How can a family business be passed on to the next generation in a way that leaves everyone feeling they have been treated fairly? Succession expert Claudia Buchmann shares some insights.
Inheritance is a topic that can give rise to conflicts between family members; especially in cases where the family owns a business. It’s no surprise then, that HBO’s hit series "Succession", which centers on this topic, has resonated with viewers.
But what makes for enthralling entertainment in this fictional story can in real life divide families for decades and drive flourishing companies into ruin. Often, such conflicts arise because family members feel they have not been treated fairly. We therefore decided to talk to Claudia Buchmann, a well-known succession expert of "St. Galler Nachfolge" (link in German), about the importance of fairness when it comes to business succession.
Ms. Buchmann, no one wants to be treated unfairly. When you and your colleagues advise entrepreneurial families on succession, how important is it to ensure that the process is fair?
As advisors, we can make sure that families discuss fairness and justness. Our objective is for them to talk about what each member understands as being fair and just in the context of business succession, and where they share the same views on the topic.
We also help families understand that there no such thing as absolute fairness, nor is there just one fair solution. Every family member has a different understanding of fairness and the principles of fairness. If they take that as a basis, they can establish a common understanding of fairness.
A one-size fits all approach probably isn’t much help in such situations – you can’t cut a company up like a pie and divide it. And it’s not just money that’s at stake, I assume family members also often have an emotional attachment to the business too.
Exactly. A company cannot be cut up and divided into a certain number of pieces like a pie. But when you’re addressing company succession, it’s important to also focus on the importance of the principles of distributive justice and procedural justice.
Providing advice about family constitutions is part of our range of family governance services. For more information, please visit the dedicated Family Governance website.
That’s a bit abstract. Can you give us some examples?
Distributive justice addresses "Who gets how much." This can be determined with the help of principles, such as merit ("to each according to their performance, their contributions"), an equality ("to each the same") or needs ("to each according to their needs").
Deciding which principle (performance, equity or needs) a family ultimately wants to apply is not easy. In our experience, the performance principle is often applied when someone is assuming responsibility within the company (for example in the case of leadership succession).
Another example of the performance-based principle is when two siblings work at the family company in different roles and are remunerated according to their position and the amount of responsibility they have. One example of the equity-based principle would be when shares are distributed equally among all family members in the case of ownership succession. Performance and equity-based principles are most frequently applied when responsibility for a company’s management and ownership is being handed over.
It’s important for a family to address the question of fairness together and to do so transparently.
As mentioned earlier, there is no such thing as absolute fairness. Which means that the principle of fair process is also very important. This principle is based on the assumption that a solution that needs to be worked out will be more readily accepted by all parties if they are all involved in the process and therefore have the possibility to contribute to the outcome. Information and knowledge should be handled the same way. If everyone has the same information, then there is transparency, which is also an important part of fair process.
These examples suggest that taking a family’s individual circumstances and values into account is important in ensuring that succession is fair for all sides and thus successful. Is that correct?
We feel it’s important for a family to address the question of fairness together and to do so transparently. This means that communication must be open and trusting. It also involves discussing values and agreeing on which of those are shared.
So timely and transparent communication are important for a successful succession process. When should this communication ideally take place?
It’s never too early to have that discussion; also because it helps sensitize family members to the topic and enables them to develop a constructive culture of talking about things that go beyond the everyday. In our experience, this helps parents and their children interact and get to know each other on a different level. Discussions like this are often new for them, and can take some practice.
How important is it that, despite everyone having their own ideas and desired outcomes, they all talk to each other in an unbiased way?
Being open to different outcomes is important if you want to find solutions together. It’s also important to listen, ask questions, get a shared understanding of concepts and terms, and to try to see things from a different perspective, to name just a few.
We have talked a lot about family, values and communication. We believe it’s important that all of these considerations and discussions about fairness and justness are also included in the more overarching question of how business succession can be fair for family members while also being expedient for the business. Both the family and the company need to be considered.
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