Is Meritocracy Better Than a Blood Relationship for Family Succession Planning?

Transitioning of family businesses from one generation to another is a common challenge.  However, as family businesses continue to blossom, many are recognizing the need for succession planning.  Often, when the lone-founder of the business leaves, many family businesses tend to crumble.

Research has shown that many Chinese family businesses don’t last the past three generations.  This is because first, most family businesses lack a sustainable business model.  They depend on trial-and-error strategies for competitive advantage.  Secondly, Chinese family traditions whereby male descendants get equal inheritance can dilute the ownership of the business.  Thirdly, often, birth order or seniority is used to select successors other than meritocracy.  These businesses depend on family factors rather than merit in choosing successors.

For your family business to survive from the founder to the second generation, there is a need to make a smooth transition and this is solved by successful planning.  When well-governed, family firms can outperform non-family businesses.  Some of the most popular global businesses started as family businesses such as Walmart and Volkswagen.  If family businesses are well managed, they can last through generations.

Stakeholders involved in succession planning 

All family businesses do involve outsiders as part of their management teams.  In any family business, there are commonly three stakeholders involved in succession planning.  These are owner/founder, professional managers, successors.

The founders find a challenge in succession planning since they view leaving their position as dying a little.  Most vow they will never retire and when they leave the business they feel as if they experience a personal loss of identity.  They also fear that they will lose all the years of significant work they have put into the business.  They lack confidence in the abilities of the successor and are often conflicted about choosing a suitable successor.  Sometimes their decision is interfered with by underlying family issues of jealousy and rivalry.

The successors on the other hand view that they can bring new insight into the business and often dislike the founder’s way of running businesses.  They refuse to obey authority and yet they want to be given responsibility and authority.  Successors may also have rivalry among themselves.  For example, sons debate who the father will pick as a successor.

The professional managers may have the interests of the organization at heart but often refrain from challenging the members of the family.  They commonly have more loyalty to some members than others; such as having loyalty and a personal relationship with the founder.  On the other hand, they are often more qualified to run the business since they are hired on the basis of merit.

Knowing this, one cannot help but ask, is meritocracy better than blood relationships for family succession planning?  Or differently phrased, is it easier to plan for succession of the family business when outsiders are involved as opposed to when blood relatives are involved?

Before we jump to conclusions, let’s first look at the benefits and pitfalls of meritocracy and blood relationships in running family businesses.

Benefits of meritocracy

  1. Hiring the best outsiders to manage the business put the interests of the organization first.  These are professionals and are often better qualified than family members.
  2. There is no emotional attachment and non-performing managers can easily be let go as opposed to if they were family members.
  3. Salaries and benefits are allocated according to a person’s merit and contribution to the organization.

Downsides of meritocracy

  1. Outsiders often don’t have the core values rooted in the family that often contribute to developing a grounded organizational culture.  Without family, these values can fade and hurt the organizational culture.

Benefits of blood relationships in family businesses 

  1. Family members understand each other better and are often driven by similar values.
  2. Blood relations have a commitment to the business as they are committed to family.
  3. Years of growing up in the business give them valuable informal training.

Disadvantages of blood relationships 

  1. Sometimes there is no accountability for poor performance.  Individuals can let their values come ahead of that of their organization and not be held accountable for it since they are family.
  2. There is emotional involvement in management.  Decisions made are seen as emotional or influenced by underlying rivalries other than being seen as rational and professional decisions.
  3. Lack of openness for fear of offending each other can lead to unaddressed issues.
  4. Lack of meritocracy happens whereby the next generation may lack the ability to cultivate the necessary skills needed in the business environment.
  5. Lack of clear planning of the future governance of the organization, often leading to clashes in terms of power, authority, and responsibility.

Looking at the above lists, it may seem as if the disadvantages of blood relationships outweigh those of meritocracy.  However, we must not underestimate the family values and connections involved in the case of blood relationships.  Meritocrats sometimes focus too much on profit-making and compromise the values of the organization.  On the other hand, family members are likely to do what it takes to make the business survive tough times.

This is why family businesses may need a third party to help them make rational decisions.  An executive coach brings a different perspective into the picture, balancing the needs of all stakeholders and most importantly, prioritizing the needs of the organization.

What a succession planning executive does?

  1. Addresses the underlying issues relating to family involvement in the business.  A professional helps unearth the state of the family and that of the business that the family members had been refusing to address.  For example, it may be automatically assumed that the firstborn son will be the obvious successor but no one is willing to address that he is not competent and provide solid evidence why without causing any conflict.
  2. Establishes a council to discuss these matters and lay down ground rules.  This is a way to involve family members and professional managers to participate in policymaking.
  3. Develops a family constitution aligning family values and those of the business.
  4. Develops a succession plan by laying out the role changes, a time plan, retirement plans and communicate the laid down plans to all stakeholders.

Conclusively, it may be easier for succession planning where meritocracy is involved, but it doesn’t necessarily mean it creates better organizations. Blood relationships may lead to complicated dynamics in the business, but they often have a commitment to the business. The family values lead to a stronger organizational culture from which the organization thrives. With the right form of succession planning guided by executive coaches, family businesses can thrive despite the number or nature of blood relationships involved.

The Destiny Team