Owners on paper: why families are losing control of their businesses
On 11 August, the Harvard Business Review returned, after some time, to the topic of family business with ‘Why Family Businesses Lose Control’ by Judy Lin Walsh and Alison Isaacson. familyandtrends has often criticised the complacency and bias with which American management theory views family businesses; this time, however, the authors begin with an observation: “family businesses rarely lose control due to a single catastrophic event… they lose it when they fail to prepare future owners for a generational transition”, which must be tackled with an entrepreneurial spirit and a willingness to adapt the business to changes in the competitive environment, one might add.
The case cited at the start of the article is telling. A major American publishing group now in its third generation: the patriarch dies suddenly, leaving behind five talented but estranged children. He had ‘planned’ the succession with his accountant: a trust and a tax-efficient arrangement for shares and dividends. He had never prepared his children to be owners, nor had he given each of them a suitable role within the family, the estate and the business. Within three years, the family sold the business – for a fraction of its original value – to the managers who had run the company alongside their father and with whom the owners had never built a fruitful relationship. Officially, the sale was attributed to the crisis in the print media; in reality, it was a crisis of ownership.
familyandtrends has long maintained that family-run businesses, with their independent advisers and directors, devote an enormous amount of energy to preparing the company’s future leaders and far too little to preparing its future owners, thereby falling into two traps.
The first is the trap of representation: ownership becomes passive. Young people are given a title, but no substance to put them to the test and no authority built up through practical experience. The authors describe a family with two ‘decision-making rooms’: in the first, a few members made the decisions; in the second, the younger ones were involved to make them feel included, rubber-stamping what had already been decided. Those who are treated as incapable of contributing end up not contributing, and the role of the owner slips away: the family becomes the ‘Cassettista’ described in a previous issue of familyandtrends, who buys a garden without knowing how to tend it and occasionally drops by to see how things are going. This happened following the death of Adriano Olivetti, when a fragmented and divided ownership structure failed to articulate a strategy or provide leadership from the owners.
The second is the ‘distance trap’. Young people who aspire to be responsible owners are kept at arm’s length until they prove themselves worthy in the eyes of the current generation and its fussy advisers. Amid fears of nepotism, scepticism, overprotection and misunderstandings, many become discouraged and drift away, giving up not only a managerial role but also that of owner. “The young people you turn away today,” the authors write, “could be your board members tomorrow”. In Italia, prejudice against nepotism drives many entrepreneurs to keep their children at arm’s length out of a sense of propriety: ‘get your spurs first’ is a sound principle if it corresponds to the early years of the discipline phase in the generational handover process, but it becomes dangerous if it turns into exclusion. Leonardo Del Vecchio built one of the country’s greatest industrial success stories, but involved his children only marginally; today, eight heirs own Delfin in equal shares, where a very rigid governance structure is showing serious and obvious cracks.
