The current issue of our newsletter looks at intergenerational transfer. But this time, it is not about the transfer of wealth but the transfer of competencies and the responsibility for the management of family wealth.
The intergenerational transfer of family wealth is one of the fundamental issues faced by each successful family. Besides the transfer of the wealth in itself, equally important is the form of handover of decision-making powers as to how the wealth will be treated by the family in the future and, particularly, who and how will assume the responsibility for the wealth.
The choice of a suitable successor becomes even more complicated if the wealth is transferred along with a specific business (such as a manufacturing plant) and also involves the transfer of management. Concerns are expressed not only by parents but also children who are not sure whether they will be able to assume such liabilities (however, such doubts are better than unfounded self-confidence). The worries are directed not only outside, towards the market, but also inside: Will the successor receive a positive welcome from the management? Will he succeed in the firm? In addition, the company’s employees will also have their doubts (mainly those who were close to the original owner). For them, such a fundamental change is the same source of uncertainty.
If the current owner expects that one day his children will take over the wealth along with the powers and responsibilities, the information should be gradually passed on to the community. The successors must be included in the business as such as well as in the relationships affecting the business. The same steps should also be taken towards the community around the family to ensure that the successor is accepted on both sides.
Manager and his property rights
We often come across an opinion that the manager should acquire a more significant share in the company if he is systematically building it. Our opinion differs. We believe that linking property rights with management rights is not suitable. The owner should derive remuneration from the property on the basis of the ownership, and this right is inviolable. The manager must receive adequate remuneration for his work but this has nothing to do the shareholder’s interest.
Defined roles and rules
A family successor should be involved in long-term preparations and their role should be defined within the family as well. The role and position of the owner (shareholder) as well as that of the manager (who also is a shareholder) must be precisely defined. It is also advisable to pre-define internal rules based on which the future manager of the family business will be evaluated. At the same time, it is helpful if the owners of the family business define the rules of management remuneration irrespective of whether the management is comprised of shareholders or is external. Such pre-defined rules bring a necessary level of transparency that is essential for good relationships within the family in the future and should be stipulated in the shareholders’ agreement.
The topic and importance of the shareholders’ agreement will be discussed in one of the next issues of our newsletter.
Is the transfer of wealth, competencies and responsibilities a topical issue for you? Please let us know and we will be pleased to discuss all about succession with you.