Many entrepreneurs generate enormous wealth that they want to pass on to their children and grandchildren. They are not yet a family business, but they want to be. They want wealth to be put to good use, and for their business and investments to continue to add value. But the mindset that has led to their success often undermines their openness to the changes needed to continue their business into a second generation. This is the dilemma of the next generation: how do subsequent generations preserve the legacy of the founder? and continue to build a successful family business?
Business founders often fall into common pitfalls that hinder their continued success:
- They become so confident in their own superpowers that they stop listening to others.
- They feel like they’re the only ones who know how to run the business, so they’re not willing to quit or let go.
- They expect growth to continue and do not anticipate any major change.
- They want to find a successor like them who will run the business as they have.
- They seek out advisors, executives, and even family members who don’t challenge them.
- They want their kids to repeat their journey of “doing it on their own.”
- They assume that to be ready for the future is to continue things as they were, because, after all, they have been hugely successful.
This poses a huge problem for members of the next generation, who often see that major business changes are needed. As the elders developed the business, the rising generation often learned, traveled, worked for other companies, discovered new opportunities and possibilities, and took active steps to prepare to enter the business. They have a lot to offer, but the behavior of founders can be frustrating and can lead them to feel that their voice is not taken seriously. When they clearly see the need to innovate, how do they overcome the avoidance and reluctance of their elders?
For example, one family I worked with had developed a huge real estate portfolio under the leadership of their entrepreneur father, now in his 80s. Four of his seven descendants, in their 40s and 50s, worked in the company, but felt unable to talk about new directions, while others worked elsewhere, sometimes in related fields. They knew the business and their relationships needed work. They wanted to meet to think about how they would work together after their father died, but he told them they shouldn’t. Were they children, who had to obey their powerful and prosperous father? They decided to meet anyway and informed their father. They considered renewing the business, new acquisitions, how much cash they wanted in their lives, environmental concerns, and the impact of their buildings on their small town. They were content to wait for their father to pass, but they wanted to prepare for the major changes they felt were necessary in the way they did business.
I interviewed older and younger family members of 100 top global family businesses that have thrived beyond their third generation, asking them, “What have you done to overcome these founding tendencies? How did you set the company on a new path? Successful families realized that their business would not just continue to grow, so they had to consider whether it was time to sell the inherited business or start new ventures. The ancients may not have been ready, willing or able to do this, but it had to happen. Intergenerational success depends first on overcoming this obstacle.
How could they accomplish this? These successful companies had a unique resource, which does not exist in non-family businesses: their rising generation. This generation – who grew up in the founder’s shadow and expects to inherit ownership and leadership – often has no formal power, but it does have moral power and influence. They usually find ways to intervene and persuade elders and family to change.
When I asked these families who was responsible for their most significant changes, they indicated that two-thirds of the changes came from members of the next generations, who took the initiative and had the support of their parents. Many families reported that a major shift in their family culture occurred during their second or third generation, a transition from success in a single company to a multi-faceted collaboration that included diversification, significant innovation and a redefinition of the company. Typically, the family continued as a shared entity, but the business itself took on a very different form. This huge change did not come from above, but largely from the initiative of the younger generation.
To sustain a long-term family business, clearly having a founder building a great business is only the first step. Successful families need a second transformation, when the second and third generation redefine the business and develop new opportunities. Unlike the founding generation, their reality is that they need to cooperate and develop a structure to work together to seek out and develop multiple opportunities. The resulting challenges are often not fully understood by the founder, so successive generations must either gain the support of the first generation owner or grow on their own to prepare for their succession.
My research revealed that the rising generation generally did not wait for permission; they took the initiative. After all, it was not a problem for the founder, it was their problem: how could they continue the legacy they inherited? They came together and took action, organizing major change. As millennials or members of Generation Z, they grew up in a digital and connected world, receiving a much broader education than their elders. They looked to the future and shared their concerns about what needed to change in their business and how the family could work together to implement the changes they felt were necessary.
Three structural innovations, in particular, made it possible to move from simply pursuing what had succeeded in the past, to preparing and anticipating how to meet future challenges:
Active engagement with the company.
The new generation must be informed and involved in the company. If they expect to become owners, whether or not they work in the business, they must be prepared to exercise oversight as responsible owners. It starts with sharing information, but the sharing must be active and the communication must be two-way. Transition and change can only happen if everyone is aware of what is happening. As potential owners, they want more than financial information; they want to know the values, policies, practices, strategic objectives, capabilities and threats on the horizon.
Active learning can take many forms: younger family members, although not ready to join the board as full members, can be invited to be board observers. It’s like an apprenticeship, where they can meet and learn from family and non-family board members and learn about the challenges facing their legacy business and their other shared businesses. Other families create what they call a “Junior Board” that meets regularly with key leaders to learn about current business challenges. A junior council tackled a current problem each year and wrote a report with their recommendations for solving it. Many of their ideas have become major innovations. These opportunities have allowed young family members to come up with ESG and sustainability values that they believe should be embedded in the business.
Mentoring and development programs, with clear criteria for governance roles.
To become leaders, young family members must develop their capacities. The family must invest in their development and provide them with opportunities to use what they have learned. In the example above, young family members were encouraged to develop their skills through coaching, assessment and education programs paid for by the family. Becoming a successful business owner and inheriting the family wealth that came with it brought enormous responsibilities that made it prudent for each family member to develop business skills and consider playing a role in family governance; they could not be passive spectators.
Corporate and family governance roles have been clearly defined, as have qualifications and selection methods. Family members were told to prepare to take on these roles, and the family had a clear plan for bringing in the next generation. It was all part of an active program of education and family development.
The creation of a family bank.
Family businesses often have investment funds, and many of the younger family members I interviewed have been able to participate in decisions about portfolio construction, for example, to reflect ESG values. Additionally, there was a process for family members to bring business ideas, and even their own businesses, to the family. As some families sold their inherited business and became investor families, the younger generation was given the task of leading the family into new investment opportunities. In some families, the older generation took care of the inherited business, while the rising generation became social investors. This opportunity was offered with appropriate checks and balances, often involving non-family counselors to help ensure the efforts were successful. Younger family members could access family wealth for entrepreneurial ideas, but they were also held accountable for how it was used.
As the legacy business and entrepreneurial leadership of the founding generation gives way to a new generation, they enter a transition from a single leader with a thriving business to a new era where there are multiple related family owners, and often have to create a path to reconsider what business they are in, what goals to develop and how they are going to do it. The second transition is usually assumed by members of the second and third generation, who themselves become entrepreneurs and pioneers. Their leadership is less visible than that of the founder, but no less important.
Growing a family’s wealth doesn’t just happen by circumstance, or by emulating the success of the founding generation. Each new generation of a business family must reinvent themselves, and reinvention happens from a group of capable, committed and collaborative next-generation owners. The older generation must groom them, then trust them to continue the legacy in their own way. When they are ready to be leaders, the family heritage can continue to grow from one generation to the next.