The shift in demographics that is causing a historically unprecedented transformation of the work-force, is also having a dramatic influence on the management and dynamics of the family-owned business. Historically, the primary objective of most family-owned businesses has been driven by generational management continuing in the legacy. More business owners are nearing retirement and wanting to pass-on the day-to-day management of the business, are now exploring and exercising the option of going outside of the family to fill executive leadership roles. Maximizing the economic legacy and recognizing that continued value creation and providing an income stream could be a more prudent option than continuing family leadership or selling the business, even in today’s environment of strong business valuations.
Versique has a practice area dedicated to executive search for family-owned businesses and has been successfully conducting C-level and President searches for family-owned businesses for years. This is the first of 2 blogs addressing the topic of non-family executives in a family-owned business. This blog will address some of the more important issues that have surfaced during executive searches from the family’s perspective, and the follow-up blog will address issues that a non-family executive needs to be aware of when joining a family-owned business.
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Importance of Culture Alignment
Most family-owned businesses are attractive places to work because of the unique cultures that have been created by the family. Maintaining that unique and attractive culture can be complicated when bringing in non-family executives. The key and challenge at the same time is to hire an executive with a personality profile and management style best positioned for success in the culture of the business. This requires an interviewing and selection process designed with determining and establishing an alignment of core values to ensure an appropriate culture-fit with the family-owned business.
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Injecting a Complimentary Skill-set
The family may lack a certain skill-set determined necessary to take the company to the next level and going outside may be a necessity that compliments its existing management capabilities and/or gaps in ability. This may be necessary due to a turn-around situation, required value-creation due to exploring a future transaction, major acquisition, and subsequent integration, or just plain growth. Existing executive management and generational options may not possess the capabilities required to successfully execute a desired strategic direction. Continuing the economic legacy of the family-owned business may be of more importance than continuing the family management of the business.
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Difference Between Ownership and Management
The family involved in management of the business need to understand the clear distinction between ownership and management. At the time, the non-family executive needs to understand that they do not own the business. Therefore, in an environment where a family-comes-first philosophy may dictate decisions, this is important to understand for success. Regarding the family members, ownership does not automatically imply someone is in the best position to make a management decision regarding the strategic direction of the business. Family members need to recognize that at-times leaving the decision involving value creation to someone else may be in the best interest of the company.
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Orientation to Leadership Development and Mentoring
Frequently, families may consider bringing in a non-family executive because the next generation simply isn’t ready to take over leadership. Leadership development and mentoring the next generation to ultimately take-over the management of the company requires a management style and a well-developed skill set to successfully execute the leadership development aspect of this strategy. Needless to say, this critically important specification of the nonfamily leader’s responsibilities needs to be appropriately messaged to prospective candidates and anyone else involved in the search.
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Relinquishing Control
Specifically, with regard to an incoming non-family CEO, the family CEO really needs to let-go and relinquish control to the new leader. As obvious as this is, it frequently gets overlooked and not addressed appropriately to ensure a successful transition. This requires a detailed plan that identifies clear and specific responsibilities in the corresponding job description and more importantly, a mechanism that ensures accountability in the family CEO for a successful transition of control. When available, an Advisory Board can assist in this accountability transformation, but a successful leadership transition still requires a commitment by the family CEO to realistically relinquish control, delegation of real authority and enabling the non-family CEO to develop reasonable autonomy.
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Compensation
The driving intent and ultimate objective of any compensation package is to motivate intended behavior and designing executive level compensation packages to successfully attract and retain non-family executives is critically important to a successful search process. The trend we’ve been seeing recently in family-owned businesses is away from the sharing of equity and instead, baking formulas into the compensation packages that mirror equity. Typically, executive compensation packages include the components of; base salary, short-term flexible bonus, and a long-term deferred compensation component with corresponding vesting period associated with the realization of this deferred portion. Formulas designed to function like equity are being tied to earnings and value-creation, with annual deferred payouts and payouts in the event of a future transaction. The long-term deferred components of executive compensation vary drastically depending on each situation and what kind of behavior is attempting to be motivated.
As mentioned above, the shifting demographics of baby-boomers retiring, or in the case of business owners, wanting to pass along the day-to-day management of the business, are coming to the realization that looking outside the family for the next executive leadership may be in the best interest for maximizing the economic legacy of the business. For a variety of reasons, owners are exploring for the first time bringing in a non-family executive to run or help run the family-owned business. These family-owned businesses are frequently facing this realization for the first time and are treading into uncharted territory, they don’t know what they don’t know.
The unique environment of a family-owned business can be extremely rewarding and a very attractive place to work. When looking at bringing-in non-family executives to lead or help lead their company, exceptional due-diligence from the family perspective needs to be addressed up-front and as the search process evolves to successfully transition to non-family leadership. In addition to search firms with experience in family-owned businesses, the University of St. Thomas has an office dedicated to assisting Family-owned businesses and can an extremely valuable resource, check-out their website at UST Family Business Center.
The next topic to be addressed will address the issues involved from a candidate’s perspective when looking at an executive leadership role within a family-owned business. As mentioned above, Versique has a practice area dedicated to executive search in a family-owned business. For additional information, please refer to our website at Versique Family-Owned Executive Search.
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