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The joint study by PwC, INTES and DBU shows that many families with a family constitution cite generational change as the trigger for drawing it up. However, the details of succession often remain unregulated.
For more than one in two families with a family constitution – namely 51 per cent – generational change was one of the reasons for drawing up a family constitution. This is a high figure. It demonstrates how closely succession and family constitutions are linked from the families’ perspective. Nevertheless, many entrepreneurial families only regulate succession in detail to a limited extent, and even when a family constitution is in place, this is only to a limited degree. What does this mean for families facing the issue of succession?
The basis for answering these questions is the study ‘In Best Shape – The Family Constitution in Family Businesses’, jointly produced by PwC Germany, the INTES Academy and the INTES Endowed Chair for Entrepreneurial Families and Family Businesses at the Digital Business University of Applied Sciences (DBU). The survey involved 175 German entrepreneurial families. One finding stands out in particular.
Succession as a trigger, but rarely regulated in detail
Before the study’s findings can be put into context, it is worth making a distinction. This is often overlooked in public debate. In some families, the succession has been clearly decided. No one from the next generation is available, or all potential candidates have deliberately chosen a different path. For these families, external succession – that is, a sale or external management – remains a realistic and manageable option. More commonly, however, a different scenario applies. There are several people within the family who are, in principle, suitable candidates. However, they have not yet made up their minds, or their suitability and interest remain unclear. It is precisely for this group that the study reveals a significant gap.
Only 46 per cent of family businesses with a family constitution have drawn up a profile of the requirements for potential successors. 39 per cent have defined a structured selection process. And in the event that a shareholder is suddenly unable to fulfil their duties, only half of the businesses with a constitution have a contingency plan in place. These findings are surprising. This is because 51 per cent of families with a constitution explicitly cite generational succession as one of the reasons for drawing it up. Other reasons include the professionalisation of the owner family (70 per cent) and conflict prevention (57 per cent). Multiple answers were permitted for this question.
Why caution is not always a mistake
This gap in the requirements profile, selection process and contingency plan should not be interpreted solely as a shortcoming. Research into entrepreneurial families shows that self-determination and autonomy are among the most important factors for the next generation in terms of their willingness to take over the business in the future. A requirements profile that is defined too narrowly can restrict this self-determination. The same applies to a rigidly prescribed selection process, even before anyone from the younger generation has made up their mind. Caution regarding binding commitments can therefore be a conscious decision, not a failure.
At the same time, it is evident that a certain degree of structure tends to encourage rather than hinder a willingness to engage with one’s own future within the company. In research, this is often referred to as ‘boundary management’. Those who know that there is a reliable process for leadership succession within the company can develop more freely within this framework. This framework then acts as an anchor, not as a rule. The real challenge lies in creating just enough structure to provide guidance, without imposing too many binding commitments, which would make the younger generation feel that their decisions are being dictated by others.
It is important to note one caveat here. Entrepreneurial families vary enormously. Some run smaller businesses now in their second or third generation, with a single location and strong local roots. Others run international groups with several thousand employees and correspondingly complex shareholder structures. There is no one-size-fits-all solution for either of these scenarios. However, a carefully drafted family constitution can provide a framework in both cases. Within this framework, potential successors can find their bearings without the family having to make every decision for them in advance.
Impact arises from the process, not the document
Another finding of the study puts the previously mentioned figures on job profiles, selection processes and contingency plans into perspective to some extent. Two-thirds of the companies surveyed – namely 67 per cent – confirm, with hindsight, that drawing up a family constitution was worthwhile. 72 per cent report a stronger sense of unity within the family. 61 per cent report greater peace and stability. The entrepreneurial families surveyed describe this in their own words as follows: some say that family members not working in the business have developed a greater understanding of the company. Others report that working together on the constitution has forged a bond between the second and third generations.
These effects arise less from the finished document itself and more from the process of drawing it up. When a family comes together to discuss values, roles and expectations, this exchange in itself brings about change. This holds true regardless of how detailed the written rules ultimately turn out to be. As far as succession is concerned, this means that a family constitution is, first and foremost, an invitation. It invites the entrepreneurial family to engage with its own future; it is not primarily a set of rules covering every eventuality.
The family constitution as a framework, not a magic formula
The family constitution sets out the framework for succession. This applies at two levels. At the management level, the focus is on selection criteria and competence requirements – in other words, who can join the management team and under what conditions. At the ownership level, the focus is on the organisation of the family itself, for example where it is divided into lineages and stipulates that shares may only be sold, bequeathed or gifted within one’s own lineage.
This interplay between the family logic, which is reflected in the relationships within the entrepreneurial family, and the corporate logic, which follows rational economic patterns of thought, has been set out in the family constitution. Just how closely this framework is linked to succession is also evident when shareholders leave the company. Even amongst families with a constitution, around a quarter to just under a third still see a need for adjustment in this area. When a new generation takes over, it is often necessary at the same time to clarify how departing shareholders are to be compensated. It is precisely when a shareholder wishes to leave the company as part of the succession process that it becomes clear how strongly the family stands behind the family constitution.
Conclusion
With each successive generation, the number of family members grows. As a result, the complexity of family relationships also increases. The question of how to organise succession without curtailing the younger generation’s autonomy is therefore becoming more important rather than less so. A family constitution can provide a framework for this. However, whether this framework proves effective depends less on the document itself and more on the family’s willingness to address this issue early on and with honesty.
Prof. Dr Alexander Koeberle-Schmid is one of the leading thought leaders in the field of ownership strategy and family constitutions in the German-speaking world. He supports entrepreneurs, successors and entrepreneurial families in finding their bearings even amidst growing complexity, and in remaining capable of making decisions and taking action together. He is the INTES Endowed Professor for Entrepreneurial Families and Family Businesses at the Digital Business University (DBU), founder of the Institute for Owner Strategy, and comes from an entrepreneurial family himself.
Marvin Assenmacher is a research fellow at the INTES Endowed Chair for Entrepreneurial Families and Family Businesses at the DBU, as well as at the Family Business Centre at the Management Centre Innsbruck. His research is shaped by his experience in auditing and strategy consultancy, as well as his work as a freelance consultant to entrepreneurial families. Within his network, he is regarded as an entrepreneur and academic with a special connection to the younger generation in entrepreneurial families.
