By: Reyneke Van Wyk
Shirtsleeves to shirtsleeves
You may have heard the adage: ‘shirtsleeves to shirtsleeves in three generations.’ This refers to the idea that the third generation of a family enterprise often finds it challenging to hold on to a business passed down to them by their parents and grandparents.
It is not always a lack of willingness or talent on the part of the next generation that prevents effective succession. In many instances, failure can be attributed to a mismatch in the risk appetites of two generations. Within this tension between differing risk appetites, however, there is a ‘biting point’ where protection mode and risk-taking mode meet and hold the right potential energy to propel the business forward within parameters that preserve a sense of control and purpose. Crucially, finding that biting point relies on good communication and governance and ensuring that there is a willingness and an desire for the third generation to be involved at all.
Although there are many variations, including differences in timing, there are certain recurring themes common to many family business stories.
Typically, first generation entrepreneurs are characterised by a nothing-to-lose attitude, with the big risk appetite that comes with it.
The second generation tends to be more focused on growth. Often, they find that they are able to grow the business to a scale way beyond their expectations – an outcome that usually prompts them to go into protection mode, keen to preserve the value built up.
The third generation, the cliché goes, is unable to hold on to the business, with only a successful few managing to hand the baton on the next generation.
Entrepreneurialism thrives on freedom to fail, in a controlled environment
In order to fuel the business through to the next phase, the third generation needs their elders’ ‘permission’ to innovate, take on risk and to reignite the family entrepreneurialism, assuming the timing is right to do so.
From their position of relative security, the first generation is often happy to allow the next to take on risk to develop a business-owner mind-set and grow. Experience tells us, however, that when it’s their turn, the second generation are often more reluctant to give the third generation the same freedom to fail.
The other factor that can come in to play here is a waning interest in the original business purpose on the part of the third generation. They may want to build a career for themselves in an entirely different direction and industry. It is another risk to the continuation of a family business, which relies on open communication to consider all the wider – possibly external – solutions and effective planning to tackle it before it becomes problematic.
Assuming the interest is there, without the endorsement of the second generation, the third will remain unable to steer away from protection mode. When zeal for risk is met with caution or discouragement, many families experience significant conflict between the generations.
The role of communication and governance in uniting differing views on risk
Those families unable to resolve conflict around risk may, at best, fail to harness the next generation’s enthusiasm for growing the business. At worst, the next generation may decide to abandon all efforts to hang around and consolidate the safe, steady strategy favoured by their predecessors.
It is a strong argument for engaging the next generation sooner rather than later. For any family – especially those involved with a business – succession planning benefits from developing a constitution and governance framework. Some of the families we work with prefer a more informal approach. However, in both scenarios, they will only work with clear communication.
A programme of education can be transformational in enabling all generations to explore the opportunities and challenges that lie ahead. They rarely fail to open up communication through probing engaging topics for discussion.
Mentoring, including the role of storytelling between the generations, is another useful tool. Ideally, it should be done while the second generation is still involved in the business, day-to-day. That way, they can provide the third generation with the benefit of their expertise through lived experience and telling the family story as it unfolds.
The second generation will be reminded of the lessons learned from their own parents in allowing the third to make mistakes and evolve professionally within a controlled environment. In this way, ultimately, they will be in a better position to run the business as they will have learned to deal with real time challenges, on the ground.
Institutionalise to move the business forward
Once an understanding has been reached, and the risk biting point found, a family can start to institutionalise the business. As the leadership team of the company professionalises, operations are formalised and more rigour is introduced to processes, it might be a good time for the second generation to consider a transition from chief executive to chairman. Such a move, for instance, provides a great opportunity to stay involved while keeping a steadying eye on operations.
The leadership team should also reflect on the fact that not all family members are suited to family business work or may not have the qualifications, experience, passion and drive to lead a family business. If this is the case, the family would need to consider finding a suitable leader outside the family.
If reaching the risk biting point requires a mix of good communication and good governance, prioritising transparency and education is essential. The ability to do so can help preserve the legacy of a family business well beyond the shirtsleeves.
Our Four Pillars of Capital research series draws on insights and data gathered from clients and friends of our firm and finds, broadly, that social, intellectual and cultural capital are as important to the long-term, intergenerational health of a family or a family business, as its financial capital.
For full details, visit our Four Pillars microsite at stonehagefleming.com/fourpillars