Learning to move through uncomfortable issues like leadership succession, compensation, and performance of management constructively is one of the biggest challenges that boards of family businesses face. That came across clearly in a series of interviews we conducted with 19 external and family member directors of major businesses in six countries in early 2019. Those discussions surfaced the most common taboos, as well as approaches for addressing them. They also highlighted, as one director described it, “the additional interpersonal skills and courage to deal with the issues that the board has to have.”
Choosing a successor to the CEO can be an extremely sensitive topic in a family business. The relative currently at the top may even be deeply resistant to the notion of being replaced—and vocal about it. The people we spoke with had some advice about how to encourage open and honest discussions on the subject:
- Build trust.
- Assess independently.
- Be transparent.
Next-Generation Talent Development
Figuring out how to bring the next cohort of potential leaders in early enough to learn the business and gain the skills needed to run it is another major challenge. If directors don’t tackle this, a lot can go wrong. When two third-generation family members were offered executive roles, they declined—leaving the business with no successors. Here are some suggestions for preparing young family members for roles in the business:
- Agree on the rules before they’re needed.
- Codify the rules.
- Create a compensation committee of independent directors
Underperforming Family Executives
One of the thorniest problems is how to deal with family executives who aren’t doing their jobs well. There are several ways to nip it in the bud. Ideally, family members in the business should report to non-family bosses, who get the reinforcement they need to provide regular, honest assessments. But that's not always the case. Below are a few ways to deal with underperforming family executives:
- Non-family supervisors should be given clear direction on expectations regarding how they support and evaluate next-gen members.
- As family members ascend levels, give more oversight by a committee of board members with the engagement of HR.
- Assign every family executive a coach or a mentor.
- Put struggling family members on an improvement plan. if they can’t, offered other opportunities in the business where they can succeed or a path to an exit.
- For underperforming CEOs, have the lead independent director introduce a “long-term” succession process that starts with designing the ideal future CEO profile and clearly defining the performance expectations. Then the board can suggest comparing current CEO performance with the ideal to identify gaps and areas for development and quantify the opportunity cost of keeping the current CEO.
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Full story: Sonny Iqbal, German Herrera and Jennifer Pendergast: Managing the Trickiest Parts of a Family Business, Harvard Business Review (23 January 2020)