Can an Outside CEO Run a Family-Owned Business?
Gus, the dad of one of us (Rob), found his dream job. After being head of sales in a large sporting goods company for over a decade, he was ready to move up to a CEO role. A good friend ran a sizeable sports cap company, a family business, and he was looking to step aside. Gus took the job and relocated his family. Eighteen months later he was out and looking for new employment.
A son may not always be unbiased about a parent, but Gus was a smart businessman. (In fact, he quickly found a top job in another business.) He had stepped unknowingly into a family business system in which the patriarch was unready, ultimately, to step aside.
Should he have turned down the job? Not necessarily. In our experience, the majority of family owners sincerely supports an outside, competent leader. But every such leader should expect – indeed embrace – intricate family dynamics if he or she hopes to be successful. Often, these dynamics are evident in predictable patterns and sets of behaviors, which we describe below using five archetypes. These are stereotypes, admittedly, but nonetheless real enough that you should prepare yourself to work well with each of them in order to succeed:
General MacArthur. Often the founder who built the company up from nothing, General MacArthur retires with the idea, usually unconscious, that “I shall return.” He or she has no real responsibility for the business anymore, and often has no title or formal position, but his or her passion is still the business. Given that General MacArthur is usually the controlling owner in a family business – legally and/or psychologically – you can’t actually stop him or her from returning, and so you must turn the situation to your advantage. The retiring founder has invaluable experience and expertise, so ask yourself whether there is someplace else in the business where he or she adds real value – e.g., board chair or head of the family foundation. At the same time, you should move to establish a board with strong independent members if one does not already exist. This will help moderate the effect of the General’s reengagement in the business.
The Historian. Just as the boy in the fairy tale who was always crying “wolf,” the historians of the family business world are always crying “family values.” Don’t get us wrong: values are critical and often give family businesses a competitive edge over publicly traded companies. But sometimes all the talk about the past is a cover for something else, typically deep-seated resistance to change. When you encounter this person in your work, try to separate the talk of values from the family legacy, e.g., the story of the founder building the business from scratch, or the history of the first retail story. Values may be immutable, but the legacy can be redefined to allow for necessary changes in strategies and policies. Try to help the family keep alive a sense of history without becoming enslaved to the past.
The Squeaky Wheel. Not uncommonly, there is second or third generation family member who has inherited some shares but who has no direct experience in the business. Typically these people have a core of advisors, mostly lawyers or tax people, who advise them to maximize the value of his holdings, not the company’s overall value. If you encounter a squeaky wheel in your position, then work with the board or shareholder council to provide basic financial education for all the owners. You also need to read the shareholder agreement and to familiarize yourself with the capitalization table, which shows how much the equity owners of a company have, and often how much money they have invested in the company. A dissenting minority shareholder is an annoyance, but if he or she is a majority shareholder, then you could be in trouble. Even if the person is a minority shareholder, you should try to get a sense of whether the majority shareholders are willing to move ahead if someone pulls them in a different direction. Legally, owners may have many options that they’re psychologically unwilling to exercise – e.g., calling a shareholder vote when there is a shareholder disagreement. Forewarned is forearmed.
Hamlet. Sometimes the patriarch or matriarch brings in a non-family CEO (including an in-law) to serve as regent until the adult child is experienced enough to take over the business. Although this is far from universal, we have seen heirs apparent who try to undermine their parents’ choices; this typically happens when there is tension between the parent and the next generation. You must always take young Hamlets seriously because they are the future of the company, and because they are not always quite so indecisive as the Prince of Denmark. They know precisely where the weak links are in the family business system and they can pull at them until the whole chain breaks apart. When you spot an heir apparent, recognize and accept that you are but the bridge to the future. Try your best to educate Hamlet – and make sure going in that you have a good exit package. Your runway is short — three to five years, not ten.
The Wild Child. Tragically, it’s all too common for families – business and otherwise – to have their addicts and alcoholics, and the human toll is inestimable. The price exacted of the business may also be huge. We once had a client where the cousin owned 40% of the company and he had a heroin addiction that commanded the family’s time and attention for more than two decades. The cousin could not stay sober long enough to let the family get down to the work of running the business. If you have a significant owner who is an active alcoholic or drug addict, look to see if the family knows how to manage conflict. Is there someone around to help family members detach with love so that they can keep the family business system operational? If both these things are missing, you should recognize that through no fault of their own the family may be unable to make the necessary decisions to run a business without very great difficulty.
These characters are likely to reveal themselves during your interviews if you are paying attention to the signals. In our experience, the hiring process closely mirrors how the family business systems make (or can’t make) decisions. If you are interviewed only by the founder – or, conversely, if all 300 owners need to sign off before you can be hired – you can probably expect to encounter similar dynamics once you start the job.
One last thing: Try to talk to your predecessor before making your final decision; she can help you figure out the game. Have others left satisfied or frustrated? Are there enough buffers in the system to protect you? If the system is moving forward and making decisions in a positive way, then that’s a good sign that these characters are making positive contributions. If not, be prepared to engage in family dynamics that will challenge and maybe even stall the best laid plans. If a good, even world-class leader doesn’t know what he is up against when he enters an enmeshed family business system, he is unlikely to win. And then everybody loses.
First published: Aug 15, 2014, Harvard Business Review