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The challenge of ‘outside’ recruitment for family business

Family enterprises facetheir greatest challenge when it comes to recruiting external employees at senior management level, yet there seems little that any business can do to guarantee success.

There are many tales of family business founders who want to step down or retire but who face the problem of no obvious successor within the business, or within the family.

According to experts and advisers who have experienced both recruitment success and failure, the greatest problem faced by family businesses is when they are forced to recruit replacements from other businesses.

When Carly Fiorina took over the US computer and IT giant Hewlett-Packard, the appointment was seen as a significant success. Yet Ms Fiorina found herself humbled at the feet of family shareholders when she attempted to drive through a controversial US$25 billion acquisition of its PC manufacturer rival Compaq.

The merger had some support among institutional shareholders, but foundered when the children of co-founder William Hewlett expressed their opposition. Soon afterwards, the Packard Foundation, controlled by the son and three daughters of Hewlett's co-founder, David Packard, created a significant block against the deal.

Hewlett Packard's is a celebrated success story of two men who founded a business in a small garage back in 1938. The families' current control of 18% of stock holdings may not have been enough to resist the deal, but their opposition influenced employees, small shareholders and some analysts who had been unconvinced about its value.

Within days, Ms Fiorina – seen as one of the most outstanding managers in the highly-competitive IT industry – was subject to open speculation as to how long she would keep her job.

Who knows whether Ms Fiorina would have faced the same difficulty if she had been part of the H-P 'family'? Then again, who knows whether the original Hewlett and Packard would have contemplated as risky a venture as the Compaq deal?

Many years have passed since H-P would be called a 'family-controlled'business. But that makes the power of the minority family shareholders all the more notable, especially for those who would never have expected the family to wield such influence in strategic matters.

The pitfalls
Senior-level recruitment is one of the riskiest but often the most necessary decisions in any family enterprise. There are no rules as to how founders or their successors should approach recruitment, but many consultants say there are several obvious pitfalls to be avoided. The main issues are:

- Whether the business has examined its real need in terms of future management structure and personnel.
- Whether it has set out the characteristics of its ideal recruit.
- The details of the deal, for example the leading candidate for the job may seek equity or performance bonuses which are more common in the corporate world.

"Most family businesses are reluctant to import senior managers, and sometimes when they do it is too late – the business would have benefited from an earlier intervention, for example, "commented one senior recruitment consultant. "There are several known examples of situations where a senior manager has been introduced to a business only to find that it is virtually unmanageable because of feuds within the family. "

There are some key problems. Several managers agreed to discuss their experiences with Families in Business, but only on condition of anonymity. Some of them are still playing important roles for the companies who hired them, even if they had found it extremely difficult to settle into the enterprise.

Archaic but enthusiastic
The finance director of a family-owned food manufacturer says that he discovered an archaic system of book-keeping in a business with sales of more than US$40 million. "They had no idea of their stock, and could not even say how many raw materials went into each batch of the product, "he recalled.

"The books were run in the same way – and by the same people – as had been the case when the chief executive's great-uncle had been in charge. People insisted that nothing could be changed, because it was 'always done this way', even though it was clear we could have saved many hundreds of thousands of pounds just by introducing systems which had been quite standard within other businesses for many years. "

Computers were introduced to the business only after the new man 'from outside'had convinced family shareholders that they would pay for itself by achieving greater efficiency. Sure enough, the business did save a lot of money and simplified its process by agreeing to that simple investment.

That finance director's experience was typical for many who have been recruited into family businesses. At the age of 43, he had worked for three major British companies since qualifying as a chartered accountant, and his choices amounted to continuing a middle-management career after his employer was taken over by an American competitor, or attempting something new.

He was registered with a recruitment agency, and had found the various jobs on offer quite unattractive, or too similar to the post he held already. When the family-run food business emerged as a possibility, he was sceptical, but intrigued enough to agree that his name be put forward.

"My interview was chaotic. The boss arrived late, left during the meeting, then took me on a whirlwind tour of the factory next to his office building. The conversation ranged all over the place, from his interest in sailing and Formula One, to the minutiae of employee relations on the shop-floor, "laughed the new recruit. "It was clear that his personal and business lives were intertwined completely, and that most of the management of the company was in his head, rather than being discussed within normal corporate structures.

"In some ways I was concerned that joining this business would be a bit of a carnival-ride, all midnight phone calls and weekend meetings, with little chance of having time to think. But I was genuinely intrigued, as it was obvious that the boss lived, ate and breathed the business. He had fantastic enthusiasm. "

The 'marriage' worked well. Eleven years later, the finance director remains in the business, although he has no equity, preferring cash bonuses. The business has continued to prosper, with higher sales and much greater profitability thanks to the practices and new investment that he urged his boss to introduce. He reports that he is in a strong position, having taken over a large part of the company's operational management. Today he is helping 'the boss' groom a young nephew who has entered the business, and who will – one day – take over its management.

