Warning family businesses: Don’t even think about the next CEO until you read this

ILLUSTRATION BY RUTH MACAPAGAL

As an advisor and consultant of some of the most famous families and their businesses in the region and globally, I know from experience that one of the most pressing questions families have when it comes to leadership is: who should be at the top?

Family or outsider?

A prominent fourth-generation family business patriarch called me to put a successful succession plan in place. His business conglomerate is in the food service industry. He asked me, “Tom, is it better to have a family member or an outsider lead the business?”

Let me answer this in the following ways: First of all, the question is wrong. Why? Because both can work. Instead, the question you should be asking is: “who are the best people for the job?”

Your goal should be to build and sustain a business that is built on meritocracy, where the best ideas and the best people thrive. Your goal should be to build a culture and organization that is a magnet for top talent. A culture of ruthless accountability and performance. A culture of optimum execution.

This will make your business fast and agile, which is fundamental for success in a world where change is happening faster than ever before in history.

Should you worry?

If your people are not up to the job—regardless of whether they are family or not—I do not care about your market position today. You may be among the largest in your industry or even a market leader. But you may still fall at any moment because most businesses are just one or two major strategic decisions away from monumental failure.

You don’t believe me? Look at the many famous failures in corporate history, from Kodak to General Motors, from Blackberry to Nokia, from Polaroid to Toys R Us and from Pan Am to Compaq. All were giants in their time. All of them failed to innovate and missed the boat, the next big thing, the next train and the upcoming trends.

I have said this before, but it bears repeating. As the “mentor of the giants” (Fortune), in my work with top Fortune 500 CEOs, self-made billionaires and famous business leaders, I have seen how fundamental it is to have a healthy sense of paranoia, to worry about what you might be missing. If you don’t worry, you need to worry!

How do you know if a family member is right for the job?

You don’t! Usually, family members and owners of family businesses have too many blind spots. They are additionally blindsided by their wish about what they want reality to be. They do not see clearly because many emotions and wishful thinking are at play.

As a result, it is very challenging for most of them to be objective and neutral. The solution? Get an expert outsider advisor who has a neutral perspective, no skin in the game and is used to evaluating and building great executives.

The deep bench

In any case, no matter what your final goals are, you have to build a deep bench. This means that succession planning within your company, along with the building of leaders across all levels of your organization, is one of the best insurance policies for your business to survive and grow – despite the acceleration of changes and uncertainties in the business world and economic environments.

What if the next generation is indeed up to the job?

If—after a deep investigation—the next gen can lead, then of course if it is better to have a family member at the helm. Why? Because there are many benefits of a family member leading the business:

• There are no concerns about loyalty. Even with the best external people, you may never be 100 percent certain about their loyalty.
• There is an increased sense of responsibility to carry the legacy and success forward.
• Family members often work longer hours and put more “sweat” into it.

In short, it is generally preferable to have a family member head the organization. But this should not be a “force fit.” And it has to be done in a structured process with a clear coaching and onboarding plan. Get the best coaches for your next gen and remember: great executives are made, not born.

Are there exceptions?

Yes, especially if you have a large conglomerate and not enough “high-quality” family members to lead the different businesses. This is a natural realization for a lot of families once their group of businesses reaches a certain size.

Recently, I was with the family members of an American seventh generation multi-billion dollar family business conglomerate following their request for us to optimize their innovation and collaboration between business units to boost profitability. They put it well, “It is improbable that we have enough of a gene pool among our family members to cover the diverse range of industries our businesses are in.”

How much freedom should we give to outsiders?

There is always a fine line in the balance between exerting influence on top executives as a family and the need to attract and retain top talent. If an outsider is running your business, you have to take the following considerations into account.

On the one hand, giving top executives free rein allows you to attract and retain top talent. On the other hand, conceding too much power to the executives restricts the family’s influence. It is a dilemma because top talent executives naturally want power and freedom in running the companies.

One of our clients went too far: they were concerned that the executives had too much power and freedom in the running of the group’s business units. This led to some fallouts and public arguments between the top execs and the family members, which is never good for the reputation of your business.

Clear swim lanes

Since every family is unique and every business is unique, the solution must also be unique for it to work. But based on our global and local experience (over 83 percent of our clients are family businesses), you should establish clear swim lanes and ground rules between the family members, the head of the family and the top executives running the business(es). This includes a clear definition of how far the freedom of the executive goes, what is still decided by the family and when.

The more clearly the family’s scope of influence is defined, the fewer conflicts will ensue, the better the executives can perform and the better the overall performance of the business will be.

Often, the root cause of the troubles the families have with outside executives is that these swim lanes and rules of engagement are not defined clearly enough. Accountability starts with clarity. Clarity breeds success. If the swim lanes are fuzzy, so will the results be.

Three action steps

1. When choosing between family and an outsider, ask yourself: who are the best people for the job?

2. Get external experts to evaluate if the next generation of your family is indeed fit to lead or if this is wishful thinking.

3. If you decide that it is best to have external top talent run your business(es), establish clear swim lanes and ground rules between the family members, the head of the family and the top executives. Clarity breeds success and high performance. INQ

Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email [email protected].