Proficient chess players begin each game with a clear strategy that prepares multiple moves in advance. While each move is designed to set up the next, a strategic chess player will remain adaptable to changing circumstances. This same approach of strategic forethought, flexibility, adaptability, and resilience are best practices for inter-generational continuity in wealthy families.
Succession will happen—it’s a matter of when, not if. Families should prioritize proactive planning to ensure a smooth, successful transition. Such early planning will also create a number of options for the how, the to whom, and the when.
Transitioning leadership and management
Proactive continuity planning provides more choice and less risk. It clears the path to capitalize on opportunities. In a business world that is volatile, uncertain, complex, and filled with ambiguity (VUCA), proactive continuity planning by your family and for your family is a great antidote.
There are many aspects to robust continuity planning which, when done well, can help align decision-making and strengthen family unity. The plan should address transitioning both the ownership and control of the family wealth enterprise as well as the leadership and management of the family office and, if applicable, the business too.
In this article, we focus on the important elements of leadership and management succession which include the human, intellectual, and social capital forms that are important to a family’s wealth.
There are several key factors when transitioning leadership and management. While skill sets will vary depending on roles, the necessary considerations are similar. Diligent and nimble continuity planning helps pave the way for ongoing prosperity and well-being in the family wealth enterprise. We’ve identified three different scenarios that encompass most transitions, and the decision-making varies in significant ways across these scenarios.
Critical considerations for leadership and management rolesThe family wealth enterprise has three interconnected circles of participation—the family members, the family’s business team, and the ownership of wealth. Each circle has a distinct lifecycle, and the stages of the lifecycles may not always align. That’s why having a detailed continuity plan is so critical.
There are several key factors to consider when transitioning leadership and management. While the required skill sets may vary across roles, the considerations are similar. For example, when planning for continuity, the person taking on ownership and leadership roles may be the same individual, or may not be. Overall, the plan will outline how to assess a candidate’s characteristics in such main areas as interpersonal skills, professional experience, accomplishments, and business and financial acumen. Many even suggest that EI – emotional intelligence - trumps IQ.
People considerationsFamily member or not, assuming a leadership role will require the same traits including humility, accountability, maturity, integrity, and diligence. Such traits are often a reflection of the family’s values. The candidates for management or executive positions should possess these characteristics, even if they do not have an ownership role or voting control. A wide range of leadership positions may need to be filled, so the continuity plan cannot focus on a single heir or successor. For example, a management role in the family office will require a different skill set than someone on the management team of the family business. Thorough continuity planning will account for each leadership opportunity and outline the specific preparations necessary.
This process cascades throughout. Each role that transitions should have a detailed job description that defines the core functions, responsibilities, authority, and accountability. This description should also draw on input from people in the role and those aspiring to be. This helps to identify the required knowledge, attitude, skills, and habits of a preferred candidate. A non-judgemental, objective evaluation of candidates’ capabilities will help to assess and address any gaps. Ongoing development and evaluations of the candidate will keep the transition on track. These evaluations can also be tied to compensation and reported to the board for approval.
A leadership role in the family office requires an understanding of the family’s history and values, as well as a thorough knowledge of all investments. The successor will need to have a clear grasp of the family’s risk tolerance and its long-term, multi-generational vision. Crucially, this role also calls for the emotional quotient to manage personalities and balance the many competing interests within the family.
Professional considerationsFor leadership in the family business, the successor needs to have a comprehensive understanding of the business’s products and services, systems and processes, culture, and more. The ability to persuasively and positively advocate for the organization and the family is critical. They should also have deep-rooted industry knowledge and experience, which will help them tap the best people to fill roles throughout the business. They will need to combine this knowledge and experience with strong business acumen and the ability to manage people, so they can form and articulate a vision for the future that gains firm-wide and family buy-in.
There are important interfaces between the family office, the family business, and the family. It is essential to have effective governance in place: clear controls, boundaries, and communication protocols. The family should bear in mind the three Cs that form the pillars of effective governance: consensus, communication, and consistency. These strong governance practices help facilitate information sharing as appropriate to achieve alignment and maintain unity. They also help to manage conflict and smooth decision making.
