The Willingness and Commitment of the Relay Generation (2)

Key Finding I: Who does the founding generation wish to pass the baton to? And how?


Key Finding I
 
  1. Most entrepreneurs expect a smooth succession for the businesses they’ve founded; only less than 5% think it is proper to reduce or transfer their stake, or even close the business after their retirement if there is no suitable successor.
  2. Younger entrepreneurs hold a different view than the older generation regarding the manner of succession (pass on the baton to offspring or professional managers): Older entrepreneurs are inclined to designate their children as successors; those below the age of 50 are more open-minded in this regard.
  3. Nearly all founders who have developed their succession plans insist that the relay generation should take over ownership of the business. Younger and older entrepreneurs think differently regarding management rights. Most entrepreneurs below the age of 50 believe that the relay generation does not necessarily need to also execute the management rights.
  4. The founding generation (especially those with a higher education background) is inclined to have the relay generation work in other companies or set up their own business before returning to the family business.
  5. In general, entrepreneurs hope that the relay generation can begin working in their family business in a lower position. The founding generation (especially those with a higher education background) would like their successors to first rotate through different positions in the family business.
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Whether or not to Pass on the Baton? Who to Choose as the Successor? Second-Generation Family Member vs. Professional Manager

What is the most desirable way for the founding entrepreneurs of family businesses to pass on the baton? Our research results show that most entrepreneurs expect a smooth succession for the businesses they’ve founded; only less than 5% think it is proper to reduce or transfer their stake, or even close the business after their retirement if there is no suitable successor. However, not all entrepreneurs wish to pass on the baton to the second-generation family members, 55% of them are willing to consider professional managers as their successors.
 
Our analysis further indicates that entrepreneurs’ opinions about the manner of succession vary depending on their age: The older ones are inclined to designate their children as successors; entrepreneurs below the age of 50 are more open-minded in this regard. It can therefore be inferred that it will take time for professional managers to hold the reins of family businesses. Over the next 10 years, as the founding entrepreneurs retire, their businesses will most probably be run by second generation family members.

What to Pass Along? Ownership vs. Management

Nearly all the founders who have developed their succession plans insist that the relay generation should take over ownership of the business. Regarding the succession and execution of management, around two thirds (62%) of the respondents have a flexible attitude: the second generation should take the helm of the enterprise as a shareholder, while a professional manager is engaged for business management. In the event that the family business runs into a major crisis or the professional manager turns out to be incompetent, the second generation should manage the business on their own. This shows that the first-generation entrepreneurs have no overwhelming inclination about whether to hand over the family business to a family member or an external manager.

Entrepreneurs below age 50 have a more open attitude about whether the second generation should take over the management of the family business: most believe the second generation does not need to manage the business, and should only hold a stake. They should only run the company if needed. The more educated they are, the more of an open attitude the first generation will have regarding whether the second generation should take over the management of the family business. Those who believe the second generation should take over management are in the minority; most believe the second generation should only take over the ownership.

How to Nurture Successors? External vs. Internal Nurturing

As for the best approach to learning about corporate management, nearly two-thirds (65%) of the first-generation entrepreneurs expect the second generation will set up their own company (23%) or work in other companies (42%) before returning to the family business. This indicates that the entrepreneurs put an emphasis on the managerial expertise accumulated by the second generation through working externally.

The highly educated first-generation entrepreneurs (those with a bachelor’s degree or above) prefer that the second generation work externally to learn about corporate management. The first-generation entrepreneurs with a junior college certificate or below prefer that the second generation assume a position in the family business, as they have more confidence in being able to nurture their successor themselves.

Where to Start? At the bottom vs. at the top

First generation entrepreneurs expect that the second generation will start at the bottom. Some 46.3% of them consider rotating their successor through different positions; 32.5% of them plan to offer the successor a front-line position. Only 6.3% of them hope the second generation will start as an executive. The first generation entrepreneurs with a bachelor’s degree or above prefer rotating their successor through different entry-level positions. This indicates that highly educated entrepreneurs generally believe diversified entry-level positions will facilitate a smooth succession to the second-generation.  

