Worldwide Offices:
Search:

Overcoming the cultural challenges of company successions, December 2008

Growing numbers of family-owned and closely-held enterprises in Europe, North America, and other regions are undergoing leadership successions as company founders depart and new owners assume control. These transitions raise a variety of financial, operational, and strategic challenges that underscore the need for careful succession planning.
 
The cultural dimensions of enterprise successions are equally challenging. In addition to the uncertainties inherent in the succession process, company stakeholders must contend with changes in the management styles between the outgoing entrepreneurial founder and the incoming leadership team. The success of company transitions hinges on the ability of owners, managers and employees to navigate these cultural shifts.
 
Entrepreneurial Culture
In entrepreneurial companies, authority, responsibility, and risk are vested in the company founder, whose personal preferences and leadership style dominate the organisation’s internal culture.
 
Entrepreneurial cultures typically display a high level of organisational fluidity and a strong reliance on informal rules and procedures. Job descriptions and individual responsibilities are loosely defined, and promotion depends less on performance than on longevity and personal loyalty to the founder.
 
In the early stages of their development, entrepreneurial companies are often in constant flux as the founder and employees mold the organisation in response to market demands. As the company struggles to survive, everyone does whatever is necessary: there are no set job descriptions, only work that needs to be done.
 
As entrepreneurial companies mature beyond day-to-day survival, their need for high quality employees grows. But the enterprise may not yet possess the financial resources to compete with larger companies for talented workers. As a surrogate for premium salaries and benefits, entrepreneurial companies may rely on a nurturing and paternalistic culture to promote a sense of belonging among employees. Such enterprises stress organisational harmony and personal loyalty. Employees who can multitask and display strong work ethics are rewarded with job security.
 
How things are done is based on precedent and passed on by word of mouth or stories that explain “how we do it here.”
 
Resistance to Change in Entrepreneurial Companies 
Entrepreneurial companies are often resistant to change. The company’s organisation and culture have co-evolved to meet the security needs of long-term employees, whose performance metrics are based on longevity rather than competence and results. These individuals are comfortable with the status quo and protective of the enterprise’s cultural norms.
 
Mistakes are not well tolerated in entrepreneurial, single-leader cultures. The intolerance for mistakes is often a vestige of the early survival culture and a reminder that the founder carries most if not all of the financial risk. The performance management system often rewards with silence and punishes publicly i.e. “You are doing a good job until I tell you that you are not.”
 
Longevity serves as the basis for most promotions to management. As the company grows and begins to hire outsiders, the promotion for longevity rule is replaced by a focus on skills, competencies and results. As a result, long-term employees who had expected to obtain coveted managerial positions often resent and ostracise the new employees, working to protect its hold on the culture and the company.
 
Transition to Management Team Culture
During the transition out of the entrepreneurial stage, the company’s leadership structure changes from a single individual who holds most of the authority, responsibility and risk to an organisation where authority, responsibility and risk are spread across a management team.
 
The transition to a management team structure usually begins with the promotion of long-time employees. Whilst the founder continues to hold most decision making authority, newly appointed managers may seek to expand the scope of their jobs by holding onto pieces of their previous position and establishing the responsibilities of their new role. The lack of clear job definitions encourages this practice.
 
At this stage in the company’s development, decision-making often appears consensus driven; it is common for the management team to operate like a clan or clique. In reality, the entrepreneur still makes the key decisions and managers declare consensus to confirm the founder’s decisions and reaffirm their personal loyalties.
 
Aligning Organisational Structure and Culture
As the founding entrepreneur moves toward retirement, he or she begins to explore leadership and ownership succession options. By this time the company is usually large enough to require a group of owners to replace sole ownership by the founder.  
 
The change in ownership marks a dramatic shift in the company’s organisational structure, which must be aligned with a new set of cultural norms. These will mean management will now have to take real decisions, performance will become a more valued asset than longevity and it will be more than likely that company policies, rules, and procedures will be formalised so that the “right” way to do things is based on efficiency and quality rather than the founder’s personal preferences.
 
As a result of these structural changes, company leadership takes on a new meaning; shared leadership replaces deference to the personal judgments of the heroic entrepreneurial founder, company leaders begin to “work on” the organisation rather than just “in it” and begin to think together, using conflict and differing perspectives to improve decision-making.
 
Over the next five to ten years, the world economy will experience more ownership and leadership transitions in family and closely held businesses than ever before. Aligning structure and culture to fit the new ownership/leadership model will be crucial to the success of these transitions.
 
To read the full report you can download it here
 
If you are interested in knowing more about overcoming the cultural challenges of company successions, you should contact the editor of this article, David Bartlett, RSM International's Economic Adviser.
Global Services
 

RSM is the brand used by a network of independent accounting and advisory firms each of which practices in its own right.  The network is not itself a separate legal entity of any description in any jurisdiction. The network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug.