If you really want to understand the notion of “business sustainability”, you should visit the Hoshi Ryokan hotel in Japan. The Hoshi family has been running the business since the year 718. The hotel is passed on from generation to generation following simple but iron-clad rules that have helped it survive for 46 generations (1,301 years).
Of course, no business person thinks so many generations ahead. The problem is that in relatively young economies like Lithuania, business people rarely think about the future at all more than 5 years down the road, and the captains of business who set up companies here in the first years of re-established independence are still holding tight to the helm, keeping one topic off of the table and deep in the drawer. The topic of succession.
The third Wealth360 asset management conference organized by Lewben Wealth this year gathered speakers from abroad and Lithuania with exceptional experience and knowledge in the area of succession.
Dr. Julia Eberhardt, the head of the German packaging materials company LEEB Flexibles, took over the family business together with her brother in keeping with the best practices of succession theory: after their father, who had run the business, decided in 2008 to withdraw from his active role, the heirs went through a preparation process during which they were groomed by a hired manager.
The handover of LEBB Flexibles is a great example of planning and transparent processes. From the time planning began, there was an open discussion of all possible solutions – passing on the business to family heirs, the option a hired outside manager, and sale of the business. Once it was decided to pass on the business to heirs, clear rules were articulated for the person handing over the business, like not interfering in decision-making and operations once management of the company was given over to the heirs.
The way the LEBB Flexibles heirs prepared for the handover of the business by working alongside a hired manager is an invaluable lesson for other family businesses which choose a similar path. The chosen manager not only complemented the company in terms of knowledge and abilities, but also provided the additional time that was needed for the heirs to ready themselves. In selecting a manager, it was required that the person fit the company’s leadership style and hold similar values and principles of business ethics.
According to Dr. Julia Eberhardt, that carefully planned process with clear interim goals brought out the inheritors’ interests and action plans, and helped avoid a sometimes extremely painful division of assets.
Another startling story shared at the conference by French Champagne House Taittinger heir Pierre-Emmanuel Taittinger showed what happens when the family that owns a business does not have either a succession plan or the desire to plan. In 2005 the Taittinger family sold its business to a pension fund from the United States, but barely a year later P.-E. Taittinger, after lining up support from banks, bought back the champagne house that bears the family’s name for nearly $600 million. The American fund earned $200 million in year. The family lost much more than just money. But ultimately the story again turned into one of a happy family and a successful business. Today P.-E. Taittinger is working effectively shoulder-to-shoulder with his son and daughter, and has already passed on what he considers to be the key secrets of this very particular and subtle business.
Dr Morten Bennedsen, a lecturer at INSEAD Business School and a well-known international expert on family business management and succession, reviewed both good and bad examples.
The statistics are not grounds for optimism, he said, as only a small percent of businesses are handed on to a third generation of the same family, though that is not a hard rule. It is necessary to plan, prepare for succession yourself, find suitable roles for members of the family, decide on a form of ownership, prepare your children and grandchildren for succession, and most importantly, talk a lot among yourselves. Chaos and failure to plan are expensive, Dr Bennedsen stressed: the business can even fail because of bad decisions; the costs of passing on the business to heirs rises; the company’s value may plummet due to increased risks associated with individuals; the next generation may simply turn its back on the family business; and family disputes become nearly unavoidable.
Lewben Group’s Director of Legal & Tax Services, Gediminas Laucius, spoke at the conference about why preparing to hand on a business and succession planning are always an advantage. The numbers prove it: businesses of families that plan succession and have a Family Constitution generate a return 15 percent larger on average than those that put the question off. When a Family Constitution is drawn up that is clear and leaves no room for doubt or misunderstanding among family members, the process of handing on the family business can avoid going down a wrong road and risking losses.
Insights shared at the conference by Vilnius University lecturer and psychiatrist Dr Eugenijus Laurinaitis were more general, but relevant to anyone who is concerned with continuity and sustainability. The end of life is an inescapable law which one should accept, come to terms with and, aware that that day eventually will arrive, lay the foundations for future generations.
In this context, the Hoshi family in Japan, which has been running its hotel for more than 1,300 years, makes one consider the immortality of sorts embodied when a business continues from one generation to the next, and so on for 46 generations.