To create an enduring legacy beyond one’s own lifetime is an emotion nurtured by most entrepreneurs and business owners, and they would have a better chance at creating that legacy if the two phrases, succession planning and inheritance planning are used with dispassionate clarity. For there is a world of difference between the two. Succession planning is about business continuity whereas inheritance planning is about fulfilling a tradition driven filial contract. But when it is time to hang those boots and find a successor, there is a tendency amongst most to knowingly or even unconsciously use these terms interchangeably. What is termed as a succession planning exercise is in reality inheritance planning.

Ownership and management are distinct and modern business and mercantile law allows for their clear separation. Yet, few can overcome the force of tradition to practice it. On-boarding next of kin in key operating roles with a clearly scripted road map to corner office is an accepted convention. This trait is largely universal in both MNC’s or SME’s whether in tradition bound Europe or in Chaebols, Zaibatsu’ and Indian business across Asia.

What is the reason that most business owners are unable to separate business continuity from a filial contract? Why can’t the successor be a professional manager and not family? One could argue that the system of a board construct and position of CEO is designed precisely to address this. But in reality, the Managing Director or the person calling the shots is in all likelihood from within family.

But before we go further, let me put to rest for those who have picked a contrarian thread at this stage. It’s not all black or white but about grays in such matters. By no means it is suggested that an inheritor from within family cannot be an efficient business successor. Of course, they can be. And in fact, many are. But professional managers do get blindsided in favor of family during a succession planning exercise. There are examples to the contrary though, where professional managers are the chosen successors and are in charge un-encumbered. Tatas, Infosys and L&T are good examples of such. Yet, as a norm, most succession planning endeavors end up choosing family over a professional manager.

The reason for reticence in separating ownership from management is perhaps because it is a leap of faith after all. Handing over reigns to next in family is a social tradition that is rooted in medieval ancestry. Dynasties ruled by divine order and crown passed from father to son. Though in an Indic context, Arthshastra does not subscribe to this filial view and has clear and practical statutes on governance and inheritance, but that is for another article.

Modern business allows the entrepreneur to take that leap of faith. There are well defined structures from trusts to managing agencies to facilitate the separation. American corporations have been successful to a large extent in keeping ownership and management distinct. Perhaps because the New World is not burdened by tradition. Then there are some good examples in Europe. Asians; Koreans, Japanese and Indians seem to struggle with it though.

A reason for this could be that institutional capital, leverage and structuring is a recent phenomenon, and business’ in these traditional regions have relied on family silver and that’s why the tendency to keep it all within the family. Control is a powerful emotion stemming from this tendency which is also perhaps the reason why even publicly listed Indian corporations have a relatively less free float compared to their peers elsewhere.

In a modern free market enterprise, family silver can be separate from company silver and both can turn to gold. But for that ownership and management must be considered exclusive of each other. Even if company stock is willed to the next of kin as inheritance, it may pay to expand search for a worthy business successor outside family and include professional managers. One could of course luck out if the search loops back to within the family, but a sincere attempt at a broad basing the exercise can yield attractive returns.

“Skin in the game” is an argument put across in favor of keeping it all in the family. That ownership stimulates operating interest. While this may be true in case of first-generation inspired pioneers it may not hold true for their next gen. And why should it? Afterall each is motivated differently, and destiny may have a different plan for them. Perhaps to be a world-renowned musician or a scientist or even a deep-sea conservator. On the other hand, managing a business may motivate a professional manager which could be his skin in the game. Motivation is after all complex and people can be motivated by aspects other than just stock.

MAKING INDIA A HIGHER EDUCATION EXPORTER

In the end, by keeping ownership separate from management, a business owner can in fact double his chances at legacy. A business legacy through an efficient professional manager and a personal legacy through an accomplished next gen in an occupation of their choice and the entrepreneur can be proud of nurturing both. That would be doubling the odds in favor of legacy.

Thank you for reading.