Institutionalisation and generational succession in family businesses: arrangements that secure continuity

Why is generational succession a critical threshold?

In family businesses, the founding generation often grows the business through personal effort, intuition and relationships. The trust built with customers, suppliers and financial institutions depends largely on the founder's personality; important decisions are made on the basis of the founder's experience rather than a written process. This structure provides speed and flexibility in the early stages of a business. However, when management is to be handed over to the new generation, the same structure can become one of the main risks to the continuity of the business.

Generational succession is not simply a change of manager. It requires decision-making authority, institutional knowledge, business relationships and roles within the family to be reorganised at the same time. If this is not done in advance, succession may begin with an unavoidable situation such as a health problem or an unexpected departure, and the business may face critical decisions without any arrangements in place for them.

What does institutionalisation mean?

In family businesses, institutionalisation is often perceived as a weakening of family ties or as handing the business over entirely to managers from outside the family. In fact, the essence of institutionalisation is to move the functioning of the business away from dependence on individuals and to base it on defined rules, roles and records. In an institutionalised family business, the family remains the owner and guide of the business; what changes is how decisions are made and how they are recorded. The core components of institutionalisation are:

• Written role descriptions and limits of authority
• Defined decision-making processes and regularly kept decision records
• Regular and reliable financial reporting
• Clear criteria for pay and career progression for family members and other employees
• Documentation of core processes and business relationships

Not all of these components need to be put in place at once. Depending on the size of the business and the timing of succession, priority can be given to the areas most affected by generational succession, namely defining decision-making authority, financial reporting and critical business relationships.

Separating family, ownership and management roles

One situation that can lead to disagreements in family businesses is when the same person takes on the roles of family member, shareholder and manager without distinguishing between them. Expectations about a family member working in the business, the expectation of a profit share as a shareholder and performance responsibility as a manager should be assessed against different criteria. In structures where these roles are intertwined, a disagreement within the family can easily spill over into business decisions, and a performance problem in the business into family relationships.

Structures can be established at three levels to separate these roles. At family level, a family protocol setting out in writing the principles governing family members' relationship with the business, and regular family meetings at which these principles are discussed; at ownership level, shareholder arrangements defining shareholders' rights and the rules on share transfers; and at management level, role descriptions, limits of authority and a board of directors that, where necessary, includes experienced members from outside the family: these are the elements of this structure. Setting in advance the conditions under which family members may take up positions in the business, such as education and work experience criteria, also contributes to a fair and predictable arrangement.

Stages of generational succession

Sound generational succession should be treated not as a single event tied to a date but as a process with defined stages, spread over years. This process generally consists of the following stages:

• Preliminary assessment: Setting out the business's current management structure, its critical roles and the knowledge and relationships linked to these roles
• Identifying and developing successors: Identifying the people who will take on management responsibility, and enabling them to gain experience in different units of the business and, where necessary, outside it
• Joint management: A period during which the outgoing and incoming generations share responsibilities in stages over a defined time
• Handover: Transferring decision-making authority and responsibility for representation in writing; defining the new role of the outgoing generation
• Monitoring: Reviewing the process regularly in the board of directors and in family meetings after the handover

A matter that requires particular attention at these stages is the new role of the outgoing generation. If it is not clearly defined which role the founder will take on after succession, such as adviser, board member or family representative, authority may not in practice be transferred and uncertainty may arise between the two generations. Setting out the boundaries of the new role in writing ensures both that the founder's experience is drawn on and that the new management's scope for decision-making is protected.

Transferring knowledge and relationships

The less visible but decisive dimension of generational succession is the transfer of institutional knowledge and business relationships. Which customer works on which terms, which supplier is critical, how relations with financial institutions are managed and which details in production determine quality are often known only to the founder or a few long-serving employees. If this knowledge is not recorded, it risks being lost with the succession.

The tools that can be used to transfer knowledge are simple: regular records covering critical customer and supplier relationships, contract terms and communication history; written workflows for core processes; and involving the new generation in important meetings and handing over relationships gradually. For businesses active in international markets, moving relations with business partners abroad from personal contact to an institutional communication system is also important. When some of these tools are addressed together with the business's digital transformation, they both ease the transfer of knowledge and increase the efficiency of day-to-day operations.

TÜBİAD's approach

The Corporate Governance and Organisation Directorate also applies its working practices on role descriptions, decision follow-up, liaison officers and the recording of handover processes to work aimed at strengthening the institutional capacity of organisations. The institutional assessment work package of the Institutional Capacity and Cooperation Development Programme provides a framework for setting out the management structure, allocation of roles and decision-making processes of family businesses.

Businesses with a pronounced need to move processes and records into a digital environment can be linked to the Digital Transformation and Productivity Programme, and businesses wishing to put their relationships in international markets on an institutional footing to the International Market Access and Business Development Programme. Shared questions on generational succession and institutionalisation can be considered as workshop topics in the Applied Research and Workshop Programme, with the participation of the business community and universities.