Sometimes, it can’t be kept all in the family. At some point, family-owned firms discuss the advantages and disadvantages of bringing in outside advice and services. This can range from financial services (including CFO for hire) to marketing to human resource to IT. The biggest discussion, though, centers around bringing in a non-family executive to run the business.
This is a key role that has its own unique challenges, but also can bring a number of advantages in both operations and growth. Like all companies, family firms must be profitable over the long-term to be sustainable.
Business leaders who are already validated by their own sense of accomplishment in other companies can work well in a family-owned business. These individuals know when it’s necessary to take unpopular stands with family owners. It’s a delicate skill of being able to tell family owners what they might not want to hear for the good of the business—and to do so while never losing sight of what’s good for the family. As an external CEO shares, “Whenever I am challenged with a big decision at the line of what’s good for the business and what’s good for the family, I picture the fleet of vehicles we have out on the road that bear his family name; not mine.”
Choosing the Right Leadership Structure
Creating shareholder value in a family business often means something completely different from what that term means in public companies. Non-family CEOs must understand the difference.
An effective governance structure is essential. In general, there are three types of owner-leadership structures:
1. Family Controlled Enterprise: Family shareholders elect the board, which elects the CEO. Most often there are outside board members who are influential. The core purpose is to preserve and grow the family wealth with professional leadership and with decisions made in the best interest of the business. Shareholders often expect regular distributions/dividends from the enterprise. The purpose is not to employ family members unless they can contribute to the core purpose. Often, structure, criteria and processes are put in place to bring family members into the enterprise. The non-family CEO and other senior leaders may have some shares, may have a different class of stock (voting vs. non-voting) or a hybrid form, such as stock appreciation rights.
2). Family/Professional Management Enterprise: While the CEO may be non-family, family members are also employees in the business. And, some of these family employees may be shareholders. The family employees may be in leadership or managerial roles and there may be multiple generations of family employees. This is often one of the most challenging situations for the CEO in establishing principles, standards and processes to hold family employees to the same level of performance, accountability and compensation as other employees. Allocating resources and managing the organization’s culture are key issues for the CEO. In addition to their compensation as employees, family shareholders often expect regular distributions/dividends. The board of directors, which elects the CEO, may be only family shareholders or may have some non-family directors or non-voting outside advisors or advisory board.
3). Family Run Business: This is by far the most common of family businesses. The core purpose is to preserve family ownership, active family involvement and family pride from generation to generation. Some implicitly embrace another core purpose, which is to preserve a current or aspirational life-style for family members. Compensation of family employees is not necessarily at market rate. There can be conflicts between what is in the best interest of the business and best interest—or desires—of the family members when making decisions, which can be difficult to manage.
A sense of entitlement can be a destabilizing issue. Some family owners who are not employees may be displeased with decisions made by the family-owner employees. There can be a number of sources of friction that need to be skillfully managed for the business to succeed and to preserve family harmony. Seldom will such businesses hire a non-family CEO unless there is pressure either from within or from financing sources and advisors to hire an outsider to “turn the company around.” In that instance, the business begins to look more like a family/professional management enterprise.
Michelline Dufort is director of the Center for Family Enterprise/CEO Forum at the University of NH in Durham. Phil Ryan facilitates a CEO Peer Group for the center and is a corporate advisor. For more, visit paulcollege.unh.edu/center-family-enterprise.