External Managers in Family Firms
The CFO candidate came for ten interviews. Ten times he spoke in great detail with the managing partner of the global family company about corporate strategy, responsibilities, and their understanding of his role. Ten times they discussed the values and culture of the organization. And then, at the end of a process which lasted many weeks, this experienced executive said “thanks, but no thanks.” He couldn’t imagine, he told the managing partner – a member of the owning family – that he would ever be able to deal with top management and the family shareholders on an equal footing. And that meant he wasn’t the right person for the job.
A top post still vacant, a substantial amount of time invested and the CEO personally involved – all for nothing? So it might seem. But the story actually serves as a positive example from the world of family firms. Through their professional behavior, the two executives were able to avoid the problems that so often plague relationships between external managers and family-run companies. In more than half of all external management hires, disagreements on culture and roles, different understandings of leadership, and conflicting definitions of responsibilities lead to a premature parting of the ways. 1
Family firms turn to outside executives
This high rate of turnover is no coincidence. Many family firms see the integration of outside hires as a one-sided process – the non-family member must learn to fit in. But this attitude ignores the signs of the times. Family-run companies are increasingly dependent on external talent:
- Demographic change is set to worsen the shortage of skilled professionals – and today family firms already have to go to great lengths to attract outstanding outsiders. In the race for top talent, family-run companies are in direct competition with major corporations, who usually have the edge.
- The international success of many family firms forces them to hire external leaders in order to be competitive at global level.
- In many cases, the next generation of family members does not yet have what it takes to be considered for challenging leadership positions. According to a study by Egon Zehnder, in almost half of all cases candidates from inside the family have significant shortcomings when it comes to professional experience and entrepreneurial traits.2 Consequently, family firms must also seek external solutions.
- The ownership structure of many family firms grows more heterogeneous from one generation to the next. While 30 years ago the company might have been able to fill all executive positions with family members, today that is often impossible. This is due not only to an increasing level of specialization and professionalization, but also to differing interests within the family and different career choices among the next generation. In response, these companies are increasingly turning to outside talent, even to fill top management positions.
- Social and economic megatrends such as digitization also exert enormous pressure for change. These forces mean that family firms also need the right expertise to keep pace with change and gain a foothold in new markets. Again, this can only be obtained by bringing in qualified outsiders.
- Against this backdrop, family firms have to offer external managers more than “just” a secure job and a good salary. From programs targeting members of Generation Y to a deliberate opening up of the corporate culture to embrace other perspectives – companies that truly want to attract talent can hardly sidestep genuine change.
Complexity reduction through diversity: success in a volatile world
Bringing in external executives makes good entrepreneurial sense in any case, especially in light of the increasingly volatile business environment. A fitting description of economic uncertainty is provided by an acronym coined by the U.S. military: VUCA – volatility, uncertainty, complexity, and ambiguity. These words paint an accurate portrait of today’s market situation in which companies must compete, where the pace of innovation is just as rapid as the twists and turns of the global economy. In an environment like this, grand strategies help just as little as traditional recipes for success. And even family firms are increasingly taking a short-term approach.
In these times of VUCA, one of the best ways to stay agile and responsive is to hone the ability to adopt multiple perspectives. Or in short, complexity reduction through diversity. As the ability to generate a smart and rapid response to change becomes even more crucial to entrepreneurial success, being able to think and act based on diverse perspectives will also grow increasingly important. Anyone whose thoughts and actions run on a single track will soon be left behind. The successful leader of the future will be the one who enables their organization to tackle the volatility and complexity of the market from a variety of angles. This works best – and this is especially important for family firms – when the organization makes a specific effort to integrate a diversity of outside perspectives.
Of course, this can’t be achieved by simply hiring managers with unusual backgrounds and viewpoints. Organizations only truly profit from diversity when they can integrate these perspectives and ideas in their own mindsets. What really counts is how well they apply these perspectives for the success of their company and consciously incorporate heterodox viewpoints into their daily business.
An outside perspective adds entrepreneurial value: external managers and board members. These considerations are particularly valuable to family firms, which often have a very dominant organizational culture that tends to inhibit rather than encourage professional, ideological, and cultural differences. There is a persistent and widespread expectation that everyone who wants to stay must, sooner or later, adapt to fit in. But this mindset leads to a great waste of potential – potential which companies cannot leverage until they start viewing diversity of thought and action as an asset.
A simple example serves to illustrate how decisive outside perspectives can be, particularly in mastering crisis situations. Shortly after the beginning of the financial crisis, a leading global family company based in southern Germany had to make a decision about some multi-million-euro investments. Despite collapsing revenues, the majority of the family shareholders argued in favor of the cost-intensive construction of new production facilities abroad. The owners had been planning these investments for years – which meant some of the parties had become emotionally invested in the plans.
