The retirement chair: Why half-leaving doesn't work

The upheaval at Leighton last week -- with the departure of its chief executive officer Hamish Tyrwhitt and chief financial officer Peter Gregg, who had their positions terminated after German construction and engineering giant Hochtief launched a $1.155 billion off-market offer to increase its ownership stake and board representation -- sends a signal to family businesses about the perennial battle for control on boards. One way or the other, Leighton will sort itself out. Sorting the board issues for family business is messier.

For a start, according to the last MGI survey of family businesses, 62 per cent of family businesses did not have a formal board of directors but of those that did, 83 per cent did not have non-family, non-executive directors. Good governance requires outside independent expertise to enhance performance as a business grows.

Third or fourth generation family businesses tend to bring in outside expertise. Good governance is the key to their durability. And like public companies, they know how to handle the chairman-CEO issue.

Peter Carroll of Fordham Business Advisors says the big problem for family businesses remains when the former CEO retires and goes on to the board as chairman, creating potential governance nightmares.

“Public companies typically have a rule whereby if you’re the previous CEO, you can’t be the chairman, whereas a family business doesn’t have that option,” Carroll says.

“How does the retiring CEO go to another board? It means the board is still accountable to an interfering chairman. The board can’t do what it’s supposed to do, it gets stymied.”

He says it all comes down to the board’s chairperson.

“The chairperson hasn’t planned his or her succession out. They haven’t groomed their successor, as BHP would do. And if the family can’t deliver the talent, they have to go outside the family.”

Alternatively, the incoming CEO and his or her predecessor-turned-chairperson can work out protocols. Phil Sims, the fourth generation chief executive of 100-year-old Adelaide food manufacturer Robern Menz did that when his father Grantley, now 74, stepped down as CEO to become company chairman. His brother Richard is general manager of operations (A sweet taste of manufacturing success, February 13).

“He (Grantley) has specific functional roles,” Sims says. “He is very involved but on a part time basis.”

“The lines are pretty clear. My role as chief executive is managing the whole business, my brother is working in the operational area, my father acts as landlord and looks after the property side. That’s quite defined. It would be difficult if there were grey areas but we have clear lines of demarcation.”

Carroll says family businesses are a riskier governance proposition than listed companies. 

“In a listed company, the directors understand corps law, they understand the difference between management and ownership. In a private business they often don’t understand that,” he says. “Quite often, they get the company cheque book mixed up with their personal cheque book. Some run it like their own personal fiefdom. That can happen in a public company but you have auditors, you have risk committees and you have a board that makes the CEO accountable.”

He says family businesses in their second generation have typically never seen a professional corporate governance process.

“The first generation founded it, the second generation built on it,” Carroll says. “You hear stories about how Dad used to have a board meeting in the shower running around by himself every morning.

“These days as family businesses get more successful and bigger, the family puts in place a proper corporate governance process. They might be strong on the sales side or business development side but they would be looking for some sort of finance input. Sooner or later the family sees they can’t deliver the talent and that forces them to go outside the family unit and get maybe a non-family member as CEO or COO.”

A good example of that is the decision by Daniel Grollo to hand over the baton to deputy chief executive Carolyn Viney -- the first non-family member to take the top job in the history of the family business established in the 1950s as a concreting company by his grandfather. His son Bruno, who took charge in the 1980s, handed it over to Daniel.

Grocon is an example of how family businesses become more professionalised, but as Carroll points out, that didn’t happen until the third generation. That is when it happens.

The problem is most family businesses don’t last into generation three. Perhaps Australian family businesses can learn from the American family business sector where there are companies like Wal-Mart in their fifth and sixth generation. There is still some way to go.