Navigating succession and ownership in a multi-generational family business
Navigating succession and ownership in a multi-generational family business
How can family businesses effectively plan for leadership succession across generations while maintaining stability and trust?
Imagine this scenario: You are a shareholder in a large family-owned company with a diverse mix of property and business interests. As this business has moved into the third generation of owners, it is represented principally by a cousin consortium. Recently, a significant shareholder who serves as the executive director has informed the board of their intention to step down from daily involvement in the business. They have recommended that their son, a talented professional and Partner at an international law firm, take over their role. However, the son does not currently work in the business. To encourage his son to join, the executive director has proposed issuing shares to him at no cost, with the expectation that all other shareholders agree. This proposal has caused significant concern among the shareholders.
Why governance matters
As family businesses grow across generations, ownership and leadership transitions become more complex. This article explores how governance structures can help navigate succession and equity decisions, especially when family expectations and business needs collide.
The governance gap
This scenario underscores the importance of having established governance structures such as a family charter, a family council or a shareholders’ agreement. Without these frameworks, decision making can become uncertain and inconsistent. Formalising governance provides clarity, promotes fairness and supports long term stability. Governance frameworks are most effective when established early and proactively, before any challenges emerge. This allows decisions to reflect shared family values rather than reactive emotions. succession planning is a process, not an event
Effective succession planning should commence at least a decade in advance. This approach allows the business to prepare for succession by identifying and mentoring future leaders and by addressing any gaps in their education or experience ahead of time. A structured approach enables the business to assess a range of qualified successors, ensuring a smooth transition and minimising disruption.
In this case, recommending the appointment of a family member with no prior experience in the business raises concerns. While the candidate may have strong professional credentials, transitioning from a professional services environment to an executive leadership role in a complex family enterprise requires a different skill set. Leadership in a family business often involves navigating operational challenges, stakeholder relationships and long-term strategic planning, all areas where prior industry experience is invaluable.
The risks of issuing shares without contribution
The proposal to issue free shares to the executive director’s son also raises significant concerns. Granting equity without merit or contribution can set a problematic precedent, dilute existing shareholders' interests and creating tensions among family members.
Performance-based share incentives
A more equitable approach might be to structure a performance-based incentive, where shares could be offered for purchase on favourable terms after the individual has demonstrated value to the business and gained the trust of shareholders. Other considerations include the dilution of other family members and whether this is consistent with the broader family objectives as well as estate planning matters.
Implement effective frameworks
This situation highlights the importance of proactive governance. A family charter establishes clear policies on share acquisition and succession. A family council offers a structured communication forum for family members. A shareholders’ agreement legally defines the rights and obligations of all shareholders. These documents, amongst others, ensure transparency and fairness, minimising conflict.
Given these complexities, it is crucial for shareholders to voice their concerns and advocate for a structured approach to succession and ownership decisions.
Secure your family business's future
Managing succession and ownership in a multi-generational family business requires proactive planning and robust governance frameworks. Our family enterprise team can help you establish effective governance structures, develop a comprehensive succession plan and ensure a smooth leadership transition.
Contact our family business experts today for tailored support and practical solutions that align with your family's unique needs and goals.
