Multigenerational group of carpenters working together in a woodworking workshop

How to reduce family business generational transition failure

Authors

  • James Bly

    US EY Private Family Enterprise Business Services Managing Director

  • James Wood

    US-East EY Private Family Enterprise Business Services Managing Director

5 minute read 23 Jan 2026

Independent directors can help family businesses thrive through generational transitions.

In brief
  • Generational transitions in family businesses are critical, complex and complicated.
  • Six principal causes of failure include inactive owners, weak governance and unclear boundaries.
  • Independent directors can mitigate risks through sound leadership, clear governance and careful preparation.

Generational transitions in family businesses are critical junctures that can shape the future of the enterprise, often unfolding over 10 to 15 years and now occurring alongside significant market shifts driven by macroeconomic forces and the convergence of exponential technologies.

Strong performance today does not guarantee success in the future, as many family businesses face vulnerabilities tied to what we believe are the six principal causes of generational transition failure.

With few large family firms surviving beyond five generations, independent directors play a vital role properly navigating these complexities. “For independent directors on the boards of these larger family businesses, the stakes are high. Their role is not merely advisory; it is essential in steering family enterprises through the complexities of generational change.” said Brock Griffiths, EY Americas Family Enterprise Leader.

How EY can help

  • Family Enterprise Business Services

    EY Family Enterprise Business Services is designed to help enterprising families grow larger, more valuable businesses that will last for generations. We can help you develop and implement a plan for growth, generational transition and shareholder liquidity.

    Read more

The six principal causes of generational transition failure

Larger family businesses often find themselves at a crossroads during generational transitions, facing a range of challenges that can greatly affect their long-term trajectory. The six principal causes of failure serve as a framework for understanding common pitfalls, providing actionable insight into the dynamics that can derail even well-established enterprises.

 

Below is a closer examination of these factors:

  1. Inactive owners and beneficiaries. As family trees expand, the percentage of active owners compared to inactive owners typically declines. This shift can lead to a disconnect, as some inactive owners may view risk differently or prioritize immediate liquidity over long-term reinvestment. This tension can create friction with active owners who are focused on growth and sustainability, complicating decision-making and strategic alignment.
  2. Uncoordinated financial demands on business profits. Balancing the capital needs of the business with the liquidity demands of family members is a delicate process. When financial expectations are misaligned, it can limit capital expenditures and growth initiatives, leaving the business ill-prepared for future needs. Conversely, this misalignment can frustrate family members seeking more immediate returns, leading to dissatisfaction and conflict.
  3. Unclear boundaries between the family and the board. The traditional three-circle model of the family business system,1 which categorizes roles among family, ownership and management, is less effective as ownership and governance structures grow more complex because of the increased use of generation skipping and dynasty trusts. As structures become more intricate, roles and responsibilities can blur, leading to confusion and conflict. Without clear boundaries, decision-making can become inconsistent, undermining governance effectiveness.
  4. Lack of nonfinancial capital development. Successful generational transitions rely on a comprehensive understanding of capital that extends beyond financial assets. Human, intellectual and social capital — collectively referred to as nonfinancial capital — are critical components of long-term success. Neglecting these dimensions can weaken the family’s stewardship capabilities and diminish the business's resilience.
  5. Inadequate business governance and oversight. Weak governance structures can erode business performance and diminish equity value, particularly during transitions. Those persons responsible for appointing board members, such as trustees and voting shareholders, should understand the future vision for the business and the skillsets and experience needed to provide effective oversight.
  6. “Elephant in the room” issues. Often, the most significant risks are the hardest to address. Whether they stem from owner-level disputes, business-level challenges or broader industry and macroeconomic factors, failing to address these issues can create a toxic operational environment.

The role of independent directors

As family businesses navigate generational transitions, those responsible for governance and oversight need to remember the six principal causes of failure to reduce generational transition risk. Therefore, the role of independent directors becomes increasingly critical. While challenges, such as inactive owners, financial misalignment and unclear boundaries, may not fall directly under the board’s purview, they can significantly impact the overall health of the enterprise. So, what can independent directors do to effectively support family businesses during these pivotal moments?

Below are four actions independent directors can take to materially influence transition success.

  1. Encourage the establishment of distinct governance structures. Independent directors should advocate separate governance structures for the family and the business. Such a framework supports clear communication and direction between the two governance systems. Family governance often focuses on developing a capable and cohesive shareholder base, while business governance oversees strategy, growth, capital allocation and operational performance of the business. By delineating these roles, independent directors can help facilitate that family and business interests are aligned and support a more collaborative environment.
  2. Support the development of capable next generation shareholders. Effective family governance is essential for preparing the next generation for stewardship, regardless of whether they work in the business. It clarifies roles and responsibilities by helping family members understand their contributions to the enterprise. The goal of a strong family governance system is to cultivate “patient capital,” or a shared belief among family members in the value of participating in a long-term, multigenerational business.
  3. Ensure competent business governance. While family governance lays the groundwork for a cohesive ownership structure, independent directors must ensure that business governance systems operate effectively. This includes establishing procedures to facilitate qualified individuals lead the company and can steer it toward growth and long-term value creation. Transparency in reporting and the use of data analytics are essential to understanding growth opportunities and risks.
  4. Create operational confidence. A well-functioning business governance system instills operational confidence, giving family members assurance that the company is being managed effectively. This confidence, combined with patient capital, creates a strong foundation that positions larger, multigenerational companies for long-term success. 

Independent directors play a critical role in guiding family businesses through generational transitions. By fostering open communication, establishing clear governance structures and addressing underlying issues, independent directors can support larger family businesses to not only navigate generational transitions but also to strengthen their long-term resilience. Understanding and addressing the six principal causes of failure is not only a boardroom responsibility but also a critical component of facilitating the longevity and success of family enterprises for future generations.

The complexity of generational transitions tends to compound over time. It is never too early to start with advanced preparation.

This article originally appeared as a National Association of Corporate Directors (NACD) Directorship feature.


Summary 

Independent directors play a vital role in guiding family businesses through generational transitions by strategically addressing governance, communication and strategic alignment challenges.

About this article

Authors

  • James Bly
    US EY Private Family Enterprise Business Services Managing Director
  • James Wood
    US-East EY Private Family Enterprise Business Services Managing Director
Related topics
Family enterprise
Private business

Related articles

How to prepare heirs for tomorrow’s family business

Future-ready leaders can be fostered through strategic development and diverse experiences.

James Bly

The value creation advantage: boosting cash flow in family offices

Discover how family offices can unlock additional cash flow through targeted value creation without disrupting their investment strategies. Read more.

Understanding the value (and values) of Gen Z

Key strategies family enterprises can implement to connect with Gen Z for long-term success. Read more.

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.