Indeed, governance problems in the third generation can slowly suffocate a firm. Villalonga and Amit, in their recent paper, report that family businesses that indulge in mechanisms to limit control to a select group (such as special voting-rights shares) underperform, presumably because these mechanisms reduce the pressure on management to excel. Weak corporate governance, they note, usually leads to weak and vulnerable companies.

The confluence of family and business challenges facing the third generation make it tempting to throw in the towel. Those who remain steadfast, such as the Blommer, Mitchell and Young families profiled in the pages that follow, have found the right alchemy to blend the vision and energy of entrepreneurs with management skills and governance policies.

Generational Shadow
The founders of a multigenerational family firm cast what some observers call a “generational shadow” over their heirs, occasionally reaching to the third generation through either their own presence or the legacy and standards they embed in the company’s culture and management structures. This can often be positive, especially when the founder provides useful strategic guidance to the second and third generation of managers, and a clear articulation of the firm’s motive and values.

However, it can also hamper the subsequent generations in attempts to make the company their own, constraining them in ways that may hurt the company’s performance. Structural legacies may end up hampering performance; these researchers say heirs need the flexibility to adapt the company to changing times, and the governance procedures to the changing size and nature of the family.

Illustrations by Jonathan Barkat.

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