In 1984, a New York Times reporter asked legendary Occidental Petroleum CEO Armand Hammer why, at age 86, he had not yet named a successor. “If I pass,” Hammer began. Then he caught himself. “When I pass, the board of directors will name a successor.”[1]

Fast forward 34 years, to a major 2018 study of business owners. When asked, “What is your ideal exit strategy?”, 10% percent of business owners responded, “I don’t ever plan to exit.” [2]

It’s easy to smile at these entrepreneurs’ suggestion that they have the option of immortality. But their statements also point to a serious problem within the family-business sector. Many family-business owners strongly resist accepting that at some point, one way or another, they’re going to have to let go of control of their business. Unfortunately, the alternative to succession planning is not for the business owner to stay on forever. It’s for their company to die with them.

The problem of holding on to control is a serious one for family-owned business around the world, but it is especially acute in Canada and the U.S.:

  • Forty percent of family-business leaders in North American plan to wait until they are older than 70 to retire, in comparison with only 27% globally.[3]
  • North America has twice as many family-business leaders from the “Silent Generation” (born between 1925 and 1945) as the global average. This means that an extraordinary number of leaders here are hanging onto power into their 70s, 80s, and even 90s.
  • North America has the world’s lowest level of female business leaders, at only 7%. (Compare this to Central Asia, for example, where the figure is 43%.[4]) This matters because female leaders tend to make decisions about succession earlier and retire younger. [5] With so few women heading family firms in Canada and the U.S., this region has not seen the beneficial change in attitude to relinquishing control that female leadership can bring about.

This resistance to letting go of control leads to a host of negative consequences. Culture and practices become fossilized, stifling innovation and reducing resilience. And business owners’ reluctance to give up control is a major factor in the failure to start preparing for the future by choosing a successor and engaging in succession planning. In turn, this failure plays a key role in the familiar statistic that 70% of family-owned businesses don’t make it past the end of the first generation.

Key fears behind business owners’ urge to stay in control

Thinking about handing over the reins of a family business involves a combination of things many people naturally resist, including change and retirement. This resistance is amplified by an owner’s intense relationship and identification with his or her business.  Experts identify several main fears that lead business owners to hang onto control:

  • Fear of losing identity and status. Many entrepreneurs get their sense of who they are and why their existence matters from their business. As consultant Keith G. Baldwin notes, “Many business owners tie their identity and self-worth to their work, so it’s understandable that there is a negative reaction when it is threatened.”[6]  This is especially true for business founders—but that doesn’t mean that owners in the second generation and beyond are exempt from these feelings.

One study of succession psychology in family business reflected a more typical fear. In a focus group of retirement-age owners, 100% of the participants said they “could not” face the idea of retirement, because letting go of control over their company would mean losing their identities. “What would I do?” they said to the researchers. “This is all I know. This is what I do.”[7]

  • Fear of losing control over life and family. Experts agree that many company founders become entrepreneurs in the first place because they have a stronger-than-average drive to exercise a great deal of control and power in their lives. Because of this, giving up control of the firm feels to them like “the first step toward losing control over life itself.”

This unusually strong need for control in their lives can extend to a desire to control the family. In fact, leading family-business authority John L. Ward believes that many business founders care more about this issue than any other. In his many years of experience with family-business founders, he discovered that “entrepreneurs’ real in issue in their inability to let go [was] control of the family. They believed that as long as they had control of the business, they had control of the family.”[8]

When handing over the reins of the business also feels like a loss of status within the family, the business owner can really dig in. One business successor relates, “My father refused to let go because he feared that after retirement, he would no longer be the patriarch that all his children would look up to and depend on. He wanted to die ruling the family and the firm, and, unfortunately for all of us, he did.”[9]

  • Fear of financial insecurity. It may seem strange that people who are usually set for life—or, in some cases, set for the next 10 incarnations—would be afraid of running out of money. Yet this is one of the most common concerns cited by business owners, and one of the main reasons they give for not wanting to stop running the business.

In truth, the fear that the business will fail, and that the incumbent will lose the income and quality of life he or she wanted, is not unreasonable. Only 30% of family-owned businesses survive past the end of the second generation, and only 12% past the third. On top of that, when wealth is transferred from the first generation to the second, a full 70% of that wealth is squandered—and it only gets worse in the third generation, where a remarkable 90% of families lose their wealth.

However, business owners who resist handing over control because they lack faith in their successor’s competence can be creating a self-fulfilling prophecy. If the incumbent is refusing to let go of control, how—and why—is a successor going to learn how to run the company well?

How business owners can start letting go of control

  1. Find a new role in the company. Data show that succession works best when transferring power is reframed as protecting continuity and creating a legacy. When outgoing leaders interact with their business as stewards, rather than “monarchs,” they can see themselves as having value to the business even after they have handed control to the next person.
  2. Redirect toward other passions and pursuits. Many business leaders still have tremendous energy and vision when the time comes to exit their main enterprise. With planning and guidance, they can find fulfilling, energizing ways to use their talents—and find that their identities grow, rather than diminish, after they relinquish control of their business.
  3. Set a hard, immovable retirement age. This is a simple trick, but it works. When a hard date for retirement is set, the owner is forced to start preparing—both themselves and their successor(s)—for the changeover of leadership. These agreements must be clearly detailed, formalized, and communicated, or they may not work: many owners renege on verbal promises to retire as the time draws near. By the same token, setting the date in stone (or at least legalese) when it seems comfortably far off in the distance can help the owner gradually reconcile themselves to the inevitable.
  4. Bring in specialists to help with all aspects of succession planning. Qualified and experienced advisors can ease the owner’s mind by providing business evaluations and laying out options. Importantly, they can also create a retirement financial plan for the owner and his or her spouse that will ensure stability no matter what happens to the company. Meanwhile, business coaches and therapists can be brought in to help with the more personal and emotional side of business succession.

As organizational psychologist Ivan Lansberg points out, most business owners have a part of them that wants to let go of control. They want more free time, relief from the burden of running the show and shouldering most of the responsibility, and a sense of confidence that their business will prosper in their absence. Given tools and techniques for easing the fears that keep them holding a death-grip on their businesses, even the most die-hard business owner can find the freedom that awaits.

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References:

[1] Winston Williams. “The Uneasy Peace at Occidental.” NYT 09 Sept 1984. https://www.nytimes.com/1984/09/09/business/the-uneasy-peace-at-occidental.html
[2] Mass Mutual 2018 Business Owner Perspectives Study, p. 12. https://www.massmutual.com/static/path/media/files/sb1020_final.pdf
[3] “The impact of changing demographics on family business succession planning and governance.” (KPMG 2019 Global Family Business Survey), p. 7. https://thestepproject.org/wp-content/uploads/2020/09/STEP2019GlobalFamBizSurvey-Report1.pdf
[4]  Ibid, p. 20.
[5] Ibid, p. 20.
[6] Keith G. Baldwin. “The Missing Piece: The Psychology of Relinquishment.” https://www.lexology.com/library/detail.aspx?g=ee86b3da-96a1-4adb-b150-4a915f5706f9
[7] John L. Ward. Perpetuating the Family Business. Palgrave Macmillan: New York, NY, 2004. p. 43.
[8] Ibid, p. 44.
[9] Ivan Lansberg, “The Succession Conspiracy.” https://lgassoc.com/writing/the-succession-conspiracy