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Family Business Advisory

On the Verge of Globalization – Family Businesses in Emerging and Fringe Economies Face Special Challenges in Finding the Right Successor.

Family businesses in emerging and fringe economies face special challenges in finding the right successor.

  • 31 October 2011

On the verge of globalization

Family businesses in emerging and fringe economies face special challenges in finding the right successor.

Away from the meta-national decision centers, family businesses in emerging and fringe economies need to continuously adapt their business models to the growing presence of globalization. Sometimes, this can mean they have less time or lack the necessary focus to optimize vital internal processes, such as top-level succession planning. In what follows, Egon Zehnder consultants working on three different continents – in Argentina, Indonesia and Portugal – argue that in these special circumstances there are several aspects that must be observed if succession planning is to match up to best practices and meet with success.

We search in vain for a strictly scientific and un-equivocal definition of “emerging economies”. S&P, for instance, assigned a total of 19 countries to this category at the end of last year, while Dow Jones counted no less than 35, including Argentina and Indonesia. But even in the absence of precise definitions, experts are agreed that these economies all display strong growth and rapid industrialization. In these parts of the world the business environment often changes much faster than in mature economies.

Partly as a result, emerging markets are assumed to provide greater potential for profit, but they also harbor substantial risk factors. And in another crucial distinction, the corporate landscape is far more clearly dominated by family firms – the archetypal form of private enterprise – than in developed economies with their established industrial traditions.

Adding to the catalog of differences between emerging or fringe and developed nations, the distinction between urban centers and rural areas is far more pronounced in most emerging countries. Their rapid economic progress is often focused on a single center or a small number of cities. This, of course, has knock-on effects in terms of infrastructure, educational opportunities and general standards of living, as reflected in the availability of goods and services and leisure facilities. As we will show, all of these factors exert a direct or indirect influence on succession processes at family-owned companies in the different countries.

A company without a well-designed succession process is invariably a brittle system. Just how brittle is shown by the high proportion of family firms that fail to master the shift from one generation to the next and go under, no matter where in the world they may be.

What holds true for succession planning – or the lack of it – in the world’s richer, more industrialized countries is even more in evidence in emerging or fringe markets where family businesses have traditionally been a key driving force in economic growth. Thus, the general reluctance of many family-controlled businesses to face the succession issue early enough can cause acute problems in countries on the verge of globalization. Family businesses in emerging or fringe markets need to adapt their business models continuously to the challenges of rapid change. As a result, they often completely forget about succession planning – a topic that leads a neglected existence at the best of times – until it is too late.

No one-size-fits-all solution

From our experience and the collaborative model we have developed, Egon Zehnder International has been able to capture and present a set of best practices that work across continents and cultures. Best practices, however, do not translate into a formulaic one-size-fits-all approach. In many respects, the challenges facing family firms derive from the unique dynamics of the families and organizations themselves. As a result, best practices translate, rather, into a series of codified and documented processes that can guide family businesses through succession planning. At the same time, however, these processes need adapting to the specific requirements and conditions that apply in smaller but often high-growth economies.

To illustrate how this works, we want to look at two family businesses from different countries – Argentina, an emerging economy, and Portugal, an EU fringe economy. While Portugal is set apart through its membership of the EU, it nevertheless displays structural similarities to the Argentine market. In their respective countries these two family firms (jeans manufacturer IVN in Portugal and milk producer Williner in Argentina – see insets) are either market leaders or rank among the top players. As globalization progresses, however, they are also finding themselves exposed to increasingly international competition – a development that will also have a major impact on their succession planning and that must be taken into account in the relevant processes. In fact, succession is a process that should begin years before the actual event.

Effective succession planning requires balancing the need to deliver short-term results with the need to invest in the longer-term development of talent. When succession planning fails, it is often because it ends up being merely a mechanical process of updating a list of high potentials matched with slots they might fill. Best practice dictates that, in order to obtain a significant talent pool to serve present and future needs of the organization, succession planning and leadership development must be treated as interrelated issues. Moreover, the CEO needs to be involved personally and hold senior managers accountable for developing talent and constantly strengthening succession alternatives.

Effective implementation of succession planning depends on the organization adopting a talent mindset in which there is time for and investment in in-depth talent assessment, including external benchmarking. High-potential candidates can figure in several succession plans, even in different departments or business units. Refining and adjusting the solution to cope with the organization’s business context and culture – that is, a commitment to continuous improvement – produces better results all around.

In family businesses, succession is a two-stage process involving the transfer of both management and ownership, which might occur at different times. At the highest level several options in terms of succession exist: appoint a family member, appoint a professional non-family manager, or exit the business.

Planning early, implementing over time

For many entrepreneurs and family business founders, giving up direct operational control at first appears unthinkable. In fact, though, the only unthinkable and unacceptable option is “do nothing.” The two companies we advised already had experiences with non-family top managers (IVN) or were looking for one (Williner).

Planning early and implementing over time can help overcome the natural reluctance to connect with the succession issue at all and with the idea of a non-family CEO in particular. It helps ensure a smooth transition, be it to a family member or a professional manager. The focus should be on “who,” not “how.” A written succession plan enjoys a better chance of success if it incorporates both practical and psychological aspects into the search process. These would include timing, how the decision is taken and confirmed, the communication process, and the skills, experience, and leadership competencies required by the next leader. If the transition is to occur within the family, the successor should submit him/herself to a transparent career development plan, as well as, over time, developing his/her own vision for the future of the family business.

