Communication Traps: Applying game theory to succession in family firms

 

(Authors: Nava Michael-Tsabari and Dan Weiss)

Research Applied summary prepared by Ken McCracken, Consultant, Withers Consulting Group

“Would you like to start discussing your succession plan?” is obviously a key question for the founder of a family business. Advisers know that the answer could be either:

• “Yes, let’s get on with it” — a type of client the authors describe as an activist; or
• “No, not now, thank you” — a type of conservative client who prefers to defer discussion for personal reasons and perhaps also so as not to pressure the successor.

But does the successor know if the founder is a conservative or an activist? In order to model this discussion using game theory, the authors assume that the founder has more power in the discussion than the successor, tied to a tendency not to share information about when succession planning should commence. In other words, the successor has to make a guess by interpreting a range of informal signals. In this game it is also assumed that founder and successor both seek family harmony, which means having a lack of disagreement or conflict while transferring management control of the family business.

In deciding whether to move forward with succession planning or hold back, the ill-informed successor who is concerned about retaining family harmony is in danger of falling into two communication traps:

1. If the successor anticipates that the founder is an activist and chooses to move forward, but the founder turns out to be a conservative, there will be discord.
2. If the guess is that the founder is a conservative, who favours a hold back strategy, but the founder is in fact an activist, the outcome is tension.

Moreover, the authors discovered that if the successor is averse to conflict, she or he is likely to choose to hold back in order to avoid the risk of discord. This might suit the conservative but is obviously not good news for the activist founder who wants to get on with the discussion.

The traps are laid because the successor lacks information, which is described as a structural problem in the discussion. The authors argue that this conclusion also highlights that the difficulties communicating about succession are not all to do with personal relationships, feelings and emotions.

The obvious solution to the structural problem, of course, would be for the founder to come clean and, if founder and successor both value family harmony, the successor can take action that will avoid painful clashes and disagreements.

This article describes how practitioners or other family members can be involved in the transition process:

• Practitioners or other family members can be very helpful in the role of go-between, making sure that the founder knows what he or she actually wants and informing the successor accordingly.
• Practitioners can facilitate discussions between founders and successors, which can help to reduce the information gap. A skilled facilitator has many tools in her/his tool kit to help people discuss topics in a non-threatening, yet illuminating way.

Practitioners can assess how conflict averse people are and can help them learn how to deal effectively with conflict.

This paper serves as a reminder that succession planning needs to be an inter-generational discussion because the answers that the founder and the successor each want for the future are tied up in the lives of the other. To learn more, read the “Discussion” section of this paper.

About the contributor:

Ken McCracken is joint managing director of the Withers Consulting Group in London. He can be reached at ken@withersconsulting.com.