Beyond the third generation

“From shirtsleeves to shirtsleeves in three generations” is perhaps the world’s most famous phrase about family businesses. It’s universal – just said in different ways. The Chinese say “Fu bu guo san dai” – wealth never survives three generations. The Brazilians say “Pai rico, filho nobre, neto pobre” – rich father, noble son, poor grandson. And the Italians say “Dalle stalle alle stelle alle stalle” – from the stables to the stars and back to the stables.

But it is my view that the rags to riches and back again concept is less relevant today, especially in many German-speaking economies. Indeed, in my experience, many family businesses move successfully to the third generation and beyond. I see, for example, fewer and fewer family businesses fall into the traps mentioned in an article in the Harvard Review of Business, entitled: “Avoid the Traps That Can Destroy Family Businesses”. That’s because they follow a clear succession path, which includes taking the following steps:

  • The next generation is informed about what to expect. Previously, many family businesses pursued a more autocratic approach with the next generation, telling them to do certain things. But now, many family businesses are following a much more inclusive strategy between the generations. There is also a clearer path for those who do not want to be part of the family business.
  • Better family governance. Many family businesses have adopted family constitutions and councils. This means they meet more often to resolve issues. Through these structures, the next generation is expected to meet all the key players in the family business, including the non-family managers. This helps to ensure that all are clear about what role they can expect to play in the future.

In German-speaking countries, many family businesses have two boards – a supervisory board and a management board. This helps to facilitate an even smoother transition between the generations. The supervisory board is where the family members reside. Here, they will have financial oversight, but little or no management role. The management board will be where the chief executive, financial officer and operating officer reside. They will manage the business. In most cases, they will not be family members. So there is clear division of responsibility and little danger of misunderstanding.

There are many examples of this structure throughout Germany, Austria and Switzerland. For example, one of Germany’s biggest companies, Volkswagen, is structured in this way. Family member Ferdinand Piëch is Chairman of the supervisory board, and non-family member Martin Winterkorn is Chairman of the management board.

In Austria, the seventh generation Bankhaus Spängler structures itself in a similar way. In fact, most family businesses in German-speaking countries have two boards. This gives them a robust structure that helps manage the transition from one generation to the next. It’s a great way of avoiding the classic third generation pitfall.

Astrid Wimmer, Partner, Family Business Leader Austria, EY

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