Different stakeholders should be involved – selected family members, non-executive directors, and trusted employees – as well as outside help to bring added expertise and objectivity to the table. Benchmarking against business processes and performance metrics, against industry bests and/or best practices from other industries can also add a measure of objectivity to the search process.

Three special challenges that family businesses in emerging and fringe economies face in succession planning should be handled with extra care:

Limited talent pool

First among these is that the pool of qualified candidates available to the succession planning process will likely be limited. The job market may not be fully “liquid.” Also, companies that are not based directly in the commercial hot spots in emerging or fringe markets, normally in the region of the capital city, will often have difficulties recruiting the best outside talents. This was a problem encountered by IVN in Portugal and Williner in Argentina. In response, the succession planning strategy must be more flexible, more open to the necessity of trade-offs, and also more aware of the need to tie the process to effective internal talent development.

At Williner in Argentina, for example, our initial proposition was to evaluate the possibilities of promoting from within, while simultaneously strengthening the company’s talent development process and thereby minimizing the need to search for talent externally. If mining internal talent did not produce a suitable candidate, at the very least the effort would reveal unique cultural and personal traits in the talent pool that would help maximize the chance of recruiting the right external candidate.

In this particular case, following an appraisal, Egon Zehnder International recommended that the Commercial Manager be promoted to General Manager, despite the fact that he did not speak fluent English, and needed some support in the financial area.

Systems under construction

Until recently, most HR systems were purely operational. The transition of HR to a business partner role in family businesses is generally taking longer. In our two business case studies, the area of talent management is still under construction and not very robust, which hampered the succession process – especially when the search turned to the internal talent pool.

But with the business environment also changing rapidly as we said at the outset, the essential thing is to keep the new succession planning methodology simple and realistic – based on the company’s strategy and a robust competency model. There is also a need for coaching the business leaders – not only in identifying successors, but more generally to get involved in people development.

Cultural issues

The impact of cultural issues in family businesses is invariably strong and nowhere more so than when it comes to succession planning. However, in younger or more peripheral economies, until recently less exposed to international best practices, the cultural angle becomes more acute. Family firms in countries with a traditional patriarchal culture in particular will often be highly geared to the man at the top, in many cases the company founder. In place of established processes and systems to support talent management, here it is often a case of gut feeling and personal preferences on the part of the boss – something we at Egon Zehnder International have encountered in several emerging economies including Indonesia. Also, many of the senior managers often have spent most of their careers in one company and are accustomed to a particular environment and way of doing things. This form of specialization can be efficient, but makes it difficult to build scale and scope. This brings an extra degree of complexity to succession planning.

Another aspect here is that when external successors are appointed there is an urgent need to ensure their cultural fit. The owners of jeans manufacturer IVN in Portugal encountered this problem when they engaged in their own search for a non-family CEO.

Following this unsatisfactory experience, Egon Zehnder International performed a CEO search for IVN. We started the process with a series of meetings to discuss the optimal profile for the new CEO, agreed on the inevitable trade-offs, and established the need to optimize the organizational structure to help integrate the new executive – who would initially sign on as COO.

We were involved initially in organizing workshops on people development, establishing a competency model, and optimizing the succession planning architecture. The CEO search was thorough, and along with competencies and critical experiences also focused on personal characteristics of the candidates.

Thus, when developing succession planning activities in family businesses, special care should be taken regarding cultural or political issues. Getting to know the owner and his or her passions, values, and concerns is critical in mobilizing the organization. Being assertive, when required, is part of the advisory role.

Integrating external candidates into family businesses with a strong culture – which is typical of younger economies – is not an easy job. Finding the right candidate is only the start. Both the family and the company then need to devote time and energy to achieving successful integration.

For family businesses in emerging and fringe economies, succession planning follows its own rules. It can be more difficult and complex than for their counterparts in mature and major economies. But learning from proven best practices and adapting them to the specific conditions of each family and the economic environment of the company will greatly increase the chances of success.

Williner is one of the largest milk producers in Argentina, with USD 250 million in revenues [2010], 1,500 employees, and five manufacturing plants. Its main multinational competitors include Danone (France) and Saputo (Canada). The Williner board is composed of the third and fourth generation family owners. When the shareholders of the Williner Company agreed to look for a non-family CEO for the first time in their history, they faced the problem of attracting a top-talent candidate to a small city (96,000 inhabitants) some 500 kilometers from the economic, political, and cultural center of the country, Buenos Aires. The company had limited experience in external recruiting; the most recent outside hire was the HR manager from a competing dairy firm in the region.

One of the largest clothing companies in Portugal, Irmãos Vila Nova (IVN) is the producer and retailer of the Salsa Jeans brand. The company has a presence in 35 markets through mono-brand stores, department stores, and carefully selected multi-brand stores. IVN reported sales of approximately EUR 130 million in 2010 and employs over 1,000 people. It competes against multinationals such as Levis. The company is still owned and controlled by one of its founders, Filipe Vila Nova. IVN is based in Famalicão/Trofa, an area 300 kilometers from Lisbon, making it harder to attract top-notch candidates. In 2009, the owner agreed to look for a non-family CEO – the first in the company’s history – when his brothers decided to sell him their shares and leave the company. A CEO was chosen – a direct pick which proved to be a mistake. Though he brought international expertise to the role, his cultural sensitivity was too limited to integrate well into the family business.

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