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Creating opportunity for NFCs in family firms

Governance : Non-Family CEOs

More and more family businesses are bringing in non-family CEOs to help them grow and succeed. But creating the right environment for them to succeed in is tricky, as Andrew Keyt, Joe Astrachan and Tim Blumentritt discovered in a recent study.

Andrew Keyt is executive director of the Family Business Center at Loyola University Chicago.

Joe Astrachan is distinguished research fellow Loyola University Chicago and director of the Cox Family Enterprise Center, Kennesaw State University.

Tim Blumentritt is assistant professor of Management & Entrepreneurship at Kennesaw State University.

Worldwide, family businesses are the most prevalent corporate form today. But rarely does a single family account for all of a firm's employees. Most family firms, if they are to succeed and grow, must hire non-family employees and leaders.

When a family firm hires a non-family CEO (NFC), unique challenges emerge. Like their peers at other businesses, NFCs are assigned to generate outstanding business performance. But, unlike those peers, family business executives face potentially awkward circumstances. They often function as superiors on organisational charts to people who sit on their boards and evaluate their performance. They manage, develop, evaluate and even fire the children of the family that owns the firm.

Given such constraints, how can a family firm create an environment that gives a NFC the best opportunity to succeed? What combination of structures, practices and personalities will generate a prosperous business, a satisfied family and a happy executive? How does a family firm identify, evaluate and support a NFC who possesses the necessary business acumen as well as the ability to manage the complex web of relationships?

Seeking answers to these and other questions, we examined existing literature and management theories on family firms, and undertook group interviews with 28 individuals with direct experience in such situations.

Throughout our research, we have used the term "professionalisation" to describe management and governance by highly qualified individuals who are not the patriarch/matriarch. Too often, discussions of non-family executives imply that family firms are incapable of building or employing sophisticated management techniques. On the contrary, our research and experience have shown that hiring a non-family manager to lead a family firm is most often a well-considered choice to augment the skills and interests held by the family members.

A NFC's success is charactised by several key elements. The executive must be highly effective in business, and must possess the capacity and motivation to mesh with the family's culture, navigate family dynamics and cultivate productive relationships. At the same time, the firm's principals must provide the support and direction of a strong board consisting of both family members and outsiders, and must empanel an effective family council that distills the diverse needs and opinions of family members to deliver clear direction to the CEO.

Business acumen
Make no mistake: NFCs must be highly capable performers, regardless of the means whereby they attain their positions. But family firms expect character and integrity as well. In fact, when hiring and governing outside executives, family businesses tend to rely more on trust and comfort than they do on structured control mechanisms.

Such character skills are necessary for NFCs to navigate these unique environments, where business activities mingle with family members' outlooks, personalities and needs to create potentially explosive working conditions.

Successful NFCs will also influence the nature of the firms they serve. Family businesses often hire non-family executives when an infusion of managerial skill is needed, or when a successful family CEO retires but no family member is ready or willing to assume the reins. In either case, a NFC may be looked upon to lead the business into a future that may or may not have been envisioned by the founder or previous CEO.

A strong board
How can a board, be it a board of directors or an advisory board, be structured in ways that offer the non-family leader – and therefore the firm – the greatest opportunities for success? Traditionally, a board governs management on behalf of a firm's shareholders, responds to and approves the management team's strategic plans, and provides resources and networks. In family firms, however, the relationship between a board and a NFC may take on additional dimensions.

First, a strong board acts as a buffer between the family and the non-family leader. A family can deliver too many or two few opinions about what members expect the NFC to achieve. While the voices of stakeholders and shareholders must be given weight, no effective CEO could reasonably spend time, energy or social capital responding to every family member or constantly defending his/her strategic decisions.

To avert such situations, family members who serve on the board of directors can step in. As representatives of the family, board insiders can take responsibility for communicating their constituents' opinions of the proposed plan. Once a plan is accepted, the NFC then can defer to the board any second-guessing by family members.

Second, an effective board will support the CEO on unpopular but necessary decisions. NFCs are hired to make strategic decisions that promote success. But when a NFC deems it necessary to eliminate a business line managed by a family member, enter a new market, fire a family member or move in directions not envisioned by the founder, that CEO may need the support of the board, particularly the non-family directors, to gain the family's acceptance. Chosen for their business acumen and networks, outside directors likely will exhibit the wisdom to guide the CEO's decisions and assure family members that such actions will benefit the firm's shareholders.

Comfort with family dynamics and values
While NFCs are hired to move the firm forward, they also must be adept at navigating interpersonal dynamics while gathering support for their business decisions. Successful NFCs will share the family's values and will strive to understand what the family expects of them, while avoiding entanglements in family politics.

Beyond generating profits, families may expect the NFC to contribute to the firm's legacy, enhance its standing in the community, or keep a struggling business line afloat simply because it was the activity on which the firm was founded. So important is the cultural and character fit in evaluating and retaining the NFC, that lack of such may trump good business performance.

