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The generational handover in family business: Is it better to appoint internally or externally?

Article author Jesús Rico Professor of Strategy at EAE Business School
By Jesús Rico

Sooner or later, all large family companies have to tackle the quandary of the generational handover. Should they appoint a member of the family who knows the company and has its mission imprinted on their DNA? Or is it better to bring on board a director from outside the company who shakes things up with a new vision?

In recent years, we have witnessed a wide range of responses to this dilemma: companies that have opted for a family member to take over, such as Santander, companies that have recruited a director from outside the family, like Dyson, and companies that have gone for a mixed model, such as Inditex, in which an external director was succeeded by someone from the family.

Deciding which model is best depends, to a large extent, on the company’s circumstances and the goals it wants to achieve. In other words, there is not one single right solution for all family companies. For instance, if a company opts to keep the generational handover in the family, it must take the following three fundamental conditions into account:

1) The person taking over the helm must have proven their worth. It is not enough simply to be a member of the family. The talent required to lead a company is not something you automatically inherit genetically; you have to show that you are up to the task. For instance, Juana Roig, the daughter of Juan Roig, the executive president and majority shareholder in one of Spain’s biggest supermarket chains, Mercadona, managed to make the chain’s online sales rocket in just six years. Another example is Marta Ortega, Amancio Ortega’s daughter and the new president of Inditex, who started at the bottom as a shop assistant in one of the group’s stores and gained a full understanding of the business from the ground up.

2) They must really be willing to take on the challenge and consider it to be their best option professionally. Top executives generally have several options both within and outside the company, some of which may offer them better professional prospects or more interesting challenges. We must ensure that the chosen director is really committed to our company.

3) They must have enough prior experience. This is particularly vital in companies that are not too big yet. One classic approach is to send potential family executives to “friendly” companies to gain some experience away from home, but in a welcoming setting. For example, Juana Roig (Mercadona) worked at Inditex with Amancio Ortega.  

In contrast, there are times that the company’s circumstances make it unadvisable to choose a family member to take over the company’s reins.

We might want to transform the company or make it evolve. Perhaps we have rolled out new business lines, or maybe the company has grown so much that we have to rethink its objectives culture, etc. Alternatively, we could be struggling to find the right successor within the family.

In this case, it is essential that we are extremely critical and accept the reality of the situation: if we cannot find the suitable, by which we mean best, directors within the family to lead, transform and oversee the company’s future, it is better to look elsewhere. This was the case for Dyson, the British company founded in 1978 by James Dyson, which leads the way in technology applied to the domestic sphere. Some time ago, the company opted to appoint external executives.

Other companies such as Ferrovial, which operates in the UK, Australia, the USA and many other countries, decided long ago to appoint external directors to run the company, but keeping the presidency within the family, with Rafael del Pino Jr. at the helm.

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Article author Jesús Rico, Professor of Strategy at EAE Business School

Other companies choose a mixed model, bringing in an external president while the most suitable family member to take over finishes off their training and gains experience. For instance, in Inditex, Pablo Isla, who is not a member of the Ortega family, led the company very successfully, until he was replaced by Marta Ortega, the daughter of Amancio Ortega, the company’s founder.

In all cases, when selecting an executive from outside the family, it is crucial that they fit in perfectly with the company’s culture. Regardless of whether the goal is to keep the company on course or evolve it, whoever takes over the helm must have a very clear understanding of the company’s history and the essential values that the owner family have imprinted on it.

Whatever final decision that company makes, it is extremely important, particularly in large companies, to move on from a sole administrator model to embrace a governance model based on a board of Directors. The board may be a mix of family members and external directors who offer a counterpoint to the family perspective. This complementary balance is necessary to avoid falling into complacency or a lack of critical reference. This would also be the ideal place for family members who do not yet have the optimal profile to take over the reins to gain experience and insight on a new project for the company.

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