Succession: how relationships impact leadership development in family businesses

Succession is the Achilles’ heel of family businesses. A key reason for failure in this process is the insufficient or null preparation that next-gen leaders may receive before they take over leadership positions. The theory of leader-member exchange (LMX) suggests that the quality of the relationship between the leader and other members has a significant impact on their development. Hence, high-quality relationships lead to stronger bonds, and ultimately, better leadership development.

In a family business, close relationships between key stakeholders are present by default. The impact of these relationships can heavily influence the business environment and shape the experience of incoming leaders who are closely related to family, non-family members and other stakeholders. Much research has examined how families develop the business and technical skills of their business successors, yet little is known about the impact their relationships have on the leadership skills of heirs.

To address this gap, Maria José Parada of Esade, together with Kiran Kandade, Georges Samara, and Alexandra Dawson, interviewed 24 next-generation leaders in a diverse range of family businesses across India, ranging in size from 10 to 5000 employees. The results – which were consistent across location, size, and sector – reveal factors specific to family businesses that have an impact on leadership development within those businesses.

Five key factors

The LMX theory says there are three key elements within the leader/follower relationship that are essential for high-quality relationships: trust, respect, and mutual obligation. These aspects are also present within the family business dynamic, but with two additional factors: mentoring and early affiliation with the business.

Understanding these five key factors and their impact on the relationships between incoming leaders, their predecessors and non-family members is vital for leadership development, according to Parada and co-authors.

“A better understanding can help successors develop high-quality relationships with various firm stakeholders,” they say. “We also identify key processes that can help build and maintain high-quality relationships around potential next-generation leaders from an early point in their lives – a source of competitive advantage that can lead to family business prosperity across generations.”

Early affiliation

Of the five routes identified to high-quality relationships, the two most cited by the respondents – mutual respect and trust – intersect with the LMX theory. “Mutual respect is key for developing high-quality relationships because it allows the next-generation leader to take inspiration from people they admire, emulate those whom they revere, and rise to higher levels of competency when they feel recognised as well,” say the authors.

“Trust is essential because it is based on reciprocal belief and enables fast and shared decision-making processes. It allows next-generation leaders to develop confidence, know that they are supported when making decisions, and that the advice they receive is in the best interest of the family, the business, and themselves.”

However, while the third element of LMX – mutual obligation – did feature in the results, respondents cited two factors they considered more important: an early affiliation to the business and mentoring.

“Participants who had early affiliation with the firm highlighted the close relationships and admiration they had toward the founder,” say the authors. “Interestingly, our interviews show that incoming successors, when visiting the workplace from an early age, were able to develop their relationships with the incumbent and with key individuals in the business. Being involved from an early age generates childhood memories about the firm and creates a strong connection with family business employees.”

Mentoring

Mentoring, by both family and non-family members of the business, was the fourth most important aspect of creating high-quality relationships according to the interviewees.

Mentoring relationships are not necessarily developed only between the parents and the incoming successor

“Mentoring relationships are not necessarily developed only between the parents and the incoming successor,” say Parada and her co-authors. “Members of the extended family can have a pivotal role in mentoring successors before they join the business. They can help successors understand the current management style, help them integrate into the culture of the business, and teach them the way things are done.

“Mentoring is key for high-quality relationships because it allows the next-generation leader to learn about the business itself and understand the nuances such as tacit knowledge of other stakeholders, current management style, and organisational culture. This all leads to the development of a more effective leader of the business.”

The next generation

The research is specific to the context of India and has some limitations. “We focus on the successor’s perspective, so an analysis from the incumbent’s perspective would add to the understanding,” say the authors. Nevertheless, the findings contain important practical implications for family businesses.

“With regard to recommendations to practitioners, consultants, and leaders of family businesses, we suggest that founders and predecessors of family firms provide next-generation opportunities to socialise and build high-quality relationships with all family business stakeholders,” say the authors.

“Such opportunities should be provided from an early stage in the successors’ lives by creating mentoring relationships and developing mutual respect, trust, and mutual obligation with stakeholders in the firm.

“Further, next-generation leaders who wish to enter the family business should build deep, profound, and symbiotic relationships that grant them the essential background and the necessary tools to develop into effective leaders.”