The Importance of Expanding the Definition of 'Succession Planning' in Family-Owned Companies

By Lynn N. Clarke


Family Company Succession Planning Private Company Governance Family-Owned Company Online Article

As independent board directors, succession planning for the CEO and the C-suite is an enormously critical responsibility. But, when you serve as an independent director of a family-owned company, it's imperative to expand the definition of succession planning to include the development of qualified family directors.

Only about one third of family-held businesses remain family-owned by the second generation. Of these successful companies, many are run by non-family executives, which can sometimes lead to a reduced focus on the family culture that helped create success. A pipeline of strong family directors is an effective way to ensure that the company's cultural foundation remains intact.

Of particular importance is for the board (and ownership group) to have a deliberate plan to develop the next generation of effective directors. Having great family directors is one element proven to help a company succeed beyond the second generation. To balance this, it is equally important that a board has a majority of independent directors (versus family members or executives).

In my experience as an independent fiduciary director on more than 10 family boards, answering three questions can help successfully develop effective family directors:

  1. Are shareholders and current family directors truly committed to involving the next generation in company governance?

  2. Are they willing to allow independent directors to lead the process of bringing a next-generation shareholder onto the board?

  3. Do interested next generation shareholders have the time to commit to becoming effective board directors? Do they have the low ego and willingness to be mentored and coached by independent directors? Are they truly coachable?

Shareholder Commitment to the Next Generation

Current family shareholder directors must want their children to be part of the future board leadership. At the same time, clear distinctions between company leadership, board leadership, and family leadership are important for all to understand to achieve effective governance. Not every family member wants or is qualified to work in the business. That's ok. But it is important for all board members and non-family CEOs to understand the separation between the board and the family. The board and CEO are responsible for "the business of the business." The family leadership group is responsible for "the business of the family." Both are needed for multigenerational business success.

It is important to have effective family representation on the board so that management understands the shareholders' culture and financial guardrails. The current generation of family board members must actively support bringing their children onto the board and treat them as adults for next-gen directors to succeed.

Independent Directors Lead the Next-gen Process

Independent directors are in the best seats to help lead the process of identifying and onboarding next-generation shareholder directors. They can objectively vet next-generation candidates without letting parental emotions get in the way of good decision-making. Everyone thinks their kids are the best. But in the boardroom of a multibillion or multimillion dollar business there's no room for parental emotions. Independent directors can more easily discern the interest level, business acumen, raw intelligence, and ability of a next-gen shareholder to be an effective director. The process should include the same elements used in hiring independent board directors, along with an extra step of written reasons as to why a next-gen shareholder wants to be a director.

Time, Ability, and Egos (or Lack Thereof)

Next-generation shareholders can be incredibly effective, even if they don't have direct business experience. However, they will not be good directors if they allow their egos and last names to get in the way of listening, being mentored, and being coached. Based on my experience, here's a summary of the characteristics of effective and ineffective family shareholder directors I've worked with that may be helpful in developing effective next-generation directors.

Effective family directors, or "winners":

  • are willing to devote significant time to learn more about the company;

  • truly care for the employees and brand;

  • possess a strong desire to take care of the company for the next generation;

  • have a strong desire to make an immediate impact, tempered by listening to their mentor to first deeply understand board dynamics and company culture;

  • invest the time to truly understand the business and effective board governance, well beyond attending a conference or two;

  • fully engage with independent directors on an ongoing basis to build business and governance knowledge; and

  • do not let their title or ownership status get in the way of learning or listening.

Family members who should never be board directors, or "losers":

  • are imperious, put their last name first, and have no ability to listen or willingness to be coached;

  • lack commitment, have big egos, and never invest time to learn about the business or governance;

  • do not read board books in advance;

  • only want to wing it;

  • have no commitment to the business—their only goal is to disrupt board meetings; and

  • have an inflated sense of self-worth and expertise and an inability to engage or converse.

Independent directors of family-owned businesses can take note of the above characteristics of strong shareholder directors to inform how they spot and develop next-gen family board members. A commitment to development from all parties—independent directors, shareholder directors, and non-board family members—is critical to ensuring successful succession planning in family-owned businesses.

Lynn Clarke
Lynn Clarke is lead independent director for Vollrath Manufacturing and serves on the boards of A. Duie Pyle, Basic American Foods, Diana’s Bananas, and the NACD Carolinas Chapter. She also is the operating partner for Jelly Belly Sparkling Water and was the 2021 NACD Private Company Director of the Year.