Culture fit takes priority in finding the right executive for a family-owned company’s next phase
90% of American businesses are either family-owned or controlled[1]. So, as executives age and the business’ needs change, it’s necessary to think about the future. How can a family-owned company maintain its legacy and simultaneously push its business into a new era?
John A. Davis, who leads the Family Enterprise Programs at MIT’s Sloan School of Management, conducted a multi-year study of multigenerational family wealth, and found three paths that family wealth can take over time, described below[2]. Because most families with moderate to significant wealth hold most of their assets in the form of an operating company that they own and control, the success of the business largely accounts for the financial success of the family.
As family-owned companies age, they face a combination of common hurdles:
But it’s clear that companies must overcome these obstacles to avoid the two negative outcomes above (Three-generation or Quick Descent paths). To do this, companies may need to bring in one or more outside experts to help catalyze change, spur growth, improve quality, costs and/or increase profit.
To set the business on a successful regeneration path, families have the option of recruiting an outside executive to lead the most important aspects of the business. This decision may come about for a few key reasons:
When beginning the process of recruiting an outside leader, privately owned and equity-backed family businesses could run into different hurdles. With the former, there could be significant resistance internally. Clark says, “If it’s tightly held, the owners are often reluctant to share information with non-owners or non-family.” Also, family-owned companies may not have access to their industry’s top talent, which means relying heavily on a hiring firm that’s not as familiar with the company’s culture and operations.
Equity-backed businesses will have more access to potential executives, but the ultimate decision requires input from investors as well as family. In this case, the family has to remember to put the business first and consider the needs of its stakeholders. This could result in choosing a leader that may not be the family’s first choice.
Once a family-owned business has opted to replace or augment the existing leadership team with outside leadership, it’s crucial to find a leader who’s a good fit. There may be general characteristics that define a great leader (e.g. willingness to take risks, strong business acumen, etc.), but moving into a family business requires a more nuanced skill set.
Family businesses also need a leader who’s self-disciplined and knows which battles are worth fighting. This executive must be flexible and show a willingness to juggle priorities as needed, and he or she has to foster a collaborative environment[4].
Clark points to New England Coffee as a prime example of family businesses “understanding how outside employees are valuable”. The family-owned coffee company recruited Uno Foods SVP Chuck Kozubal in 2011. As President and COO, Kozubal oversaw the company’s sale to Riley Foods Company. He left once the deal was closed and Jim Kaloyanides became the fourth, and last, generation of Kaloyanides to run the company.
During the search for an outside executive, Jim Kaloyanides says the family knew it was of high importance for a leader to work well within a family environment. “The qualities that were at the top of the list were the ability to communicate and having a comfort level working with owners with diverging opinions about where the business should be, sacred cows and things of that nature,” he says.
New England Coffee’s approach to outside leadership steered the company forward, maintaining a legacy that has endured since 1916. A huge part of their success required a focus on an abstract metric – culture.
Kaloyanides affirms that culture plays a huge role in making this decision. He says, “In a family business, you do need to have that personality where you understand you’re in charge, but ultimately the family is what you need to manage, being able to work with them and understanding their sensitivities and desires.”
When it comes to choosing the right executive, BSG has found that two assessments in particular are critical to optimizing for a successful outside hire:
Outside leadership is often a necessary step for a family business that wants to survive. With the right mindset and an understanding of how new leadership will fit into the existing culture, companies can find their next great leader. Outside executives can do more than offer a fresh perspective – they can position a family brand for continued longevity.
NOTES: For more on BSG’s Culture Assessment tool as well as other key assessment and performance optimization tools, please see https://www.bostonsearchgroup.com/talent-toolbox
[1] Inc. (2019). Family-Owned Businesses. Retrieved from: https://www.inc.com/encyclopedia/family-owned-businesses.html
[2] Cambridge Institute for Family Enterprise Study on Multigenerational Family Wealth (2014), as described in Enduring Advantage, 2nd Edition by John A. Davis. https://johndavis.com/enduring-advantage-collected-essays-family-enterprise/
[3] The Young Entrepreneur Council. (December 28, 2018). Small Business Trends. Retrieved from: https://smallbiztrends.com/2016/01/leadership-in-family-owned-business.html
[4] Ballini, Beatrice, et al. (September 22, 2017). Leading a Legacy: How Outsiders Can Thrive as Family Business CEOs. Retrieved from: https://www.russellreynolds.com/insights/thought-leadership/leading-a-legacy-how-outsiders-can-thrive-as-family-business-ceos