New trends and demographics are making succession decisions even more complexSeptember 27, 2021
It’s the question every family-business owner has to face sooner or later: “How do I choose my successor?”
Until recently, the answer has usually been simple enough: “The business goes to my oldest son.” This model of succession, known as male primogeniture, has been with us from the first days of family business right through the Baby Boomer generation. In fact, it’s still with us: globally, 45% of current family-business CEOs are the first-born of their families,[i] and in North America, 93% of them are men.[ii]
But now that’s changing. Driven by the positive impact of female leadership, a desire to avoid family conflict during succession, and a higher priority on fairness, many family-business CEOs are leaving their businesses to all of their children equally. A 2018 Mass Mutual survey revealed that a full 60% of current family-business owners planned to split control and ownership of their business equally among all their children, regardless of which ones were qualified, interested, or involved.[iii]
Experts have a word of advice to CEOs planning to go this route: Don’t.
As well-intentioned as it might be, there’s no evidence that shared successorship works, and every reason to believe that it will just make a messy situation worse.
- Equal is not the same thing as fair. In fact, in the case of business succession, it’s almost guaranteed to be the opposite.
- Equality means that all people get the same thing, even if some start out with more (money, talents, opportunities, social contacts, etc.) and some with less. This is different than equity, where people receive a greater or lesser share of the resources according to what they need, so that they can achieve an equal outcome.
- Equality also means that all the children get the same assets and power even if some have been working hard in the family firm for years and others have had no involvement with it at all. How is this fair?
- Any way you slice it, rubber-stamping equal control and ownership in the family firm for each child will almost inevitably result in greater inequality. This means that the succession process will be less fair instead of more.
- People get their ideas of what is fair in different ways. Specifically, they use four different bases for assessing fairness:
- Fairness according to need: roles and compensation allotted on the basis of family-member need.
- Fairness according to equity: roles and compensation allotted on the basis of family-member contributions.
- Fairness according to equality: roles and compensation allotted equally, regardless of other factors.
- Fairness according to competition: roles and compensation allotted to whichever family member prevails.
It’s clear to see that unless every next-generation family member has the same concept of fairness, and unless that concept happens to be “fairness according to equality,” giving them equal ownership and control in the family firm is likely to make problems of perceived injustice worse, not better.
This is not to say that male primogeniture is the right way either. The tradition of automatically dubbing the oldest son the heir to the family business has gone hand in hand with another tradition: 70% of businesses failing by or at the end of the first generation. This may be a coincidence—but statistics do show that family businesses using male primogeniture to determine their next CEO will probably underperform compared with those that choose their successor on a different basis.[iv]
The fact remains, though, that deciding to give all the children an equal share is just as arbitrary as deciding to give it all to the oldest son. And arbitrary is not the way to a smooth succession that avoids the pitfalls of sibling rivalry, family conflict, unprepared successors, and damage to the business.
The best way to achieve both a sense of fairness and an effective succession is to cultivate what psychologists call “global reciprocity” within the family. Global reciprocity , which can be thought of as the emotional equivalent of patient capital, is the mutual attachment and trust among family members that lets them accept any individual unfair interaction because they know that over the lifetime of the family, things will balance out.[v] When family members have a sense of global reciprocity, they can build so-called “thick trust”[vi]—that is, trust based on familiarity and personal experience of reciprocal fairness. This allows them to discuss emotion-laden events such as succession constructively and move through transfers of power with minimal conflict.
None of this comes from the wave of a magical Equality Wand. A truly successful family-business succession comes from a truly successful family. And that means CEOs giving their families the same things they give their businesses: time, commitment, hard work, and a passion for achieving the best.
[i] KPMG: STEP 2019 Global Family Business Survey, p. 5
[ii] Ibid, p. 20
[iii] Mass Mutual: 2018 Business Owner Perspectives Study, p. 13.
[iv] KPMG: STEP 2019 Global Family Business Survey, p. 14.
[v] Torche and Valenzuela, “Trust and reciprocity,” pp. 186-190.
[vi] Aspen Consulting Team. “10 Relationship Challenges in Family Businesses and Legacy Families.”