The CEO, who was not a family member, realized that the expensive construction project was largely about looking after the interests of certain family members. In some cases, good business sense seemed to have taken a backseat. The executive argued forcefully in favor of delaying the investments, knowing that no one could predict with certainty how the economy would look in the coming years. The owners allowed themselves to be persuaded, and in hindsight were able to admit that the CEO’s critical arguments were correct. Because of his outside perspective, he was able to offer a more objective opinion.
This example shows that although accommodating heterogeneous viewpoints may sometimes call for a conscious effort, they are the best insurance against the business risks posed by monocultural thinking. And this applies not only at management level, but also to the composition of important bodies such as advisory councils. Outsiders with relevant business experience can make an important contribution here, as long as they are professionally selected and possess outstanding qualifications. Mentoring by non-family executives is especially valuable for the next generation of the owning family. As talented family members are usually entrusted with positions of responsibility much earlier than comparable external managers, they stand to benefit all the more from professional mentors, a role ideally played in family firms by outsiders.
Tailored corporate governance and a value-based culture
Informal structures often play a more important role in family firms than in other companies. Many family firms have embedded the family’s functional principles in the firm’s organizational culture. For example, important business decisions are made not at official board meetings, but around the kitchen table. The company founders are often strong figures of authority. And there are a multitude of unwritten rules which have a tangible impact on the day-to-day workings of the firm.
The primacy of such informal structures usually means one thing to an outsider: a lack of transparency. The power dynamics within the owning family are often too complex; the path by which ideas translate into corporate decisions is insufficiently formalized. For non-family managers, this presents a significant hurdle on the road to success. Learning to navigate the power and decision-making structures takes a long time.
The less these informal structures shape daily business, the faster outsiders can develop to their full potential – to the benefit of the company. Clearly defined organizational and decision-making structures that apply to everyone are therefore key to facilitating the rapid success of external managers within the company. Far from preventing the family from shaping the corporate culture, good governance structures make the process more professional. They codify the unwritten procedures and rules, anchoring them as the functional core of the company. Clear organizational rules delineate professional, binding, and transparent structures for all concerned. 3
Family firms often have a distinctive set of values, usually originating directly from the mindset of the owning family. These values lead to the development of a culture that is significantly more important to the company’s day-to-day workings than it would be in a non-family company. Together, the values and the culture provide a solid foundation for professional governance structures. At first glance this might seem like a paradox – indeed, many observers point to a family-led corporate culture as an obstacle to greater professionalization. However, values such as “cross-generational thinking,” “innovation,” and “strong regional roots” are principles that can guide an entire organization. They can serve to solidify a foundation on which the company can build a stable governance framework. The structures of a company align with its values and culture, not the other way around.
Finding the right candidate: the three phases of a successful search
With professional governance and an open mindset, family firms offer the key conditions for an external executive to leverage their full potential. On this basis, they can establish a systematic, professional search process which comprises far more than “just” selecting a suitable candidate.
Figure 1: A professional succession process is made up of three phases
Professional search processes begin long before suitable candidates are contacted. The run-up to the actual search stage is critical to finding a good match. In this phase it is essential that the owning family and board reach agreement on which competencies the new executive should bring to the table, how their role will be defined, and what personal characteristics are of particular importance to rapid integration in the company culture. This works best when the organization has a unified understanding of its values, culture, and strategy.
Often incorrectly called “soft” factors, culture and values provide an important set of principles which can be used to draw up a detailed, tailored profile of the desired candidate before the actual search even starts. This applies in particular to the specific competencies that every executive should bring to the vacant position. This may seem self-evident, but it is a point that is often overlooked. When it comes to the skill sets of their own management, many companies take a one-size-fits-all approach. That is a mistake. Of course certain competencies are always necessary, like being results-oriented and having team leadership skills. However, a specific leadership role also requires a specific skill set. This is why every search phase starts with a clear definition of responsibilities and ends with a detailed list of competencies required of the candidate. It is helpful for owners, shareholders, and board members to discuss the successor profile in order to uncover any disagreements at an early stage and resolve them whenever possible. If this does not happen, soon after taking up their new roles the new hires will find themselves caught between the differing expectations of the various stakeholders. Uncertainty and a significantly longer integration phase will then follow – or, in the worst case, a premature departure.
One useful method of reaching a consensus on the skills most important to the company is the competency model. Based on their corporate values and strategy, companies develop a list of qualifications and abilities to serve as the least common denominator of its entire management. This has the advantage of applying a single, individually adaptable evaluation framework to both family members and external managers which aligns with the organization’s overarching goals. 4
Systematic and professional: from interview to integration
Once a candidate’s competency profile has been shown to be a good match, there are still some hurdles to be cleared on the road to a successful hire. The professional structure of the search and selection process is subsequently as important as providing systematic support to the selected candidate at the integration stage.
