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Senior Management in a Family Business

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Senior Management in a Family Business

Senior managers are an essential part of the family business governance structure and their quality directly affects the company performance and family wealth. The senior managers are in charge of implementing the strategic direction set out by the board of directors and managing the daily operations of the company. Having the right managers at the head of the company is a key element of family business success.

Family vs. Non-Family Managers

During the first years of their existence, family businesses are usually directed and managed by the founder(s). Their management structure may remain quite informal and the decision-making power is concentrated in the hands of the founder(s) and a few close relatives. This management structure usually works well during the early stage of development of the company. A driven and hard-working founder(s) is usually the main reason for the success of a family business at this stage.

As the company grows in size and its business operations become more complex, a more formal management structure, a decentralized decision-making process, and a qualified management body become necessary to deal with the complexity of the business and the more challenging day-to-day operations. Unfortunately, many family businesses ignore the need for professionalizing their businesses and keep senior management positions exclusively for family members. Although many of these family members are skilled managers that add value to their business, often they are not qualified to perform such duties. Even in the cases where all family members are good managers, they may not have the specialized skills and expertise that the growing and more complex company requires. Successful families in business understand that in the longer term, some family members should step down and be replaced by more professional and skilled outsiders.

Ensuring that the family-owned company has the right senior managers is a process that should start early, even as early as during the founder(s) stage of the family business. Some of the steps of this process are:

-          Analyzing the organizational structure and contrasting the current and optimal roles and responsibilities (compared to peer companies) of each senior manager.

-          Designing a formal organizational structure that clearly defines the roles and responsibilities of all senior managers. This should be based on the company’s current and future business operations’ needs.

-          Evaluating the skills and qualifications of the current senior management based on the new organizational structure.

-          Replacing and/or hiring senior managers.

-          Decentralizing the decision-making process and approval levels as necessary. Decision-making powers should be linked to the roles/responsibilities of managers and not to their ties to the family.

-          Establishing a clear family employment policy and making its content available to all family members (see section II-1-1 of this Handbook for more details on family employment policies).

-          Developing an internal training program that allows skilled employees to be prepared for taking on senior assignments in the future.

-          Establishing a remuneration system that provides the right incentives to all managers depending on their performance and not their ties to the family.

The following table summarizes how family businesses address some employment issues depending on whether they are prioritizing the family or the business:[1]

Issue

Family First Companies

Business First Companies

 

Employment Policy

Open door policy for all family members. The family-owned company often becomes a safety net for those who can not succeed outside the business.

 

Only qualified family members join the company. Conditions for family employment are clearly set and contain requirements concerning education and prior work experience outside of the family business.

 

Compensation

Equal pay for all. Everyone is paid the same, regardless of their experience and contribution to the business. Competent family members are expected to care for (via compensation, benefits, etc.) their less-than-competent siblings or cousins.

 

Compensation is based on performance and responsibility. Compensation is based on market and industry measures, not on family needs. Accountabilities and reporting relationships are clearly communicated and understood. High performers are highly paid. Family members may be terminated for poor performance.

 

Leadership

Leadership is based on seniority, rather than demonstrated competences or successes. Longevity in the family business may be more highly valued than working and succeeding outside the business.

Making sure leadership is earned. The family mantra is to have “the best and the brightest” running the business: family or non-family. Non-family senior executives may be recruited from within the industry although some companies successfully grow their own top managers.

 

Business Resources Allocation

Business resources are used for family members’ personal needs (housing, cars, personal purchases, etc.).

Business resources are used strategically. There is a clear separation of business and family assets. Budgeting and planning are important; earnings are used for growth initiatives or paid out as dividends.

 

Training

No formal training programs. Family members are expected to intuitively learn business practices.

Need for formal training is timely recognized. Trainings are scheduled and delivered to teach family members necessary business practices.

