Succession planning in family-owned companies

Family-owned businesses face a critical succession challenge: Balancing inherited ownership with merit-based leadership. Brazil's JBS offers lessons in grooming heirs and professional management.

Some decades ago, there was a debate in Kolkata on the motion “Family-owned enterprises should have a family member at the helm”. Not surprisingly, the outcome was polarised between the family business folk present and the professional ones. Even today, the question is a live one, especially where the enterprise(s) are listed companies.

 

According to the literature on the subject and in my experience, people of Latin America, South Asia, and East Asia are inclined to or are culturally comfortable with family leadership than people in Anglo-Saxon economies. Paradoxically, governance, board structures, and regulations are modelled on Anglo-Saxon principles. This makes for a natural tension between a social view (have family leadership) and a professional view (have the best leadership). There is active approval and/or a tacit acceptance in Asia and Latin America if a Mallya or a Chhabria heads a firm by that name. (Last week, former head of an Indian regulatory body displayed a post — hopefully in jest — that the Tata imbroglio could be solved by placing Jimmy Tata, an HDFC Bank employee unrelated to the family, to head Tata!)

 

Do family-owned listed companies treat succession planning with the care that is essential? Based on outcomes, some seem to do so, though the rigour of their grooming and selection processes is unclear. The fact that Birla, Bajaj, Singhania, and Godrej, for example, have survived and prospered for over a century suggests that they do indeed have some method.

 

There are, of course, many cases where businesses have failed to do so, particularly in terms of preparing the family member(s) for succession, which is a key task. Should family heirs of ownership be pitted against professionals for breadth of experience and assessment of preparedness so that the better leader can be chosen? Should this be done within the family or by the nominations and remuneration committee of the company, assuming it is a listed company? What if there is disagreement within the family council? These are open questions.

 

Even in regions where family succession is favoured, the modern trend is shifting from “of course the founder’s child” to “the founder’s child if rigorously tested”. The lofty principle is the assumption of a shared clarity on the distinction between ownership, governance, and management. If truth be told, there is no such shared clarity. In practical terms, ownership, governance, and management are not in hermetically sealed containers. There is overlap, hence disputes, and hence wealthy lawyers!

 

A family member may inherit ownership. However, the leadership of the management team should be earned through competence. Deloitte identifies insufficiently tested successors as one of the most common challenges in family businesses. For a business family with next-generation members, the most robust approach is to create a succession committee over three-five years, consisting of family members and independent board members.

 

There are some generic lessons about family members managing companies: First, a family may occasionally miss a scion to run its company; second, that if a young scion is to be a future chief executive officer (CEO), careful mentoring with succession planning is essential; third, the plan should be visible to key players with the inherent acceptance and approval of the professional CEO; fourth and last, the professional CEO, who groomed as successor, should be gracefully recognised for his services.

 

The key question to be addressed by the family council or the succession committee is whether the candidate family member has been through near-death experiences and adaptive challenges. Think of Ratan Tata facing the turnaround of Nelco or the wrath of militant labour unions in the erstwhile Telco.

 

Such a plan is visible in the case of Jose Batista Sobrinho (JBS), a large Brazilian company. The family gave up the reins of CEOship and got it back at a suitable time.

 

The JBS story

 

In 1953, Jose Batista Sobrinho, a Brazilian rancher, began his small slaughterhouse as a business. He started small but successfully expanded his operations so competently that by 2000, his firm, called by his initials JBS, counted among Brazil’s largest beef slaughterhouses. The founding family liked to emphasise that it ran a simple company with traditional roots. Despite its size and influence, JBS stayed private.

 

By the early 2000s, Jose passed the running of JBS to his two sons, Wesley and Joesley. The young Batista brothers had a very different approach from the founder about growth and how fast the company should expand. Using the miracles of cheap credit, political connections, and a growing market, JBS achieved more growth in six years under the brothers than what was notched up in 50 years under their father.

 

JBS was also the beneficiary of the government’s influence over big firms. The Brazil government under President Dilma Rousseff (2011-16) bet heavily on a few giant firms to rapidly increase the country’s growth. Those firms received special favours so long as they were willing to wire cash to overseas accounts or contribute to political campaigns in a suspiciously generous manner.

 

An excessive or super-rapid attainment of bigness has “a nasty tendency to spill over into politics, particularly into the corruption of government and creation of political backlash”, as observed in the book The Curse of Bigness by Timothy Wu.

 

In 2016, when Ms Rousseff lost the elections, the Brazilian police raided JBS offices and seized incriminating documents pertaining to how the company had misused their economic and market power to achieve their stupendous growth.

 

By 2018, two years after the raids and enquiries into JBS affairs, the brothers left the company to a professional, Gilberto Tomazoni, who ran the company for eight years till 2026. Mr Tomazoni will now assume the role of vice-chairman of the board after handing over the office of the CEO to the grandson of the founder who bears the name Wesley Batista Filho.

 

The family scion, it appears, has been groomed with care. He worked in the grassroots of the mainstream business for 15 years and was groomed for over a decade by Mr Tomazoni. With his assumption of the chief executive role, a family member has once again got the reins of operations of the company. 

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The writer is a business commentator and the author of 21 books on human behaviour and enterprise. His next book will be on deergha aayu or long-life, productive companies.

 gopal.mindworks@gmail.com