Looming retirement of first generation of Russian business owners could trigger new assets redistribution
Issue:
June 2012, Vol.7, No.6
Tags:
Vitaly Korolev
Vitaly Korolev knows firsthand modern Russian business and the people, who laid the foundation for its formation after the disintegration of the Soviet Empire in the 1990s. After all, he is the president of Corporate Development Center, a member of the Board of the Association of Corporate Directors and Top Managers of Russia and a coordinator of the Corporate Management and Business Continuity’ cluster at the Russian Managerial Community, positions that enable him to keep abreast of all the vital events taking place in the Russian economy. Therefore, his recent statement about the rising risk of new redistribution of businesses in Russia, which will be caused by looming succession of the first generation of post-Soviet entrepreneurs, generated corresponding reactions in the local business community.
This leads to the first question to our prominent expert: how did you arrive at this conclusion?
I’ll answer this question with another: ‘In your opinion, what is the average age of the members of Forbes’ Russian Golden Hundred? The answer is about 50 years old. This means that in another 10 years, the Russian oligarchs, much like all representatives of the first generation of modern Russian business, will face the issue of succession. A completely new situation will arise in the country. Let us ask ourselves another question: Are the country and the business community ready for this situation? My answer is no; they are not.
Why do you believe that the country and the business community are not ready for this?
This is because we are doing this for the first time in our country’s history. Therefore, the first generation of Russian business can be called ‘orphans’ or ‘fatherless’. In the sense that practically no one in the post-Soviet region, including members of our Golden Hundred, inherited his/her businesses from parents, as it is done in other countries. It is even safe to say that the privatization process in the 1990s somewhat resembles an inheritance of an asset from one good-for-nothing parent, meaning the Soviet state, to haphazardly selected children, seemingly by lot. One gets the mill; the other gets ‘Puss in Boots.’ Such gifts, in fact, were free-of-charge, just the way inheritance is supposed to be. Nevertheless, despite their lack of family experience in business succession, the oligarchs, their families and companies will have to face and solve these problems of succession soon. They cannot avoid them.
In this case, what solution options are available to the oligarchs and their businesses?
I can name four: the first is to turn the company into a modern corporation with a scattered or diffused ownership structure, which, as a rule, requires listing the company in a stock exchange. But this is a path for the minority. The second is to sell the business, an option that will most probably be used by the majority. The third is to build and turn the company into a family business. About a third will follow this route. The fourth variant is to turn over the business into a charitable foundation. This solution is rather exotic for Russia, but I believe that it fits a consistent pattern. There is also a fifth option which is winding up the business, but this will not be considered because it leads to a dead end.
“Despite their lack of family experience in business succession, the oligarchs, their families and companies will soon have to face the issue of succession and continuity of their businesses. They cannot avoid it.”
So, the ‘X hour’ for oligarchs to tackle this issue will be due in about a decade from now?
Yes, about that time. Each of the pioneers of Russian capitalism will feel the advent of his exit age on his own. The perception of time is individual for every person. My business partner Mikhail Kuznetsov has told me that once he met a venture fund owner, aged 87, at a conference in the United States, who still full of strength and energy, said that he wished to last another 15 years because he had lots of ideas. At the same time, an outstanding Russian entrepreneur decided to retire from business at 64.
When considering the option of converting an existing company into a family business, what pitfalls are waiting for the owner and his successor?
First and foremost, the heir apparent’s unwillingness to perform the role of a business owner. Very often, children of well-to-do businesspeople have different values: they are more interested in stylish, modern, digital pleasures than getting involved in routine company management; they are neither ready to run a business, nor protect it from threats. Unlike these companies, the situation in most corporations, which were started from scratch, without participating in any shares-for-loans auctions of the 1990s, do not have such problems: these people spilled their blood, sweat and tears to create their businesses and would not allow anyone to take them away or, at the very least, they will fight for it to the bitter end, like Yevgeny Chichvarkin did, when he Euroset came under aggressive raider attack. It is difficult to imagine a situation, where the children of the current oligarchs will become the owners of companies of the scale of Norilsk Nickel, RusAl, etc. After getting to the helm, such heirs could easily lose the companies, or they could be simply taken away from them, not necessarily by enemies or competitors. The companies’ top management would not accept the ‘digital dandies’ as their superiors and, after comprehending their incompetence, would offer them a generous settlement to give up their parents’ businesses. Moreover, there could be internal problems, as family members could have different views about the best candidate to the head the family business.
Can the last problem be solved by via civil law, such as heirs of the first, second orders, etc?
The problem of a family business ownership continuity is not limited only to the issue of succession. Being a resident of Russia, you must have seen that society still has issues with the results of 1990s’ privatizations. This is one of the aspects of this problem, whether moral or political. We’ve already mentioned that the company’s management might not accept the heirs, as it simply does not see him as a leader. The top executives will quickly understand this and then act to take advantage of it. This is the second aspect. There is also the third aspect: the government and society cannot but be concerned over whether or not work places would be preserved in the process of ownership change. Therefore, the topic in any case goes far beyond the family circle to the outside world.
