How to successfully transition a family company

family business succession

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After discussing the company’s revenues, John Randal Tyson added a personal comment: “I’m sure you’ve heard about the situation involving me. I am mortified and want you to know that I accept full responsibility for my conduct.”

The press said that the 32-year-old son of Tyson’s chair and great-grandson of its founder had been charged with public drunkenness and trespassing in Arkansas when a stranger discovered him sleeping in her bed. Instead of dismissing him, as expected for any non-family member, the US corporation has asked its board to evaluate his conduct.

Tyson’s chief executive Donnie King reacted to analysts’ questions about why Tyson junior was in a position typically held by executives in their forties by saying,

“Don’t forget he’s been engaged in this industry for virtually his whole life.” Correct, but it is often required to become a king or queen, not the financial director of one of the top 500 public companies in the United States.

Red Bull has managed its succession with more prudence, picking three executives rather than the founder’s son to replace Dietrich Mateschitz following his death in October.

Mark Mateschitz, who inherited his father’s 49 percent stake in the Austrian energy drink manufacturer, remarked, “I do not think one should be both an employee and a stakeholder of the same firm.”

This does not imply that the scion will abandon the others to oversee activities, including the Formula One team of Red Bull. “I will express myself in a manner that makes sense to me and that I deem important,” he said of his decision to become co-owner with the Thai Yoovidhya family. Recruiting and dismissing individuals is as effective as it is to do their tasks.

The subject of succession is the most emotionally difficult for entrepreneurs. Will they sell their enterprises to outsiders or choose one of their sons or daughters as heir and manager as they age? Almost 1.5 million owners of small and medium-sized family businesses in Germany are retiring, posing a challenge for many founders of the 20th century.

The fight is visible at public firms that remain under family control, such as Fox Corporation and News Corp, managed by Rupert Murdoch, 91, who is now in his ninth decade. After decades of family maneuvering, he has established his son Lachlan as his likely successor, as accurately portrayed in the HBO program Succession.

Bernard Arnault also seemed to enjoy a family feud. His five children are employed at LVMH, and he has raised the required retirement age to 80. This allows for a face-off and fosters conjecture about his successor, which Lachlan Murdoch famously characterized to me as “a pain in the arse.”

I can understand why patriarchs might like this kind of competition: Like King Lear, they incentivize their adult offspring to vow their devotion and love and then utilize them to cement their dominance. If you have inhabited a firm for many years, the thought of it being guided by a hired hand with an MBA after your death must irritate you.

Less apparent are the advantages for the younger generation. If several individuals fight for progress, it seems inevitable that family gatherings will be disrupted. Even if there is just one kid, the unpleasant issue remains: would this individual have a chance if their name were not attached to them? Typically, the response is negative.

This is not to reject the benefits of family control. For many investors, family businesses are often more lucrative and have a longer-term focus than firms led by professional executives. It might be advantageous to have a leader who grew up appreciating the company’s mission and has a natural affinity for its mission.

It is also reasonable for family members who stand to inherit an interest in a company to familiarise themselves with its inner workings. John Tyson has been taught a brutal lesson about how leaders of public firms must act and the discipline of investor scrutiny, regardless of the outcome. It is preferable to be publicly humiliated than to remain a privileged teenager awaiting inheritance.

Yet this does not necessitate that successor be both managers and owners. According to a study of Danish businesses, family successions are less effective than the Red Bull strategy of placing specialists to succeed the founder. As dominant shareholders, families continue to have considerable influence over businesses.

Several successors have realized that John Elkann, the scion of the Agnelli family that owns Ferrari and Juventus, does not operate the companies directly but supervises them through their boards and his family holding firm. Marta Ortega Pérez, daughter of Inditex’s founder, became chair of Zara’s parent company last year, while a chief executive is responsible for day-to-day operations.

That is only reasonable.

After years of studying how companies function, many members of the next generation must have realized that being publicly accountable for everything has disadvantages. To become the heir, it is optional to manage the whole show.

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