Is your eldest son your best bet?

Oct 22, 2006 Leadership, Sunday Nation

We are still very traditional in our approach to business in Kenya. Most enterprises are owned by families; most look to the eldest son in the family to take the reins as the first line of succession. Anything wrong with that? It’s a time-honoured practice across the world: the eldest son must always assume the mantle of responsibility.

A recent study done by my alma mater, the London School of Economics, in conjunction with McKinsey, a leading consultancy, may shed some light on the matter. The researchers tried to correlate metrics of management performance – sales growth, market valuation, market share, etc – with key aspects of management practice, such as leader selection and succession. More than 700 mid-sized manufacturing companies were sampled in four countries: the United Kingdom, France, Germany and the United States. The results were very interesting.

One finding was that the German and American companies did much better than the British and French ones. But the more interesting results concerned family firms. Only a third or so of the family firms in the sample were run by managers from outside the family; yet these were the ones that performed best – 12 per cent better than other companies, on average. It gets better: the family companies run by eldest sons had management scores 10 per cent lower than the average for all companies.

The proportion of family companies run by eldest sons varied across the four countries: 50 per cent in the UK and 44 per cent in France; just 30 per cent in the US and 10 per cent in Germany. The researchers think that the prevalence of eldest-son leadership in the UK and France can be traced back to feudal traditions in those countries, where the eldest son typically inherited the family property. Tax breaks also play an important role: the UK and France have high inheritance-tax exemptions for enterprises over a certain size.

Whatever the reasons for the practice, the study concludes that eldest sons do not, on average, deliver the goods. The performance gaps between the countries can be explained, to a significant extent, by this one practice: giving the eldest son automatic control of the business.

Why should this be the case? The researchers conclude that giving a pre-designated person automatic control of any enterprise is not good practice. For one thing, it narrows the pool of candidates for overall leadership to just one – hardly a formula for getting the best person to do the job. For another, someone who expects to inherit a business as a birthright may feel no real pressure to acquire the skills and experience needed to do the job well.

Handing over the reins to the eldest son is, I fear, an even more prevalent practice in Kenya than in the UK or France. We had our brains softened by watching too many episodes of ‘Dallas’ and ‘Dynasty’ in the 1970s and 1980s. So eldest sons tend to get it all in Kenya: the business, the property, the power and the status. Younger sons must take a back-seat; daughters (of any age) get no seat at all.

We may feel we have good reasons for doing this. Most business leaders were also eldest sons when they took over the business, and so feel it is a tradition they are compelled to continue. Fathers often think that the eldest son is the most likely to protect their interests once the handover is done. We are reluctant to lose family assets by giving them to daughters (and their grasping husbands).

All of those are emotional reasons, and an over-reliance on emotion often leads to foolishness in business practice. It is surely idiocy to imagine that the first male scion to appear in the delivery room is the one with the skills to manage a business – simply because of good birth timing. Business leadership is no minor matter: it takes a vast array of diverse skills to do it well. Those skills do not appear magically as a result of fortuitous birth. True, eldest sons often perceive great responsibility from an early age, and tend to be given all the necessary education and exposure; so many eldest sons will shine simply because of all these advantages of birth. But the eldest son can also be the family idiot: spurning the opportunities provided, bunking lectures, buying a Porsche at eighteen and crashing it at twenty – yet in all likelihood will still become the CEO.

Indeed, the other main result of the LSE-McKinsey study was equally important: that family firms run by outside managers tend to outperform all peers. This is not that surprising. Family firms with outside managers sometimes have the best of all worlds: the stability and long-term commitment of family shareholders, combined with the skills and knowledge of professional managers recruited because they are the finest available. Families that have an open mind can make very good shareholders and directors: their interest in success is more pronounced than that of more detached investors, and they are more concerned about preventing management excess.

But reason tends to leave those families favouring the favoured son. Where Boss Jnr. is concerned, fathers and mothers become misty-eyed behind the rose-coloured glasses. Nothing that the heir apparent does is too excessive; all is explainable and forgivable. These types of firms, I am willing to wager, will fare the worst in any study anywhere in the world; outsiders with self-respect and genuine skills should stay miles away from them.

What this study, and others like it, is telling us is simple: we must take an enlightened view of succession planning. It’s one thing to let the first-born take over the family corner shop; it’s quite another to gamble with the future of a complex enterprise with multiple stakeholders. Issues like who Mama and Papa’s favourite was have no place in the boardroom. Once you have built up a good business, it is in your interests (and everyone else’s) to do the right thing in providing continuing stewardship. And that means a willingness to extend the available talent pool as far as possible.

We have some way to go in this regard. This is a country where the eldest son gets bequeathed not only businesses, but also parliamentary seats and even cabinet ministries! Yet the business titans who laugh at the silliness of politicians and voters are the same ones who will condone the practice in their own bedrooms and boardrooms.

I am an eldest son myself, and have nothing against them. But I do say this: let them enter the succession fray on an equal footing with other family members and a range of outsiders. We owe it to ourselves, our businesses and our economy to invest in the best skills. Let families exercise all the control they like, but leave management to those with the best qualifications for the job, whatever their birthmarks. The first baby you bounced on your knee is not always the one to bounce into the boss’s seat.