Keeping it out of the family

Family firms can be wary of bosses who aren't part of the clan, yet FIAT and Warburtons have both done it. David Bain on finding MDs outside the family.

by David Bain
Last Updated: 09 Oct 2013

John Elkann, the chairman of Fiat, said recently that family businesses can and do attract top managers. Elkann was talking from experience. Fiat is still majority family controlled, with Elkann representing the fifth generation, but it's also managed by arguably one of the most successful chief executives anywhere, Sergio Marchionne - and he's not part of the family.

Fiat represents just one of a large number of family businesses that have been revived by bringing in non-family senior managers and allowing them to get on with the management of the company as the family take a back seat. They include Lego, which appointed a non-family chief executive in 2004, who went on to transform the fortunes of the iconic Danish toy company, turning a struggling third-generation family business into one of the fastest growing companies in Europe. Closer to home, sixth-generation family business Clarks has flourished under outside leadership. The shoemaker was one of the few UK retailers to increase its profits last year.

But these and a few others tend to represent the exception rather than the rule. For the most part, family businesses aren't very good at hiring from outside the clan. They usually get too weighed down with not just the practicalities of running a business, but also the emotional side, and don't like the thought of sharing their squabbles - or their equity - with senior outsiders. For make no mistake about it, family ties certainly do have a profound influence on the way such businesses are run, and not always for the better. Just look at all those company doctor TV shows hosted by the likes of Sir Gerry Robinson.

Egon Zehnder International, the executive search firm, recently produced an interesting piece of research which found that, although family businesses might cope better with economic downturn because of their tendency to plan for the long term, they do less well when it comes to management. The survey - of 720 family business owners and senior executives from across the globe - found that over 60% of managers reckon the lack of professional structures and procedures are the biggest disadvantages of family businesses. Conflict among family members, driven by a lack of transparency and meritocracy, was also listed as a frequent brake on progress.

Family businesses often find it difficult to hire top management from outside for just these reasons, says Joachim Schwass, professor of family business at the Swiss business school IMD; even if the business looks to be heading for a big fall under existing family management. 'They get scared, they feel they're losing control.' But it's a nettle that needs grasping: a lack of good management, adds Schwass, is a big reason why only 5% of family businesses make it beyond the third generation.

'The most difficult thing is making the decision to bring in an outside chief executive,' says Peter Leach, a London-based consultant specialising in advising family businesses in issues like succession and management.

Leach reckons that taking the plunge is made easier if the family know what they want from the business. 'Do they want to be actively involved in the day-to-day management, stand back but nevertheless still oversee the business in a chairman-like capacity, or simply collect dividends while lying on a beach? Once they've made that decision then it's easier to exercise it.'

But Ross Warburton, the fifth-generation family member to be involved with the eponymous Bolton-based baker, disagrees. He says the decision to hire an outside managing director wasn't that difficult, but it was the execution that was hard. 'You have to make sure the person you're hiring has an alignment of values with the business.'

Achieving that degree of common cause can be difficult. Analysts say that in many cases when families hire a chief executive from outside and retreat to the safe distance of chairmanship, it doesn't work, because the decision wasn't taken properly in the first place. 'It can be led by a short-term problem like the need to sack workers and the family's unwillingness to do it.' That sort of thing can set an unfortunate tone for the CEO's ongoing relationships with both workforce and family, he says.

Another problem can be advisory boards. Usually set up to incorporate family members after a non-family chief executive has been hired, advisory boards often wield too much power and cramp the new chief executive's style. The question of loyalty can also cause problems, particularly if there are lots of family members involved. 'Where does a non-family chief executive's loyalty lie if he's been employed by the older generation, but the next generation is increasingly gaining control?' asks Schwass.

From the other side of the table, the best talent on the market may not be too keen to get involved with a family business - a factor borne out by the Egon Zehnder study, which found that the kind of superstar CEOs who set their sights on running a giant multinational may reject the idea of working for a family concern. A lack of transparency in decision-making can lead to fears that, however well outsiders perform, they'll always struggle to be heard above the voices of those with the right surname.

Wates, the construction company that is in its fifth generation of family ownership, knows first-hand the challenges of bringing in new management. Its first outside chief executive lasted only a few years. 'He broke the ground,' says family member Tim Wates. After an exhaustive search, he says, the company hired current chief executive Paul Drechsler eight years ago.

Second time around, the relationship looks to be working; Drechsler has since been appointed chairman at Wates and still holds on to his chief executive position as well.

Like Ross Warburton, Wates reckons getting the alignment right at the time of hiring is necessary for the relationship to prosper. But he admits it isn't always easy. 'The family have to agree what they want,' says Wates. He says this is aided hugely by a family board he leads, which meets monthly to ensure that, when it comes to the goals expected of the business, just such a united front is presented.

But what type of individual makes a good non-family chief executive, like Drechsler or Marchionne? 'Beyond all the usual attributes that makes a good manager, like confidence and forcefulness, they need to have plenty of patience and a high level of emotional intelligence,' says Wates.

And the returns for such patient and empathetic individuals can be substantial. Loyalty from the family might be the biggest benefit. Numerous studies say non-family executives last longer in family businesses than they do under other company ownership structures. Contrary to popular belief, salary and incentives can also be good. Recruitment specialists say that families often pay outside chief executives more than they would receive at a similar-sized non-family business. That's usually because the family won't give away equity in the business to outsiders when the business is 100% owned. They compensate with higher pay packages as a result.

Warburtons has attempted to bring stewardship of the family business into its pay package for its managing director by offering a long-term incentive scheme. Ross says this helps to align all interested parties to Warburtons' long-term growth ambitions. Wates pays its chief executive more than a similar-sized listed company might, but also emphasises non-monetary factors. 'Pay is obviously important to attract talent, but so is the environment one works in,' says Wates.

So there are distinct advantages to working for family businesses, even as a chief executive. Indeed, as Marchionne's success demonstrates, sometimes the best way of keeping a firm in the family is to take the management of it out of the family.

THE UPS AND DOWNS OF FAMILY BUSINESSES

The powerhouse of Europe's economy might just be the best advertisement for family businesses. Germany has one of the biggest concentrations of family-owned companies anywhere and they range from small Mittelstand businesses to huge companies such as BMW.

A common feature of most of them, even the ones with a part-listed ownership structure, is their emphasis on long-term planning, rather than quarterly profit targets.

'The advantages of family businesses are the more long-term-oriented strategy and the flexible governance that allows them in many cases to react more quickly to changes in the business environment,' says Peter Englisch, head of the Ernst & Young Family Business Centre of Excellence.

Long-term planning is underpinned by a common theme of stewardship running through many families - the concept whereby the current generation runs the company in such a way as to be able to hand it over to the next generation in better shape than it was when they started.

But the emotional jeopardy of combining business with family can often more than outweigh these advantages. Nepotism is a big problem. Typically, the next generation of the family is promoted far beyond its pay-grade because of the sense of entitlement that often comes with being part of the clan. In extreme cases, they can end up driving the business off a cliff.

Families are also not very good at knowing when to give way to non-family professionals, often leaving the decision too late, or mishandling the transition.

And even that cherished long-termism can be a double-edged sword. What if capital is misallocated because the wrong long-term goals are being pursued? Sometimes, those quarterly targets can be good discipline rather than tyranny.


Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today