Hyderabad : With people living longer, increasing demographics and societal changes, family businesses in different parts of the world are exposed to new challenges which make their traditional methods of succession and governance no longer appropriate. Globally, 48 universities conducted a survey across 33 countries, covering over 1,800 family businesses, under the umbrella of STEP (Successful Transgenerational Entrepreneurship Practices) Project, to reflect upon the changing demographics and how they impact the family business governance, succession, entrepreneurial orientation and performance. Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business being the only member from India conducted the survey in India.
The report “The impact of changing demographics on family business succession planning and governance” is co-authored by Andrea Calabrò, (STEP Global Academic Director & IPAG Family Business Institute, IPAG Business School) and Alfredo Valentino (STEP Global Research Champion & ESCE International Business School) and sponsored by the KPMG Enterprise Center of Excellence for Family Business. The report finds that more than half of global family CEOs do not have a formal retirement plan and 70% of global family businesses do not have a formal succession plan. However, Millennial CEOs are ready to take over.
“Many of the Indian family businesses were incorporated in the late 1980s and early 1990s when economic reforms were introduced. Most of these business founders find themselves at the brink of retirement with no planned succession. However, the challenges of retirement and succession are not limited to India. The STEP 2019 Global Family Business Survey shows that family businesses in different parts of the world are also exposed to these challenges”, said Dr. Nupur Pavan Bang, Associate Director, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.
She further adds that “the number of family businesses surveyed in India was 53 and the findings of the global survey are very relevant for all family businesses in India too. The changing demographics, differences in generational outlook and other societal changes are rendering the traditional methods of retirement, succession and governance redundant. Proactively planning to tackle the challenges of succession, retirement and governance, while keeping the changing society and generational outlook in mind, will go a long way in perpetuating family businesses”
Some of the salient findings of the survey are:
Generational Outlook: Millennial family business leaders (39%) have the highest level of education, have lower tenures as CEOs, they plan to retire by their fiftieth birthday and family firms led by CEOs from ‘Generation X’ and ‘Millennials’ perform better.
Retirement Plan: Global family CEOs plan to retire between the age of 61-70. However, more than half of global family CEOs do not have a formal retirement plan and about one third of global family CEOs do not plan to spend time in business activities after retirement. There is a need for family businesses globally to implement CEO retirement plans. Family CEOs are still retiring too late but despite of this after their retirement they plan to not be further involved in the business.
Succession planning: 70% of global family businesses do not have a formal succession plan. Though 47% of global family businesses have a succession plan in case of unexpected events. While this is good, it is not enough to ensure the long-term sustainability of family businesses. Successors’ self-commitment and competence are the key criteria to select the next CEO. While 45% of global family business leaders states that ownership will stay in family hands, ‘Generation X’ and ‘Millennials’ CEOs do not see that the next CEO should be from the family. It is necessary that family businesses globally consider that the next leaders will be Millennials and implement formal succession plans resulting from a process taking into account business, family needs, and the Millennials’ perspective.
Family governance and corporate governance: There is a perceived need for change of family businesses’ existing family governance structures. Family businesses wanting to strengthen family members’ identification with the firm need to implement more than one family governance tool. Adopting more than one family governance tool leads to higher degrees of entrepreneurial orientation and firm performance compared to the ones which adopt only one.
Effect of gender and societal change: More female CEOs are not just needed but are also beneficial to the family business. Family businesses with female CEOs have less autocratic leadership than male CEOs, the female CEOs plan to retire at a younger age than their male counterpart and decisions and succession take place earlier if the next senior family business leader is female.
Entrepreneurial orientation, performance and main concerns: Availability of talent is the main concern of family business leaders globally. Family businesses which are led by leaders belonging to Generation X and Millennials have higher level of firm performance than family businesses led by older demographic cohorts. Hence, it is time to ‘pass the baton’ to Millennial CEOs to boost family business performance. Moreover, to sustain competitiveness it is also important to continuously look for talent and family businesses globally should reflect on how to increase and strengthen their branding as an employer.