“Family Gravity” and Structured CEO Succession Key Drivers to Long-Term Success of Family Businesses
Feature in Harvard Business Review (April 2015)
Family-owned and -controlled businesses represent 80 percent of companies worldwide, but by not retaining their corporate ethos or “family gravity,” or following a disciplined CEOsuccession process, many underperform or fail to survive according to new joint research from global executive search firm Egon Zehnder and Family Business Network International. The research, featured in the April 2015 issue of Harvard Business Review, involved senior family and senior executive interviews and studies of recent leadership transitions at 50 leading family firms across the United States, South America, Europe, Asia and the Middle East with annual revenues exceeding €500 million.
The lifespan of family businesses is typically limited, with only 30% of these firms lasting into a second generation, 12% surviving into a third and 3% operating into a fourth generation or beyond. Egon Zehnder’s analysis focused on top family-led or -controlled companies – most in the third or fourth generation and all represented among the top three in their geographic markets and industries – and their best practices to unlocking great leadership and improving longevity.
To preserve “family gravity”, the firms studied have at least one key family member at the center of their organization, representing the clearly defined values and common vision, and with a strong personality to align differing interests.
The most successful firms then approach CEO succession proactively, structuring a selection aligned with the firm’s “family gravity” and with a clear hierarchy for considering candidates: family first, internal talent second and external executives third. In the research, 38% of CEOs were family members, and of those who were not, 54% were internal appointees and 46% external.
“Ensuring continuity of family gravity in the next generation remains a key imperative that places an even greater emphasis on CEO succession,” said Joerg Ritter, Global Family Business Advisory Co-Leader at Egon Zehnder. “Even looking at our exemplary sample, nearly 30 percent considered just a single candidate for their top role. A professional, fair selection system and thoughtful onboarding process can help transitions unfold smoothly, creating long-lasting value for the company.”
Egon Zehnder’s research identified two supporting characteristics that set apart the researched firms: establishing a governance baseline; and identifying future leaders from within and outside the family.
- A family and corporate governance baseline should establish independent oversight and maintain a clear separation between family and business issues. Supervisory or advisory boards – with an average size of about nine members – had oversight on 94% of surveyed firms. The share of family members on these boards averaged 46% in Europe, 28% in North and South America, and 26% in Asia.
- The best family firms find their future leaders early and invest in them. Forty percent of the companies studied included potential next generation leaders on their boards and committees to develop their management and governance skills, and to ensure continuity of “family gravity”. For nonfamily executives, cultural fit is often most important in predicting success, in addition to assessing family business competencies, potential and values.
“Sustaining a family business across multiple generations presents complex challenges but can be very successful with the proper leadership planning and foresight,” said Sonny Iqbal, Global Family Business Advisory Co-Leader at Egon Zehnder. “The research indicates a viable roadmap grounded in recognition of the ‘family gravity’ and clearly defined processes for leadership development and succession practices. This course of action can and will position family firms for accelerated growth and more resilient, long-term performance.”
About the Research
Egon Zehnder and the Family Business Network International conducted the global research with 50 leading family-owned or -controlled businesses between January and August 2014. The family businesses surveyed were among the top three in their respective geographic markets and industries, with at least 50% of voting rights controlled by family members, most constituting third- or fourth-generation members. Seventy-seven percent of the European companies, 48% of those in Asia, and 33% of those in the Americas were more than three-quarters owned by the family. At least one key family member and one key nonfamily executive, including 34 chairmen, 12 nonfamily chairmen, 12 family CEOs, and 31 nonfamily CEOs were interviewed.
Read the full article: Claudio Fernández-Aráoz, Sonny Iqbal and Jörg Ritter: Leadership Lessons from Great Family Businesses, in the Harvard Business Review (April 2015).