When a son or daughter steps in to take over the chief executive chair of a family business, timing is everything. The client, the business, and family stakeholders are at potential financial risk after a transition, which places extraordinary demands on the inheritor. Those anointed to the owner/manager role can be similar to infants trying to standup and walk–the sharp-edged realities of the world and their own blind eagerness conspire to topple them.
As part of the overall analysis and planning for clients who own businesses, advanced planning groups examine financial issues, but just as importantly, they help create the outline for an orderly preparation and transition from one generation to the next–and prepare for the unexpected.
Unprepared Yet Successful
Sometimes circumstances bring an unexpected turn in top management–and an underprepared, untested new leader without a transition plan to follow. When her husband committed suicide at age 48, Katherine Graham took over the Washington Post Company, which her father had purchased 30 years earlier at a bankruptcy sale. Her father had never considered her to run the company, and Graham had never expected him to give her an important job at the newspaper. She had only held relatively low positions editing the letters to the editor at the Post and as a labor reporter in San Francisco–a career path that wouldn’t normally lead to the CEO’s office. She did, however, have a deep appreciation of news and the profession of journalism–and she knew the top journalists at the paper.
By all accounts, she learned to be a strategic, shrewd businessperson and important supporter of journalism. Warren E. Buffet observed Graham close-up as a major investor in the company and during his service as a director of the Washington Post Company during half of her 28 years of active management. He saw how she struggled with doubt about her ability and qualifications even after recording remarkable journalistic accomplishments and corporate courage, such as during the newspaper’s coverage of the Pentagon Papers and Watergate. Her business success really impressed him–the Washington Post Company went public in 1971 at $6.50/share. Twenty years later when she stepped down as CEO, shares had grown to $222. Nevertheless, Buffet observed, “this spectacular performance–which far outstripped those of her testosterone-laden peers–always left Kay amazed, almost disbelieving. She was never quite sure where debits and credits belonged and couldn’t shake the feeling that the lack of an MBA degree destined her for business failure.”
Running the Gauntlet
“New leaders of family businesses influence stakeholders, not because they’ve earned that right but because they or their families posses large equity stakes, enjoy the support of the incumbent CEOs, or control organizational resources and rewards,” observes Ivan Lansberg, senior partner at Lansberg, Gersick & Associates, New Haven, Connecticut, in his article “Tests of a Prince,” Harvard Business Review, September 2007. “However, they can’t sustain their leadership thought raw power; stakeholders must also accept that leaders have the right to influence them…the greatest challenge any newly anointed CEO faces is turning stakeholders into followers.”
When a new chief executive inherits the position, he or she must confront the challenges of siblings and cousins who may not work in the business but have a controlling interest in it. Others, such as senior executives, investors, banks, regulators, and unions may question the heir’s qualifications to run the company. Each has an agenda that likely conflicts with those of the others. The opinions that these stakeholders form greatly affect how the new executive manages the transition period and long-term management of the company.
The less time the anointed executives have spent learning the business from the inside or working elsewhere to gain experience, the harder they’ll need to work at establishing themselves as worthy leaders. “The incumbent typically maintains an active presence in the company even as the unfortunate successor tries to take charge. This leads to considerable uncertainty and fuels iterative testing by stakeholders desperate to learn about the new boss,” notes Lansberg. For inheritors such as Graham who arrive without much preparation, the testing is particularly rigorous.
Four Tests of Anointed Leaders
Ivan Lansberg, senior partner at Lansberg, Gersick & Associates, New Haven, Connecticut in his article “Tests of a Prince,” Harvard Business Review, September 2007 identifies four kinds of tests that new anointed leaders in a family business typically confront:
Qualifying tests. Before the child ascends to the executive throne, stakeholders expect achievements in education, career accomplishments outside of the family influence, and other evidence of professional development. In short, the stakeholders seek to measure the anointed candidate against the high criteria they would expect from a non-family job seeker for the position.