Proactive continuity planning will energize family members and encourage their involvement in the family office and business activities. This deliberate planning can also increase the confidence of non-family executives and management, reassuring them about the stability and future prospects of the business. However, if continuity planning is inconsistent or inadequate, the opposite will happen—diminished confidence and the adverse effects that come along with it. Successors not seen to be capable of leading and managing into the future may not instill confidence in stakeholders.
Effective planning is invaluable, and it can only be accomplished through comprehensive preparation and outlining specific steps and key tasks, along with clear milestones and a transition timeline. Tying the plan to critical objectives and regularly evaluating the progress and effectiveness of the transition will help the family and business stay on track for continued prosperity.
The role of non-family leadership in the succession planEven if a family retains full ownership and control of the family wealth enterprise, certain non-family individuals can play a critical role in continuity planning. This can include experienced advisors who are involved in the family office, non-family leadership within the business, and other outside experts.
Any trusted person who has familiarity with the family and influence with key members can provide helpful input about developing and carrying out the succession plan. Gaining the perspective of someone outside the family can also broaden perspective and lend valuable insight to inform consequential decisions.
Three scenarios for the succession of leadership and managementFamilies should always be looking to identify and deliberately prepare successors for leadership and management roles among the rising generations. This is a core practice for effective family office governance and risk management. It’s also important to have a contingency plan in case of the unexpected, such as if the designated heir is unable, or unwilling, to fill the role.
There are three main scenarios for how the succession of leadership and management proceed, and each one raises distinct questions that must be addressed:
1. A family member has been identified to take over, and they’ve had thorough preparation along with participation in the family office or business. How can you best set them up for success in terms of planning and communication around the transition?
2. A family member has been identified to take over, but they might be too young or don’t have the skills yet. How can you vet them to determine readiness, and what do you do in the interim?
3. No family member wants to take over, no one is prepared, or no one is qualified. What is the process to pick a non-family successor or determine the future of the business?
Scenario #1: Facilitating success for the chosen heirThis is the most straightforward scenario when deliberate planning has proceeded as envisioned, and the timing is appropriate. The identified heir should have the requisite education, experience, and skill. This preparation and training will have positioned them to fulfill the key duties for a leadership role.
While these conditions are ideal, steps still must be taken to put the heir in the best position possible upon takeover. It’s critical to communicate the plan to all key stakeholders on an appropriate timeline. This helps bolster confidence in the family’s plan and maintain continuity during the transition. Compensation is an important element to review, and it should be commensurate with the heir’s skills, experience, and performance relative to similar roles at other organizations.
It’s also important to establish a new role for members of the current generation of leaders who are handing over control. One option is to form an advisory board that includes members of the now generation—as well as others, potentially closer in age to the heir’s peer group—for major decisions or to help guide the new leader until they mature in their position.
Scenario #2: The heir isn’t ready and an interim plan is neededTiming is a critical variable in any planning, and the lifecycle of the family office or business may not line up completely with plans for the chosen heir. In these cases, a non-family individual may be the option to fill a leadership role on an interim basis. This could be a good opportunity for an experienced person near the end of their career or for someone who is already part of the business and seeking a temporary role.
When placing a non-family individual in a leadership role, it’s especially important to have a mutual understanding of the family’s interests, goals, and expected timeline. This encourages alignment and avoids potentially damaging inconsistent off-message communications. Critically, this non-family member should also be prepared and able to mentor the chosen heir and facilitate their future transition into the role.
Compensation for a non-family member in their interim role can be a complex consideration. Most family-owned businesses will not want to surrender equity. Although an ownership stake can help link incentives to business performance, there are other options to achieve this. For example, a phantom stock agreement can tie compensation to business outcomes without giving up equity. In any scenario, compensation should be reviewed closely and be subject to board approval.
