An evergreen issue for family businesses is preparing for succession. And now, more than ever, this issue has many complexities. With more and more children of entrepreneurs being educated abroad and developing their own career aspirations, it is critical to think about the issue of succession early and develop a strategic plan. We talked with Zurich Institute of Business Education CEO and President Philipp Boksberger and Professor Oliver M. Rui of CEIBS (China Europe International Business School) to find out what entrepreneurs should be thinking about.
Family businesses make up about 90 percent of the world’s companies, playing a very important role in the economy throughout the world, particularly in the Middle East and Asia. They contribute up to 80 percent of GDP in Middle East countries. In China, they contribute more than half of GDP and employ around 80 percent of the total population, not to mention contributing more than half the total tax revenue.
Deciding who will take over
For many family businesses, the first choice is to pass the business on to a son or a daughter. With smaller families, however, the choice of a successor is limited. Rui notes, “In China, most entrepreneurs have one or two children. Their children are likely to study overseas and may be reluctant to return and take over the family business which is mainly labor-intensive manufacture.”
Keeping the business in the family is not always the best decision for the family or society. Rui says, “To enable the business to contribute to the economy one should pick the right successor, which may not be a son or daughter. Most family business owners want to pass the business to their children, but this is not always the best. The owners should balance between merit and blood”
There are other options that keep the family involved without having the next generation lead. Many families choose to appoint professional managers to take over, allowing their children to be board members and financial investors. Rui counsels, “There is no universal solution. Each family should have its own solution. No matter which succession options, the owners should establish the corporate governance mechanism as soon as possible. It will change from rule by man to rule by system”
Governing the family
The decision about who will succeed is the tip of the iceberg. Boksberger has seen many families go through the process. He cautions, “What’s important is to start thinking about succession at as early a stage as possible. Don’t wait until you’re 50 or 60. It’s a long and complex process – if you want to do this successfully you have to plan.”
Rui advises separating family and business: “Think about your family governance, develop your own constitution, organize family meetings to discuss important issues and invite advisors to deal with conflicts within the family.” To help, CEIBS is starting programs to help the family business have their own family governance structures.
Boksberger says that there is much to learn from the Swiss tradition of multi-generational family businesses (many in their sixth generation): “Our role is to support family businesses with this process, creating positive governance structures and helping to determine what can be outsourced to professional management.” The Lorange Institute partners with experts: “Swiss banks have experience working with established families. This allows them to share information during this transition phase in China, where many family businesses are experiencing the generation handover for the first time.”
And if the family decides to hand over the reins to a son or daughter? Rui notes that in China, loyalty is to people, so it is crucial that the next generation has a chance to develop leadership skills. He advises, “If your child is interested, train and nurture as early as possible. Don’t wait until after graduate school.”