Intergenerational transmission in family owned businesses

1. Intergenerational transmission in family owned businesses Neil Janin Director Emeritus McKinsey & Co. Ramallah, November 21, 2011

2. Only a minority of wealthy families retain their wealth position over time • By 2009, 64% of those in the top 100 Forbes list in 1999 had lost their position • 2 shocks: • technological in 2000 • financial in 2008 and today • 10 years of change: • Industrial innovations • Rising global competition Number of those in the top 100 Forbes list in 1999 and number of those still on the list in 2009 Actual Number 1999 2009 SOURCE: Forbes, Family Business Practice analysis 1

3. Many family-owned businesses are unsuccessful in managing intergenerational transmissions and vanish after the first generation Survival rate of family-owned businesses, % France Germany U.K. Founding (1st generation) 100 100 100 2nd generation 3rd generation 4th generation N/A N/A 1 SMEs and large companies SOURCE: Stoy Hayward and the London Business School (1989); European Commission (1994); Family Business Practice analysis 2

4. Pritzker family • Death of leader led to battle among siblings and family members. Lawsuits and accusations led to a public battle and the company was split up • The value of living modestly was not passed on beyond the immediate successor and the family members resented growing disparity in wealth Hunt family • The Hunt family lived modestly for their wealth, except for Albert III, who was over $20 million in debt and could not afford to be disinherited • Conflict led to lawsuits and sale of the company Fairfax family • Conflict led to bankruptcy – cousins were fighting for power – changing directions and lack of management focus on business issues affected the development the company Ford family • Sluggish response to market trends and consequent loss of market share to competitors in the ’20s and ’30s led to disagreements between founder and incumbent son-president of the company. After the death of the son, the founder formally took back control as president, only to be ousted by the third generation Murdoch family • Pressure by Murdoch’s current wife led to partial ownership but no voting rights for the two youngest children – Murdoch refused to develop succession policies, creating uncertainly about future leadership • “Speculation in the market about the Murdoch News Corp: will it be split up?” Case examples of failures in family owned businesses Source: Investment News 1999; NYTimes 2005; Family Business Magazine, Autumn 1996; Business Wire 1996; The Age 2003;

5. Four stakeholders have agendas in succession planning • Owner / founder • Professional managers • Family • Successor (s)

6. The founder’s inaction may work against successful succession planning • Founder • Leaving a position of power is like dying a little. • Personal loss of identity • Fear of losing significant work activity • Jealousy, rivalry towards or lack of confidence in successor • Inability to choose amongst the children • Owner / founder • Professional managers • Family • Successor (s)

7. The complex dynamic of fathers and sons and the siblings is as old as the world • Owner / founder • Professional managers • Family • Father – Son relationships • Father consciously facilitates son's entry but subconsciously needs to be stronger than his son • Son seeks increased responsibility and authority but finds that his father refuses to cede authority, or continues to call the shots from behind • Sibling rivalry • Deep desire of children for exclusive love of their parents • Siblings’ rivalry is extended into adult life and in the business context • Successor (s)

8. The family and the spouse may work against successful succession planning • Spouse • Norms against discussing family's future beyond lifetime of parents • Norms against differentiating siblings • Spouse's reluctance to let go of her role in business • Owner / founder • Professional managers • Family • Context • Family’s fear of disturbing the security status quo. • Clients’ connection to the owner/founder • Cultural values and norms that discourage succession planning • Reluctance to involve daughters or non-blood family members • Successor (s)

9. Employees often are key to the success of the business and may resist or choose to leave • Owner / founder • Key Employees • Reluctance to let go of personal relationship with founder • Resistance to change – fear of loosing power or even employment • Fears of differentiation among key managers • Professional managers • Family • Successor (s)