Understanding the life stage of the firm and the NFC's role in that history is also crucial. A NFC chosen as a bridge between a retiring family CEO and the ascension of a junior-generation CEO, for example, will likely be expected to prepare the future leader in addition to running the company.

A family council
A family council is a representative governance group elected to deal with family issues, draft family policy, and adjudicate and execute charitable and other distributions. A council provides a structured forum for airing family issues and opinions about business activities, in ways designed to minimise impact on the firm's competitive performance and intrusion on the CEO's role.

Families who own businesses typically bring with them strong emotions and jealousies based on tradition, intra-family sects and rivalries (among siblings or cousins, for example), and divisive interpretations of events. Given the significant amounts of money at stake when the business does or does not perform to expectations, such emotions often intensify. The NFC who is dropped into the midst of a family where such conflicts thrive unchecked will face a mighty struggle indeed.

An effective family council will act as the voice of the family, distilling input from members and developing a cohesive set of expectations that are communicated to the NFC in ways that help the executive align business goals with the family's priorities. A good council also will train family members to think and act as owners rather than as managers.

Agent or Steward? or Both?
To date, much research has focused on identifying the management style that is best suited to family businesses. Our interviews show that, while agency theory surely is at work in most family firms, stewardship theory holds special importance in the ways that family companies operate.

According to agency theory, individuals are self-interested; therefore, a firm's principals must use control mechanisms to ensure that its managers (agents) act in the best interests of the firm and its stockholders rather than their own. Hallmarks of agency theory include contracts, monetary and extrinsic rewards, clarity of direction from principals and a defined set of expectations.

Stewardship theory, on the other hand, assumes that both manager and organisation perform optimally when the manager (steward) and the firm's principals share a relationship based on intrinsic motivation, high organisational identification and a philosophy of involvement rather than control. Hallmarks include character issues, trust, cultural compatibility, mutual emotional bonds and a dearth of strict control mechanisms.

Our research suggested that successful NFCs must be both good agents and good stewards. Evidence illustrating the applicability of agency theory in family firm governance emerged in the finding that, because most families seem to prefer that a family member hold the CEO post whenever possible, a non-family member would have to possess noticeably superior business skills just to obtain the job. Similarly, underperforming managers are more likely to be removed if they're not family members.

The finding that strong non-family CEOs bring needed skills or experience to their employers – thus supporting agency theory – bears out earlier research by G Filbeck and S Lee, who reported that larger family businesses with a non-family presence used more sophisticated techniques than did smaller family businesses. Similarly, MA Gallo and A Vilaseca found that family businesses with non-family CEOs achieved higher returns than did family businesses with family members in that role.

At the same time, the following examples from our interviews show the importance of stewardship theory in the management of family firms:

  • Successful NFCs often develop a heartfelt affinity for and identification with the family. NFCs who lack that affinity – in favour of an exclusive focus on business performance and compensation – will likely experience a disappointing tenure.
  • The family can improve the NFC's odds for delivering solid performance by using the council structure to insulate the CEO from the potentially messy process of distilling individual preferences into a coherent set of objectives, and clearly communicating those objectives and expectations to the CEO.
  • During a generational transition, a non-family CEO may be asked to help instill in younger family members the skills important for eventual ascension to the CEO ­position. Successful NFCs in a mentorship role will require a very clear sense of their place in the family firm's history, and a willingness to be subservient to the longer-term processes of which they are a part.

Challenges in Selecting a Non-Family CEO
The pool of possible NFC candidates – those who are both good stewards and good agents – will be influenced by several realities. Executives who have worked for more demanding public firms may not adapt to the quirks of a family business culture. At the same time, non-family members who have worked with a family firm for a long time and therefore know the culture may not have the breadth of experience necessary for successful leadership.

To begin evaluating candidates, a family can develop a framework by analysing its life stage and current needs. A company facing a business crisis may require a CEO with certain skills or experiences that family members do not possess. A business seeking a leader to act as a bridge between generations will likely want a candidate who can also mentor the future family CEO. While a bridge CEO may come from among the long-time employees in the firm, a crisis CEO likely will not.

Still, other families may chose to hire a permanent NFC, reducing or eliminating their participation in active management in favour of their ownership role.

Thriving and surviving
Not all family businesses treat their non-family managers the same nor expect the same things from them. Families vary in their level of cohesiveness or degree or fragmentation. Some are naturally more oriented toward business matters; others lean more toward family matters. We do not mean to suggest that any single right type of manager exists – with the specific training, personality, experience or other attribute that will guarantee success as a NFC.

What our findings do show is that family businesses can structure themselves and govern their NFCs so as to bolster the NFC's ability to move the firm forward while interacting with the family in productive and rewarding ways.

We suggest thinking of successful NFCs as guests at Thanksgiving dinner who are asked to prepare the turkey. They are invited into something dear to the family and are trusted with a key part of its activities, but they remain guests. The best NFCs will have the personalities, skills and motivation to thrive in such settings – generating financial and emotional rewards for all involved.

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