The Generation Game

← Back to main page

It is during a family business’ third generation that a series of tensions typically come to a head, threatening profitability—and even survival.

• Should family or business interests come first?
• How can we balance family members’ different ideas for the business?
• Should our next leader come from inside or outside the family?

So, how have Europe’s most enduring family businesses managed to negotiate their way around the most common pitfalls? And what can younger family businesses learn by their example?

We partnered with Bocconi University to carry out in-depth interviews with dozens of executives at 10 of Europe’s most-successful family businesses to uncover the secrets to their long-term survival.

Family vs Business: Which comes first?

In 1972, the children of Porsche founder Ferdinand Porsche made a bold move: they decided that all family members would resign from their management positions, leaving the day-to-day running of the business to top talent from outside the family.

Why did they take this decision?

Despite their best efforts, the family had been unable to agree on who among the next generation should take over the reins when the time came. Every option on the table seemed to be unfair to someone or other. So, they decided it was better to remove themselves from the equation altogether. It proved to be a prescient decision. Half a century later, both the business and family are thriving.

Every family business owner will one day face the difficult decision of whether to put family or business interests first.

In the beginning, it’s natural to adopt a “business first” mentality. For the founder, the business is everything. They devote all their time, energy, and resources to the business—and raise their children to be the same.

But by the third generation, as the family grows larger and branches out, the pressure grows to adopt a ‘family first’ mentality—where the main purpose of the business is to support the family, rather than the other way around.

Family members take on the top management roles, regardless of whether they have the right skills, talent, or experience. And profits that could be reinvested in the business end up going into the family coffers instead. Family members start to make business decisions based on what’s best for them and their immediate families, rather than what’s best for the business.

When families like Porsche have the foresight to recognize that by putting the growth of the business first, they were in fact putting the needs of the family first. By removing themselves from the picture, they gave management the space and freedom to do what they feel is in the best interests of the business—which in turn boosted the family.

The Porsche family aren’t alone. All 10 of the family businesses we spoke to have, at some point in their history, made brave, difficult choices that put business growth above family pride. This includes decision about:

• The family—for example: deciding that family members can’t be in the top management team, or even firing an under-performing family manager.
• Ownership—for example: persuading different branches of the family to sell their shares to another branch to strengthen leadership of the business.
• Governance—for example: creating a Family Council, to act as the voice of the family and co-ordinate each members ideas and concerns.
• Management—for example: hiring top talent from mostly or exclusively outside the family.

What unites them is the fact that they’ve all understood that growing the business is the best way to look after the family for generations to come—and their readiness to take difficult decisions, setting things like egos, family pride and short-sighted self-interest aside.

Me vs We: Balancing family tensions

We often see cultural tensions intensify during the third generation. With the family tree growing wider, different personalities from different family branches begin to have their own ideas and ambitions. This can quickly undermine the shared sense of identity and direction that was so carefully crafted by previous generations.

At this stage, family businesses often fall into one of two related traps. Members either start to put their own personal needs before what’s best for the business (Me before We), or they focus too much on joint goals that ignore the legitimate needs of individual family members (We before Me). Both scenarios create an imbalance that pulls the business and family in opposite directions.

Many family businesses try to prevent this from happening by creating some sort of set of shared principles or values in writing. For example, a mission statement, purpose statement or set of values that everyone in the family can agree on.

While this can be a useful exercise, our 10 families also do something else: they recognize that everyone does not have to agree on every issue.

Instead, they try to foster a basic level of togetherness—just enough to remind everyone that they are part of a broader family with a shared heritage, and that their own personal needs and opinions need to be balanced against everyone else’s.

What these families have all understood is that while they may need to agree on a few core, business-critical issues (for example: ownership, governance, succession) they can agree to disagree on others. All they need to agree on is a ‘common denominator’ of core values or beliefs—and find enough common ground for everyone to feel they belong, and that they have a place and voice in the business.

Family vs. Non-Family Leaders: How to make the right choice

One of the most difficult issues every family business faces is the question of succession. Who has what it takes to steer the ship and ensure survival into the next generation – and the next and next? One of the most difficult issues every family business faces is the question of succession. Who has what it takes to steer the ship and ensure survival into the next generation – and the next and next?

There’s an unspoken assumption that the next CEO will and must be the child of the current CEO. The line of succession is based more on bloodline than merit. And the thought of hiring someone outside the family feels like a betrayal or admission of failure.

While the family businesses we spoke to recognize the importance of preserving the valuable knowledge the family and business that’s been handed down from one generation to the next, they are also happy to look outside the business for leaders. In fact, eight out of our ten families had a non-family CEO by the third generation.

What sets these businesses apart is that they prioritize the best person for the job, regardless of whether they are from inside or outside the family. That means that even when hiring from within, they still expect family members to have the training, skills, and talent to perform well.

If no one within the family fits the bill, they’re ready to look beyond their bloodline to find the person who does. And if a family member isn’t performing well, they’re not afraid to remove them.

This approach has two advantages.

• It helps to spur on any family members who may want a role in the business to work hard to raise their game: no one is under any illusion that they can simply walk into a top job just because of their family connections.
• It discourages the less talented or motivated family members from attempting to lay claim to the top management roles.

Some of our families have gone even further and barred family members from holding top management positions altogether. In doing so, they’ve ensured that no one person or branch within the family can be seen to have a larger say or stake in the business than any other.