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Helping Family Businesses
Prosper Across Generations®

Preparing Owners for a Non-Family CEO


By Christopher J. Eckrich, Ph.D. and Otis W. Baskin, Ph.D.

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Family businesses most often start out with a family member as CEO. As the business is passed down through generations, there often comes a point where the family owners have to decide whether to hire an outside CEO. Bringing in a non-family CEO may be the obvious choice. However, the introduction of a non-family CEO—even one that the owners strongly support—brings significant change to the way the family ownership group works together. The leadership transition is more likely to be successful if the family ownership group understands the impact a non-family CEO will have on their family system.

Families often recognize only after failed attempts that they were ill prepared for the transition to a non-family CEO. Much can be learned by looking at the preparation efforts of those families that have succeeded in integrating a non-family executive.

Ownership groups looking at a non-family CEO for the first time often find that they must change the informal ways in which they function and become more structured. For instance, if Dad was the previous CEO, it cannot be expected that the new CEO, who no longer shares the ­family’s last name, will be given the same degree of trust and respect initially upon the transition. In fact, this transition is a wonderful opportunity for families to professionalize how they function as an ownership group.*

The first step is to prepare the ownership group to work with this new individual. The key question here is how involved the family will be in maintaining its oversight and connectedness to the CEO. It is an ownership task to determine the structure and composition of the board of directors. The family may choose to have one or more family owners on the board to provide oversight, or the family may choose to focus their energies on selecting highly qualified independent directors who will oversee the new CEO. We frequently find that families are tempted to decide how many owners should be on the board based on the number of family branches under consideration. While this has worked in some instances, it implies that each branch represents a different faction. This structure takes away from the unified ownership voice that we feel is needed by a board charged with overseeing a non-family executive.

Families often find that they can achieve a more powerful voice by having either one or two family directors serving with outside independent directors. In situations where the ownership group has grown to a significant size, it will be impossible for all owners to sit on the board. As a result, some owners will need to get comfortable with providing their voice to management through a different channel.

It is at this stage that the infrastructure of a family council is needed to organize the family so that a single voice can be realized in ownership matters. In larger ­families, the task of a family council may be augmented by an ownership council that will provide the ownership voice in business matters. In either case, successful families commit to organize themselves in such a way that individual factions will not approach the new CEO to attempt to sway him or her toward a specific position, but rather that the family organization will speak as one unit to the board of directors, who will provide oversight. Owners often need to be educated on the roles of the board and family or ownership council to recognize that they do not have authority to determine key business issues such as evaluating the CEO’s performance or setting compensation. This can be important to owners.

Organizing the Ownership Voice

Most commonly, the board selects a qualified family member as chair. Having an effective family chair assures that the family’s wishes and needs will be integrated in driving the corporate agenda forward. When ownership groups choose to have a non-family chair of the board, a vice chair from the ownership group can serve alongside the chair and assure that the ownership voice is heard. Families whose boards are dominated by outside directors find this arrangement preferable, as their comfort with the incoming non-family CEO is new and the idea of having no connection to the board is troublesome. That said, families are coming to see the value of a non-family chair in situations where there is no family member qualified to manage the board.

Ownership groups also must be able to clearly articulate their common vision, ownership objectives and goals, as well as their core values, so that the board can assure that these elements become directives for the non-family executive. We often interact with family organizations where the essential vision and goals of ownership are assumed, but not articulated. Frequently, the assumption that all are on the same page about ownership vision is incorrect. When ownership groups unify around a common set of goals and objectives, it reduces the need of any particular owner to use inappropriate influence directly on the non-family CEO, or on the board. Instead, ownership relays the guiding goals and objectives with one voice, allowing the board to confirm that they are carried out in a proper manner over time.

Additionally, the non-family executive’s adherence to ownership’s unified set of core values is critical. When we hear of failed efforts to integrate a first-time, non-family CEO, an oft-heard quote is, “He [or she] did not understand how we do business.” In other words, the new executive, in the effort to reach the goals and the objectives set forth by ownership, failed to do so in a manner consistent with the core values of the family. In some cases, the owning family finds itself growing embittered with the tactics chosen by this new non-family executive. The non-family executive is seen to be incompatible with the ownership group and removal is pursued. This can be prevented by giving clear expectations on the front end. This enables the non-family executive to see how the values of the family must be considered in achieving the articulated goals and objectives of the family. Otherwise, results can be pursued against the family’s grain, leading to loss of trust in the relationship.

