Leading the family-controlled company

 

Whether the CEO of a family-controlled business is a member of the family or an outsider, the central challenge remains the same: how do you successfully balance the needs of the business with the interests of the family? We've seen it repeatedly in our work with family-controlled businesses, and we recently heard it strongly reaffirmed in a series of conversations we conducted with family-member CEOs and independent CEOs alike, in both privately held and publicly traded companies. 

The unique pressures created by family control are many. Family members may have widely varying financial objectives and timetables, which can complicate strategic planning and deployment of capital. It can also lead to conflict with other family members as well as management. Most families, too, have their unique dynamics — and sometimes dysfunctions — which can be invisible to the outsider CEO and which even a family-member CEO may not be consciously aware of. Yet those dynamics are unceasingly at work on the board and elsewhere. And for those family members who work in the business, promotion and succession are especially sensitive topics.

Even CEOs who manage to walk the fine line demanded in the role readily acknowledge the difficulty. Says the former CEO of a highly successful U.S. consumer products company, who found himself constantly at odds with the founder/chairman, “I think the board would tell you that in most cases I won and the business won, but it never felt like victory because of the enormous effort that was required for every battle.”

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The most critical issues

Among the CEOs we talked with, there is not only agreement about the difficult nature of the challenge but also broad consensus about how to meet it. Three of the most critical issues, they say — and as our experience again confirms — include the following:

Understand the family's values and its dynamics. This can be as challenging for a family-member CEO as for an independent one. The values may not have been explicitly stated and the family dynamics may be difficult to articulate — for an insider or an outsider. If the family hasn't codified its values in relation to the business, they might consider doing so through a family charter or family council. Sacred cows should be acknowledged, discussed, and addressed, and the values that emerge should be clear and clearly communicated throughout the company.

Potential conflicts between the family's values and the business should also be explored. For example, a family whose members have been pillars of a community for decades and whose family name is on the business may oppose actions — such as relocating operations — that might be good for the business but bad for their hometown. They may oppose entering certain kinds of businesses, no matter how tempting the opportunity, or engaging in certain business practices, though those practices are widely accepted. Some of those values may be non-negotiable; others may be satisfied in ways that still enable the business to capitalize on an opportunity.

Understanding family dynamics can be even more challenging than confronting values. It's worth the effort, however, because the subtle workings of a family can greatly affect the business and inhibit the CEO. For example, family members, including a family-member CEO, may give undue weight to the opinions and wishes of a revered patriarch or matriarch, or to a family wunderkind. The willingness to defer to the wishes of that family member can lead to unnecessary tension between the family and management and, more damagingly, to poor business decisions. Over time, it can seriously undermine the company. Similarly, power struggles between different branches of the family often emerge in the second or third generations. It's a situation that is no more comfortable for an independent CEO caught in the crossfire than for a family-member chief executive who might be seen as favoring one side or the other. In either case, it can distract attention from the real business of the company, drain management energy, and drag down performance.

Here is where a neutral third party, like an independent director or a leadership consultant, can help. With no emotional or personal stake in the situation, the third party can provide an objective reading of the family's dynamics and help the CEO see more clearly how those recurrent patterns might be affecting the business — for good or ill.       

Unlock the value of independent directors. The best governed family-controlled businesses, whether publicly or privately held, increasingly rely on independent directors. The virtues and value of independent directors are widely recognized: They provide the objectivity that family members may lack. They bring the perspective of other businesses to families and boards who may have known only one business and business model for generations. In publicly traded companies, independent directors demonstrate the dedication to good governance that regulators and institutional shareholders increasingly demand.

