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The next generation

Management | September 1, 2014 | By:

How to develop future leadership and ensure a smooth transition for your business.

Over the past eight years, I’ve had the opportunity to research hundreds of family businesses to better understand what makes some family businesses thrive over generations while others fail. One thing has become clear: active development of the next generation is critical if a family business wants to grow financially and build on the founder’s vision.

With industries like specialty fabrics, where capable talent is already hard to find, investment in the next generation takes on even more significance and presents a real opportunity for family-owned enterprises. In this article, I’ll walk through five things business-owning families can (and should) do now to ensure a smooth transition from one generation to the next.

Evolving issues

In addition to developing business acumen, my conversations with next-generation leaders have revealed a host of added pressures they report as they contemplate involvement in the family business. How do they earn the respect of those whom they will lead when those employees still see them as the boss’s kid? How do they escape from living in the shadow of a successful predecessor who also happens to be a father, mother or other close relative? How do they feel safe making the mistakes that come with learning a business, when other family members are likely to be aware of everything that happens?

Achieving a unique personal identity—a normal part of human development for everyone—can be especially challenging for next-generation members from successful business-owning families, because that identity is often tied to the family business. The senior generation can help with the process by encouraging and enabling younger family members to discover what they are truly passionate about, whether or not those interests lie within the family business. Things rarely go well when family members feel pressured to join the family firm. Managers shouldn’t panic when their children want to try something else; spending time outside the family business often gives them the self-confidence and experience they need to lead the family business when they come back to it.

Take time to consider the next generation’s perspective, and have an open conversation about the pressures they feel and how you can work together to overcome them.

Family climate

One woman told me she developed her leadership skills and credibility within the family firm through a succession of assignments that had increasing levels of responsibility. When I interviewed her, she was well on her way to successfully turning around an acquisition that had nearly gone out of business before her family had purchased it. It was clear that her family had devoted tremendous time and effort to developing effective governance systems, including family meetings to foster open communication, articulate shared values and provide leadership training opportunities.

In my research, the number one predictor of next-generation leadership effectiveness has been the extent to which these young people accepted responsibility for their own actions and decisions. This capacity is, in turn, directly related to how the family dynamics had been characterized by open communication, shared values and norms, and management’s attention to the needs and concerns of business successors.

The number one thing families can do now is develop systems and processes to foster open communication and help the next generation understand the family business and feel supported as they get involved.

Accepting accountability

When one successful entrepreneur was ready to involve his children in his enterprise, he gave instructions to his senior executive to create jobs for his children that shielded them from the risk of failure. He didn’t want to taint the family name and wanted to protect his children from the consequences of making mistakes. When the founder retired, he left a company poorly prepared for success, with next-generation family members who were not ready to take over leadership responsibilities. When interviewed, they told me how difficult it had been to develop their own leadership skills and credibility within the organization without real responsibility and accountability. The (nonfamily) senior executive recognized the situation, and attributed the struggles the company experienced after the founder’s retirement directly to the decision to shelter the next generation. He commented, “In hindsight, I should have stepped up and said, ‘We gotta give those kids an opportunity to fail.’”

Family members in the business report that they learn the most about effective leadership from challenging job assignments that give them opportunities to make complex decisions—and experience the results of those decisions. These experiences proved more important than formal leadership training, and had the added benefit of helping them gain self-confidence and the respect of others in the organization.

Whether inside or outside the family enterprise, make sure that next-generation leaders get the chance to experience real responsibility, accountability and risk so they’re ready to take on the real responsibility, accountability and risk that will come when they assume ownership.

Provide accurate feedback

In one family firm I researched, nonfamily leaders could clearly articulate what the founder’s son needed to learn to become a more effective manager, but no one seemed to have the courage to tell him. They knew he would be their boss someday.

Next-generation family leaders often don’t receive the kind of feedback they need to develop the self-awareness a business leader should have. My research suggests this is a common problem in multi-generational family firms: next-generation leaders’ self-ratings of their leadership skills and behavior rarely predicted how others in the firm rated their leadership effectiveness.

It’s often uncomfortable for family members to provide accurate feedback to other family members in the business. An effective alternative is to select an experienced and trusted nonfamily leader within the organization to provide regular feedback.

Make sure the next-generation leader receives accurate feedback, and consider enlisting a trusted nonfamily leader to do the job.

Start early, go long

When I asked study participants about experiences that had the most impact on their development of leadership skills, most began by telling me a story about something that had happened when they were very young, often only ten or eleven years old. Many stories revolved around exposure to the family business at that age; observing mother, father, grandfather, aunt or uncle, as well as nonfamily employees and customers. Sometimes they talked about having simple duties like cleaning up work spaces, basic bookkeeping tasks or answering the phone. They also talked about pursuing their own interests at school or in sports or other hobbies. Most mentioned early leadership experiences in high school and college, such as being editor of the school newspaper, captain of a sports team or president of a fraternity. And they told me what they learned from job assignments at work, particularly the challenges they faced in early supervisory positions.

Learning leadership skills is a life-long process, and what happens early has a lasting impact. Family members who had early exposure to the business, were encouraged to pursue their own interests, and took on leadership roles in school and college had a great foundation when they got involved in the family business.

Encourage family members to be around the business at a young age and to gain leadership experience outside it as they are growing up, to prepare them for leadership success in the family firm.

Developing leadership skills in the next generation is neither easy nor automatic. It involves family dynamics as much as it does business strategy, and that can be a challenge for leaders who are already busy running the family enterprise. It’s not surprising, then, that so many succession plans are dominated by tangible items like ownership structure, estate tax strategies and investment policies, rather than outlining processes that ensure the next generation is prepared for leadership. But if a current business leader’s goal is to ensure the continued growth of the family business and shared vision, work on the family dynamics is an all-important first step.

Despite those challenges, I’ve yet to find a family that wasn’t glad they undertook the process. Developing the leadership skills of the next generation wasn’t just the best thing for business; in the end, it was the best thing for the family, too.

Stephen P. Miller is president of GenSpan Inc. in Asheville, N.C., co-founder of the Kenan-Flagler Family Enterprise Center at the University of North Carolina at Chapel Hill, and consultant with the
Family Business Consulting Group in Chicago.

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