Generation next: choosing the leaders of tomorrow

Passing the baton in a family business can be a complex and contentious issue, but whether a business is growing in scale or planning for the next generation, the question of leadership is one that needs to be addressed.

Recent findings from the Family Business Barometer, an annual survey of European family businesses conducted by KPMG, reveals the majority (76 per cent) of Irish family firms intend passing the business to the next generation.

"Leadership is a vital aspect of any business, however, the added dimension in a family business is whether they feel it is necessary to have a family member in a leadership role," says Ken McCracken, Family Business, KPMG in Ireland.

“If so, how do the family balance this desire with the needs of the business? Especially if the talent in the gene pool does not exactly match the needs of the business,” he says. Keeping it in the family is certainly not a given, with 29 per cent of Irish family businesses consulted in the Family Business Barometer saying they are considering the appointment of a non-family CEO.

Whether choosing a family member, or looking outside the family, businesses facing this decision can expect to face a unique set of challenges.

“Picking a leader for a family business is much harder than in a non-family business,” says Paul Keogh, a family business consultant who has more than 30 years experience working with family firms in Ireland and around the world.

“For years, the eldest son was the automatic choice, irrespective of ability to lead. This is still the basis for selection in China and many parts of Asia. Up until recently, in many family businesses, the sons were encouraged to join the business and the daughters to follow less demanding roles until they got married. This is also changing,” says Keogh.

‘Which child to pick’

“Deciding which child to pick can be very difficult and the most qualified to lead the business does not always get the job. Many family businesses also find it hard to face up to the possibility that none of their children might be able to run the business – this might be seen to the world as a slight on the family name.”

To navigate through these difficulties, many family businesses have introduced a more formal structure to employment, rather than passing on a leadership role automatically.

“Family members should work outside the business for at least five years and should be at least at middle-manager level before being accepted into the family business,” says Keogh, who points out an unhelpful trend of next-generation family members working while travelling as a way of garnering experience.

“This is not management development. They need to work their way up an organisation from trainee to manager to feel any sense of achievement before joining the family business.

“Equally important, they should never join the family business straight at director level,” says Keogh. “Leadership positions should be advertised and an independent selection committee put in place. Family members should apply like everyone else and get the leadership job on ability and experience.”

The establishment of a formal structure for employing and designating leadership roles is echoed in much of the research around family businesses, as is the need for professional training and education for would-be leaders.

Ian Smyth is a lecturer in human resource management at Ulster University, and a founding member of the NI Family Business Forum. “Some of the research we have conducted at UU points to the development of learning capital in the next generation to be an absolutely critical component of the succession dilemma,” he says. “Whether it’s the next generation spending time away from the firm before they actually join, gaining a qualification to legitimise their learning, to getting a mentor to help develop their career – this is vital.”

Another finding of KPMG’s Family Business Barometer report was the potential for inter-generational clashing in family businesses, as senior generations are living and working longer, and younger generations struggle to establish their positions. The longer working life of the senior generation in the firm can result in a beneficial, gradual exchange of leadership roles if structured well. But if unstructured it can also lead to conflict and complications.

“Conflict occurs when there isn’t clarity around people’s roles, responsibility and authority in the business. For a firm to grow and become more ‘professional’, decisions need to be made with the business first,” says Smyth.

‘Inevitable conflict’

“But all too often, family comes first which leads to emotional attachment and the inevitable conflict that comes from it. Worse is when family members feel they should have a say in running the firm when they have neither an ownership stake or are responsible for the day-to-day management of the firm.”

“To avoid this, firms need clarity, professionalism and clear communication,” says Smyth, who points to the benefits of creating a family business charter. “When family businesses put in place clear guidelines for family involvement in the firm, this can help to avoid a lot of those awkward situations that can come about when clarity is in short supply. This governs everything from what it takes to join the firm, what is expected of you if you take a leadership role, what being a shareholder means, and also what it means if you are a family member that has an emotional stake in the firm, but no ownership or management responsibility.”

Whether keeping leadership in control of family members or looking outside the family to fulfil leadership roles, it seems clear that family businesses who prioritise the business over family have a better chance of seeing the firm successfully pass on to a new generation.

“The best family business owners and managers aren’t afraid to hire beyond their skillset, and their ceiling should be the next generation’s floor in many ways,” says Smyth.