10. Convoluted behavior: Lack of trust and misunderstandings in the family leads to conflict avoidance, lying, hiding things from each other, one on ones, etc. 1 • Lack of meritocracy: The inability of next generation participants to cultivate the requisite skills that match those needed by the current and future business environment 2 • Lack of clarity: The lack of planning and governance at the business, family and ownership levels .Inadequate estate planning - which is lack of concern for each other's welfare 3 • Weak or misaligned values: Lack of common understanding of what values the company and the family lives by, and wants to preserve. 4 Why it fails? Aside from owner/manager's unwillingness to address his own succession • The four most pressing causes of family business failure are:

11. Do nothing • Sell the business • Appoint a family member • Founder / Owner manager • Appoint a care taker manager • Liquidate the business • Appoint a professional manager Planning starts with the founder / owner manager who must decide what he wants?

12. The owner manager should keep in mind what makes strong families Characteristics Explanation • Commitments • Importance that family members place on family unity • Sharing the same goals • Concern for each other's welfare • No pursuits that threaten best interest of the family • Appreciation and communication • Ability to recognize each other's positive qualities • Acceptance of differences and respect for personal choice while working towards shared goals • Shared open and frequent communication • Time together • Regular family gatherings • Both quality and quantity • Shared values • Ethical, spiritual, and religious values of integrity, honesty, generosity , etc.

13. Planning the family’s business future is a process Establish a family council to provide a discussion forum Develop a family constitution which states family values and policies Develop a succession plan Address critical issues relating to family involvement in the business • Evaluate the state of family and the business • Develop long term goals for the business • Determine policies to govern family-business relationships • Provide a forum for family members to participate in policy making • Start tackling the "forbidden agenda" • Lay down ground rules • Spell out families shared values and business-related policies • Record family stance on business, moral, ethical, and behavioral issues • Spend time sharing stories • Lay out role changes and a timetable • Make retirement timely and unequivocal • Communicate to all stakeholders

14. An outside non-executive director, or an advisor can be very useful • Objective and seasonal guidance on business issues • Unbiased sounding board • Mediation in resolving family disagreements • Specialized expertise which may not be available internally • Network of contacts that can be mobilized on behalf of company AND • A counselor to the owner/manager

15. Last word of advice to the Owner/Manager • Take care of yourself… and take care of your family.. and your business • Be patient open, and have the courage to have difficult conversations, where you understand and you are understood • Get outside professionals to help you navigate the legal, business, and psychological issues • Put time on your side: start early, start now by talking with somebody you trust

16. This presentation has concentrated on • Transmission and succession issues • It should be put in the perspective of • Good family business governance

17. Framework for developing a target model for governance in a family owned business • How to design and control boards and align board relationships and company management to protect and grow the business • How to structure business and financial portfolios to grow family net wealth and protect it over the long term • How to structure and control a family governance system to maintain family unity and sense of purpose, avoiding potential conflicts not only over financial issues, but also over personal relationships/values/behaviors • How to manage family net wealth outside the company’s core businesses (e.g., private equity, legacy assets) to ensure asset preservation • How to provide the means for the family to funnel resources into philanthropy, aligned with the family mission and values Business Portfolio & Governance Wealth management Family Ownership Foundations • How to optimize the legal entity structure to ensure that the family continues to strongly influence or have full control over the business, increasing overall fiscal/tax effectiveness • How to ensure access to capital markets if desired or needed SOURCE: Family Business Practice analysis 16

18. A= Aspiration G= Guidelines For a family-owned business to be successful 5 dimensions must be working well and in synchronicity • Corporate governance • Professionalization • Dynamic portfolio evolution • Business portfolio • Capital composition and structure • New business development Business portfolio & governance • Shareholders agreement • Holding structure • Legal documents G Wealth management Family Ownership A G • Investment office • New opportunistic /legacy assets • Governance G • Family charter/constitution • Family forums • Family services • Succession plan Foundations • Own foundation (issues of Management, governance) • Third-party foundations SOURCE: Family Business Practice analysis 17

19. NEIL JANIN • neil@neiljanin.com • +33673848582 • 1 BIS rue de Buenos Aires • Paris 75007 • France

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