Previous articles in this series have touched on a number of issues important to family businesses, including goal setting, culture and governance. Let’s now turn to another issue that can be critical to sustaining the legacy of a family business: whether and how to bring in outsiders to the board and to the executive ranks, especially in the role of CEO.
The initial involvement of non-family members in governance and management is a major transition that can affect the identity, performance and overall success of the business. Handled properly, allowing outsiders to be a part of the decision making and/or to run the business day-to-day can have a very positive long term impact on the family’s wealth and reputation in the community.
Family Business Benefits of Bringing In an Outsider
A common impetus for involving outside board members and executives is the need to expand the company’s access to expertise and perspective. The views of an outsider can supplement those of family members, helping them adapt yesterday’s paradigms to tomorrow’s realities. Growth-oriented middle market companies that take this important step benefit in multiple ways. They expand their understanding of their market. They are more skilled at keeping ahead of industry shifts. They are better at connecting product strategy to current and evolving market demand. And they improve alignment of internal functions for better execution.
Like other growing companies, a successful family business often needs additional capital to finance expansion and scale operations to reach the next level. Bringing in outside capital typically involves adding outsiders to the governance structure since significant investors will typically want a seat on the board and participation in key decisions.
Sometimes, as a family business expands and becomes more complex, they discover that the best person for the top job is not a family member. The selection of a non-family member CEO is one of the most exciting - and risky -transitions a family company will make over its life span.
Deciding To Select An Outsider
Before considering his or her industry experience and technical skills, a family business must ensure that the CEO candidate supports the values, vision and overall approach of the firm. If an outside CEO cannot understand and connect with the values and goals of the organization it is immaterial how talented or successful they have been elsewhere.
Matching time horizons is another key consideration. A family that wants to perpetuate the business and its legacy generally prefers longer-term strategic thinking. A non-family executive (and outside board members) must be attuned to this timetable. The risk of a mismatch is especially great when outside executives are from public companies where quarterly earnings targets are paramount. A similar mismatch can occur with executives from the private equity world where the objective is to grow and exit a company in a few years.
Lastly, an outside CEO must be open to considering alternative approaches when the line between duty to business and duty to family blurs. Even a sophisticated family business with a complex structure—consisting, for example, of a family council, Board of Directors and diverse management staff, which includes both non-family members and family members, faces such issues. For example, if a member of the family is having health issues or financial difficulty, family members in the business may want to provide compensation or benefits that cannot be justified on strictly business grounds. In this case a non-family CEO will have to accommodate something other than strictly bottom line business thinking.
Family Business Insight
Today, more than 80% of all businesses in the United States are family owned and operated, accounting for a majority of job creation and about half the GDP. The family business model is a resilient one, with a special opportunity to build long term wealth and exceptional goodwill among customers and communities. As noted in this series of articles, by thinking carefully about governance, succession, estate planning and the role of outsiders, family companies have an exceptional opportunity to sustain a robust business for generations to come.
About the Author
Brian Kinahan’s specialty is increasing the valuation of a business before it’s sold. He brings 35 years of C-level experience in middle market companies including 10 years as permanent Chairman, CEO or COO, plus 10 years assisting CEOs of distressed businesses and another 10 years helping CEOs of growing companies generate sustained profitable growth by upgrading business practices to match the demands of a larger enterprise. Contact or learn more about Brian here.
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