Even before they know the new boss, other executives and stakeholders will use such tests as an initial report card.
Self-imposed tests. To help define them in the leadership role, inheritors tend to construct tests of their own design, whether consciously or not, to publicly demonstrate their abilities. A revised business strategy, organizational restructuring, or acquiring another business are typical examples. It’s an opportunity for stakeholders to elevate their perception of the new executive. On the other hand, grand plans come with the risk of failure.
Circumstantial tests. Labor disputes, sudden death, and other unexpected challenges are another kind of qualifying gauntlet. At such times, the successor must appear in control and able to manage to the crises. To the stakeholders, he or she must appear to lead the analysis of the problem and manage the solution in order to gain creditability.
Political tests. Successfully maneuvering through internal political battles is another way new leaders demonstrate strength and shrewdness. Rivals who resent the inheritor’s new position may sabotage plans and spread false information to undermine the new executive. New leaders need to refine their own instincts and personal sources of information and advice outside of the existing set of corporate or family colleagues whose allegiance may be conflicted.
Edgar Bronfman, Jr. grew up as the privileged son of family fortune built on the Seagram Company and its international brands including Seagram’s 7 Crown, Chivas Regal, Glenlivet Scotch, and Captain Morgan. He skipped college and co-wrote pop songs and produced a few Broadway plays and Hollywood movies in the 1970s with limited success. Feeling family pressure, he joined the firm in 1982 and after a three-month apprenticeship, left for London to become managing director of Seagram Europe. He moved up the organization over the next decade until he took over from his father in 1994. That’s when he started using Seagram’s to follow his dreams, which led to the complete transformation of the family business–and the loss of much of the family wealth.
Seagram’s profits not only came from liquor. By 1995 70% of company profit came from owning 25% of DuPont, which originated from a settlement Bronfman’s father negotiated 14 years earlier. Less than a year after taking over, Bronfman sold the stake back to very eager DuPont management–at 13% below the market rate. The third generation leader who had other ambitions apparently found little excitement in a company “whose best source of income was a passive stake in a boring chemical company.” Edgar Sr., who fought against his own father’s constant meddling in his management, went along.
Bronfman grabbed MCA (later Universal) for $5.7 billion soon after. He had bought his way into the entertainment business and hunted for more acquisitions. Industry insiders viewed him as an inexperienced, rich-kid dilettante. A line by Hollywood executive became famous at the time: “He’s like a pi?ata! Hit him and money comes out.” He made a deal with powerhouse Barry Diller with questionable results. In 1998, he snatched Polygram record company for $10.4 billion. Other deals followed.
A few years later, Seagram needed help. It’s once predictable profitability was gone with the new acquisitions. The way out had serious consequences–a disastrous acquisition by Vivendi in which the family only got stock and no cash. To make the situation worse, the hard-pressed markets at the time the deal closed in December 2000 had reduced the value of the share price from the expected $77.35 down to $54. Vivendi quickly sold off the liquor business that had launched the family fortune and used cash from the sale to reduce the entertainment company debts that Bronfman’s acquisitions had caused. Seagram was gone. Shortly after that Bronfman stepped down from his executive position.
As seen in the case of Katherine Graham, she and the company succeeded despite her lack of personal preparation for the role. She triumphed with her interpersonal skills, commitment, and vision that meshed with what was best for the company. Fortunately, she thrived, as did the stakeholders. The suicide of her husband wasn’t a total surprise–it followed several years of psychiatric care with periods when he wasn’t able to run the company. Nevertheless, no transition plan was in place when Graham suddenly was drafted to take over.
Edgar Bronfman, Jr.’s father had suffered with the controlling management style of his father, so gave him considerable room to pursue his dreams–despite the concerns of other family members over many of the deals and the direction of the company.
Each family business and the family dynamics behind it are different, but detailed succession plans can help prepare, guide, and support the new company leaders–and protect the financial interests of the family stakeholders.