Mind-Map

Non-family CEOs:
theory and practice

Professor John Van Reenen, Director, Centre of Economic Performance, London School of Economics, UK

At the FBN 23rd International Summit in London in 2012, one of the hot topics was non-family CEOs. Professor John Van Reenen presented data that shows that, on average, family-owned firms with an outside CEO have a higher management score than firms with a family CEO. But for firms that might be considering an outside CEO, five practical watch-outs were highlighted by family leaders and other participants at the Summit.

In his Summit speech, Professor Van Reenen described his research into management quality in firms with various types of ownership. Broadly, the best-run firms are those that have either private equity or dispersed ownership. Government-run firms are among the worst. The data suggests that family-owned firms with an outside CEO have a pretty good management score. But family-owned firms that are run by a family member (particularly the eldest son) have a lower score – on average.

Professor Van Reenen suggests three issues with automatic family succession as CEO, such as father to eldest son. Firstly, narrowing the CEO selection to a family member reduces the pool of talent. Secondly, if the eldest son knows that he is going to become the CEO whether he merits the role or not, there is no incentive for him to work hard or prepare himself thoroughly. Thirdly, talented non-family managers will want to leave the firm because they stand more chance of getting the top job in another firm that has a more open promotion process.

According to Professor Van Reenen, his research findings demonstrate that passing on the running of the business to the eldest son may not be the soundest business move. His recommendation is that family owners should at least consider the alternative of bringing in some professional outside management. He notes that in Germany, although the ‘Mittelstand’ of medium-sized firms is dominated by family ownership, they tend to hire in professional managers to run their firms.

But when it comes to practice, here are some practical watch-outs that need to be considered:

#1: Principal-Agent conflict
One of the potential issues of separating management from ownership is that the senior management may increasingly divert money into high salaries for themselves rather than paying out profits to shareholders. Professor Van Reenen recognises the danger that senior management may try to “line their pockets at the expense of shareholders”.

The existence of potential conflict between those who manage (the ‘agents’) and those who own (the ‘principals’) is not, in itself, a reason to avoid non-family CEOs. But it is a reason to be watchful.

Non-family CEOs may bring all sorts of positive qualities and competencies to their roles. But if they are mainly concerned about their own rewards, and if they are not effectively monitored by family owners, then they are far from a miracle cure for all problems.

#2: Personal qualities
During break-out sessions at the Summit, a family leader described the ideal non-family CEO as needing a ‘mix of ego and humbleness’. The person must have enough ego to be a leader. Yet the person must also have enough humbleness to accept that family owners have the last word. It’s not easy to find such a person, particularly when ‘humbleness’ can only really be tested when the person is in a position of power. Even experienced families can find that they have made a wrong choice. They then have to accept that they made a mistake (difficult in a psychological sense) and fire the person of whom they had high hopes (awkward and possibly agonising).

#3: Commitment to family ownership
Another family leader explained how a non-family CEO had been appointed because of his excellent experience and credentials. However, over some years, it became clear that the CEO’s ambition was to list the company on the stock market. This would allow faster growth and greater prestige for the CEO – but it would also bring the family’s control to an end.

The CEO was a domineering character and he had a powerful negotiating position: ‘if you don’t back me in my ambition for this company, then I’ll resign, and you know that I’m the one who is really driving growth and increasing value’.

The CEO was resisted by some of the family owners and the non-family chairman of the supervisory board, who still believed in family ownership. The chairman actively looked for a member of the family who could be trained up as an executive, so that there would be a counterweight to the domineering CEO. It took several years but a suitable candidate was found and internally promoted.

The family were now in a position to say: ‘if you want to resign, go ahead, we know that there is another well-qualified manager who can both do a great job for us AND who is committed to family ownership – because he is a family member.’

The outcome, several years on, is that the business remains firmly in family hands. The family member is on the executive board though he is not CEO. But for as long as he’s on the executive board, any non-family person who serves as CEO is much less able to push for a public listing.

#4: Time preference
Another watch-out is that some executives achieve success in public companies by focusing entirely on ‘hitting the numbers’ every quarter. But this approach may not suit the longer-term thinking of many family businesses. In fact, a manager who is all about short-termism is likely to damage a business that prizes reputation, trust and consistency.

