Are you equipped to handle to soft issues in your family business?

It’s often said that succession is a mix of “hard” issues—like estate and tax planning—and “soft” issues—like choosing a successor to the current president.  Most family business advisors are well equipped to help senior generation leaders walk through the complexities of the tax code and find a “tax efficient” means of passing stock to the next generation.  Yet the most difficult issues, the ones that represent the greatest danger to the future of the business and the unity of the family, are the “soft” issues.  Unfortunately, few of us are equipped with the tools necessary to manage an effective leadership transition.  

I tell senior generation leaders that succession is about strategy and that strategy is about conversation. Succession strategy requires honest and direct conversation with potential successors about their strengths, their weaknesses, how they impact the organization, and what is required for them to grow into a new level of leadership.   

My friend Mike is 68 and owns a great marketing and logistics management firm.  His four adult children work in the business, and because he and his wife love them all equally, all four children are paid the same.

Everyone in the company would acknowledge that Mike’s oldest daughter is the most capable successor in the company, yet the family has yet to have conversations about succession.  And they never discussed the resentment created by having four family members paid equal amounts. Why does Mike avoid the issue?  One word: FEAR. And he has good reason to be fearful. 

Mike had a painful split with his younger brother 30 years ago and has only recently begun speaking with him again.  By paying members of the next generation equal amounts, Mike and his wife have avoided difficult conversations about merit-based pay and accountability for performance.  Three of the four successors work very hard, but the youngest, John, plays golf nearly every day (family members joke that he has 18 appointments every afternoon) While John maintains that his golf game is an important part of client development, there’s no real discussion about his performance.   The result is resentment among the siblings and a serious succession problem for Mike.  

The “solution” to Mike’s problem is clear:  promote your oldest daughter to president, introduce a compensation system that rewards family members for their contribution and value creation, and tell John to shape up or ship out.  Unfortunately for Mike, this requires a difficult series of conversations with the family and real conflict…Mike’s greatest fear.

Mike’s strong desire is to do nothing, but he realizes this simply defers a major conflict until his death.  So how does Mike manage his own leadership succession when his family is ill-equipped for the difficult conversation that is succession strategy? 

Here’s my advice for starting the conversation:

1.          Acknowledge the clear facts.  This sounds like an over-simplification, but it will provide immediate relief to those who feel the pain of the situation, but see no resolution.  In Mike’s case, it might look like this:

a.         I am 68 and we need to talk about my succession.

b.         Eventually, one of you will succeed me as president of the company, which implies that one of you will be the boss.  We need to discuss how this will happen.

c.          Up until this point, we’ve paid all of you the same, yet you do not all perform the same functions and each of you create different kinds of value for the company.  While I view you equally as my children, you are not all equal as business leaders—and your performance is not equal. 

d.        Paying you all equally created resentment.

e.         I’ve avoided these issues out of fear of the conflict it will cause between us and between you as siblings

f.           I love you all and want to work this out before it’s too late and you’re forced to do it without me.

2.        Create some rules for how you’ll discuss these difficult issues.  Steve Spinelli, President of Philadelphia University, often says that “entrepreneurship is a full contact sport.” In the case of an entrepreneurial family business, there is double the contact.  As with any contact sport, rules are required or things get out of hand.  Mike and his family need to agree on the rules for how they will talk to each other.  Some suggestions:

a.         Stay in the room.  The family should agree that no matter what, we'll continue working together until we figure it out.  We will not storm out when it gets difficult.   Open heart surgery is difficult and painful, but walking out in the middle of surgery is never an option.

b.         Learn to ask questions.  The only hope we have of influencing others, of being heard, is if others believe we’re truly listening to them… that I am truly working to understand their perspective.  The best way to demonstrate that I’m listening is to ask questions.  So rather than offer an immediate response to a comment, ask several questions to ensure that you really understand what the person is saying.

c.          Approach conflict, but do so without the anger or aggression.  Most folks, (men) tend to get loud and angry when confronted with a perspective that challenges how they view themselves.  When voices are raised, when folks become aggressive, we lose because listening stops.  Learning to speak honestly and assertively, without aggression is difficult and requires discipline, but it is the only shot we have of being heard.

3.         Discuss key leadership transition principles.  Begin the conversation with questions such as:

a.         Opportunity vs. entitlement:  Is leadership of this company the right of a family member, or is it an opportunity for a qualified family member?

b.         Stewardship vs. self-interest:  What are the implications of acting out of self-interest vs. acting as stewards of our business?

c.          Meritocracy vs. equality:  Do we believe in merit-based pay and promotion, or should all family members have equal pay and roughly equal responsibility?

d.        Freedom vs. obligation:  Are family members free to pursue their individual interests and passions, or are they obliged to work for the business?

e.         Accountability vs. impunity:  Do we believe in holding working family members accountable for their performance?  If so, how?

4.        Process vs. Person.  Agree on a process of developing your talent, evaluating that talent, and choosing a successor—rather than focusing on “who” will be the next president.  Ideally, bring on a Board of Directors or Board of Advisors to help manage the succession process.  In this way, the senior generation leader is relieved of “choosing” one child over the other, and the process is professionalized.

Why is succession so difficult?  I think the reason is because life is difficult—and the relationships in our lives are difficult.  At its core, succession is about conversation, deep, honest, and difficult conversations with those we love.   It can create disappointment, pain and conflict, something we all like to avoid.  Yet, with practice and discipline these conversations can be productive.  

In summary, as you enter the succession process, define some rules for how you will talk with each other, define the principles that will guide the overall process, and, if possible, seek some outside guidance (a Board of Directors or Advisors) to help you manage the transition.