What will it take for a family business to capitalize on a non-family member’s competencies and experience?By Ellen Frankenberg
Most family business owners today understand that they can’t pad their payrolls with any relative who needs a job, qualified or not. Even so, these same business owners often hesitate to compete aggressively for the talent in the non-family marketplace.
Like all other human beings, business family members have limits to their skills and energy. When it’s time for a transition, the next generation may not be the best choice to grow the family’s “Golden Goose.”
Jim Collins wrote in Good to Great that the first priority must be “getting the right people on the bus.” But the “right people” may not necessarily share the same DNA. Sometimes a talent transfusion can provide the new blood a company needs to make its lazy Goose begin to dance.
For example, consider the Habegger Corporation, a Midwestern distributor of heating and cooling systems. In 2002, when chairman Fred Habegger decided to retire in his early 60s, he knew his son Brian, then in his mid-20s, was not ready to take over a company headed toward $150 million in annual sales. So he hired John Dorr as president and CEO, bringing to his firm Dorr’s extensive experience from outside the company and the Habegger family.
Dorr provides confident and vigorous leadership, the Habeggers report. He also mentors Brian Habegger as Brian takes on increasing responsibilities. Reports indicate that Fred’s golf game is improving, as well.
Dorr recommends “a lot of open discussion to clarify the distinction between leadership and ownership, and what roles family employees play. Especially if there are several family owners, it’s important to understand the family leadership of the company.” The non-family leader, Dorr suggests, must “develop a good understanding of the family dynamics in order to develop trust between both parties ... and determine whether the previous executive will actually be able to retire.”
But few non-family executives get to exercise this type of leadership. In a 2002 study of 20 outside managers, Massachusetts consultant Harvey Wigder found that 75% of the outsiders didn’t last a year. The good news, according to his report in Small Biz magazine: One-fourth of the business owners who failed to find the right non-family executive on the first try found someone who worked out well on the second attempt. They were probably successful the second time around because they had learned what pitfalls they needed to overcome and what policies they needed to implement.
A good place to start is by recognizing non-family executives’ concern that they will have to contend with the following obstacles:
• Promotions offered only to family members.
• Non-family employees’ inability to earn equity in the business.
• Lack of access to essential financial information.
• A casual culture, without clear goals and requirements applied fairly to everyone.
• Decisions made at the family barbecue and then announced Monday morning.
• Business owners who have a 24/7 commitment to the company—and call non-family employees at all hours.
• Next-generation members who take charge too soon (with non-family managers assigned to mentor them on an accelerated schedule).
• Getting caught in the “emotional spaghetti” of family politics.
Despite these issues, many candidates believe that the advantages of working at a closely held firm outweigh the disadvantages of corporate America. In a small or medium-sized family company, there aren’t rigid hierarchies; non-family managers have access to the decision-makers. Other selling points: Family business owners usually seek a balance between work and home. Family owners will work harder to keep their businesses going in tough times because they think in terms of the next generation, not just the next market quarter. And the financial rewards in a family firm can be substantial, even if they don’t include stock options.
Before bringing in a non-family executive, the family must have its decision-making skills in gear, especially if there are multiple stockholders. The family and business must be able to function well within three basic structures.
A. The management team must make all the decisions about the operation of the business without family interference. Even if a favorite cousin is fired for sexually harassing the office staff, there are significant legal reasons why this decision cannot be the topic of gossip (i.e., the need for confidentiality in the event that a lawsuit is filed).
Management team members must be selected because of the competencies they offer, regardless of birth order, gender or family status.
It’s advisable to use an objective assessment tool such as the Devine Inventory, which can be taken on the Internet. This instrument measures workplace performance across 33 behaviors and compares a candidate’s competencies to those of managers across the country. It can also be used to build effective teams. This assessment provides a practical, efficient way to get both family and non-family candidates into the “right seats on the bus.”
B. The family forum enables family members to get correct information about the company and develop policies governing relatives’ participation in the business. I have worked with families to develop a family strategic plan, which complements the business strategic plan.
A family charter, which outlines the family’s core values and goals, can provide guidance to a non-family CEO. Regular family meetings allow family members to learn about the best practices of other successful family firms. Relatives armed with this knowledge will be more inclined to support company strategies even in lean times, and less inclined to gossip or manipulate behind the scenes.
C. A board of advisers may include family members (who might serve on a rotating basis) as well as non-family business leaders. Outside board members can offer expertise that a small company cannot afford on its payroll.
The chairman of the board may be the family patriarch, who can still keep tabs on management performance at quarterly meetings even if he’s now living in Florida. Non-family CEOs often find the board to be an invaluable resource for long-term planning. And family members can rest more easily if they know that non-family management accountability is consistent and company goals are clear.
Here are ten tips for family business owners who are thinking of recruiting a non-family leader:
1. Develop a written job description with measurable performance indicators.
2. Make it clear that all employees will be paid on the basis of performance.
3. Build a strong management team.
4. Communicate frequently and consistently; schedule regular meetings.
5. Provide an annual formal review of performance, conducted by the board.
6. Share information about revenues, profit margins and market position.
7. Develop an attractive, flexible compensation package and bonus structure.
8. Tailor a benefits package to meet individual needs.
9. Consider phantom stock, which rewards an executive according to increased company value achieved during his or her tenure, without diluting family control.
10. Define clear lines of accountability, ultimately to the board and its chairperson.
Of course, you should consult your legal and financial advisers on such major decisions. In the end, you may discover several competent candidates, and chemistry may cast the deciding vote. Will this person be an effective steward of your company until the next generation is ready to lead?
Choosing the most competent successor is a task that most of us get to do only once. Doing it well ensures that your Golden Goose will enjoy a long, prosperous life.