#5: Family harmony
There are particular considerations for families that are moving to a non-family CEO for the first time. Consider the case of Next Generation (NxG) members in a family business that has traditionally been led by the most competent member of the family. The NxG spent years in learning the craft skills that the specialised business requires. They gave up their other career ambitions in order to progress from the bottom of the organisation. They spent the best years of their lives in gaining a real ‘feel’ for the business.

Then, quite suddenly, the family decided that it was preferable to have a non-family senior management team, with the family taking on a role of ‘governance’ rather than ‘management’. The NxG’s long-held expectation of succeeding to top positions crumbled and collapsed.

It’s easy to see that this situation could be deeply traumatic for individuals in the NxG – whatever the long-term benefits of non-family CEOs ‘on average’.

There is always going to be a point of departure from a business that is owned and run by the family, to a business that is run by non-family managers. To navigate this point of departure successfully, there needs to be a great deal of social leadership. Somehow the family has to be aligned around the new direction and the need to make individual sacrifices for the common good.

In this model, for a family business to succeed all 3 dimensions have to be taken into consideration because each of these factors have a significant impact. Wether there is a problem with the family where siblings are having disagreements on certain issues. Moreover, if the business performance is doing poorly then this might affect later relationships between the family members as well as the share holders since they will be unhappy with the profits. Arguments and disagreements can increase an create tensions for the business family as a whole. In conclusion, if any of these dimensions are disturbed the family business will be affected somehow. 

My mind map

Case Study "L'Abruzzese"- Phase 1-2 & 3

Hello everyone!

I am posting Phase 1-2 & 3 of my Case study.

https://www.scribd.com/doc/265363450/Family-Business-Case-Study-Phase-1-2-3

The sustainable family Business (SFB) Model

According to Danes et al.'s Model (2007), a family business is defined as sustainable only when the family and the business itself interact with each other trying to reach a mutual state of sustainability without harming each other.

Figure 1 (Danes et al., 2007)

Five are the key principles of the model shown above:

1.       Both the business and the family are considered to be rational social systems whose sustainability and success depends on the behavior of individuals;

2.       The two different systems cooperate by exchanging resources;

3.       Owning families must be able to handle both the family and the business without regarding these two systems as divided one from the other;

4.       Although the two systems must cooperate with each other, this does not mean that the boundaries between the two should be confused;

5.       The conflicts begin to arise when there is a discrepancy between the requests / demands of the family or the business and the available resources.

During periods of stability in the family business both the family and the business are managed within their own borders, but when things start to go wrong (which seems to be almost an inevitable phase in the life cycle of a family business), in times of disruption, systems begin to use each other’s' resources.

Another Reflection on Isabell's post "Reflection of succession in regard to Ilapak and personal aspects"

While reading an interesting article about succession planning and transfer of knowledge from one generation to another, I came through a model that in a way strenghtens the comment I had already made on your post.

Figure 1- Model of Knowledge Transfer and Successor's Development in the Family Firm (Cabrera-Suarez, 2001: 40)

As it can be seen from the model, it is important to note that tacit knowledge and non-articulated knowledge, as well as experiential training and early exposures to business, can greatly help the successor in gathering experience for replicating it in the real world business.

Therefore, joining the firm after having obtained experience elsewhere proves to be extremely valuable for the family business. Moreover, by doing so tacit, knowledge is progressively transferred and this results in a better understanding of the business and allows the successor to protect his/her ideas from a possible appropriation by the competitors.

Mind Map

emotional attachment

Hello so for another piece of reflection and looking back to all our cases and topics (succession, leadership, gender, etc.) I feel there is one common theme. Emotional attachment. Many people concur that when doing business all forms of emotions should be eliminated from the equation to make the most sound decision. However, from what I have learned over the course of this semester is that emotion is what drives the family business. Emotion is the reason why the first generation leader begins his business. Usually the need to create a business springs from a need to feed the family as we saw from the Levy and Tai- Po case. And then as time passes the first generation owner sees the business as a child where he must nurture it and enable it to grow. In fact if there was no emotional attachment involved the owner would probably have no interest in the business at all.

