SHIRT SLEEVES TO SHIRT SLEEVS IN THREE GENERATIONS
Why family businesses cannot go past the grandchildren
Family businesses are a key pillar of the global economy. Depending on the study, they account for 70% to 80% of all business and generate about three quarters of world GDP. Although there are many examples of family-run businesses that have flourished for centuries, the conviction that the majority does not survive beyond the third generation is so strong, that it has been formulated as a saying in various languages long before it has been statistically confirmed by academic research. Expressions such as "from shirtsleeves to shirtsleeves in three generations" (attributed to A. Carnegie, 20th Century) or "from clogs to clogs in three generations" (England 17th Century) record the popular perception of the subject.
Because of their importance, family businesses are often studied by prominent academics in order to identify the good practices they have followed. Unfortunately, however, failures are not sufficiently studied for various reasons, depriving us of evidence that could justify rules to avoid bad practices.
Behind every successful new business there is always a talented businessman. A person with a great business idea, a unique capacity to make fast decisions – many times with few data -, a person who is ready to risk, has no comfort zone to exit from and nothing to lose. He starts from scratch and builds his small empire according to his will, his vision and his capabilities. A few decades later, his legacy is written all over the place. And, most of the times, the company is designed to be run only by somebody with the very special talents, traits, habits and skills of this person. A very famous and successful Greek entrepreneur who recently passed away had an amazing memory. He could recall the tiniest detail of a discussion five years ago, or the prices of basic raw materials ten years ago. Unfortunately, for this reason, he wrote down nothing.
So, the talented founder, starting from ground zero, goes all the way to the top. Then comes succession. Planned or not, smoothly or abruptly, it will happen one day. Other people will run the show. Taught directly from the founder, if we are at the second generation, or having met the legend for a while if we talk about the third, the chances of them bearing the same unique talents and skills as the founder is close to zero. For the part that talent is attributed to DNA, we now know that it is not inherited. For the part attributed to the circumstances in which the talented person grew her talent, it is more than clear that they can not be replicated. Therefore, chances for the second, let alone the third generation to possess these unique capabilities of the founder are slim. The successors are asked to walk into the bespoke shoes of the founder, who had extremely odd shaped feet. And they stumble.
It is becoming more and more evident that, if a successful family-run business wants to increase its chances of escaping the three-generation rule, it must "detach" itself from the elements that characterize its founder’s charismatic personality. The original business concept should be re-evaluated in the context of current market data and business talent. The growth of the business and the multiplication of shareholders require that the decision-making process is clearly worded, known and accepted by all shareholders. Structures and processes must be in place to evaluate the ability and willingness of shareholders to take on executive responsibilities. The separation of the shareholder status from that of the manager should be understood by everyone and it should also be at the discretion of each shareholder to choose a role.
One very common fallacy of high potential, high results individuals is that they believe they will go on like that forever. Most of the family businesses that escaped the three generations rule had founders that realized the need for a paradigm shift early enough, and were the initiators and the facilitators of a smooth and timely transition from a one-man show to a teamwork game.