Key Finding II: Why is the relay generation willing to take the baton? How do they prepare for the succession?



Key Finding II
  1. The higher the level of education the 2nd generation has, the more willingness they show towards succession. However, the educational background exerts a non-linear influence on a successor’s commitment to the organization. Those among the 2nd generation with a junior college degree or a master’s degree show higher commitment to their organizations; those with a bachelor’s degree show a relatively lower commitment to their organizations.
  2. The older members of the 2nd generation are, the higher commitment they will give to their organizations
  3. Sufficient preparation for succession as well as personal growth experience, especially the experience of working in the family business, can influence the willingness of the 2nd generation towards succession to a certain extent. Hence, it will be helpful if the 2nd generation successors can accumulate experience from working for the family business as soon as possible.
  4. Self-efficiency (the general confidence in one’s own ability) and personal growth experience can exert significant influence on the 2nd generation’s attitude towards succession: the more confident the successors are with their own abilities, and the richer their experience, the more willingness they show towards succession and the higher organizational commitment they make to their organizations.
  5. Self-efficiency can also help the 2nd generation to meet challenges, thus indirectly influencing their willingness to take on a succession role in the family businesses: those with strong self-confidence are unlikely to feel pressure from the better educated founding generation, their numerous brothers and sisters, as well as the top managers. Therefore they are less likely to retreat from the succession. By contrast, those who lack self-confidence may see their resolve to take over the family businesses easily weakened.
  6. Family plays an important role in nurturing the 2nd generation successors. The stronger the family adaptability and cohesion are, the more confident the 2nd generation successors are. Education background (academic degree, major and experience studying overseas) and practical business experience cannot directly help improve the self-confidence of the successors.


Educational Background & Age

As the second-generation entrepreneurs in our survey have already joined their family businesses, our analysis is focused on why they were willing to do this. Our research shows that the second generation’s educational background and age are two major determinants of their aspiration for business succession and commitment to the organization. The college-educated members of the second generation have a strong aspiration for business succession. In particular, those with a master’s degree have a significantly higher aspiration for business succession. The older the second generation is, the higher commitment they will make to the family business. Therefore it requires the first generation to have great patience to nurture and provide guidance to their successors, and it takes time for the second generation to sharpen their abilities.

Readiness for Business Succession

Besides academic qualifications, corporate management workshops, guidance from experts inside and outside the family business, and internships in other enterprises can exert a significant influence on the second generation’s aspiration for business succession. The second generation has significantly lower aspirations for business succession when they are ill prepared than when they are well prepared. This indicates that the second generation attaches great importance to their personal capability when considering taking over the family business.

Work Experience for Business Succession

The survey of members of the second generation that have begun to take over their family business shows that the challenges they have met during the succession have facilitated their growth. For both aspiration and commitment to the organization, the results show a significant trend upward as the successor gains more work experience. Members of the second generation who have more work experience relevant to business succession generally have more business management experience, are likely to translate the knowledge they have acquired into practical skills, enhance their self-confidence and are therefore more willing to participate in their family business and make a higher commitment to the organization.

Self-efficacy

The second-generation’s self-efficacy, equivalent to self-confidence, refers to one’s judgment on whether one is able to smoothly take over the family business. The research data show the second generation will have an increasing aspiration for business succession after becoming more confident. And their commitment to the organization will continue to rise along with their greater confidence.

Noticeably, the second generation’s self-efficacy can have a strong influence on their aspiration for succession. The successor’s confidence can not only boost his aspiration for business succession, but also reduce the negative impact of other factors. For example, if the first generation is more educated, with more siblings and senior executives, the second generation will have lower aspiration for business succession. For self-confident members of the second generation, the above factors don’t seem to pose any challenge or exert any negative impact on their aspiration for business succession.

Where, then, does the self-efficacy come from? Our research shows that among the members of the second generation, the successors will show stronger self-efficacy if their family has greater adaptability and cohesion. Other factors, such as educational level and overseas educational experience, don’t have much to do with self-confidence. This highlights the importance of family relationships, which generate confidence and power among members of the second generation.