But when does emotional attachment become deadly? From what I’ve learned things get tough when the first generation owner needs to pass on his business to the next generation. As we saw in our last MICA a weak Roger was just not ready to let go of his business and just assumed power of the company. Even in the case Luciano mentions how Roger just does not want to let go of his authority and is constantly interfering. In the Tai- Po case David’s family did not really want to sell the business despite the turbulence the company faced because it was part of the family. I think in regards to the second generation there is a different sort of emotional attachment, children usually have memories and see the company as part of who their father or mother is rather than fully understanding it which is why they might sometimes reluctantly take control of the business (to keep the legacy).

I think emotions is just a big part of the family business and I think emotions can be manipulated in a positive way for the second generation owners especially in regards to succession. I think the only case in which I read of a child being involved in the business at a young age was the Harilela case where his son was always actively involved in whichever way appropriate for his age. In the Tai-Po case a sudden death caused him to come back and take charge and in the Levy case Roger needed a successor. But for both Tai- Po and the Levy case I noticed that the children were not really involved with the business until they were forced to do so. I know that it is important for the second generation to make their own mistakes before entering the business but I do think that first generation owners should have their children involved in a business at a young age just so they can get a feel of what they could possibly inherit one day. I think it is important for first generation owners to always speak of the business to their young children at home and maybe have them work there while they are in high school just so their emotional attachment towards a business is not to view the company as a sort of heirloom.

Common mistakes in family business succession plans

Succession Plans FB 06

The article lists a number of mistakes often made by family businesses in succession planning. The article doesn't only list the usual issues that drive families to make those mistakes it also discusses the impact of dilemmas such as sibling rivalry, control oriented parents and preferring a family member as a successor to run the business over a professional manager with is the case in many developing countries.

mind map

When is professional management better

A Family Member or Professional Management? － The choice of a CEO and its impact on performance

This article discusses when does a firm need a professional CEO, someone from outside the family to run the business. The article explains that under what circumstances is it better to have a family member run the business and when its better for a professional non family member to run it. The study claims that family businesses with high requirements for managerial skills are better off with a professional non family member CEO,  but is it necessary for the business to be successful?

http://www.efmaefm.org/0EFMSYMPOSIUM/2007/papers/hu.pdf

Note: The article failed to convert via scribd

family businesses and entrepreneurship

Dyer Handler

This article talks about the key differences between family businesses and the way they are managed and professional business systems. It examines the effect of family members on the entrepreneur during start up and every other phase until succession planning. The article discusses the role of the family in developing the entrepreneur, it also discusses issues facing entrepreneurs today.

Case Study

Characters

Claire- mother CEO of the company

Mark and Emily-Children from the first marriage

John and Sara- children from Second marriage

Tom and Frank- children from third marriage

Peter- son from fourth marriage

Case study family business

Thomason’s travel agency 

The Family

In 1965 Claire married for the second time. After her first marriage ended a year before and giving birth to two children. Her second marriage didn’t last long as well she was a rich woman was not in a need for a man to depend on. She gave birth to another two children from her second marriage that lasted for only 3 years. Between 1961 and 1971 Claire gave birth to 7 children from 4 marriages.

Claire owned one of the largest travel agencies in the Florida one her father owned and gave it to her, as she was his only child. She was a successful woman and knew how to run the business even if she was pregnant and have young children.  The fact that she didn’t let any of her personal life issues stand in her way makes it an achievement but she did more than that, the business was making around 3 million dollars in 1958 when she took charge of the company after her father passed away, she was 24. By 1970 the tourism industry expanded in the Florida and it started to grab everyone’s attention, but it wasn’t until 1990 that tourism truly flourished in the Florida, started attracting a host of international attention. The company was making 15 and 20 million dollars a year all that with her running the business.

