How third and fourth generation owners worked together to evolve their Owner Strategy to reflect both generations’ goals.
As the owners of a global clothing manufacturer began to prepare for the transition to the next generation, they realized that the third generation and fourth generation had different views of what mattered most to them. While the third generation had largely run the family business without involvement from the fourth generation, as the family began to take steps toward transitioning ownership to the fourth generation, they recognized that they needed to find common ground to meet the needs of both generations. They were able to embark on a thoughtful process to articulate (and update) their Owner Strategy. The process had the dual benefits of giving the rising generation voice in the Owner Room for the first time and helping find common perspective on what the business should be looking to accomplish in the years ahead.
“I just want my children to appreciate this business and find a way to work together as owners,” the third-generation chairman of the business told us. Having endured a difficult battle with his own siblings for control of the business, the chairman, who we’ll call Carlos, was intent on creating a smoother path for his own children. Carlos had successfully led the manufacturing business through some challenging times in his industry and was protective over his legacy. Even though his four children had very little connection to the business – they’d each pursued careers outside the company – he was delighted when they indicated that they would like to become active owners and work together as a cross-generational owner group. The members of the fourth generation were not yet technically owners, but they began to work together with their father as a cohesive owner group.
They quickly realized that the two generations had differing views of what mattered most. Carlos had long run the business in a way to prioritize liquidity and growth, increasing the company’s debt to finance a distribution system. But the younger generation had a different view – they were also interested in ensuring that the business would stay in the family for years to come, but they preferred to diversify their investments into other assets. They wanted to prioritize control overgrowth by paying back some of the debt and build up a cash reserve to pursue other investment opportunities. How would the two generations resolve their differences?
To start the process, they organized their first ever Owner Council, which was comprised of both generations of owners (and future owners) and their spouses. Creating the Owner Council sent the message to the fourth generation that their dad took them seriously as future owners and valued their perspectives. But more importantly, the goal of the Owner Council was to begin to find ways for the two generations to make ownership decisions together.
Once launched, the Owner Council decided to create a working group to make recommendations – not decisions – to the full Owner Council about how the business should evolve in the years ahead. The working group was comprised of two members of the fourth generation, two non-family Board members, and the head of strategy CFO. This composition gave the younger generation the opportunity to interact with both Board members and senior management of the company in a way that would build trust in both directions and help the younger generation gain a better understanding of the business.
When working group’s process to evaluate the current state and explore medium to long-term objectives for the family enterprise, the working group made the following recommendations to the full Owner Council:
1. Set priorities for uses of cash:
a. Ongoing operational expense
b. After accounting for the operational expenses, additional cash will go sequentially to:
i. Fund maintenance, efficiency, and safety improvements capex (not growth capex)
ii. Pay down debt until a certain level
iii. Pay out a pre-agreed fixed amount dividend
iv. Accumulate a cash reserve (“dry powder”) up to a certain level.
v. Invest in growth capex
vi. Pay additional dividends, amount to be agreed by owners and board
2. Define a set of guardrails for our existing business to guide the growth Capex investments.
After some discussion, the Owner Council accepted the working group’s recommendations and memorialized them in a two-page document. The group agreed that the resulting Owner Strategy Statement is a “living” document, one that will be updated and reviewed periodically as the owner group’s goals change. It also became the foundation for an ongoing dialogue between owners, Board, and management that helps the owners ensure that the Board and the CEO understand their Owner Strategy so they can make decisions that align with the owners’ goals.
What they learned:
Going through the process together not only helped prepare both generations for the transition of the ownership of the business, but also brought the family closer together. Among the lessons they learned was that going through the process itself was almost as important as the ultimate decisions they reached. “The level of dialogue, the respect we were able to afford one another, and the way we were able to really listen to one another not only helped us make better decisions for the business, but it helped bring us closer as a family,” Carlos told us. This process allowed the various family members to both express their wishes and have an opportunity to hear and understand other family members’ perspectives. In the end, they drafted an Owner Strategy that Carlos and all four future owners were able to agree to. It wasn’t “perfect” – there were compromises made in the process – but it was good enough for each of them to ultimately get behind it.
The process also created a mechanism for the owners to interact with the board and the CEO on the areas that were most important to them. Prior to creating an Owner Strategy, the Board and CEO had been acting based on what they thought the owners cared most about. Now they knew the owners’ true priorities, which enabled them to set clear goals as a Board.
But perhaps most importantly, each of the family members who participated in this process refreshed their connection to the business and to one another. Learning to appreciate different perspectives while still reaching alignment on what they wanted to prioritize (setting the business up success in a changing industry and eventual fifth generation ownership) gave them a huge boost of confidence in the long-term prospects of the business. And the family. “I love my family and I love my family business,” Carlos’s son told us. “I’m more committed than ever to making sure I honor the legacy that my father has given us.”
There is no one-size-fits all solution for owners to work through differing perspectives to getting aligned on Owner Strategy. But we have seen a few practices and guidelines help.
- Operate with brainstorming rules. As you work your way through difficult discussions, agree in advance that your initial goal should be to let people express themselves. Let ideas and preferences emerge without starting to debate or criticize. Your goal is to find common ground – no judging what another owner may want. Listen to understand one another, rather than going straight to trying to find solutions.
- Seek common ground step by step. It may seem that you can’t possibly get to a good place when you start to work through what might seem to be significant disagreements. But if you work to find common ground in small steps, you will begin to make progress. For example, if you are not in agreement about how to use cash, take the discussion up a level. Can we agree that we need to be thoughtful about how we use cash? If yes, can we agree that we might want a process for deciding when to use cash? That might be enough to decide in the beginning. If you aim to find some agreement, however small, from each interaction, you will make progress, little by little, toward finding common ground.
- Set the bar at “good enough”. It may be tempting to think you have to find a perfect solution to everyone’s issues and priorities, but that’s unrealistic. Getting to an agreement that everyone can live with, even if they don’t love it, may be the only way to keep your business and your family together. After all, your alternative to “good enough” might be breaking up.
- Keep your conversations at the owner-level decisions. Your goal is to set an owner strategy that will give direction and set boundaries for the board and the people who are running the business. Keep your conversation at the level of owner decisions. In other words, you may want to come to agreement on how much debt to incur, but you should not dive into the day-to-day operational details of your family business. You’ll be more productive if you focus on getting to consensus on a few key decisions rather than wading into decisions that are best left to your board and executive team.
Summary: When it came time for a transition, a global clothing manufacturer’s two generations of family owners realized they didn’t have alignment on their goals. To successfully move forward together, all of the owners collaborated to update their Owner Strategy that reflects both generations’ goals. Through this process, the family recognized the need to find common ground to meet the needs of both generations and transition ownership to the rising generation. This collaboration not only gave the rising generation a voice but also helped them find a common perspective on the future goals of the business.