The challenges of perpetuating a family business through generations are well known. Obstacles to making these transitions are typically seen as tied to the absence of a qualified successor or anticipated dynamics complicating the flow of decision authority and ownership to the incoming generation. Families often feel like they’re faced with a few poor scenarios, such as an outright sale, recapitalization with a partner or a generational transfer that’s believed will degrade the asset in the hands of incapable management. Some avoid facing succession entirely and end up on the scrap heap of failed businesses or in fire sales driven by unfunded tax liabilities. For some, a non-family CEO promises to both keep the asset in the family and provide for management continuity. Let’s look at the circumstances and opportunities associated with the successful integration of a non-family CEO as an alternative to continuous family managerial control of the family business.
The circumstances under which a family should seriously consider non-family managerial leadership are nested in some of the most important decisions families may ever make about their enterprise. Faced with the impossibility of the status quo lasting forever, the family is, arguably, asking itself deeper questions than ever before about the anticipated future viability of the business and highly emotionally valenced questions about family member leadership and participation. Several circumstances and desires have to coalesce to set the stage for a real consideration of a non-family CEO, including:
• Absence of a family candidate. In some cases, there simply isn’t a family member with any interest or capability. This can make the choices starker and even potentially easier for the owners.
• Absence of a single family candidate who’s ready to take over. Is there a family candidate who’s simply not ready? This is a circumstance many families face because of trends toward later childbearing that emphasize age and maturity differences between one generation and the next. These gaps can make it untenable for a child to take over without further maturation and skill development.
• No desire for a family candidate. In businesses in which there are multiple family owner-operators already, the politics of choosing from one branch over another may back the family into the reality that only a non-family member will be acceptable to the full spectrum of family owners. This circumstance certainly doesn’t lessen the risk of a problematic outcome, but it’s a context from which the search for a non-family leader can emerge.
• Multiple family candidates. Are there candidates in the family who, under the right circumstances, could lead the business? This can happen when strong leaders in sales, marketing, operations, finance or strategy may exist among family members, but no consensus can be easily reached regarding who should take the lead seat.
• Baseline of professionalization. Most families can’t or won’t seriously consider a non-family CEO if they haven’t already set the stage through significant professionalization of the management team. The idea will simply not come up, or if it does, find little acceptance as a viable option.
• Desire to retain the business. Only when the business is believed to have further return potential does the idea of a non-family CEO enter the mix of other options. The family will have to believe that continuing to hold the business will return risk-adjusted advantages over asset diversification to rationally consider keeping the business and turning it more fully over to non-family management.
Each family business will have its own unique mix of these circumstances that will allow for a genuine discussion of the non-family CEO option. The circumstances set the context, but certainly don’t predict the outcome. The best case is that the family fully explore the option. The magnitude of the decisions that need to be made and the known obstacles will seriously test the resolve and tenacity of family owners to stay the course through what can be months, or even years, of transition. Many may end up deciding that it’s simpler to put the business up for sale.
Setting the Stage
Once the family decides to seriously contemplate the acquisition of an outside CEO, it can engage in a series of endeavors to lay the groundwork for a successful transition.1 Each family will need to gauge its appetite for what it can muster against these endeavors, but there are some steps that enhance the likelihood of a successful outcome:
• Develop an outside board. Apart from being among the most resisted moves in family businesses, which, once accomplished, is often viewed as one of the “best decisions we ever made”—this sends an attractive signal to candidate CEOs, namely, that the family considers thoughtful, professionalized governance of the enterprise to be a priority. Some families need time to transition from an advisory to a fiduciary board construct, but the presence of a board will be among the first questions a non-family CEO of quality will ask.
• Present a business strategy. This known success factor in effecting next generation transitions appears to also contribute to successful transitions of management to non-family chief executives.2 One discussion to anticipate is how complete that strategy must be before the new chief arrives. If it’s “fully baked” by the family, does this change how the incoming CEO will feel as to whether he owns the strategy? If the family believes that they’re hiring a strategist, then they shouldn’t treat the plan as simply something to be inherited by the incoming regime. But, the family should beware that this doesn’t prevent current management from going through some kind of strategy process as a way to engage candidate thinking in the hiring process and beyond.
• Develop risk and return expectations. Family shareholders will need to review the history of how growth has been accomplished in the past and some expectations on how this will develop in the future under new leadership. If, for example, the family expects radical growth, but has a history of growing organically and conservatively, bringing in a CEO to shift that paradigm through aggressive mergers and acquisition activity with leverage may stress shareholder tolerances and set up failure.
• Align compensation. The need for family owners to shift away from historical compensation practices often requires a new compensation plan, with equity or surrogate upside to attract the right kind of CEO talent. This provides a great opportunity not only to align CEO compensation with ownership interests, but also to look at extending new ways to compensate the rest of management. This will also interact with the philosophy of continued compensation to owners and affects other customary expenses handled by the business, such as health care and company cars.
• Make tactical and strategic revisions to shareholder agreements. Related to the above item, shorter term revisions to shareholder agreements will likely be made to accommodate the CEO’s employment and the nature (or cessation) of requirements for owner employment. Equally, if buy-sell provisions and generational transfer constructs aren’t yet fully realized, family owners may need to develop a more strategic view that includes how shares will be held and transferred.
