Psychology of Succession Planning Guess Who’s (Not) Coming to Dinner Presented by Dennis I. Blender, Ph.D .

1. Psychology of Succession Planning • Guess Who’s (Not) Coming to Dinner • Presented by • Dennis I. Blender, Ph.D.

2. Every family • is • unique

3. Every family • is • uniquely • the same

4. Family Business Model Family Business Ownership

5. Family Business Model 1 – Family member 2 – Staff member (non-family, not an owner) 3 – Owner (non-family member, not working in business) 4 – Family member in the business 5 – Family member/owner, not in business 6 – Staff member, owner, not family 7 – Family member, owner, in business 4 1 2 7 5 6 1 3

6. Family Business Ownership • Family Business Model • Family • Structure • Values, traditions • Family system dynamics • Business • Industry, size • Life cycle • Strategy, culture • Ownership • Structure • Distribution • Governance

7. Family Businesses inthe United States • Family firms comprise 80-90% of all business enterprises in North America. • Family owned businesses account for; • 37% of Fortune 500 companies, • 60% of all public companies, • 78% of all new jobs, • 60% of total U.S. employment. • 30% of family-owned firms survive into the second generation. 12% will survive into the third generation. 3% operate at fourth generation and beyond. • By 2005, virtually all closely-held and family-owned businesses will lose their primary owner to death or retirement ( post-WWII generation entrepreneurs).

8. Family Businesses inthe United States • 3 primary causes of failure of family-owned firms: • Inadequate estate planning, • Failure to prepare and provide for transition to the next generation, and • Lack of funds to pay estate taxes. • The founder’s death precipitates nearly 50% of family firms to collapse. • Fewer than 30% of family-owned firms have a written strategic plan. • 43% of family-owned businesses will have changed leadership hands by 2003. • More than 25% of family firms expect the next CEO to be a woman.

9. Family Businesses inthe United States • 70% of family business owners cite life insurance as their top source of funds to pay for death taxes. • 25% of senior generation family business shareholders have not completed any estate planning other than writing a will. • 81% want the business to stay in the family. • 20% are not confident of the next generation’s commitment to the business. • Of primary importance among family firm wealth holders is not only transferring their financial wealth but also transferring their values surrounding their wealth. • The oldest family-owned business operating in the U.S. – Zildjian Cymbal Co. – founded in 1623 in Constantinople (and moved to U.S. in 1929).

10. Rejuvenation Maturity Expansion/ Formalization Start Up BUSINESS OWNERSHIP FAMILY Controlling Owner Young Business Family Entering the Business Sibling Partnership Working Together Cousin Consortium Passing the Baton Continuing Evolution of the Family, the Business, and Ownership

11. Family Axis • Young Business Family • Adults under 40, kids under 18 • Creating workable family, marriage • Work-family balance • Entering the Business • Adults between 35-55, kids in teens, twenties • Managing midlife transition • Independence of children • Facilitating a process for initial career decisions • Working Together • Adults between 50-65, “kids” between 20-45 • Cross-generational cooperation, communication • Encouraging positive conflict management • Passing the Baton • Adults – 60+ • Senior generation disengagement • Generational transfer of leadership

12. Business Axis • Start-up • Informal organization structure • Simple model (one product, service) • Survival • Expansion/Formalization • Increasing structure, multiple products lines • Evolving owner role and professionalism • Strategic planning: policies, systems • Cash management • Maturity • Stable (or declining) customer base • Well-established routines • Strategic re-focus, re-investment • Management/ownership commitment - variable • Rejuvenation • New strategic direction • Renewed commitment, leadership • Willing to change, re-direct

13. Ownership Axis • Controlling Owner • Ownership control in one individual • Generating capital • Balancing control with other stakeholders • Choosing next generation • Sibling Partnership • Two or more siblings • Developing shared control • Defining roles of non-employed owners • Retaining capital • Controlling family branches • Cousin Consortium • Many cousin shareholders • Mixture of employed and non-employed owners • Managing complexity of family • Creating family business capital market

14. Common Transition Stage • Family - Passing the Baton • Leadership transfer • Founder’s willingness to release control • Next generation’s ability to assume control • Founder – looking at retirement • Next generation – looking to make their mark • Business – Maturity • Examining the current state of the business • Establishing new strategic direction • Determining needs of the business (financial, human resources, etc) • Ownership - Controlling Owner • Passing ownership to others • Passing control to others • Understanding needs of different generations • Psychological readiness to move forward

15. The Family Dream

16. The Family Dream • A deeply held vision of the family business in the future • An imagined possibility that generates excitement and commitment. • Serves as a beacon. • Adds meaning, purpose and inspiration. • Helps rank priorities and guides decision making. • Individual dreams of the founder are usually connected to aspirations for the family business. • Not all family members share the same dream • Place to work • Place for my children to work • Source of unlimited income • Opportunity for a legacy Business Ownership

17. Clandestine Planning

18. The Psychology of Transition • Common sources of succession conflict • Leadership • Who will be next leader? • Control • How to share, empower, distribute? • New vs. old • Products • Procedures • People • Sharing between the “ins” and “outs” • Family vs. family • Family vs. non-family • Transition timing • Black sheep and the prodigal son/daughter • “Blood” vs. marriage • Compensation • Internal vs. external equity

19. The Psychology of Transition • Family Patterns • Traditions and values • Methods of communication • Enmeshment and disengaged • Degree of triangulation

20. The Psychology of Transition • Individual Patterns • Personal dreams and aspirations • Developmental stage • Assessment of skills and abilities

21. Conflict Resolution

22. The Psychology of Transition • Methods of Conflict Resolution - Intrapersonal • Minority decisions • Majority decisions • Compromise • Consensus/win-win • No deal • Methods of Conflict Resolution - Interpersonal • Withdrawers • Smoothers • Compromisers • Fighters • Problem solvers

23. The Psychology of Transition • Promoting Healthy Dialogue • Mutual purpose • Mutual trust and respect • Mutual communication and meaning

24. The Psychology of Transition

25. The Psychology of Transition • Successor Selection • Identify future business challenges • Define strategic implications • Develop leadership requirements • Gather information about likely candidates • Internal and external • Assess candidates’ capabilities • Skills, abilities, personality • Strengths and weaknesses • Perceptions of others

26. The Psychology of Transition • Successor Selection (continued) • 6. Internal candidates • a) Competence • b) Time to develop • 7. External candidates • a) Compatibility • 8. Proceed with choice • a) Implications, consequences • b) Establish time table • 9. Make announcement • 10. Cross fingers

27. The Psychology of Transition • General Observations • Succession is a journey. To succeed, the family must keep the ultimate destination in mind. • Succession is often driven by the biological clock. • Transitions are normal and predictable. • Family patterns are easy to identify and extremely hard to change. • An active, deliberative exploration of all options and implications is critical to successful planning. • Consider the short-term and long-term interests of the business and family members. • Continuity planning requires anticipating future challenges and developing strategies to address them before they happen. Business Ownership

28. BCG Principles and Approach • The family business is the client. • Respect and honor the preservation of the family values. • Use knowledge, experience and observations to educate and anticipate likely results. • Facilitate goal setting and implementation strategies without being judgmental. • Facilitate solutions through dialogue and communication. • Collaboration amongst professionals through an interdisciplinary approach best serves the clients needs.