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Family business founders can build large empires spanning across many industries bringing prosperity to their families and associates, and yet they will all still inevitably face the same question: “How can we manage succession in a fair manner?”
Companies are not like apples that can be sliced into equal parts and then distributed evenly among the number of successors. Different turnovers, different profits; different future growth projections; and therefore, different valuations greatly impact the way succession must be managed. The next generation members of the family business will also have different aptitudes and attitudes, IQs and EQs, capabilities and capacities, all of which must be compatible with their inherited business in order to avoid square pegs in round holes. This is where the family business founders who reach the end of their working lives, come to a “decision making crossroads.”
The large Birla Group in India was built with care and at a considerable pace over a span of 40 years by the great entrepreneur G D Birla. Before he passed away, he carved out 4 sections of the company anticipating succession. The sections were not split equally because he took into account the capabilities of each of his sons. Interestingly, he broke his own rule regarding fairness and gave a fifth share to his favourite grandson, in whom he saw a reflection of himself. Thirty years later, all the sections are either coasting along or drowning except the one headed by his grandson, which has grown by leaps and bounds. In industries such as aluminium, carbon black, and polyester fibre, Birla Group is now among the largest in the world. Ultimately, the allocation which was “close to fair” for the sons, was not fair to the employees, the shareholders nor the community. And yet, the owners (and certainly the founder) did owe an obligation to these three groups as well!
And that does not include the customers – a stakeholder that cannot be forgotten especially when Peter Drucker repeats that “the only purpose for the existence of a company, is to create and keep a customer”. In all the concentration and confusion of sharing the wealth of the corporation, the main segment that helped create the wealth was somehow ignored.
There are many corporations that have disappeared by the third generation through fragmentation which was executed to satisfy “fair distribution objectives”. Therefore, it would seem that the distribution of share holding (rather than operational control) as wealth; and the delegation of management to professionals who occupy positions based on “meritocracy”, rather than on “genealogy” – may seem to be the best solution!
The entrepreneurial gene may be transmitted from one family generation to the next, like in the case of Aditya Birla, who created a castle from the small mansion that he had inherited. Or there may be an L N Mittal, who took his share and parted from his steel maker father and family, to start operations in Indonesia, and gradually became known as the steel king of the world!
But these are exceptions – and may their kind increase in numbers! For the rest of family business leaders facing succession, they must look to solutions that are fair to all stakeholders and that will help bring the corporation to the levels of success that it deserves.
