Developing future leaders in family business

Leaders are notoriously hard to develop.  When you combine the emotions and relationships of family into the equation, leadership development requires a focus beginning when the next generation are children. Our experience and research lead us to propose the below model of educational age-specific milestones. We’ll also mention the pivotal role of self-esteem, shared values and family culture in leadership development.

Educational Age-Specific Milestones:

Actions-consequences link

A crucial role of leaders is to hold the management and employees of the company accountable for their actions. In order to do so, leaders must have a sense of responsibility themselves. Ages 3-5 is the developmental stage where children start recognizing their own limits and are able to make choices between opposing goals. The crucial component in developing this link is that parents should establish clear, consistent criteria through words and action. This is also a key to developing self-esteem.[1] Consistency in the actions-consequences link builds self-esteem because the child’s “world” is experienced as predictable which allows them to make choices with predictable outcomes.

Importance of future (no instant gratification)

The ability to delay gratification in childhood is a superior predictor of success as an adult (e.g., happier, less likely to have committed a crime, educational achievement, more and more satisfactory relationships, vocational achievement).[2] Parents can develop the acceptance of delayed gratification in their children by making them wait to get what they want and developing an expectation that getting what you want is the result of something that you do. Generally, parents can start with short delays and gradually extend them to teach, at the unconscious and conscious levels, the importance of delayed gratification. There is a direct analogue in the business; people who can delay gratification generally have a baseline discount rate that is lower than those who need to consume things immediately. In business, for example, during the capital allocation process, lower discount rates lead to more benefit from investing.

Trade

Children who develop a good understanding of the motivations and underlying procedures of trade can bank on this understanding later in life. Trade also emphasizes reciprocity, which is crucial for being a good owner and a reliable family member.

Money

It is crucial that children learn that money is not just coin and paper but represents the value of things and is a promise to pay in goods or services (this is the concept of money as a tradeable IOU). Understanding the need to give up some things in order to acquire others will allow them to appreciate their value.

Investing

Knowing the importance of the future is a crucial condition for understanding and making investment decisions; especially true for family businesses, where long-term wealth creation is more important than short-term profit maximization. Investing involves learning about risk and reward (i.e., the need to delay gratification to have higher rewards in the long run), and understanding types of investments (e.g., direct investments, stocks, bonds, securities). Having children select a stock to invest in, visiting that company and using its products helps them understand elements of ownership. This understanding helps them place others before themselves, which is a true hallmark of mature leadership. Perhaps the last things to learn in understanding investing are the notions of the Time Value of Money and the cost of debt and equity.

Separation of ownership and management

Ownership does not automatically make one a manager or future leader. Different roles need to be defined clearly. This prevents feelings of entitlement and upset from unmet expectations. Understanding boundaries in general helps children develop the ability to delegate and cede control without giving-up oversight and accountability.

Emotional differentiation

Put simply, emotional differentiation is when the emotions of others do not cause an inappropriate emotional reaction in oneself[3]. A apt example is when a mother suddenly comes crying into a room where a family is having a serious discussion about the business and without a word having been said, everyone falls apart without knowing or asking why or what she is upset about. The mother’s emotions have caused an emotional cascade in the other family members. Achieving emotional differentiation is a difficult task and requires hard, consistent work.

Statements of financial condition

To be a leader you must be able to speak the basic language of business which are the P&L, Balance Sheet and Cash Flow statements. Understanding relevant business information allows future leaders to ask the right questions and hold management and employees accountable for their decisions and actions.

Financial analysis capabilities

The capability to assess the viability, stability and profitability of a business, business unit or project is critical in deciding whether or not to make or maintain an investment. Specifically, it provides information about whether to continue or discontinue an operation or business unit, whether to make or buy materials necessary for the production process, or whether to use debt or equity to invest, to mention but a few critical business decisions.

While the above educational milestones focus on the individual, another crucial element, especially among siblings, but also other family members, is to force them to make decisions together. Making decisions together not only helps build a routine for working together, but – paired with self-esteem – it also establishes trust. This should be done at all ages.

Developing self-esteem

In addition to understanding the action-consequences link and experiencing consistency in childhood, self-esteem is built through mastery of tasks that leads to a sense of accomplishment and pride, receiving accurate feedback (don’t over praise or under appreciate) which conveys they can be trusted with the truth, familial support is which important because it shows the individual that he or she is not alone, and being listened to which shows individuals that they are valued.

Learning from failure

Failure can be the most impactful teacher. We remember our failures more than our successes. Knowing what not to do reduces risk more than knowing what to do. On the other hand, failure can be a crutch and tactic in a manipulative family dynamic where victims are coddled and given more attention. Demonizing failure stifles initiative. Teaching our children to learn from failure and the power or resilience and persistence requires constant attention. One simple tactic is to decide at every age how long you would allow a child to suffer from a mistake they would make before interceding to prevent a mistake. For example, when your child is 4, you might allow them to make a mistake in which the child would suffer for no more than 20 minutes and at age 8 that might be extended to 3 hours and so on. In this way of thinking, your child is not considered an adult until you would allow them to make a mistake that would cause life-long suffering. Children learn they have to ask for opinions and advice in order to not suffer and become comfortable asking for help and relying on others.

Shared values and family culture

Shared values represent the fundamental beliefs that guide decisions, goals, and behavior[4]. A set of shared values is in many ways a set of guidelines or intents, commonly accepted and internalized by family members and employees. For example, if one of the family values is “we do not lie”, family members and, by extension, employees in the business know that lying is unacceptable.

A set of shared values and the early internalization of such values may also help to harmonize the preferences and choices of family members, thereby reducing potential ambiguity and conflict.

A culture based on stewardship seems conducive to developing shared values and therefore appears particularly suitable to family businesses. Individuals with a stewardship mentality are good team players who do what is in the best long-term interest of the group or organization to which they belong. A stewardship culture is one that nurtures and facilitates responsible, pro-organizational and trustworthy behavior among individual.

Finally, we encourage parents not to shield their children from knowledge, good or bad. Children should be given exposure to a broad array of knowledge to make them well-versed and responsible future leaders of the family business.

A similar version of this article has previously been published on familybusiness.org.

[1] Seligman, M. E. (1974). Depression and learned helplessness. John Wiley & Sons.

[2] Mischel, W. (2014). The marshmallow test: Understanding self-control and how to master it. Random House.

[3] Bowen, M. (1976). Theory in the practice of psychotherapy. Family therapy: Theory and practice, 4(1), 2-90.

[4] Schein Edgar, H. (1985). Organizational culture and leadership. San-Francisco: Jossey-Bass Publishers.