Development and succession
Other problems for family businesses include management development and succession. Jack Parkinson of Human Resource Group plc, a family-owned recruitment agency in London says, "One of the big issues for some family businesses is to reform the corporate structure in ways that allow further development in the family environment. Sometimes you almost have to go back a few steps and 'defamilise'the business. In fact, we have been through it ourselves. "

Parkinson says he knows of several family companies who have passed successfully through many generations. "It is the chrysalis phase for business that matters, that period where it faces a lot of change in its market, or in management succession.

"Many of them are inconsistent when it comes to succession planning. They can be managed in quite an unconventional way, but the better the preparation for change, the better equipped the business will be for change, including recruitment. "

Lack of focus
Another recruit recounts an experience that initially sounded great, but turned out to be very different than planned. He was recruited by a luxury-goods business run by three brothers, where he was to meld the company's varied activities into one brand-led entity. There was even talk of new investment, or a Stock Exchange flotation.

The new recruit, a seasoned company director with experience of managing listed businesses, set about attempting to make sense of a company whose interests ranged from luxury car retailing to hotels, and included textiles and property interests.

"I was blocked at every stage in terms of decision-making. Each suggestion was attacked by one of the brothers. They fought each other through me, and there was no consensus about the company's future strategy. I really wondered why they had hired me, and how they could possibly have worked together over many years. "

After less than a year, the external recruit advised his employers that they should consider splitting the company's various interests among themselves, and pursue separate careers. He joined a major accountancy group as a globalisation consultant – far away from any other family businesses – and says now that he believes both sides should examine their options very closely before agreeing to 'marriage'in a family business.

"With hindsight I accepted the job too quickly because I was attracted by the idea of having a senior role in a small management team in a business which had several attractive areas of activity.

"I didn't do enough in terms of examining what the company actually needed, and whether the brothers had really studied and talked through their ideal chief executive.

"As individuals we all got on well, and each part of the business was quite exciting. But the relationship between the brothers as a group was poor, and I realised later that the various businesses might have been attractive, but they made little sense as one company – their activities were too diverse. "

His views are shared by several leading recruitment consultancies, several of whom find the family enterprise sector too difficult, time-consuming and emotionally draining to deserve specialist treatment. "People very often turn to their lawyer or accountant, or some trusted adviser whom they have known for a long time, to find external managers", commented one specialist.

Where to turn?
These stories illustrate the issues faced by family enterprises as they consider their management needs and whether they should recruit externally. It is particularly true of small and medium-sized businesses, rather than larger corporations who retain a strong family interest but whose management has been recruited, promoted and inducted over many years. Many of the leading family-associated corporations of Scandinavia and Italy fall into that latter bracket.

But what of the businesses whose founders are still responsible for all executive decision-making, or which are managed by the adult children of those founders? Many of them still rely on making sure that junior family members are encouraged to 'work their way up' from the bottom of the business, or to gain experience with other businesses before returning to take up management positions in the family company.

So where can family businesses turn for good, solid advice in this field?

Most of the global consulting firms retain some form of specialist advice for the family sector, although it is tied closely with other services including audit, tax and management consultancy. In recruitment, firms like Egon Zhender International have established a well-respected role in serving family enterprise.

Zillah Jamieson, of Melville Craig, believes that the most successful recruitment of this kind can depend on both parties completing an honest, uncluttered appraisal of their needs.

For example, will recruitment of a senior manager fit with the comapny's strategic planning, and its implementation? What kind of experience, personality and competencies are required of the ideal candidate, and how will he or she fit in with the company's prevailing – and often long-standing – culture?

Candidate considerations
What about the candidates? They should consider their motivation for joining a family business. Is it a lifestyle decision, since many of these companies happen to be based in the more attractive, semirural areas of the UK, Scandinavia and mainland Europe? Does the candidate believe that he or she will earn a share of the business, or even take it over after a period of time?

The cultural issues identified by many observers are crucial. If a senior manager comes from a listed company, with all its structures and corporate governance, is he going to be able to cope with the more free-wheeling nature of many family businesses? How will the business react if he or she attempts to impose 'corporate' rules and structures on it?

"Recruitment in this sector requires a deep understanding of the business, "said Jamieson. "You have to be able to define what the business needs quite specifically to candidates. There is a higher element of consultation and guidance when dealing with this sector, compared to other types of company, who use recruitment consultants as a matter of routine. "

Jamieson added that demand for managers is more at the senior end – the "grey headed, experienced types"– of the market in this sector. "There are issues all along the way, sometimes psychological. For example, family business people might find the salaries expected by incoming managers to be quite massive, as they have traditionally taken more modest salaries from the business.

"All of these things are why both parties have to consider the situation carefully. "

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