A non-family CEO: invader or savior?

It’s a make-or-break decision: promote a family member or bring in an outsider CEO? External CEOs tend to perform better, but that can come at a cost.

One of the most difficult decisions any family business makes is whether or not to bring in an outside CEO.

It’s a question all family businesses will eventually face. Many will come to the realisation that they need a non-family member with specific experience and skills, lack of complicated internal ties and a fresh perspective to take the business forward, particularly if they are diversifying or moving into new markets.

It can be an emotional decision. Emotion aside, it has to be taken with care to ensure success for the company and its new head. Family businesses that do it successfully have clear rules about what happens when you split management and ownership. They need strong governance.

Professor John Van Reenen, director of the Centre for Economic Performance at the London School of Economics and Political Science, has done studies showing family-owned firms with an outside CEO have a higher management score than firms with a family CEO. As he explains in the Harvard Business Review, it comes down to three reasons: narrowing the choice down to a family member reduces the talent pool. As he puts it, “imagine if we selected our Olympic team members from the sons and daughters of those who had won medals two decades ago. Sure, there is some genetic component, but it is rather unlikely that the best person for the job inevitably is a family member”.

Then there is the “Carnegie effect” named after the famous industrialist Andrew Carnegie, who gave away most of his wealth to non-family members and who argued that if his eldest son knew he was going to inherit the firm, he would have little incentive to work hard at school. And finally, there’s the likelihood that primogeniture will discourage talented non-family managers from staying.

However, the reality is that not every family business will choose to appoint an outside CEO. They will stick to what works for them strategically.

Hat maker Akubra, for example, has ensured that every CEO since 1925 has been a family member, curiously all with the name Stephen Keir (The Keir in the hat, May 2). Company secretary Roy Wilkinson says that’s because making felt hats is a craft that’s been learned through the generations. “That’s the way it’s always been,” Wilkinson says. “I don’t think there has been a discussion about having a non-family CEO as such. It’s a craft that’s well known to the Keir family and one that they have become renowned as the best in the world at.”

As a result, he says the CEO Stephen Keir IV is very hands on and spends much of his time in the factory “keeping an eye on the quality of the product and the process, as his father did and their fathers before them.”

Sticking to a family CEO has maintained Akubra’s competitive advantage as one of the world’s most distinctive hat makers.

Wilkinson says this is balanced with governance. The company’s board has met every month for the last 25 to 30 years and four of the seven board members are independent. “We have always had independent directors on our board and they act as a balance,” he says.

Other family businesses have made the hand-over seamlessly while maintaining family control. Lionel Samson & Son Pty Ltd, easily one of Australia’s oldest continuous family companies which started in 1829, has a non-family managing director, Neil David, who was recruited from Toll Holdings (FAMILY BUSINESS: Lionel Samson & Son, Nov 15, 2012). Director Steve Samson says the company’s governance process ensured they had to get the best person for the job. But the governance process also ensures family participation.

It’s a similar story at Kennards Hire. Eighteen years ago, Andy Kennard stood aside as CEO to make way for Peter Lancken who had been CEO of a company Kennards had acquired. He says he did that because he realised Lancken was the best man for the job. Lancken is now company chairman. It is still 100 per cent family owned with two family members on the board (Why there are two Kennards, April 4).

But before companies make the transition there are some things they need to watch.

Doug Munro, who runs Munro Group HR Management, which advises family businesses, says the first and most important thing is to do a complete due diligence, whether it’s a family member or an outsider. “First you should develop a PD (position description), then develop a person specification, you should write KPIs (key performance indicators) and you should write selection criteria,” Munro says.

How do family members match up to those selection criteria? They might be terrific operationally, but can they run a business? If not, the business needs to look for an outside CEO.

Munro says the new CEO would have to know how to deal with family members and quite often, have a plan in place for compensation for the founder who might not have taken out sufficient superannuation or had an exit strategy. “It might be argued that an external CEO would have more expertise in these areas, the family CEO may not have come across it before,” he says.

The big issue for the external CEO is winning the family’s trust. For that to happen, the CEO would need to have a track record and extensive experience in family or closely held businesses. There would also have to be an induction program. The CEO needs to come out of it knowing how to handle family issues.

Where there’s people from the next generation that have given up career ambitions in order to progress from the bottom of the organisation and who have spent the best years of their lives in gaining a real ‘feel’ for the business, Munro suggests it might be better to get a CEO in the latter part of his career, with a sunset clause and who could also possibly act as a mentor.

In all this, as Lionel Samson & Son and Kennards Hire have shown, the governance process has to be strong to ensure a smooth transition. After all running a business is not necessarily the same as owning it.

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