Blood or Business? Family-owned Companies Struggle with Succession

A public feud has erupted for control of Eulen Group, a Spanish provider of cleaning, maintenance, security and other services, which also has a strong presence in Latin America. The sons of the founder, David Alvarez, are attempting to wrest control of the company from their father. The same scenario is occurring at Galletas Gullón, against the company’s matriarch, Maria Teresa Rodriguez. Unfortunately, those aren’t the only examples of offspring who have tried in recent years to dislodge their parents from controlling the companies that the older generation established. These conflicts can arise when the succession process is not on the everyday agenda of corporate management, experts say.

Josep Tàpies, who heads the family business department at the IESE business school in Spain, says “All companies are subject to risks committed by governments and managers, but family companies, because of their very nature, can more easily succumb to a series of mistakes. In recent years, academics and other experts have, from a practical viewpoint, identified, inventoried, and proposed various ways to avoid those missteps. Often, as in the case of Eulen, the problem occurs during the second generation of family ownership, when company officials either do not know how to – or cannot – resolve key challenges. In many cases, this can lead to the sale of the company. “The succession process is a key issue that the family company must confront. It is a long process that requires planning and collaboration with outside advisors. A well-prepared succession [plan] requires the intensive training of one or several different successors. It also requires you to establish conditions that will regulate relationships between shareholders, managers and corporate personnel in the future,” notes Tàpies.

An unnecessary delay in the succession process, or failure to dedicate enough time to these important steps can have a destructive impact on the future of the company, Tàpies adds, even if the firm has enjoyed a great deal of success until that point.

According to a report by Pricewaterhouse Coopers (PwC) entitled, “The Family Company in Spain,” 51% of Spanish companies surveyed did not have any formal procedures that established the relationship between the parents [who owned the company] and the company [itself], or which created regulations for dealing with situations as critical as succession. About 71% said that they were thinking about studying the issue of generational transition.

On the other hand, in the same report, PwC notes that 40% of all companies don’t even have any agreements with their shareholders to resolve any doubts that can surface with respect to such issues. “To assure success in the event of generational change, you need to establish your plans early enough to be able to clearly define the culture and values of the company, and to guarantee the professionalism of the successors,” notes José Félix Gálvez, who runs the family enterprise unit at PwC.

The Importance of Consensus

One of the most successful cases of succession involves Ricardo Fisas, who created cosmetics brand Natura Bissé. The company’s products are used by European royalty, such as Asturian princess Letizia Ortiz, and Hollywood stars including Julia Roberts. Fisas, the company’s founder and president, says his children, along with their spouses, have taken the reins of the company, without causing any disturbances either within the family or from a purely business point of view. Fisas’ oldest daughter was chosen to direct the destiny of Natura Bissé, a decision that was made unanimously by her four brothers. Fisas says that in his company every strategic move is taken by the family council, using that formula.

Julia Téllez, the partner responsible for family business law at the Gómez-Acebo & Pombo firm in Madrid, agrees that it is essential for every member of the family council to be involved in a consensual decision-making process. It can take up to a year to create a family agreement protocol, she notes, because company officials have to negotiate each point in such a way that all of the parents agree with the final designation.

The successor must not be chosen exclusively by whoever is left in charge, experts say; it must be a consensual decision approved by everyone. There must be absolutely no doubt that the person who is chosen [to lead the company] wants to assume that responsibility since, on some occasions, a son or daughter who takes over the company is guided by loyalty to the family when, in reality, he or she should be pursuing a career that is quite removed from the company. “No one assumes that the son of a great violinist will also be a virtuoso on that instrument,” notes Tàpies. “However, people do take it for granted on many occasions that the descendants of an entrepreneur will inherit the same entrepreneurial genes and managerial skills from the [parents].”

“You have to make it clear that although the property can be acquired and inherited, this does guarantee that the person who acquires the property is skilled at managing and governing it. Although clearly there were such skills within the family at the time when the family company was created – that is, during the entrepreneurial stage – that is not necessarily the case, beginning with the second generation of the family,” he adds.

Experts say businesses can avoid the sorts of conflicts currently occurring within companies such as automaker Fiat and cosmetics maker L’Oreal by setting up a series of guidelines and, above all, by not underestimating the importance of the succession process. They advise company officials not to assume that the process will involve a transfer of ownership from the parents to their children, or fail to consider a possible successor [from outside the family.] In the case of Fiat, there was recently a new development in a long-raging battle that began in 2007 between the Agnelli family, which owns Fiat, and Margherita Agnelli de Phalen, daughter of group patriarch Gianni Agnelli [who died in 2003.] In March, a court dismissed de Phalen’s lawsuit against her mother, which challenged her inheritance. De Phalen is also the mother of John Elkann, the vice-president of Fiat, who is considered the natural heir of the clan.

Likewise, at cosmetics producer L’Oreal, the Bettencourt family is immersed in a family battle involving mother and daughter – in this case, Francoise and Liliane Bettencourt, respectively. In a lawsuit, daughter Liliane claims that her mother Francoise, owner of L’Oreal, is no longer mentally sound and therefore incapable of managing the company.

Recipes for Addressing These Challenges

Experts say that in order to prevent more cases like Eulen from taking place – and to make it easier for cases like Natura Bissé to become the norm – it is important to pay attention to change. They warn that officials should not trust in the old maxim that the same formula is always going to work out in the company, or the notion that businesses don’t need to adapt to new realities and the new managers. “If you want to make sure that your ownership has the right skills, you need to plan and make frequent re-evaluations,” advises Tàpies. “Your family name does not provide any guarantees; nor do the innate skills of anyone [in your family], unless he or she also has wide-ranging experience and training. There are some cases where ownership does not have the managerial, strategic, and organizational skills that the company requires, and the company needs to make some decisions about how to guarantee its competitiveness and the longevity of the business.”

On some of these occasions, it may make more sense — even if the successors to the company’s founder are in control because they own enough shares — for subsequent generations to choose an independent professional from outside the clan to take over, experts note; someone with broader vision and experience than any family member. According to the report by PwC, more than half of all Spanish family-owned companies say they are prepared to name a person outside the family as their chief executive.

“Companies must be competitive environments, where a certain amount of tension is needed to maintain the firm muscle tone of competitiveness. Another common mistake of family-owned companies is to confuse the type of relationships that must be maintained [within the corporation and within the family]. The solution, which can be tricky to accomplish, must involve the disciplined exercise of treating your company as a company, and your family as a family,” notes Tàpies.

Finally, experts stress that it is very important to prevent the succession process from becoming an isolated, traumatic episode. Officials must provide a more permanent role for the process. Experts say this requires learning from what has taken place in the past, yet not forgetting that each moment in time requires a somewhat different formula for success. Although some decisions made in the past may have turned out to be successful, company leadership cannot lose the perspective of the current moment. “Everything we’ve learned indicates that success can also have harmful consequences. One of these is if you convince yourself that because you have figured out how to deal with a situation when conditions were difficult, that makes you a person who is immune to adversity, adds Tàpies.”

Past profitability does not guarantee future profitability. “There is no vaccine that eliminates forever the risks that exist in a family enterprise. Having acted successfully in the past is no guarantee that you will also do so correctly in the present, and much less so in the future,” notes Tàpies. “To guarantee continuity, we need to be constantly attentive; we need to avoid the belief that no matter what the circumstances, we can always follow the same recipe book that we have used in the past.”