 Her children were all growing up with her even after the got divorced 4 times. She didn’t remarry after and dedicated her time to her 7 children and work. In 2001 Claire’s oldest son Mark was helping her run the business acting as a right hand. While John, Peter, Frank and Tom were all working as well within the firm and helping their mother and old brother they didn’t have the same influence as Mark had. Mark was the only son from her first marriage and John the only one son from the second were closer to each other than any of their siblings Tom and Frank were from the third marriage and Peter was from the fourth. They were all close in terms of age but none of them was qualified like Mark he was taken to work earlier than his brothers. The sisters were out of the picture Emily and Sara had other interests and didn’t want the same life as their mother. In 2002 Claire decided it was time to retire and that her sons are now capable of taking over. All got a long well when Claire retired with the 5 sons all managing the firm under Mark’s guidance; it wasn’t until Claire’s illness with level 3 cancer that problems started between the brothers with Tom, Frank and Peter worrying about what their fate will be after their mother’s death.

The dilemma

Claire faces a tough decision on how to split the company between the brothers and at the same time insure that their sisters are taken care of without the help of anyone not even their brothers. The issue of who to take charge after she’s gone and the extent of power that she wants everyone to have when she’s gone came to her mind to ensure everyone has a certain amount of power and decision making authority.

Tom and Frank will want to sell their shares that will be given to them by Claire, Claire as well will ensure the brothers are not to sell their shares for the first five years. And will ensure that each son or daughter will only give their shares to one offspring to work for them in the board even if these shares are shared between that son or a brother or a sister of his.

Last Days

In 2004 Claire was diagnosed with lever 3 lung cancer. For a women her age it would have been difficult for her to recover as her body can’t cope with the chemotherapy, meaning Claire only had a few months left at best, with a chance of making it a couple of years if she chooses to continue with the chemotherapy. After being diagnosed she wanted to secure the future of her children and her business as well ensuring that each of the siblings could benefit from the business whether they want to work in the company or not. At first the three young brothers started to worry about their fate after their mother especially that they weren’t as close as the siblings from the first two marriages.

When Claire heard that her children might be willing to sell the business to an outsider and with the potential of someone from outside of the family to have a say in the business after she’s gone, she made sure that no one of the sons or daughters are allowed to sell their shares in the first five years that they own them in order to give them a chance to work together and see how the business is turning around to be in a compulsory way, then they have the option if they want to sell their shares and they see that they could benefit for the money they’ll pull out of the business somewhere else then they could only sell their shares to one of their brothers or sisters to still ensure that the family business will always be ran by family members even if some of them don’t want to be part of the business anymore.  

Different opinion

When Tom, Frank and Peter heard about their mothers plan they disagreed stating that each one of them should have the choice to continue in the family business or branch out to something else and that they don’t want five years of their lives wasted in a business that could in the long run not benefit them as much as if they opened a new business in another sector. When Claire heard the arguments of her sons she started to doubt herself and didn’t know what to do and still do what’s on her mind while satisfying her children in the way. She was worried that an outsider could go in and take control of the company while there’s still some of her sons or daughters unwilling to sell their shares. Tom in the same year his mother got sick got an offer from a multinational insurance company with a good salary and potential earning more money than what he’d make at his own firm with his siblings the job offer came through one of his friends that recommended him for the job that’s the primary reason Tom wanted to have the option of selling the business if it came down to it. Peter and Frank were both interested in a idea they wanted to use the money they’ll get after selling the business to open a new company specializing in importing alcohol from South America. The idea itself made Mark and Claire get worried about the both of them not only was the idea dangerous and in a competitive industry that starting from the beginning in it is near impossible they also thought that both Frank and Peter didn’t have the expertise to launch a business the size of the one they want. Doubting both Frank and Peter, Claire at the moment sees that tying down the brothers to the company and its money for 5 years could get rid of the idea and get it out of their plans for the future, she was the one that had the keys to decided whether her children could use the money and shares straight away in something else they want or not.  

