The business successor

To create an enduring legacy beyond one’s own lifetime is an emotion nurtured by most entrepreneurs and business owners, and they would have a better chance at creating that legacy if the two phrases, ‘succession planning’ and ‘inheritance planning’ are used with dispassionate clarity. For, there is a world of difference between the two.

Succession planning is about business continuity whereas inheritance planning is about fulfilling a tradition driven filial contract. But when it is time to hang those boots and find a successor, there is a tendency amongst most to knowingly or even unconsciously use these terms interchangeably. What is termed as a succession planning exercise is in reality inheritance planning.

Ownership and management are distinct and modern business and mercantile law allow for their clear separation. Yet, few can overcome the force of tradition to practise it. On-boarding next of kin in key operating roles with a clearly scripted roadmap to the corner office is an accepted convention. This trait is largely universal in both MNCs or SMEs, whether in tradition bound Europe or in Chaebols, Zaibatsu’ and Indian business across Asia.

What is the reason that most business owners are unable to separate business continuity from a filial contract? Why can’t the successor be a professional manager and not family? One could argue that the system of a board construct and the position of the CEO is designed precisely to address this. But, in reality, the Managing Director or the person calling the shots is in all likelihood from within family.

The reason for reticence in separating ownership from management is perhaps because it is a leap of faith, after all.

Modern business allows the entrepreneur to take that leap of faith. There are well-defined structures from trusts to managing agencies to facilitate the separation. American corporations have been successful to a large extent in keeping ownership and management distinct. Perhaps, because the New World is not burdened by tradition. Then, there are some good examples in Europe. Koreans, Japanese and Indians seem to struggle with it though.

A reason for this could be that institutional capital, leverage and structuring is a recent phenomenon, and business in these traditional regions have relied on family silver and that’s why the tendency to keep it all within the family.

Control is a powerful emotion stemming from this tendency which is also perhaps why even publicly listed Indian corporations have a relatively low free float compared to their peers elsewhere. In a modern free market enterprise, family silver can be separate from company silver and both can turn to gold. But for that, ownership and management must be considered exclusive of each other. Even if a company’s stock is willed to the next of kin as inheritance, it may pay to expand search for a worthy business successor outside family and include professional managers.

One could of course luck out if the search loops back to within the family, but a sincere attempt at a broad basing the exercise can yield attractive returns. “Skin in the game” is an argument put across in favour of keeping it all in the family. That ownership stimulates operating interest. While this may be true in the case of first-generation inspired pioneers, it may not hold true for their next gen. And why should it?

After all, each is motivated differently, and destiny may have a different plan for them. Perhaps, to be a world-renowned musician or a scientist or even a deep-sea conservator. On the other hand, managing a business may motivate a professional manager which could be his skin in the game. Motivation is after all complex and people can be motivated by aspects other than just stock.

In the end, by keeping ownership separate from management, a business owner can in fact double his chances at legacy. A business legacy through an efficient professional manager and a personal legacy through an accomplished next gen in an occupation of their choice, and the entrepreneur can be proud of nurturing both. That would be doubling the odds in favour of legacy.

The writer is a Business Strategist and an entrepreneur

Leap of faith

COMMENT NOW