Family businesses often gravitate toward keeping their top leadership roles within the family. A survey of 53 global firms reveals that most family businesses follow a clear hierarchy when considering candidates, giving preference to family first (38 CEOs were family members), followed by internal talent and external executives. However, just because your talent will likely come from within your company does not mean your succession planning processes do not matter. Family company Boards must create and maintain strong succession plans that consider both internal and external talent, as well as development plans for potential successors—and do all this while balancing the values and priorities of the family with the demands of growing and sustaining a business.
Succession Planning Pitfalls and Solutions
There are several common traps family-owned businesses fall into when succession planning:
Pitfall #1: The pool of candidates.
In another study we conducted of 50 family-owned companies across 18 countries, nearly 30 percent of 50 family-owned companies considered only one candidate for CEO, and about two-thirds did not follow a structured selection process. In some cases, the CEO decision was based on knowing the person or recommendation of a trusted person.
Solution: Professionalize your succession planning process, taking into account development time for internal candidates and including external candidates in the mix to ensure you truly considered all of your options. (Note that internal development is more difficult in some countries—particularly in China, where the one-child policy significantly limits the number of family members.)
Pitfall #2: The founder isn’t ready to cede control.
For first-generation founder-led companies, the founder’s ability to “let go” is often the biggest challenge for CEO succession. Many founders hope that the new CEO will simply do things his or her way with more success and growth. This is especially true in China, where first-generation founders lead most of the family businesses and they alone decide on both business and family priorities.
Solution: Founders must strive for strong self-awareness and a clear long-term vision of the company, which will allow them to see the key competencies and characteristics to look for in new leadership. Additionally, the level of control and empowerment of the new CEO should be defined through frequent communication, especially during the on-boarding process. Moreover, founders must have some type of role, otherwise they may find an excuse to take control again.
Pitfall #3: The lines between management, the family, and the Board are too blurry.
Often when there is crossover between management, the family, and the Board, it is difficult to separate the tasks of managing the business and overseeing it.
Solution: Companies must clearly define the role of the family, the Board, and management. This clarity of roles allows converged views on values and culture, transparency, trust, and communication that includes disclosure of relevant financial and operational information, internal processes of management oversight, and control. The answer lies in the family having clear rules on how the family will work among its members and how the family will work with the business. Decisions should be made in the interest of the business first and not skewed based on the interests of the family.
How Companies Can Prepare for a Smooth Leadership Transition
For strong CEO succession planning, we have identified six best practices that include:
- A clear role specification for the CEO
- Assessment of the CEO on the basis of performance and potential
- Proactive development of internal leadership talent
- External scans of potential CEO candidates from the market
- A robust CEO integration process
- Emergency planning to provide for a sudden or unexpected situation
Although there is broad agreement on these practices, only a small number of family businesses fully apply them. An independent chair should drive the succession process, and if the CEO and Chair roles are combined, he or she must be extremely open-minded and open to self-development.
Having a transparent and fair CEO selection process along with a thoughtful on-boarding process can help the succession process unfold effectively. Our research shows that companies can prosper if they establish good governance as a baseline, preserve family values, identify and develop high-potential executives both within the family and outside it, and bring the right discipline to their CEO succession processes.