Don’t Let Your Family Destroy Your Business . . .
For decades, the Irving family’s sprawling New Brunswick empire operated without the internal turmoil that has afflicted, divided or destroyed other family firms. K. C. Irving’s three sons—John, James and Arthur—each ran distinct but complementary parts of the multibillion-dollar enterprise, which has interests in everything from energy to logging, shipping, agriculture and even retail.
But as the next generation of Irvings became active in various parts of the conglomerate, the vaunted unity of K.C.’s three sons began to fragment. According to the Wall Street Journal, cousins running different divisions refused to abide by the unwritten rule that Irving subsidiaries buy from one another. Simmering fights over money and control boiled over. Finally, in 2010, Arthur Irving moved to formally oust his son, Kenneth, over a legal dispute about a family trust. In the years since that castle coup, other fissures have appeared in the tightly controlled Irving universe.
READ: Despite Challenges, Majority of Family Businesses are Faring Well »
“The whole Irving story has exploded,” observes business author Gordon Pitts, who has written extensively about family-owned empires and how they crumble. “As cousins entered, it [got] much more difficult.”
Some of Canada’s bloodiest corporate battles have involved family members duking it out in epic rifts that enriched lawyers and filled the business pages with juicy corporate gossip. The eccentric Billes family offspring scrapped for years over the fate of the Canadian Tire chain before one emerged triumphant. Developers such as Vancouver’s Bentall clan and Ellis-Don, the London, Ont.-based construction giant founded by Don Smith, underwent wrenching fights as control either passed from one generation to the next. Perhaps most famously, the McCain family’s schism—pitting brothers Wallace and Harrison against one another—permanently severed Canada’s pre-eminent food processer.
READ: Don’t Let Family Ties Bind Your Exit Strategy »
Not all powerful business families implode: When Paul Desmarais died last year, his sons, Paul Jr. and André, succeeded in dividing responsibilities over the vast financial services firm with little evidence of acrimony. But even among less visible business families, the succession process often creates enormous friction. What should be an orderly handover instead produces lingering schisms, costly litigation and even the demise of the company that generated all that contested wealth in the first place.
New research identifies one reason the generational transition becomes so fraught: A huge number of family firms have no plans in place to handle it. A survey conducted this year by Canadian Business and Deloitte shows that only 17% of family-owned businesses in Canada have succession plans. Given the lack of preparation, it’s not surprising that only one-quarter of family businesses succeed in transferring ownership and control to the second generation, and only 11% make it to the third, says Michelle Osry, Canadian leader of Deloitte’s family enterprise consulting group. “It’s a sobering and stark statistic and should serve as a cautionary tale that doing nothing is a disaster.”
READ: Too Many Family Businesses Have No Succession Plan »
Osry and other succession experts point out that families are often sandbagged because they’ve failed to plan well in advance for a generational transition by creating an orderly, formal and, most importantly, consensual process to see it through. “We say formality is your friend,” she notes.
On paper, it’s crucial to begin planning for a succession years in advance of an exit or liquidity event, and while the founder is still healthy. But in closely controlled private firms with an autocratic leader, it’s not always clear how those conversations begin if the founder doesn’t want to engage with other family members. “A lot of owners are the smartest person in the room,” says Jacoline Loewen, an investment advisor at UBS Canada. “They find it very difficult to let experts help them.”
READ: Most Canadian SMEs Don’t Have Succession Plan »
David C. Bentall antes up his personal story to illustrate the point. His father, Clark, and two uncles, Howard and Robert, owned the powerful B.C. builder The Bentall Group, which built much of Vancouver’s Class A office space in the 1960s and 1970s.
“It was a very happy and successful collaboration between three brothers for almost four decades,” David says. “[But] it didn’t end well. They never thought about what the endgame was.”
Clark wanted to pass the company’s leadership on to David, his son, but the other brothers disagreed with that plan. The core point of friction: whether the firm should pass to family or professional managers. Clark and his family lost out in a 1996 battle, which saw the company sell a 57% stake to Quebec’s Caisse de dépôt. “That was a pretty sad ending,” says David, who now runs a Vancouver-based succession-planning firm.
Osry advises clients to hold quarterly family meetings to hash out what she describes as a “family constitution”—a kind of mission statement that lays out high-level values and principles, but also articulates protocols governing the distribution of dividends among shareholders and employment rules for family members.
She cites the example of a recent client, a private B.C. firm with $400 to $500 million in annual revenues, and which is controlled by the third generation. As a result of a decade-long succession planning process, the 17-member family established a retirement fund for the founder, and then undertook a gap analysis to determine which skills were lacking among the members of the next generation. As a result, Osry says, the firm ended up going outside the company to hire a CFO. The clan also developed eligibility criteria for family members who want to join the company. “They strongly believe [the children] have to earn their way into the business.”
READ: Family Businesses at Risk »
Proper governance is also a “huge issue” for private firms, and plays an increasingly critical role in creating a framework for a smooth transition, observes Eileen Fischer of York University’s Schulich School of Business. As with boards for public companies, she says firms are well advised to adopt best practice governance principles, including a board with independent, qualified and properly remunerated directors who bring a range of specializations to the task of oversight.
Well-governed boards have an enterprise risk committee with responsibility for building a succession plan that enjoys broad buy-in. Those directors, Fischer says, should be creating contingency plans if the founder dies before a family successor is ready to assume a leadership position. Most importantly, an independent board can also deliver difficult news to the founders—for example, that an entitled heir apparent may lack the necessary skills to run the company.
READ: How to Tell If Your Kids are Ready to Take Over »
Besides figuring out whether a family member can take over the company’s operations, succession advisors say clans must also come up with a consensus about a transfer of ownership, as well as implement a plan that allows the founder to extract their equity from the firm. If a founder won’t relinquish their majority ownership position to the next leader, Fischer says, “There’s always going to be that power imbalance. You can’t have two generations running the company for any length of time. It just doesn’t work.”
Perhaps, but in an era when people are living and working into their 70s, family business may have to rethink more traditional notions of a crisp handoff. In some cases, family firms should be thinking about “intergenerational partnerships,” which see parents and adult children sharing managerial authority for an extended period—perhaps as long as 10 or 15 years. It’s the sort of arrangement that appears to have worked well for a number of The Rich 100 families, including the Saputo, Weston and Desmarais families, all of whom brought children into the business well before the founders stepped back. Bentall cites one client—a family firm run by a father and two daughters—that didn’t want a succession plan but rather a partnership strategy. “That’s a big shift in thinking.”
READ: A Second-Generation Success Story: Linda Hasenfratz at Linamar »
But increasingly, those kinds of lengthy timelines may not be realistic, Pitts says. As the business and technology cycles accelerate, fewer family businesses are surviving over the long haul. “The issue isn’t the future of the family business, but rather how the business family proceeds into the future.”
That’s a top-of-mind question for Larry Rosen, who in 2005 assumed managerial control over the upscale menswear retailer his father Harry founded in 1954. Now the managerial shoe is on the other foot as Larry ponders his own retirement and the potential role that his own sons—all in their 20s—might play in the business. Reflecting on his own entry into his father’s business, Larry feels the process should have been more formal. Not everyone has an entrepreneurial mindset or management skills, he says. “You can have a son or daughter who is as smart as a whip but is not suited to be in management.
READ: How to Revitalize the Family Business »
“When I step down, I want to make sure that the successor has been objectively assessed,” he says. “I have to do what’s right by the business.”
This article is from the Winter 2014/2015 issue of Canadian Business.