Trying to institutionalize a business whose model has not yet stabilized often causes more harm than good. Until a company grows to a certain level, the founder’s close involvement is necessary. Institutionalization should not be used to fix an undeveloped business model—it should protect a well-established one.
Institutionalization becomes necessary when:
- The business model is mature, but growth and profitability plateau.
- The company becomes difficult to manage operationally.
- The owner has no time to think, plan, or meet stakeholders.
- The company has opportunities for horizontal or vertical expansion but remains stuck in the core business.
- The owner needs distance to explore new ideas, build strategic relationships, and access new markets.
- The owners reach a certain age (around 60), at which point succession planning must begin.
- Leadership needs to be transitioned smoothly, guided by structures like independent boards, career-long development for successors, and external experience.
Successful multigenerational companies delegate authority to systems, not individuals. Like a state-bureaucratic model, experienced technocrats prevent inexperienced leaders from making catastrophic mistakes.
An example is the Japanese Hoshi hotel group, founded in 705 AD, now run by the 17th generation. Researcher William T. O’Hara notes their long-term continuity stems from:
- Including independent professional managers in leadership.
- Maintaining a written mission.
- Seeking guidance from experienced leaders and advisors.
- Making next-generation training a structured responsibility.
- Valuing external experience and education.
Many companies collapse because the second generation cannot carry the weight.
That article comes from the experiments we have conducted over the years.
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