• Agree on CEO decision rights. Among the first questions candidates will ask are those related to the span of their authority. Typically, this can be addressed by owners working through a decision matrix that identifies issues such as signature authority for expenses, assumption of debt or major customer repricing, which have some guardrails in place. Included in this are items related to whom the CEO can hire and fire. Setting this up as a matrix, with time as the x-axis, shows a candidate how decision-making authority is expected to evolve, with greater restrictions present over the first 90 days than what would be expected a year or two out.
• Develop “next chapter” plans for owners. To mitigate an outsized feeling of what’s being lost by owners in this transition, each owner needs to develop a plan about what he’s going to do. This may, under some circumstances, be facilitated by owners getting some form of coaching about what life after the business should look like. If the transition is only about loss, it runs the risk of foundering because new personal and professional identities haven’t sufficiently detached from their years of inhabiting operating roles. Owners with no exciting place to go will be tempted to jump back in and potentially scuttle the process.
• Thoughtfully select a recruiter. It will be challenging enough to settle on position specs for this role, but getting the right recruiter means finding someone who gets not only your organization and industry, but also the realities of family businesses. This capability is better developed than it used to be in both boutique and larger recruiting businesses, and there are recruiters emerging who specialize in working with family businesses. Some families worry that they’ll have to settle for lesser talent than that available for fully “professionalized” firms and that they’ll be looking for a needle in the haystack. The reality appears to be otherwise, particularly when the family has taken demonstrable steps, such as those identified in this list. This also means that, often, families will actually have more choices than they thought and have to begin to discriminate between, for example, CEOs who have significant history with private equity engagements or those who have a history of running sizeable businesses inside larger conglomerates—sometimes neither one of these histories are attractive to the family business, which may in the end have the opportunity to insist on other skill sets.
• Identify special role expectations involving next generation participants. If there are other family members who stand to be eventual leaders of the business, clarity around the role the non-family CEO will have with his own potential successor, and the timeline that’s anticipated will be important. It’s not unusual for a CEO to be asked to help mentor and groom a family successor who’s as of yet unable to assume the post. If there’s such an expectation, the family should understand the rules around how this will develop and clearly communicate them to candidates.
• Develop a communication plan. This plan should resemble any plan for major company events. That means that it should identify stakeholders—usually clients, suppliers, management and employees—and develop strategies for who should know what and when for each group. Developing this plan enables family owners to step into the shoes of these stakeholders and identify possible areas of disruption. As this list implies, there are a lot of moving parts in a transition like this, with multiple opportunities for missed timelines and ambivalent messaging to stakeholders. This will never be perfect. In one case we recently worked on, the family was doing all the right things to usher in this transition, but experienced significant delays in getting the CEO actually signed on because the CEO’s exit from an existing engagement was tied to the sale of that business, which was, as is often the case, taking longer than expected. The unintended effect of this delay was to leave current family operators and non-family management in a kind of purgatory. It also led to suspicion in management that the family wasn’t serious about making the change and projections that the family couldn’t let go. Good bi-directional communication is an antidote to having these situations go off the rails. Part of this communication plan needs to address, as simply as possible, the fundamentals of: 1) what does this change mean for me; 2) who will I be reporting to; and 3) what does this mean for how I will be getting paid? The communication plan should include how the owners intend to communicate with each other, which ideally includes regular meetings focusing on the transition and may often be optimized by use of an outside facilitator.
• Develop an on-boarding plan. On-boarding starts before the CEO joins the business, and family owners should build a glide path that gets the CEO introduced to the company and armed with how they want to make their “first 10 plays.” This may mean attending board meetings, industry events and company tours. It should be laced with discussions about mutual expectations for and approaches to the first 90 days and beyond. It answers how existing family operators will still participate in what activities and for how long. It also addresses what reporting relationships the CEO will have and how those will evolve over time. If the board is up and running, the ideal for some may be that reporting evolves from direct to the family to direct to the non-family chairman of the board. This will vary for each family and its evolving system of governance.
Enhancing Probability of Success
There’s no single script for how to bring in a non-family CEO. This is one of the most significant decisions and processes many family businesses will ever make or undergo. The challenges to making this happen are substantial, and the math around the probability of successful outcomes will give pause to the family and its advisors along the way. The magnitude of this transition and the number of moving parts mean that attention to the process of multi-stakeholder change will be most important in enhancing the probability of success. Space limitations prohibit attention here to the full suite of strategic and day-to-day approaches that will attend this kind of transition, but experience suggests that managing through the issues and approaches outlined above will get the family into the right ballpark with a set of rules that can tilt the odds in their favor.
1. See JoAnn Norton, “Beating the Odds: How to Improve the Probability of Success of Non-Family Chief Executive Officers of Family Firms,” FFI Practitioner, Vol. 3, 2007, for a summary of her dissertation research and subsequent studies of this topic.
2. See Craig E. Aronoff, “Megatrends in Family Business,” Family Business Review (1998), at pp. 181-186.