 

 

CEO and Senior Management Succession

CEO and senior management succession is probably the most important issue that confronts companies, including family-owned ones. This is because a company’s top managers are usually the drivers of its performance, growth, and survival. The issue of management succession is even more important for family businesses as it becomes particularly thorny as the family grows larger and several potential senior management candidates from different branches of the family become available. Many family businesses put off the succession planning of their senior managers until the last minute, which leads to crises that sometimes can cause the death of the family business. Poor senior management succession planning could indeed be one of the reasons most family businesses disappear before they reach their third generation.[2]

This section of the Handbook will mainly provide some basic advice on establishing a sound CEO succession planning process within the family business. Most of this advice can also be used for ensuring a smooth succession for the other senior managers of the family business.

Families in business might ignore the necessity of planning for the succession of their CEO for a multitude of reasons. Some of these reasons include:[3]

-          Family members delaying the decision in order not to create potential frictions among family members in case several potential CEOs are available within the family.

-          Family members delaying the decision because no current family member or outsider is deemed capable of replacing the current CEO.

-          Family members avoiding to address this issue in order not to discuss the topic of the eventual loss of a family leader (the current CEO).

-          Current CEO refusing to admit that the company can survive without him/her and/or is afraid of retirement and refusing to address succession issues.

Importance of a Formal Senior Management Succession Plan

Senior management succession is a process that follows several steps in order to ensure proper succession to key management positions including the CEO one. A formal succession plan ensures business continuity and thus increases the chances of survival of a family business as it is handed over from one generation to the next. The purpose of this plan is to ensure the skills and leadership necessary to replace any outgoing senior manager are available when needed. An effective CEO succession plan should allow for the selection of the most competent person (whether it is a family member or not) as the next CEO. In addition, it is crucial to involve all family members, the board, key senior managers, and other important external stakeholders in the selection process and make sure they agree on the next CEO choice.

Steps of a Formal CEO Succession Plan

The CEO succession planning process usually differs from one family business to another depending on the complexity of the business, the degree of involvement of the family in it, and the availability of competent CEO candidates from within the family. The following is a step-by step process that can help family businesses get better prepared for their CEO succession:[4]

-          Starting Early: Many family business advisors recommend starting the selection process of the next CEO as early as when the current CEO is appointed. This will ensure the continuity of the business and provide the company with a new CEO that was carefully chosen and well-prepared to succeed to the current one. The early start of the CEO selection process is particularly important if the next CEO is expected to be chosen from within the family. In this case, the process of selecting and grooming the next CEO from the younger generation would take longer than if the CEO is to be chosen from outside the family.

In most family businesses, it is the current CEO who initiates the succession planning process. An active board can also play an important role by insisting on the establishment of a succession plan in case the current CEO is not taking this on early enough.

-          Creating Career Development Systems: A successful succession plan is one that selects the best possible candidate for the job, regardless of whether this candidate is related to the family or not. If the next CEO will be chosen from the family or its current employees, a rigorous career development system should be developed to prepare the potential CEOs. Such a system would enhance the competence of the CEO candidates by offering them any necessary education, training, and by giving them periodic feedback on their performance within the company.

Some family businesses decide to hire an external CEO if no good CEO candidates are available from within the family or its employees. In this case, a committee of the board (Nomination Committee for example) should lead the succession planning of the CEO. The committee would start by setting the selection criteria for the next CEO before searching for suitable candidates. In addition, many family-owned businesses find it useful to employ professional headhunters to get access to a wider pool of candidates.

-          Seeking Advice: Particularly while narrowing the list of potential successors, the CEO should get advice from the external independent directors of the board. If these don’t exist, trusted senior non-family managers should be consulted. Some families also find it useful to get the opinion of the family council in the selection process, especially if the CEO candidate is from the family.

-          Building Consensus: The success of the future CEO is largely dependent on his/her acceptance by the key stakeholders involved in the company. It becomes then mandatory to involve all key stakeholders in the CEO selection process including the board of directors, senior non-family managers, and family members.

-          Clarifying the Transition Process: Once an adequate succeeding CEO has been selected, a clear transition process for both the current CEO and the successor should be developed. This transition process would specify the transition date and also define the levels of involvement of the current CEO after retirement (advice to the successor, board membership, additional activities, etc.). 



[1] Mike Cohn, “Does your Company Put Family or Business First?”, The Business Journal of Phoenix, January 2005.

[2] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

[3] Ivan Lansberg, “The Succession Conspiracy”, Family Business Review, June 1988; Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

[4] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

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