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When not to keep it in the family: How to hand over to a non-family executive

By Alexandra Newlove

In 2006, as Ford Motor Company headed towards a $12.7 billion loss, the worst in the company’s 103-year history, Bill Ford, chief executive and great-grandson of the legendary Henry Ford, realised he needed help.

In an email to staff, Ford introduced his new top man: former Boeing transformation master Alan Mulally, who over the next eight years executed a revitalisation which saw the automaker’s stock appreciate more than 1000% from recession lows, and Mulally remembered as one of the all-time great business leaders.

Less celebrated—but arguably just as important—was the leadership of Bill Ford, now-executive chairman, in realising he was not the right person to steer his family’s company through this tumultuous period in its history.

“Bill realised they needed outside talent,” says Dr Otis Baskin, a consultant and professor who has worked with family businesses for more than 20 years.

The willingness of the Ford family, who control 40% of the voting stock, to support Mulally’s plan was crucial to its success.

“You never heard a single Ford family member say: ‘We should have done it a different way’. There was no second-guessing and the family spoke with one voice,” Baskin says.

“That is a huge advantage for the executive.”

Presenting a united front behind your non-family operational leader is just one of the key ingredients in this challenging, but often vital, transition.

Bridging the gap

A large age gap between generations, disengaged or incompetent heirs, or rapid industry change that makes the family’s institutional knowledge irrelevant are just some of the reasons a family-run business may find itself seeking a high-performing outside executive.

One of the families Baskin works with had their first experience of bringing in a non-family leader after five generations in business. They had been in manufacturing, mining, and cattle ranching, naturally acquiring a lot of undeveloped land over time, which was eventually incorporated as part of a growing city.

“The city came to them and said: ‘You own about 8,000 acres of undeveloped farmland in our city limits and you need to do something with it. It cannot just sit there with cows on it’,” Baskin says.

“So they realised, suddenly, they were in a different business to what they had always been in traditionally. They did not really have that kind of expertise—real estate development—which is what was suddenly thrust on them.”

Preparing for your new arrival

In the case of the cattle ranchers, the first part of the hiring process was getting their governance in order. In fact, you’ll be hard-pressed to find an expert who doesn’t stress the importance of solid governance when it comes to the often-fraught issue of succession.

“Governance is always the first step,” Baskin says.

“Yet it always seems [like] the last thing that families who have been running their business with family executives think of.”

Corporate governance can protect against a multitude of possible future family business disasters, including a lack of leadership talent—or interest—amongst the next generation.

“We start with the values of the families and if there is not a clear [values] statement, we work with them to articulate that,” Baskin says.

“Once you have those values, then you can create the family vision as owners of this business—why do we own it? And what is the potential of this business? ‘Because our great-great grandfather started it,’ is not the right answer.”

Regardless of whether the family is promoting someone internally, or bringing in an external hire, the consultants CampdenFB spoke to (perhaps unsurprisingly) advised bringing in a recruitment expert.

Heinz Leopold, who spent five years in the C-suite at family-owned German coffee giant Tchibo, says families tend towards having an insular view of their businesses, and are too reliant on instinct, rather than analytics, when it comes to choosing the new top brass.

“They do one or two interviews and think ‘Oh, you’re our man’. I can tell you, in the majority of cases, this is wrong.”

Baskin says a good consultant can help deal with the frustration of “kissing a lot of frogs” during the hiring process.

“The potential mistake is hiring someone who is so steeped in the current situation that they cannot help create a new vision. Sometimes you have someone who is an outstanding second in command, but they are not necessarily the right person to take control of the business.

“The most important thing is to cast the net as widely as you possibly can… The family should not create false savings during the search.”

Leopold, now an executive head hunter, says a common mistake is picking someone who the family feels embodies all their own values—when in fact a different perspective is called for.

“People usually founded a company because of the idea they had, not because they necessarily had management skills,” he says.

“Management skills are totally undervalued, but in the end they make the company work. You do need somebody who is full of emotion about the product. But you also need somebody who is totally rational, and even harsh when needed to improve [the company] and change it for the future—because no industry will be like it was forever.”

The pain of letting go

In 1847, Samuel Smith and his family left his native Dorset in England and set sail for South Australia. A gardener by trade, Smith worked for a local family for a short time, before buying a tract of land and planting one of the first vineyards in the now-famous Barossa Valley near Adelaide.

Fast-forward 169 years and the resulting wine empire Yalumba—a global exporter exporting to more than 50 markets—is closely held by Smith’s fifth-generation ancestors, brothers Sam and Robert Hill-Smith.

Robert Hill-Smith ran the business until 2015, and remains chairman. But when it was time for him to retire as managing director, both his children and those of his brother were either still in education or just cutting their teeth in the professional world.

The solution came in the form of Nick Waterman, who left a 20-year career with some of the biggest global technology companies to join Yalumba in 2003. He initially managed the imports distribution business, eventually becoming chief operating officer, and on Hill-Smith’s retirement, managing director.

Despite his sister being married to Robert Hill-Smith, Waterman clearly defines himself as a non-family executive.