It’s also not strictly necessary to find an outside candidate, and in certain cases, the senior family member may simply maintain their role for longer than initially planned. Then they can transition the selected heir into the role when ready without bringing in a non-family individual to a leadership position. If this occurs, the senior family member still must accept that they will eventually need to give up control. An updated timeline should account for that, and new contingency plans should be made to remain adaptable. This process of deciding when to transition leadership to the rising generation can be similar to creating a will and organizing for the next phase; it’s often put off for a later date, and it’s beneficial to be proactive.
This scenario may also be a trigger to sell all or part of the business. The timeline and assessment of the chosen heir’s readiness for the role may be a determining factor. Ultimately, dutiful succession planning in advance should outline the leadership traits, professional experience, and business acumen needed for the role, along with methods for assessment. These criteria will help evaluate the options and inform the decision-making.
Scenario #3: There is no heir and the family must decide about the futureSometimes, for a variety of reasons, there is no heir identified or available to fill the role. Then it may be necessary to select a non-family individual as a successor for long-term leadership and management. If so, the family will still want to retain ownership and control while also ensuring continuity for ongoing success.
In this case, the process will be similar to identifying an executive candidate within a business. It requires a clear description of the role and a defined set of expectations for the candidate to fulfill. It remains imperative for them to establish trust and confidence with the family and key stakeholders. Clearly outlining their responsibilities and confirming the experience and ability to carry them out, will prepare both the family and the candidate for success.
Lacking an identified heir can trigger difficult decisions about the future of a family and how it holds and manages its wealth. Selling the business or going public could be viable options, depending on the family’s goals and circumstances, as well as the overall outlook for the business and industry. In some cases, ceding control may be the best way for family members to cash out and maximize value. There are many options available, including tapping current non-family executives.
Bringing in non-public investors who can provide both capital and expertise can also help continue business operations, and their compensation can be structured in a way that avoids giving up equity. Particularly in this scenario, it’s important to link compensation to business performance without yielding equity, and a phantom stock agreement is one way to achieve this.
Ultimately, there is no single solution for this scenario, but deliberation among all key stakeholders will help to weigh the options and decide upon the best course to address the family’s goals and values.
Leadership compensation considerationsFamily member: Compensation should be commensurate with the heir’s skills, experience, and performance relative to similar roles at other organizations.
Non-family individual: Compensation should be reviewed closely and subject to board approval.
Non-public investors: Compensation can be structured to avoid giving up equity and maintain full ownership. Investors will measure success by the return on their capital. This singular measure may not be aligned with the family’s vision and purpose.
Scenario planning for your familyWhile the appropriate strategy for continuity planning will depend on the individual situation, every plan and timescale must remain adaptable to changing circumstances. Building flexibility into the plan is critical to navigating unplanned external triggers, like an economic downturn or other macro factors that require reassessing the plan. A range of other disruptors can impact the plan, including industry-specific changes, new regulations, demographic shifts, technological advancements, or even a public health crisis. Families may have to deal with unforeseen personal issues that arise too (e.g., divorce, health complications, death). Planning should have ample forethought along with recurring assessments. Even with the best-laid plans, remaining responsive and adaptive is invaluable.
The succession of leadership and management requires a long-term strategy, so families should think far beyond the next move. By preparing well in advance, identifying clear requirements for each role, providing ample training for necessary capabilities, and remaining adaptable to shifting circumstances, families can protect their legacy and ensure ongoing success.
Three steps for leadership and management succession:1. Set a clear and flexible strategy for transitioning leadership and management roles.
2. Have a contingency plan in place should circumstances change.
3. Outline directives for family and non-family successors including personality traits, business acumen, responsibilities, and compensation.
Learn more on how BDO’s family office services help families preserve, protect, and pass on wealth.
For more information, please contact:
Jeff Noble, Director, Private Wealth
Bryan Huck, Manager, Wealth Advisory Services
The information in this publication is current as of February 2023.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
This article was adapted from BDO USA: https://www.bdo.com/insights/tax/how-to-plan-for-succession-paving-the-way-for-continued-prosperity.