Approximately 90 percent of all companies in the United States are owned or controlled by a family; more than half the people in this country work for one of them. History has proved time and time again that many of these businesses don’t survive when being transferred from one generation to the next. How can clients have a successful transition and keep the family business alive? A new report by Bank of America, U.S. Trust, in partnership with the University of Virginia’s Darden School of Business, provides some well-sought advice on cultivating human capital, financial capital and innovation across generations.
Human Capital
How leadership deals with the asset of human capital plays a key role in successfully preserving family values in the business culture, even as the company transitions from one generation to the next. No preferential treatment towards family member employees, and even having family members’ performance reviewed by non-family member employees, is one method that helps align non-family employees’ interests with those of the company, according to the report. Current leaders also need to realize that it’s sometimes necessary for a non-family member to step in as CEO to preserve the business. Additionally, the report suggests adopting a stewardship theory of leadership: trusting employees to perform and regulate their own tasks, emphasizing collaboration and intrinsic rewards, such as trust and reputation, rather than self-serving rewards such as bonuses and stock options. Communication with non-family stakeholders, as well as within the family, is crucial to the business’s survival and prosperity as well.
Martin Davidson, senior associate dean and global chief diversity officer, Johnson & Higgins Professor Business Administration, at the University of Virginia’s Darden School of Business, also discusses the importance of diversity. However, the diversity he emphasizes that can help achieve a company’s strategic goals isn’t the type of diversity that first pops into mind—the diversity he’s referring to is different perspectives. Whether it be detail orientation versus big picture thinking or boomer versus millennial, “skillful leaders encourage their employees to express differences, negotiate conflicts and come to productive solutions that move the business forward,” says Davidson.
Financial Capital
After defining family and establishing a clear understanding of the key stakeholders in personal investment and business decisions, it’s necessary to take into consideration how much of the family’s personal resources to integrate with its business resources. According to the report, establishing a family constitution is vital. The constitution can serve as a roadmap for the eventual transfer of wealth, providing “a forum for the family to outline its values, and determine the extent to which and structure by which, it exerts control over those values through the management of its financial resources and investment in its future generations.” Consideration must be given as to whether the business wants to provide for the pursuit of personal or professional passions, which, sometimes, could ultimately translate to future growth in the family business via innovation in unforeseen ways, as the younger generation may not necessarily be looking to go into the family business.
A founder also needs to consider how much voting and cash flow rights he’s willing to relinquish to others, particularly when transitioning the business to a new leader in the family. Retaining the ability to steer a company needs to be balanced with cash flow rights or bonus structures to align a new leader’s interests with those of the company.
As with human capital, aligning financial capital with the local community is important. Not only does being a socially responsible company help with talent recruitment and retention, giving-back through philanthropy and impact investing helps build long-lasting relationships with the community where the company operates, which can help the business withstand moments of hardship and adversity.
Creating a family constitution, an estate plan and a business succession plan that can effectively help the business and family grow is, of course, where trusted advisors such as wealth advisors and estate planning attorneys step in.
Innovation
Technological advances and what the report identifies as the Smart Machine Age are making it necessary for companies to update their mindset and behaviors and embrace such disruptive innovation to stay ahead of the competition. This is certainly readily apparent to advisors and estate planners working with millennials. Much like financial advisors need to keep up with the times to keep younger clients happy, businesses need to embrace technology—not only in their products and services, but also in operations and management (this circles back around to retaining employees).
Yet, in the age of digitalization, many companies stand to profit from promoting human excellence and emotional engagement. Have you ever dialed customer service, only to become further frustrated when a computerized operator can’t resolve your particular issue? Retaining a human touch can help set apart certain businesses and provide a competitive advantage.
Deciding how much a family business should invest in innovation is also a pressing question; “[N]ot every innovative project will pay off, but those that do may create new revenue streams,” the report stresses.