During the selection phase, companies should pay close attention to analyzing the candidate’s abilities – looking at both their past and their future. To what extent have they demonstrated their commitment to values which are of particular importance to the company? How have they handled setbacks in the past? What positive references can the candidate provide from previous jobs? Such questions give rise to interesting findings which can only emerge from detailed and focused discussions.
Scrutinizing the candidate’s past is only one aspect, however; looking at their future potential is just as important. Will the candidate be capable of significant professional growth in the future? Which traits support the conclusion that they will continue to develop their potential for the benefit of the company? In this analysis of the candidate’s potential, it is especially important to consider “soft” personality traits such as curiosity, focus, and a strong sense of empathy.
The selection of a suitable candidate is an important milestone in the succession process, but success is still not guaranteed. The first 90 days after the new hire starts their new job should be choreographed to facilitate quick and lasting success. In this initial phase the company has many means at its disposal to make the onboarding process significantly easier – allowing the new leader to apply their potential all the more rapidly for the benefit of the company.
Indeed, the integration of an external hire ideally begins before their first day at the company. Before they even officially start their new job, independent consultants can familiarize them with the most important challenges they will face in the first weeks and months. The same goes for key stakeholders and the manager’s team. In addition, it is important to map out the long-term strategy before day one and define opportunities for initial, rapid results.
After the newcomer joins the organization, intensive feedback is necessary to help them succeed quickly. It also lets them hone their awareness of the do’s and don’ts of their new company’s culture. In addition, they have to gain an understanding of the interests of different players in the firm, from the CEO to the key board members and shareholders. And it is instrumental for the executive to develop a feel for the expectations of their own staff. This way they will rapidly create a dynamic team around themselves that will successfully implement their initial important decisions.
Outsider? Rethinking attitudes towards external managers
When profiles and expectations for roles and competencies have been clearly defined and the right candidate found and successfully integrated, non-family executives usually stay with the company for many years. 5 But despite this, even when they have successfully filled top positions for many years, the “outsider” label seems to stick. “An external manager,” people say, and the message is always implicit – you still don’t really belong.
Given the growing demand for external managers, it is surely time to rethink this attitude. Many highly successful executives in family firms identify deeply with the values and culture of the organization and of the owning family. They in no way consider themselves outsiders – quite the opposite, in fact. They see themselves as essential pillars of the corporate culture, as part of the family.
Family-run businesses should aim to cultivate this sense of belonging.6 When externally hired managers are able to become part of the family, metaphorically speaking, family firms can create even stronger ties of loyalty than they had before. To take advantage of this opportunity, however, they must first establish a culture of welcome that lives up to its name. They must embrace the outsider – who they sought out, after all – just as they would welcome a new member to the family; which means that after a short and critical appraisal, everyone does their best to make the newcomer forget they were ever anything but part of the family.
This article is a translation of an expertise first published in 2014 in the Lexicon of German Family Firms.
1 Internal Egon Zehnder analysis of management succession in 400 German family firms with revenues between €50 million and €1.5 billion in the period from 2001 to 2009.
2 ibid.; a wide variety of instruments are available to companies for qualifying the next generation of the family for leadership positions at an early stage. However, this calls for systematic and long-term analysis and development measures. Egon Zehnder has developed effective solutions in this context, not least as part of NextGenLAB and through systematic support for succession planning.
3 On the topic of governance, cf. Koeberle-Schmid, A.; Witt, P.; Fahrion, H.-J. (2010). “Gestaltung der Governance im Familienunternehmen. Gremien und Instrumente der Business und Family Governance,” Zeitschrift für Corporate Governance, 4/10, pp. 161–169.
4 As a next step, family firms can have their entire management – family and non-family – evaluated in line with the defined competency model in a Management Appraisal. This scientifically based analysis shows precisely how well the management team matches the needs of the company. Cf. Gerhardt, T & Ritter, J. (2004). Management Appraisal: Kompetenzen von Führungskräften bewerten und Potenziale erkennen, Campus Verlag.
5 Stiftung Familienunternehmen. Die Verweildauer des Managements von Familienunternehmen und Unternehmen im Streubesitz, 2010.
6 On the significance of emotional ownership for non-family employees in family firms, cf. Sieger, P; Bernhard, F.; Frey, U. (2011). The Committed and the Happy: Exploring the Effects of Justice and Ownership Perceptions among Non-family Employees. Springfield: IFERA – International Family Enterprise Research Academy, 2011 – 11th Annual IFERA World Family Business Research Conference – Palermo, p. 20.