Sibling rivalry

Claire has a big family she loves each and every one of them dearly and didn’t differentiate between any of her children. She made sure that each one of them was treated and taken care of equally when they were younger but due to her children not trusting each other her business could face problems within the management after she’s gone if problems just started to occur when she’s alive. She fears that the brothers won’t get along and that they would fight for management and shares in the business if she doesn’t do that herself before she leaves them. Brother rivalry is common in family businesses; brothers may not get a long for more than one reason whether they have different views or different ways of running the business, that’s why trust between brothers from four different fathers could be difficult in business when two or three of them are doubting the rest and are afraid that they won’t be able to have a role in the business because of their brothers. Mark and John both threaten Frank, Tom and Peter by how close they are to each other and their understanding of the business that surpasses that of the younger three brothers.

Issues

Different Career paths

Frank and Peter both wants to sell their shares and enter a new business with the money they acquire from their mother’s business. They always wanted to start something new and something they chose for themselves, even though they don’t have the knowledge to enter the alcohol market, they see it a business that can make a lot of money quickly if the job is done right. Different career paths in families could be a cause for a business to fail if the 2^nd generation has members that are not willing to work for the family business and sell their shares to someone else instead, or if they might keep their shares and do nothing but take money from the businesses profits. This could cause a business to fail when family members start neglecting their family’s work and concentrate on their own business.

Security 

Claire’s children all want security they want to know that their lives are stable and that they have the finances needed for the already planned near future at least. Security could cause brothers to decide to sell their shares to guarantee that they’ll get money from their family business that they could use for their own business in the future. Tom, Peter and Frank are an example of that, they wanted to sell their shares fearing that Mark could exclude them or that the business could fail after their mother is gone. Numerous reasons can force family members to leave family businesses but if the business doesn’t guarantee security in the future members could choose to get out of the business and work with this money somewhere else.

Theory

Succession planning

Succession planning is an important part of the business if this business wants in to future to continue making profits and expanding. The company needs to put a set of rules to ensure that the business wouldn’t be harmed by changes in management whatsoever. The business needs to set rules on the 3^rd generation and how the 3^rd generation should be allowed to participate in the business in the future. Without any succession planning businesses could face chaotic battles between family members over control of the business that’s why succession planning is necessary.

Three cycle model of family business

The ownership, the family and the business are the three dimensions of this theory. The theory explains that the three dimensions are connected to one another and that if one of them is affected the other two will, for example the business will suffer is there is problems in the bored, like there is now with Claire’s children, and if the family suffers for any reason that will have an effect on the business and possibly ownership as well.

Envy within Family business

Jealousy and envy in families could ruin them, businesses are fragile and jealousy could be the only reason for it to fall and never be the same again. For example in the case study Tom, Frank and Peter envy Mark because of the power he’s got after his mother in the business.

reflection

Hey guys,

So I posted this cartoon in my newsletter but I think as a reflection it would best to talk about how I feel this satirical cartoon below reflects on the overall issues in regards to a family business. I was just thinking about MNCs and the general codes of conducts they implement within the workplace. Usually in a professional environment it is frowned upon to have people who are related working within the office it is also prohibited for people to have relationships with co-workers. These rules are imposed in order for people not to mix business and personal relationships in order not to astray from office affairs. In many of our MICA cases Ed always said we weren’t talking about the business and we were always focusing on family affairs, but in my opinion this was just inevitable. We always feel with our families that we have leverage to say and act out in a certain way that may not usually be accepted with others and this is why I believe family affairs naturally intertwine with a business. The business just becomes a way of life for the family.

When family and business comes together and boundaries are dissolved they can sometimes create disaster.  As we can see in this photo there is definitely a lot of nepotism involved in a family business which can cause issues such as communication problems where families want to maintain family harmony without realizing this can have a negative effect on the business. A lack of communication within a family business amongst family members can definitely harm the business AND the family in the long run. I think this cartoon and our final discussion of Ilapak definitely showed me that the two most important things within a family business are succession and also valuing your non-family employees. I feel some families forget their employees are their most valuable asset in moving their business forward and keeping it stable and family matters are secondary when it comes to the business.

On a side note I was going through many articles in regards to family business and I feel one matter we did not really get into is profits and the family. A company’s primary goal is to make profits but what happens when the family takes advantage of the business and uses it as a bank? Family members sometimes forget that they cannot overcompensate themselves because this once again may effect non-family members and demotivate them. I definitely believe owning a family member requires discipline in not having to interfere personal and business matters.