Strong Governance is Key to Succession Planning for Family-Owned Businesses

Board Perspective Series

A 12% survival rate for family businesses beyond the third generation is a statistic that is frequently cited. It is an old metric and may be more directional than precise these days – but the fact that it continues to resonate so strongly is emblematic of the difficulty in keeping a family business thriving.

With WomenCorporateDirectors, KPMG recently spoke to family-business directors and executives from around the world to discuss the critical role that governance plays in providing the edge that enables family businesses to succeed over the long term.

Over the course of our interviews, succession planning—for both executives and the board—arose as the critical component to endurance. In family businesses, succession planning is often exceptionally challenging due to family dynamics and emotional considerations. It’s one of the biggest differences between family-owned businesses and other companies. It’s also an area where independent directors can add enormous value—if they remain objective and maintain the family’s respect and trust.

Succession planning—both long-term and as a plan that can be activated immediately in the event of crisis—is critical to a company’s survival, and, as a matter of strong governance, it is the responsibility of the board to ensure that a plan is in place.

Begin the discussion early. Many boards begin the succession process as soon as a new CEO is named, and keep it on the agenda at least on an annual basis.

The CEO may resist, but starting the discussion early and keeping it on the annual agenda make it simply a part of the company’s governance and may help make the idea of having the discussion less threatening.

Set the stage. For owners who may be resistant to the topic, thought should be given to whether there is a context that might help make them more receptive. For example, compare these two approaches: bringing the discussion up in a board meeting that already has a packed agenda may fall flat; while there may be better success if a director who is also the owner of a family business lays the groundwork by bringing it up in an informal, one-on-one discussion in which he/she relates their own experience of succession planning discussions with his company’s board.

Make it objective. Here, external directors who are involved in other family-owned businesses can help, as can consultants who have experience working with family owned businesses. The more there is clarity regarding the strengths and experiences that are required in the next leader, the more there can be an objective assessment of how the capabilities of potential successors match up against the requirements, as well as identification of gaps.

Look at it broadly. CEO succession is paramount, but there are other roles to consider. From a company perspective, the board should be assured that the organization has plans in place in the event it loses other key talent, such as the CFO or head of R&D. From a family perspective, there may be ways to keep talented family members engaged in the business even if they are not going to become the next CEO or join the board.

Find more from the full report at kpmg.com/us/wcd.