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Let the outsiders in

Vincent Costantini is managing partner at Roseview Group. www.roseview

There are several reasons why some family businesses may seek outsiders to run the show, including lack of a successor or inability of a director to manage a growing firm. Vincent Costantini outlines the circumstances and benefits of professional input

The New York Times reported recently that Amazon.com's founder and chief executive, Jeff Bezos, is under pressure to step aside. Both securities analysts and Amazon's board of directors have encouraged Bezos to turn over the reins to a battle-hardened operational executive who can strengthen the company's weakening share price. In today's business climate, this phenomenon – moving corporate management from the founder to professional leadership – is not limited to big public companies.
 
CEOs are required to manage their businesses through a kaleidoscope of issues. These challenges pose different demands and require different skills. Founding a new venture and nurturing it through the survival and initial growth phases require both creative intuition and bold risk taking. But leading that same company through the next phase of development requires, among other skills, broad industry experience and, at times, reinvention of its products and an overhaul of its market approach. We have found that there are three main reasons family companies choose tprofessional management.

The first reason is to help the company adjust to changing demands. Entrepreneurial private companies may have been wildly successful for years, if not decades. But typically, there comes a time when the company simply outgrows the talent and abilities of its founder. It is not unusual to find that leaders of middle market family companies have never had the opportunity to work for larger or more sophisticated companies.
 
For example, one of our clients with close to a billion dollars in sales decided after 30 years in business to turn the operations of his firm over to a member of his family. A year into the transition, the founder came to the painful realisation that his child was not up to the challenge. But he also felt it was just too late in life for him to resume control of the business. While a sale of the company was an option, business was negative at the time, and the capital markets were not interested in the sector. After examining all of his options, the founder decided to bring in an experienced outsider, the former CEO of a large public company. His long range goal was to sell the company when the markets and company's fortunes improved. Until that time, the company would be managed by a professional leadership team that would answer to an outside board of directors chaired by the founder.
 
The second reason is that the founder or current owner-managers have reached a pivotal stage in their careers, are approaching retirement and want to explore other opportunities or simply enjoy the fruits of their labours, but no other members of the family have demonstrated the talent or desire required to lead the family business forward. However, for a variety of reasons, they wish to maintain ownership of the enterprise. In addition, these owners often feel a deep sense of loyalty to their employees and a profound commitment to the culture and mission of the enterprise itself.
 
We had a client in Baltimore, Maryland, several years ago who was the founder of a large, successful real estate investment and development company with a small financing division that served outside clients. Eventually, the financing division showed so much potential that it was spun off and is now a billion dollar public company. It was clear to the founder that he could not continue to manage both organisations, but there was no compelling reason to sell the original parent company. His solution was to move full time to the finance group and reach outside his organisation to find a talented senior executive who would agree to make an equity investment in the original company to align his interest with the interests of the founder.
 
Finally, and perhaps most challenging, the third trigger for seeking outside management is when the senior generation wishes to step back from the management of the business, but the succeeding generation is not yet ready to assume senior level decision making roles. Hiring an interim executive to manage the company for a limited period of time makes sense. But finding the right candidate for the "temporary" position in a family company presents challenges as some candidates consider roles defined by a finite time period burdensome. On the other hand, others with experience recognise these opportunities as stepping stones in their careers or perfect as a late stage career move.
 
Twenty years ago, for instance, I became a part of a growing externally managed private family investment company. The founders had been spectacularly successful and gradually began to back away from the day to day responsibilities of managing the business. Their children, while an active part of the business, were not ready to take a leadership role in their family's business. However, over a period of 15 years the individual members of the family assumed increasing positions of responsibility within the organisation, until five years ago when one of the family members was named chairman and CEO. There was never a question in the minds of the outside management team that the day would come when the family would again take day-to-day responsibility for the management of the company.
 
Whether a company is privately owned or publicly controlled, leadership transition of any sort is always complex, costly and fraught with uncertainty. Risk to the overall business is considerable, including possible failure to recruit and retain an effective professional. Thus, a considerable investment of time and resources is wise and establishing a solid foundation by defining the transition process carefully is paramount. This planning process is now commonly known as continuity planning, encompassing at least five independent, concurrent planning activities led by several primary professional advisors. It includes personal financial, tax and estate planning, corporate strategic planning, corporate and family governance, and creating a shareholders' agreement capable of funding both corporate strategic plans and controlling family/shareholder needs.

Specific qualifications for professional management candidates are defined in the company's strategic planning process. Asking the following questions begins to identify the right outside leadership for the company: What is the company's current financial position? Who are its major competitors? What does it need to remain competitive? Does the company need one executive or an executive team?
 
When designing candidate criteria, owners should also think deeply about the company's stakeholders. What are their needs? What are the historic relationships? What interpersonal skills does the candidate need in order work effectively with stakeholders?

Another critical step is clear acknowledgement that the founding entrepreneur or the family is prepared for and open to advice from professionals outside its immediate circle. Many of the best and brightest candidates will not even consider a position in a private or closely held business unless the owner has first taken steps to create a strong, talented, independent board of directors. Although directors are not necessarily given voting control over the company's direction, professional management candidates take a great deal of comfort in knowing that the entrepreneur or family is increasingly prepared to allow others to significantly impact the future direction of the business.
 
Ultimately, each family owned or controlled company has unique leadership needs at every stage of its growth. Choosing to move to professional management, whether for short or long term goals, when planned appropriately, has become an increasingly viable and attractive option as an alternative to an untimely or unwanted sale of the enterprise.

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