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When Family Isn’t The Answer

Recruiting non-family executives into the family business

Stephen P. Miller

Stephen P. Miller is executive vice president of The Biltmore Estate in Asheville, North Carolina.

A successful family business often grows beyond the family’s ability to manage it alone. Family businesses lucky enough to be in this position must think about professionalizing the business and bringing in non-family executives with specific skills to help them lead the business. Done well, it can be a beautiful thing for family owners and non-family executives alike. Done poorly, it can be a source of conflict and disappointment and can do serious damage to the health of the business and the career of the non-family executive.

First Things First
What makes a family business different from a publicly held business? While there are many answers to that question, the most fundamental difference is in the multiple perspectives brought to bear on the family business. These differences are simply and elegantly communicated in the model shown below. This model, developed by John Davis, president of the Owner Managed Business Institute and a senior lecturer at the Harvard Business School, and several of his colleagues, is commonly used by family business consultants and educators.

There are seven different positions in the model. The perspective a member of the family who has ownership in the family business but is not involved in the management of the business (Position 4) might be different from the perspective the family CEO (Position 7) will bring to a decision about dividends. Perhaps the family owner who is not involved in management is most interested in receiving dividends paid out of earnings, and the family CEO is most interested in reinvesting those same earnings back into the business to fuel future growth.

It is most often differences in perspectives rather than differences in personalities that cause conflicts in family businesses. It is essential that everyone involved in a family business, including non-family executives, understand and respect these differences in perspective.

The Three-Circle Model of Family Business

Three-circle model The Three-Circle Model describes the family business system as three independent but overlapping subsystems: business, ownership and family. Any individual in a family business can be placed in one of the seven sectors that are formed by the overlapping circles of the subsystems. For example, a shareholder who is not a family member and not an employee belongs in sector 2—inside the ownership circle, but outside the others. A family member with ownership but who is not an employee will be in sector 4. Finally, an owner who is also a family member and employee would be in sector 7, which is inside all three circles.
Source: Kelin E. Gersick et al., Generation to Generation: Life Cycles of the Family Business

Understand Why
Make sure you understand why you are thinking about employing one or more non-family executives in the business.

Is it because you need skills that neither you nor other members of your current management team have to help you grow your business to the next level? Is it because you are thinking about retiring in the next few years and no member of your family is interested in or prepared to take over your responsibilities? Is it because you don’t feel that family members who are involved in the family business are capable of assuming additional leadership responsibilities? Are you looking for a “magic bullet” to solve a major business or family issue you face? Being honest with yourself about why you are thinking about investing in non-family executive talent is essential. The first three reasons listed above are probably good ones. The search for a “magic bullet” is likely to lead to an expensive and frustrating failure.

Take Your Time
Think deeply about the kind of non-family executives you want to employ and take as much time as you need to select the right ones.

It is most often the differences in perspectives rather than differences in personalities that cause conflicts in family businesses.

If you decide to bring in non-family executives for the right reasons, this becomes your most important task. Remember that all employment decisions are either win/win or lose/lose. If your selection process is sound, you dramatically increase your chances of achieving a win/win outcome. Clearly define the roles, goals and responsibilities you have in mind for your non-family executives. Write them down. Make a list of the technical skills the person you will hire must have. Make another list of the leadership skills and personality traits the person must have. Think about the kind of person who will best fit the culture of your organization. And think about your core values: Your successful non-family executive must share them. Then, no matter how much pressure you may feel to hire someone as soon as possible, keep searching until you find the person who meets your criteria. If you are worried about how long that might take and how much work is involved, think about how much of your time and money it took the last time you had to fire someone. Time and effort on the front end will earn significant returns over time.

Be Open
Share complete information openly with your non-family executives.

This can be difficult for family business owners who are used to keeping information about their business close to the vest. But professional business ex8ecutives are trained to make sound decisions based on analyzing information. They can’t do their job without it. So, tell them everything. Share all of your financial data, market information, legal and ownership agreements—everything. Make sure they understand what you expect to be held in the strictest confidence, as they have a responsibility to honor that requirement.

Strategies for Family Business Owners Hiring
a Non-Family Executive

1. Understand why you are going outside the family.
2. Be patient to make sure you hire the right one.
3. Share information openly and honestly.
4. Set and share clear expectations.
5. Compensate with an ownership mentality.

Define Goals
Be as clear as you can about what you hope to achieve with the business and in your family.

What are your goals for the business? What role do you want your non-family executives to play in determining strategy and direction? How do you expect your non-family executives to interact with family members—those who have ownership in the business and those who do not? The more you can tell them, the more likely it is that they will be able to help you reach your goals.

Compensation
Design a compensation system to create as much of an ownership mentality in your non-family executives as possible.

The first question to consider is whether or not you want to offer actual ownership in your business to non-family executives. There are no absolutely right or wrong answers to this thorny issue. Some family business owners are comfortable with offering ownership positions, many are not. If you do decide to offer ownership, be sure to think about what will happen if you and a non-family executive decide to part ways. That can present a difficult and expensive problem to solve unless an ownership agreement has been carefully thought out and agreed to in advance. Many family business owners opt instead for cash compensation packages designed to align owner and non-family executive incentives. Such plans often include market-based salaries, annual cash bonuses tied to performance and long-term incentive plans that simulate stock options in a publicly held business that are based on increases in the value of the business over time. Whatever approach you decide to employ, engage a compensation expert and an attorney to help you think through all of the issues and to design a plan that will meet your goals.

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Steve Miller Meet the Author
Stephen P. Miller is executive vice president at The Biltmore Company in Asheville, North Carolina, which owns and operates Biltmore Estate and several related businesses. He can be found on the Web at www.biltmore.com.

 

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