Much has been written about how 90% of family businesses fail to succeed through the third generation. The curse has been described by the phrase, “Shirtsleeves to Shirtsleeves,” and its equivalents in many other languages and societies. Extensive research, including by my colleague, Prof. John Ward, attribute this curse to a variety of causes: Destroyed drive, rigid paradigms, undeveloped families, family lifestyles exceeding business distributions, lacking respect for management professionalism, and family conflicts taken to the business arena.
While all those causes are valid possibilities, the one that is best known and the default choice is “destroyed drive.” It evokes the image of spoiled children, born with silver spoons in their mouths (“silver spoon syndrome”), bringing to mind the likes of Reggie and Veronica from “Archie Comics.” The most extreme and best known but least cited example lies in 18th century French history, described as: “Louis XIV built Versailles, Louis XV lived in Versailles, and Louis XVI died for Versailles.”
I would like to add an additional cause, which I call the “Law of Diminishing Skills.”
In the typical scenario, the founder, usually G-1 of a yet-to-be-family business, does the heavy lifting, sort of like taking a sports car from 0 to 60 in a few seconds or the initial liftoff of a spaceship tugging to escape Earth’s gravity. Despite their powerful thrust, for most entrepreneurs, the escalation is slow, affording time to train and prepare G-2 successors. The end of the entrepreneurial stage and the start of the next stage are not so terribly different, so G-2 is generally capable of taking over leadership of the business and can grow with it.
Often, the next phase of family business is much like the after-burner rockets that take advantage of lesser gravitational pull to surge further and faster toward “infinity and beyond.” Indeed, a successful second stage growth of a business carries it to a whole new level where different sets of skills and talents are required to manage the further growth of a much larger and more complex business. By the end of that second stage, the required managerial skills may well exceed a G-3’s skill level.
G-3 working within the growing family business don’t likely have sufficient opportunity to learn how to steer through the challenges of the next stage of growth. Some seek to develop such skills elsewhere, in another, unaffiliated company. However, when a G-3 has achieved a successful track record elsewhere, leaving that position to assume a new position in a “foreign,” albeit family business, might seem a step backwards. Furthermore, in addition to the business challenge, there would be the additional burden of the family business element. Thus, the “Law of Diminishing Skills”: G-3 simply don’t have the time to learn the extraordinary skills needed for the next stage of growth.
In those circumstances, families may best be advised to find a suitable professional manager, one who has experience leading a business to a similar next stage. In other words, find one who has “been there, done that.” Then the family can “retreat” to more suitable governance roles.
Like so many laws, the Law of Diminishing Skills has exceptions: (i) where growth under G-2 leadership is more modest; (ii) where liquidity events allow reinvention of the family enterprise or its components; and (iii) where responsibilities are realigned through merger or other reorganization. Such exceptions are described in my book, Visionaries Are Made Not Born, in the stories of (i) the Bigelow Tea family; (ii) the Ross Perot family; and (iii) the Terlato (Wines) and Wirtz (Chicago Blackhawks) families.
As they say, the exceptions prove the rule or in this case prove the law, the Law of Diminishing Skills. That seemingly negative law is an economic phenomenon that can be converted to a positive with good preparation, preferably deployed “early and often.” To be clear, that preparation can be to get family owners to be ready and able to step back to a governance role, supporting the hiring and oversight of a non-family CEO.
Bringing in non-family successors from outside bears huge risks of adapting to culture. So, for many, preparation may involve internally breeding non-family leadership. The most successful teams have strong benches. With foresight, capable managers can be hired and groomed, way before a transition point, to be ready when needed.
Either way, good communications are the rails upon which on-time trains roll best.
You may wonder how family members who aren’t up to leading the high-growth company can presume to govern an experienced non-family leader. It’s simply that the functions and required skills are quite different. Even though the Board of Directors are the CEO’s boss, a board is a group effort, often including non-family CEOs or ex-CEOs, which can help family directors develop and improve their governance skills. Some use outside consultants and courses, such as the highly rated “Governing Family Enterprises” executive education program at the Kellogg School.
The Law of Diminishing Skills is both a rule and a warning sign. Even those who believe that their (business and family) situation is different are well advised to be careful and to seek independent judgment as to whether to heed the warning signals. It’s much like a caution sign in traffic. It may seem that just as warnings of oncoming traffic, as they say, appears in your car’s side-view mirror, Family Business challenges may seem different than in reality.