Tricks to ensure the next generation becomes capable to take over the family business

This article was first published by the Economic Times, on November 15, 2022, Co-Authors: Sougata Ray, Navneet Bhatnagar

https://economictimes.indiatimes.com/news/company/corporate-trends/the-tricks-to-ensure-the-next-generation-become-capable-to-take-over-the-family-business/articleshow/95529582.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Leadership succession is a critical transition for family-controlled businesses. Successor selection is a crucial decision that determines the future strategic direction of both the business and promoter family. In practice, family businesses often do not realize the need and importance to plan for succession. Some that do recognize it, continue to postpone that decision. This happens primarily due to three reasons. First, often the incumbent leaders are engrossed in operational aspects of the business and do not feel an urgent need to plan for succession. Another reason, especially with large promoter families, is that the complexity of family dynamics and tangled interface with the business, render succession, a tough decision to make. Third, and most critical, is the lack of preparedness of the next generation leadership, which makes the incumbent leader hesitant to pass on the baton. This is often reflected in our interactions with senior generation participants of our executive education programmes for family business leaders. Senior family business leaders express their reluctance to transfer leadership charge as they lack confidence in the capabilities of their next generation members.

It is important to note that succession is not an event but a process which needs to be planned for years in advance. Promoters of a few large family businesses in India have experimented with non-family successors. However, successor choice for most family firms is often restricted to the family talent pool, which is limited to the family size. While non-family businesses can quickly replace a non-performing leader, for a family business this is not so easy because of kinship ties and lack of alternatives. For a next-generation family business successor, failure costs the survival of both the business and family. Hence, given the high cost of a failure, an incumbent family business leader must not only plan early for succession but also take effective measures to groom the next generation members. This is the biggest succession challenge family businesses face today.

Next generation leadership building takes time and careful planning. It requires diligent cultivation of mentee-mentor relationship between the senior and younger generation leaders. Our research studied 19 successful cases of inter-generational leadership transitions since 2004 in large Indian family businesses. We traced these transformational journeys to identify crucial leadership building measures adopted by these family businesses. The study found that these next generation members followed a systematic development pathway, which equipped them for the leadership role. These leaders were exposed to the family business and its operational challenges at an early age. After their graduation, they joined the family business at middle management level. They gained experience in business operations and developed an understanding of ground-level challenges. They also learnt manpower management and interpersonal skills. In the subsequent phase, they went to world-class institutions to obtain a business management degree, which equipped them with knowledge of strategic frameworks and leadership capabilities.

A critical part of this journey was the work experience they gained in large international organisations after obtaining their business degrees. Working outside the comfort-zone of their family business made these next-gen members independent business decision-makers. It built their leadership strength as they had to prove their capabilities and bear the consequences of their decisions. After 2-3 years of working outside, they joined the family business at senior leadership level. During this phase, they worked closely with family and non-family mentors. They understood the strategic and leadership challenges of the business. They became effective change agents, improved legacy systems and practices, and led their business to the next level of growth. Proving their leadership mantle within and outside the family business, with diverse work experience in India and abroad, these next-gen members earned respect and acceptance from internal and external stakeholders. In a span of 5-8 years, they took complete leadership charge. The senior generation leader stepped out of the executive role and continued to provide strategic guidance.

For succession to be effective the next-gen members must have the ability and willingness to take on leadership responsibility. This can only happen when they are equipped with a wide range of knowledge, experiences and capabilities. Structured training and outside work experience play a very important role in leadership development. Business families that plan early and take timely measures to groom their next-gen members, can implement effective intergenerational leadership succession.