in that case may just be what the doctor ordered for to embark on the journey of a smooth and successful ‘passing of the baton’! On the other hand without a systematic succession plan put in place, the shared interest, shared perspective and the removal of the divide between generations that COVID-19 has provided will be only a dream as the chaos settles and reality returns.

© 2020 KPMG, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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