Are you familiar with any successful examples of cases, when business owners have prepared their children as potential heirs of their companies?
Yes. There is a company in the Volga Region, owned by several friends. With the advent of pension age, the owners started preparing their children to perform their roles in the company. They have achieved this goal: the new generation has entered and taken over the business, and besides, also manages maintain friendly relationship among themselves, like their parents. There is a good chance that this company will stay intact and continue to grow.
“It is difficult to imagine a situation, where the children of the current oligarchs will become the owners of companies of the scale of Norilsk Nickel or RusAl. Such heirs could easily lose the companies, or they will be taken away from them, not necessarily by enemies or competitors.”
Is this the only example, or are there other owners, who are also deliberately preparing their children to take over their companies when they retire?
This case is not one-of-a-kind in the least. I know another family where the father told his son: ‘I will leave you my business if you are able to overcome the same obstacles as I did.’ The son rose up to the challenge, created his own company, achieved success, started catering to his father’s company, and finally they started inviting him to business meetings at his father’ company. This is how he joined the top management of his father's company. The issue of whether the father's team accepts the son is one of the key aspects of succession. In this regard, I would like to quote Rostislav Ordovsky-Tanaevsky Blanko, the owner of the Rostik Group: “I can only leave capital to my child, but he has to earn the right to manage it on his own.” This sounds like a declarative statement, but its meaning is crystal clear: one cannot simply ‘appoint’ his/her son a successor. The company will either collapse, or will be taken away. The heir needs to earn his authority in the top managers’ eyes. The logic is simple: the leader is the person, who earns the authority in the eyes of those he leads.
What about the option of turning a business into a charity as a way of handling the succession issue?
Charity is one of the possible options, as it has been proven by the first generation U.S. billionaires, and modern investment gurus such as Warren Buffett and innovators such as Bill Gates, as well as by some Russians that have followed their lead, such as Dmitry Zimin and Vladimir Potanin. These businessmen have already declared that they will not leave all their wealth to their children. They plan to follow a simple principle: leave the children enough money to do whatever they want to, but not so much for them as not to want to do anything with their lives.
In the ‘father-son-management’ triangle, there might be no place for the son, if his father on retirement from business entrusts the company’s management to the CEO?
Yes, such cases are possible in a situation, where the owner of 90% stake in a business leaves for some tropical island, and the CEO, who holds a 10% stake, practically runs the business, is indeed, possible. In such circumstances it is a matter of who performs the entrepreneurial function. This cannot be delegated; it can only be snatched away. In our hypothetical company, this function belongs to the owner who, prior to retiring, had been building the business for 20 years. His authority as a leader in this case is unquestionable. In case of retirement of the old owner, the top management executives would test the ‘new owner’ to the limit and would attempt to usurp the entrepreneurial role. This is essential for a company, because without this function, it is doomed to failure. But this might not end well for the heir, because together with this function, the management executives would grasp any added value and, consequently, take over the business.
“The companies’ top management would not accept these ‘digital dandies’ as their superiors and, after comprehending their incompetence, would offer them a generous settlement to give up their parents’ businesses.”“Despite their lack of family experience in business succession, the oligarchs, their families and companies will soon have to face the issue of succession and continuity of their businesses. They cannot avoid it.”
Is the ‘owner-family-management’ triangle a sufficient model to simulate the situation in such companies, after all, there are far more than three corners in such cases?
No, this model is not enough. As you know, the stakeholders in such entities include legal and private individuals that are interested in the company’s financial performance. Others include municipal authorities, services and goods suppliers, local communities, company’s employees, etc. The change of a business ownership is a process requiring a lengthy and comprehensive preparation.
How would you formulate the ideal parameters of such process?
First of all, the business itself must be ready for succession of ownership. There are several variants of doing this, including the four options we’ve already spoken about. The most important thing is to a well-informed on the specific option. Secondly, if a succession option is selected, not only the business, but also the entire family, needs to be ready for the procedure. Thirdly, another important factor is the favorableness of public and government atmosphere around a business. Here, the state needs to stop viewing the owner as an exploiter or a person to be continuously milked more and fed much less. It is time to put an end to this prejudiced attitude. An entrepreneur is not only a source of work places, but also the head of a family. It is time we realized that business does have a human face, but we will not see it as long as we only stare at the belly. This is why I implore the society and the state to raise up their heads and look at business owners in their eyes. After all, the sources of real patriotic pride must primarily result from the deeds of citizens and families who are creating something new for a country.
The original version of this interview was first published by www.e-xecutive.ru
Web design,