In all of those roles, the key to their effectiveness may lie in their numbers. A single independent director on an otherwise family-dominated board is unlikely to carry much weight. A majority, or at least a plurality, of independent directors is much more likely to be able to influence the family or non-family CEO and the family at large. “While each independent board member is expected to have his or her individual view of a particular issue,” says the retired CEO of a Fortune-ranked company and board member of a prominent family-owned business, “there is great value and persuasiveness in having them take counsel among themselves and then speak with one voice.” The company can institutionalize this practice by appointing an independent lead director and having frequent meetings of independent directors in executive sessions without the presence of management, providing a mechanism for developing a strong point of view without threatening family cohesion.

Of course, independent directors can add value only to the extent they are accorded genuine independence, including direct access to management. Conversely, although the independent board member serves at the family's pleasure, they should remember that their role is not to focus on the family trust fund but to maximize the value of the enterprise. Family members, including CEOs, can themselves achieve a measure of independence by serving on outside boards. Such service exposes them to best practices in governance, to new business perspectives, and to a different set of dynamics with management. They can then bring those experiences back to the family business, share best practices, and achieve a higher degree of objectivity in their roles in the company. 

Pay attention to the nuances in CEO succession and transition planning. As with the value of independent directors, the value in rigorous CEO succession and transition planning is widely recognized by the CEOs and family-controlled company directors with whom we work.

They fully understand the importance of the familiar elements of best practices: begin early, plan down through several tiers of management, provide development opportunities to potential successors, benchmark internal talent against external talent, review the plan regularly with the board, and maintain an emergency plan for unforeseen transitions. But because succession in a family-controlled business is fraught with family issues and expectations, the devil really is in the details — the nuances that can make a great difference in the quality of the process and its result. In addition to adopting a rigorous planning and transition process, careful CEOs and their boards will:   

• Beware of the tendency to misjudge whether a family-member is ‘CEO-ready.' We have seen this phenomenon frequently, especially with founders, and it cuts both ways. A founder who has painstakingly built a large successful enterprise may be unable to see the competent, CEO-ready adult behind the child the founder has always known. Or a founder and fond parent may greatly overestimate the talent of his or her offspring. In the case of a sitting family CEO it can cloud the judgment; for a non-family incumbent CEO it can be a difficult issue to address with a founder, family-member chairman, or other powerful family member. In both cases, independent board members and third parties can be of inestimable help in judging the fitness of family candidates for the role of CEO.
• Confront forthrightly the issue of bringing in a CEO from outside the family. The fact is that the family is a narrowly circumscribed recruitment pool, and there are many circumstances in which a non-family member may be the best choice for CEO. There may be no family member who is adequately prepared to take the reins. The company may need shaking up or need an interim leader to mentor the next generation of family leadership. There may be an internal, non-family candidate who is clearly superior, or the company may need to reduce family conflict by installing a non-family member in the top job. If the company does decide to go outside the family, it should make sure that the candidate has exceptional interpersonal skills, the humility to understand that control ultimately rests with the family, and the ability to adapt to the unique dynamics that govern the business.
• Create the conditions for the new CEO's success. If the CEO is a non-family member, the family members/directors should establish a mechanism for providing him or her with knowledge of the family's customs and folkways and with candid and constructive feedback. If the new CEO is a family member, the older generation should not automatically expect their relative to maintain a strategy or business model that has outlived its usefulness. We have seen cases, for example, in which the CEO was unable to make any significant strategic changes until the founder had passed entirely from the scene. The company should also consider term limits for the board, so that succeeding CEOs can have the benefit of advice from some of their business contemporaries.

Unique strengths

If family-controlled companies present unique challenges to CEOs, they also offer some unique strengths: Free from excessive worry about the market's short-term reactions, family-controlled companies can focus on growth for the long term and structure compensation accordingly. Because family wealth is at stake, they can reassure bondholders and protect themselves from hostile takeovers. And because of the central role played by key family members, they can also make fast decisions and respond nimbly to the challenges of an operating environment that several generations in the firm know well.

Given those strengths, CEOs who can meet the challenges outlined here have the opportunity to build enterprises of lasting value — and veneration.          â– 

The authors can be contacted at jwood@heidrick.com and bproctor@heidrick.com.

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