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What If the Successor Isn't Working Out?*

by Jane Hilburt-Davis

If the next-generation member you chose isn’t right for the job, the family and business are affected. Here’s what to do.

Imagine choosing a successor -- a son, daughter or other family member -- and later realizing that person isn’t the right one for the job. You lie awake worrying about what will happen to the business unless something is done soon. But you’re also worried about the effect on the family. How can family harmony be preserved with such an upheaval? 

First, let’s look at why that happened. It’s probably the result of several factors. A desire to keep the family business in the family (and the majority of the respondents in the 2007 American Family Business Survey said that was their goal) may have overruled a more appropriate choice. And you may have put off making the decision for too long. The 2007 survey found that “among family business owners who expect to retire in five years, fewer than a third have chosen a successor.” There reasons for this may include a lack of qualified candidates, inability to choose among siblings, failure to provide the succeeding generation with career development and training, reluctance to face retirement or the next generation’s lack of interest in the company.

Second, why has it you taken so long to face the situation? One reason is denial that the heir apparent is not really working out. You keep hoping that he or she will improve. Another reason is fear of the consequences in both the business and the family. And a third is lack of confidence in a process that stands the best chance of keeping both company and family on the right track.

I want to emphasize that things won’t improve. (As my plumber admonished me when I ignored a small drip that finally flooded my kitchen, “You know leaks don’t get better on their own.”) You need to face the reality of the situation, and correct it fast. This article offers a process to deal with this and move forward.

Joe’s sticky situation

Consider Joe, a 70-year-old founder of a successful multi-state wholesale and distribution company. He knows he made a serious mistake. Five years ago, on his 65th birthday, he announced that his daughter, Natalie, then 43 and vice president of finance, would step into his position as president. She had worked at the company since graduating from college, was loyal and, according to her father, “watched the money like a hawk.” She worked harder than anyone, even her dad, and understood the business completely. Her only faults were that she was “a little gruff with others” and not really people-oriented.

In spite of these flaws, Joe thought Natalie could “grow into the job.” The board asked him to consider other options, but he saw no reason to do so. Now he regrets not having taken the board’s advice. Her “small flaws” have worsened. She’s more abrupt than ever, is poor at delegating and has alienated contacts Joe worked hard at building over the years. A key executive has quit, and a second is threatening to resign. Morale is at an all-time low, and Joe realizes the responsibility rests with Natalie.

To make matters worse, Joe’s wife, Helen, is vehemently opposed to his firing their daughter and says the problem is Joe’s fault. She claims he’s never provided Natalie with the support, mentoring and resources she needed. Natalie’s younger brother, Ted, a lawyer working at a firm in the city, has been concerned because Natalie seems stressed and unhappy.

Joe feels guilty because he realizes that he should not have sidestepped the board, and he should have given Natalie honest feedback over the years. He’s also angry that Natalie has failed at the job and put the company at risk.”

Five steps for moving forward

Joe’s painful experience emphasizes the importance of a sound, rational succession plan. But now that the damage is done, what should he do? The following steps highlight not only what to do but also how to handle this. Both elements are critical in a sensitive family business transition.

1. Make sure you’ve tried everything to improve the situation. First, ask yourself, what role, if any, you have played in the failure. Have you stepped aside gracefully, offering support and advice only when asked? Have you given it enough time and invested enough resources in developing and supporting the new leader? Have you provided coaching and sought help from your board? Have you allowed the board to monitor and evaluate the new CEO? You also must consider whether you handed over a “mess” that anyone would have difficulty with. I always insist on a thorough assessment of the situation and the successor’s potential for change before a client in this situation moves to the next step.

2. Face the facts. If the assessment indicates there is little hope for change, the time has come to begin the transition process. Don’t waste any time once you’ve come to this realization. The next step should be a frank and direct conversation between you and your successor.

For example, Joe should sit down with Natalie and talk with her as a daughter and as a president who is being fired. I always suggest that a third person be present to help facilitate, defuse the emotions and bear witness, if needed. That person could be a board member or an adviser -- someone both of you know, trust and respect. The goals for this meeting are to: (1) get things out on the table; (2) agree on a fair process and transition plan with a timetable; (3) discuss what the successor needs to save face and exit gracefully; (4) create a plan to deal with the family and, eventually, employees and outsiders.

Generally the person being fired is aware of the situation and may in fact be relieved. One son-in-law who was asked to step down told me, “I don’t like it, but if the process is fair, I can live with it.”

3. Make a ‘parallel plan’ for the family and the business. Treat this as a crisis, with the two parallel rails of the track being the family and the company. Strive to avoid the third rail: a failed company plan and family strife. Family councils are the ideal milieu for dealing openly with sensitive family issues. In fact, I have found that families often do not begin dealing with tough family business issues like this until they have created a family council or other safe, structured environment. The goal is to help the family understand the reasons for the changes, and to ask for their support during this period of transition.

In Joe and Natalie’s case, they had agreed at the first meeting on how to tell the family and what to ask of them. The family had dinner together, and Joe and Natalie presented a united front on the transition plan. They asked for Helen and Ted’s support and understanding. A positive result of the situation is that it prompted them to form a family council.

To address the business issues, Joe and Natalie met with the board. The board members were relieved, although they wished the change had been made earlier. They formed a search committee to find the best candidate for the job. Key company executives were informed but were asked to keep things confidential until a few weeks before the new president (a non-family member) came on board. Natalie negotiated a fair compensation package and took a sabbatical before deciding what to do next. (I have had several client situations in which the fired successor stayed on in the company. Each of these situations has worked out because they moved to jobs that fit their skills and had clear roles and responsibilities.)

4. Do it right the next time. Much has been written about the right way to plan for succession and leadership selection. Do it right the first time. Effective succession processes produce successful successors. Involve the board, align the choice of the next leader with the company’s strategic plan, and avoid those third rails of selection: loyalty, birthright, primogeniture, etc. Create a family hiring and employment policy to promote a culture of meritocracy. Problems can be avoided by sound, rational planning and a rigorous, objective search and selection process.

Denial postpones the inevitable

Family businesses are complex systems. A decision in the business affects the family, and vice versa. The choice of the wrong successor can have lasting destructive effects on the successor, the business, the shareholders and the family. Denying the problem, hoping it will get better, refusing to face the fact that a mistake has been made or avoiding the consequences of a difficult decision simply postpones the inevitable.

You must deal with the situation quickly and in an open and fair way, to save face for the successor and obtain buy-in and support from those who have been affected. There is no guarantee that this will go smoothly, but a fair process, involving the family and the board, offers the best hope for a successful transition. Of course, it’s best not to make the mistake in the first place, but it you have, begin now to correct it.                    

*Originally published in Family Business Magazine

 

 

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