Any family-owned business that achieves enough success to occupy a strong position in the middle market is rightfully a source of pride. While it's nice to think that the firm's leadership will remain among family who can sustain that success, it's not very realistic. Only 30 percent of family businesses last into the second generation, and just 12 percent last into the third, according to the Family Business Institute.
The hiring of one or more outside executives into a family business can help preserve the value of the family's financial stake in the operation over the long term. In order to foster this transition, the present leadership team must make several considerations before, during, and after the hiring process to ensure that a new executive can drive progress and not become ensnared in internal clashes that can cripple a middle market firm, regardless of its past success.
The first step is for the firm to plan out the process well before a new hire becomes necessary to the business. Through objective assessment of each current executive's strengths, weaknesses, and estimated time remaining active within the firm, the company can identify what it needs from a new executive hire (having a few outsiders on the board of directors or hiring a temporary management consultant would help complete this task in a more objective fashion). Once this assessment is completed, the company's search for the right executive candidate should focus on three qualities.
Shared Values
Values can be demonstrated in part by work history, but this should be an aspect that is hashed over thoroughly during the interview process. Kevin Logterman of Cook Associates explains how the conversation should revolve around "what the company stands for in terms of values, philosophy and approach . . . If the candidates cannot understand and connect with the values of the organization, it's immaterial how talented or successful they've been elsewhere." John Ward, a professor at the Kellogg School of Management and co-founder of the Family Business Consulting Group, adds that candidates "need a great appreciation and sensitivity for business culture, as business culture in a family business is both more subtle and more powerful."
Different Skills and Perspectives
Seek out potential additions that offer attributes not presently found within the current leadership team or that will disappear when someone exits the firm. The right candidate need not be from the same industry as the family-operated company; what matters most is whether a candidate will bring insights and abilities that refresh an insular environment, explains Harvey Wigder of Fulcrum Resource Group. Once the new executive comes on board, "owners must understand and accept that . . . [some aspects of] the organizational structure will undergo fundamental changes. The new executive will invariably form opinions and make adjustments accordingly, which will surely result in staff restructurings."
Especially in a middle market setting with a smaller amount of employees, it's necessary to build the new exec's credibility with the rest of the company. In a setting with a smaller amount of personnel, a new member of the leadership team can make an immediate impact, but it's harder to break in with a more close-knit team. To ensure that the new executive can be effective, the present leadership team must help employees — who are often family members — adapt to the new power dynamic. Part of this involves communicating with employees ahead of time; it also requires present leadership giving the new executive sufficient deference and room to maneuver in their area of responsibility.
Long-Term Planning
John Ward describes this as "patient capital. Because their fundamental purpose is continuity, family businesses are very prudent in their risk taking. They put their capital into things and patiently wait for long-term success." As a result, candidates who come from a public-company background or a small start-up company background must be carefully vetted for temperament and judgment to determine if they can operate under a five-year, and possibly ten-year, business plan.
One way that present leadership can ensure a new executive's fealty to a long-term business plan is to set up compensation and incentive packages properly. For instance, if the family is unwilling to distribute full voting shares at set intervals to an outsider newly brought on board, the alternatives are nonvoting shares or shares with limited transferability. Another possibility, as brought up by Peter Leach & Partners, is to create a long-term bonus plan not involving actual shares but which still enables the executive to participate in future appreciation of the firm's value.
How should the onboarding of a new executive team member be timed? Should they start working before any family-based executives leave? Let us know what you think by commenting below.
Rob Carey is an NCMM contributor and a features writer who has focused on the business-to-business niche since 1992. He spent his first 15 years at Nielsen Business Media, rising from editorial intern to editorial director. Since then, he has been the principal of New York-based Meetings & Hospitality Insight, working with large hospitality brands in addition to various media outlets