Originally published in: Business Family (October 2015)
John A Davis, who has taught at Harvard for 20 years and owns a respected family business consultancy, is one of the best-known voices in the world of family business. We caught up with him and quizzed him about his latest thinking.
BF: What do you think are the biggest issues facing family businesses?
JD: Most people are looking at how family companies stay successful, but there is a big, big question that I think most people in the field haven’t caught on to yet, and that is how families stay successful over generations, financially, in terms of the talent the family has, and in terms of family unity.
And within that big big issue is the one of how we make generational transition. Most people are still stuck talking about management succession and sometimes it broadens to management and ownership succession, but the fundamental transition is broader than that.
And to start answering that, you have to think about how families partner across generations.
BF: So how do you do that successfully? Is that a question of creating a culture of innovation?
JD: I think that you definitely have to keep innovating within generations and as you cross generations you have to keep your innovation up and keep building positive momentum in the system.
But the idea here is: how do we build the talent, and get the next generation experienced enough so that they can help us with what we need to do in the future? It’s not about what a family did in the past and one of the biggest challenges now is that industries, economies and societies are moving so fast there is so much change that it’s harder and harder to predict what will be useful talent and experience for the future.
We don’t know that we are going to be in the same business 10 years from now, we might be, but we might not be. I am trying to help families get ready for the future and think about where their industries are going.
They have to ask: what are the talents and aspirations of the family, and how are those evolving? You’ve got to align what you are good at and what you like to do with what you need to do. Families that think about these issues and try to get that alignment clear, do better.
BF: People often talk about the next generation as if it is a standalone entity, but does a family need to think as a unit?
JD: Yes, you have to think like a unit. A family is going to go through at least 15 years where both generations are involved and in leading. This notion that there is a clean generational hand-off is not realistic, there is a substantial period where both generations’ hands are on the baton.
BF: Do you have any tips for doing generational transitions well?
JD: You have to get the next generation ready, but that is much easier said than done. Ready for what? You don’t really know. You don’t know precisely what businesses you will be in or the nature of those businesses.
One skill the family has always got to be good at, though, is making bets on the future, in terms of what businesses and investments they make, but also the talent they put in place to lead them.
Families don’t have to manage the business – that is optional. But what is not optional and what we do have to prepare families for is making these bets. That is the big, big talent. You don’t need more than one or two who are really good at it, but you need some.
You also need family members who are good at other things: building unity, presenting the family out in the community, or representing the business or being a good board member who thinks strategically, or being a good entrepreneur to demonstrate that the family still has these talents and capabilities.
We have to prepare family members for a series of different roles, but we had better have some who are really good at making bets.
BF: How do you decide who should take on which role?
JD: It depends on the family and the scale of the family. Are we talking about three relatives, or several cousins – or 23 cousins? What you are trying to do in all cases is to make sure that the selection of leadership is seen as wise and fair.
How do you do that? If it would help to do standardised assessments as part of that process, to say that we are going to look at your talents, aspirations and style, and if we can get a paper and pencil test to give us good information then good.
But do you always need it to make such choices? No. In our practice we do these assessments, we are interested in deeply understanding a person, a successor candidate, and you don’t do that just with standardised testing. You have to talk to them, to look at their track record so far, ask how they performed in certain jobs, why were they successful here and not there.
The idea is that the person understands him or herself really well. If we are developing a leader I want her to really understand herself, to know that “I am really good at this but I suck at that and I am impetuous over here, and I am patient over there and this is how I work”.
That leads to understanding what sort of people she needs around her and what sorts of checks and balances you need to maximise her effectiveness. We look deeply at the individual, and at how this person manages key relationships, and we also think about the sorts of structures and people that need to be working with that person to really make them work well.
BF: While we are on the subject of succession, what about non-family managers? When is the right time to move to an outsider to run the business?
JD: We are doing a research study now looking at the issue of the selection of the next leader and under what conditions do you choose family or non-family, and whether you look inside your organisation or should you go outside.
You really want to get this right and understand under what conditions these choices make sense. The non-family leader choice becomes much more relevant and acceptable as the organisation gets big. Your family talent pool is always small.
Whether you have seven or 73 family members, you are lucky to get a handful who are going to be interested and good at your business, so as the company gets bigger and especially as it goes through important changes, more and more families say legitimately that a non-family member might be the best person to be the next CEO or MD.
I have seen non-family executives perform terribly and others perform beautifully, and what we know is that if you go to the outside and you are not very careful about the values and the style of the next CEO that the person can be brilliant but be too disruptive, and almost insulting to the system to be effective.
If you stay with an insider that can be easier stylistically because home-grown non-family executives are deeply imbued with the culture. They could be better cultural agents than family. You don’t need family to carry the culture in that business, if you have been building what I call a tribe inside that business that is another sort of family. I see non-family executives being as good as or even better than family in maintaining cultural values
Whoever you choose, family or non-family, insider or outsider, that person had better have a broad view of what is happening outside the business, in the industry, the economy. If they are trapped by their mindset from spending too much time in the company they are not going to be very useful.
BF: Families are very often reluctant to think about succession. How far in advance should you start planning?
JD: What you don’t want to do is get stuck in a bind, and be in the situation where you have to choose one of three candidates because you have to move quickly. That is a terrible position to be in. We like to see broad transition discussions happening seven years in advance.
Often we are not successful at getting families to plan that far out because the conversations are too sensitive and current leaders don’t like to feel like lame ducks, and leave it until two years, but then you have limited your options.
You need some time, and if you go for an outsider it is vital to really get to know the people you are getting in, to have lots of letters of reference, do psychological testing and lots of interviews. But what you really want to know is how people behave in stressful conditions when they are in a position of power. And that takes a lot of time.
John A Davis has taught family business classes since 1996, and is also founder and chairman of Cambridge Family Enterprise Group, an advisory and education organization for enterprising families with family companies, family offices and family philanthropic foundations.