“When I came [into the business] I was quite clearly an employee. A lot of people didn’t know [about the personal link], it was not talked about for years, and it was not important. We did not want to create a perception of nepotism.”

When Hill-Smith decided it was time to move out of the managing director role, he knew he faced a challenge in terms of the trust and discipline required by good governors to step away from the day-day operations. He needed to let Waterman use his corporate expertise to make changes he deemed necessary. "We knew it would be difficult, and it was hard for him to let go, and in fact he still maintains an active involvement, but allowas me and our executive team to run the business and make changes we believe are necessaty, " Waterman says.

“[Robert] took over the chief executive role when he was just 34, then bought the business out when he was 37—a big ballsy move at that age to take on a significant amount of debt, then he had been running it for another 23 years. He’s now 66-years-old.

“For us, it was a matter of having some open and honest conversations. I had a mentor from outside the business who we had agreed to at a board level. The mentor was really valuable with giving me strategies to manage [those conversations] and still get things done.”

Waterman says his aim was clear from the outset: bring the business’s protocols and processes up-to-date, so the next generation inherits a well-oiled machine.

“That was confronting for Robert, because it involved a certain degree of corporatisation and making it a bit prescriptive,” Waterman says.

“There has been a lot of change, and that has probably taken us longer than I would like, because a lot of it was challenging for Robert, and maybe not what he would have done,” Waterman says.

“I likened it to coming into a beautiful Victorian home. Structurally, it was unbelievably sound, but we did not have central hot water and the heating was a bit out of date. We have renovated the house so it functions really well, without changing how it looks from the outside.”

Trust us, we’re professionals

Trust, discipline, and governance are themes that come up repeatedly when speaking about the issue of family to non-family succession.

Leopold advises any executive considering a job at a family business to look carefully at its board and reporting structures before accepting the post.

“After some time in recruitment you can tell whether a family company is professional. That does not mean they are cold and distant, but that they are able to understand their brand and the company from the outside,” he says.

In the absence of trust and solid governance, families tend to panic. In some cases, retired family members even return to the business.

“Change is a tough experience and the benefits come later. At first [the family] are bound to think: ‘Oh my God, he is destroying the company’,” Leopold says.

“It is like if you remodel your house. You take everything out and cut a wall down, and it looks horrible in that moment. But you do not say to your builder, ‘No put it all back, I’m scared’. You have to trust him that afterwards it will look better.”

As the wine industry is disrupted by direct-sales sites like Naked Wines, and the tastes of consumers in emerging markets (fellow Australian winemaker Penfolds released a Baijiu-infused Shiraz to entice the Chinese in July), Waterman says his relative ease coping with rapid change has been an asset.

“I’ve spent 20 years in technology where change is just constant,” Waterman says.

“The wine industry did not have an appetite for that. When I started here people in the industry would say, ‘Oh, we’re going through tough times, but things will get back to the good old days’. They have not. I have seen things change so dramatically all the way through the supply chain. It has been good to have had experience dealing with change and adaptation and not being daunted by it.”

While managing next-generation family members is something many non-family executives dread, Waterman says he is longing to see the Hill-Smith brothers’ children come on board—and has told them so.

“I view my role as a custodian. I’m a link man babysitting the business…making sure that when they come in, the business is in good shape. And then I’ll step out.”

The family factor

For every story of conflict and chaos when an outsider joins a family business, there is an executive who has found their career more fruitful and fulfilling for it.

Baskin goes back to the example of Ford Motor Company in the noughties.

“When you think back to 2008, General Motors was having to hold a monthly or sometimes weekly conference call with Wall Street.

“Meanwhile, [Ford’s] Mulally told the investment community that he and the family had a long-term plan. It was going to take at least a year, and maybe more to work through it, and he was not going to give guidance until they came out of it.”

Baskin worked with another Guatemalan company where all 243 family shareholders agreed to suspend their dividends during the recession.

“That is a huge decision, but I have seen a large number of families make those kind of decisions when they get good information from trusted executives.

“I think you can have a much longer and more productive career within a family business. It really is very hard to remain at the top of a purely public company because shareholders really do not know what they want.

“It is hard to call them an investor when their primary motive is to sell. Let us look at them as a trader, not an investor and realise that you have a lot of shareholders out there holding onto stock and we need to think about what is in their best interest for the long-term value of this company. I think families do that well.”

Having come from a background in public companies, Waterman echoes this sentiment.

“We’re 169 years old this year and we talk about what the company might be in 50 years or 100 years—there is that longevity. Without wanting to paint the wrong picture, there are other things that are important beyond pure profitability.

“Especially in agriculture which is subject to cycles, you get to ride out a tough time and not have to react accordingly.”

Waterman said last year was “softer” for Yalumba, largely off the back of Brexit.

“If we were a public company, first, we would have been belted by market analysts and secondly, I would be sitting here going: ‘Right I’ve got to strip costs out of the business’. Family companies do not have to do that.

“We still have a very structured way of running the business and we have strategic score cards that run down through the business.”

Then, there’s a more intangible aspect, he says.

“You have history that is based around continuity of ownership and family. [Our business] has got warmth about it. It has got a sense of collegiality and community. You do not see that in public companies.” 

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