In addition to organizing the ownership group’s voice, wise family enterprise owners will make sure that the outgoing family CEO’s voice is also considered. We refer readers to previous issues of The Family Business Advisor® that addressed managing the process of departing CEOs.

Communication

Most families in first- and second-generation enterprises communicate through informal channels. An important piece of information is discovered or made known, the information is passed informally to another family member, and the family communication network is activated. Over time, each family member receives the information in one form or another, with perhaps slight variations in the message (after all, messages vary based on the number of people they pass through). Predictably, a member of the family will not receive the information, not through intentional slight but due to the occasional ineffectiveness of the family communication grapevine. Feelings of being left out will be accompanied by tensions.

With the onset of a non-family CEO, family anxieties may be heightened, as will be the family’s desire to know how things are going. This is normal given that each owner has significant value in the asset being managed, and those who are not serving as directors may feel isolated. Families help themselves when they create effective means of communicating about the non-family CEO and about corporate performance.

Methods of communication vary widely. “Face time” with the non-family executive, such as visits before or after board meetings and/or at the regularly scheduled shareholder meeting times, is quite common. When meetings are scheduled regularly with the non-family executive, it reduces the need for family members to inquire through informal (and usually inappropriate) channels. Other ownership groups choose to have telephone conferences on a regular basis (quarterly or semiannually) so that the family may understand how business is progressing from the non-family executive’s perspective. This face time, whether in person or by phone, allows ownership groups to hear the texture of the CEO’s discussion.

This basic communication will allow trust to build between the ownership group and the CEO. Trust needs to mature in both directions for the relationship to be effective. The CEO will need to trust that the family will stay within its bounds and be supportive of organizational needs. Similarly, the family needs to trust that the CEO hears them and understands their unique concerns as owners (frequently with public reputations within the community that are influenced by the way that business occurs). Face time with the CEO is necessary, but it is not sufficient for ownership group functioning to be optimal.

Let’s remember, the non-family executive has been hired to run the business, NOT to serve as counselor, shareholder relations expert, and so forth, with the ownership group. These tasks generally fall to the chair of the board (or can be delegated to a vice chair or shareholder relations representative). The ownership group will need strong communication from the chair. This communication works best when the communication is regular (think monthly or quarterly, not just annually) and ownership issues are raised in a timely manner. The ownership group should agree in advance how ­communication will take place (phone conference, email, letter), what communication will be required, and how questions are to be moved up and down through the communication chain.

Most families communicate informally about ownership matters when a strong family leader is in place. Frequently, owners do not communicate at all about the financial performance of their asset but trust in family management to oversee the investment. The transition to a non-family CEO is a superb opportunity for the family to begin sending regular financial statements (monthly or quarterly minimally) and to receive reports from the president and/or chair on corporate performance and direction. If this is the first time confidential information has been sent out to the ownership group, reinforcing confidentiality is strongly recommended. Newly informed shareholders should be made aware of the consequences that result from inappropriate information sharing and invited to share in the responsibility of treating confidential information with great care.

The process for addressing owners’ questions deserves special attention by the family. Smaller families will utilize direct connection with the chair to address individual issues, while larger families cannot afford this as it overtaxes the chair. A positive practice we observe is that questions may come from any owner and, unless the nature of the question is specific to the asker, responses are sent to all shareholders. This allows education to take place among the ownership group and promotes transparency in the chair’s interactions. Some families find that a corporate website addressing key issues is a better way to communicate, though we see families struggle with this method if there is not a single person dedicated to maintaining the website. Family meetings are another commonly used channel for gathering questions to present to the board.

Boundaries

The owner’s remaining task is to clearly identify boundaries between himself and the other functions in the organization, especially between himself and the non-family CEO. This is often done by clearly articulating in-bounds and out-of-bounds behavior prior to the onset of the non-family CEO’s arrival. In-bounds behavior would include questions being addressed to the appropriate family representative, even when those questions are tough. Out-of-bounds behavior would include contacting individual directors rather than going through the chair and contacting the CEO formally (or informally) to sway an opinion about corporate direction.

Summary

We know of many families who successfully operate with non-family executives at the helm. These can be rich and rewarding relationships when they are based on mutual trust and respect for the boundaries between ownership, management, and the board. When families prepare themselves to make this a successful relationship, the outcome is frequently a rewarding one for all parties involved.

 

 

 

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