CEO Succession in the Family Business
17th April 2017 Pascale Michaud, Courtney Collette & John A. Davis
Selecting a company’s next CEO is one of the most significant decisions in the life of a family-owned business.
The success and sustainability of the family’s main asset and source of income, and a significant piece of their identity, rests largely in the hands of the individual selected to be CEO of their family-owned business.
To an untrained observer, choosing the next CEO in a family company may appear apparent and straightforward: the first option is to choose a talented son or daughter of the current CEO—one interested in the work of the business. The next option is to choose a talented relative (a non-lineal descendent), or someone working in the company or from the outside. But it is neither this simplistic nor predetermined as a choice of options, and no family company can afford an error in today’s competitive and fast-changing business environment. An under-performing CEO, or one that is not in sync with the owners’ vision and values, can set a company and a family back, and some companies may never recover or regain their balance, focus and drive.
There is much at stake when transitioning executive leadership. Every family business today must pay close and special attention to the selection of its next CEO, and to the succession process. This begins with the recognition that succession is a dynamic process, rather than a pre-determined decision. Too often, business leaders view the CEO transition as little more than the hand-off of a baton. In reality, the continuity of the family business is a true team effort, with a game plan that is drawn up and implemented over time. It involves both generations of owners and business leaders working together to maintain momentum in the company, and continuing to adapt their succession game plan as needed–even close to the finish line.
During over three decades of advising and studying CEO transitions in family businesses, we have designed, executed, and witnessed a variety of succession plans and transitions, including some detours. Every family business system’s dynamics, goals and timetable are unique. Still, a process that is well framed and executed with discipline¬–and is unhurried, uninterrupted, principled, fair, and transparent–is the surest way to transition to the right CEO. It is worth the owners’ investment of time and thoughtful planning to ensure that the appropriate individual is chosen to take the company to new heights. It is as important that the ownership group, board of directors, and family are united behind the new leader and his/her mandate.
Context Addressed in This Article
In the best of situations, planning for succession occurs far before the leader’s transition. A generous timeframe of a few years allows for planning, discussion, pivoting, and the development and testing of successor candidates. It also provides a valuable period of time for partnering and mentoring between the outgoing and incoming leader, and addressing matters of harmony and balance in the whole executive leadership team.
But of course, sometimes a leadership transition must take place under unfavorable conditions. It may be triggered suddenly, as in the wake of the early death or incapacitation of the current leader, or unexpectedly, such as upon the ousting of a poor-performing CEO.
This article addresses succession under favorable circumstances, in order to provide a benchmark. The succession process described here is typical for a first generation, founder-stage business transitioning to the second generation, though its lessons are applicable to later generations under similar circumstances. Our assumptions of these circumstances include that the company:
- Is privately-owned and family-controlled.
- Is mid-sized (typically with revenue of less than USD $500 million annually).
- Has moderate levels of complexity in terms of the number of business units, employees, facilities, and geographies.
- Does not anticipate abrupt changes of path in strategic direction, leadership, ownership or governance in the next five years.
In addition, this article’s recommendations assume that the:
- Current CEO is competent and in good health, allowing ample time for the process of searching, selecting, and integrating a new CEO.
- Senior generation has ownership control.
- Family’s relationships are mostly healthy, with normal and manageable levels of rivalry or conflict.
- Family strongly prefers a successor from the family, rather than a non-family CEO.
Succession Planning: The Wrong Way
Typically, in a situation like the one we have set, succession conversations begin with the current CEO asking one of these two questions:
- “Which of my children is qualified to take my place?” or
- “How do I divide up the CEO role so two of my children can co-lead?”
Starting here is a mistake, for several reasons.
First, it assumes that the company should be perpetuated instead of sold, which every departing CEO should question before passing the reigns. On a routine basis, the CEO and board of directors should evaluate the industry’s life cycle, the company’s strengths and opportunities for growth, its market value, and the family’s core competencies and goals in order to evaluate whether the business is still the right fit for the family.
Second, it assumes that the next generation is interested in leading, is capable of leading, or is enthusiastic about sharing the leadership role. Sometimes none of these is the reality, nor has it been discussed in any formal way with next generation members.
Third, it does not engage the next generation in the conversation or the future visioning process for the business leadership and ownership, which can lead to frustrations, suspicions, and strained relationships.
Finally, both these questions tend to imply that the next CEO should have similar views and a similar leadership style, or even be a clone of, the current CEO. These leaders quickly zero-in on a chosen candidate to replace them, and the company has to adjust to fit the candidate, rather than the reverse. In reality, most CEO successors need to have a different profile than the current leader: the competitive environment is evolving quickly; the company has reached, or is moving toward, a different stage of growth; and its business imperatives are changing.
Instead of starting in this way, the thorough approach described in this article suggests a dynamic set of steps. If you are not in a position to plan for succession with such a strategic approach, delegate it to an independent board member. If you don’t have a board of directors or an advisory board, appoint an external, unbiased, and trusted advisor in the role of championing and monitoring the succession process.
Succession Planning: A Better Way
First, the big picture concept is that the family ought to clarify what they are trying to pass to, or sustain through, the next generation. This typically includes the core operating business, but often there is more—such as other operating businesses, perhaps some real estate investments, art collections, philanthropic activities, or other pursuits that carry the family’s name and reputation. The entirety of a family’s financial interests and meaningful activities is called the family enterprise.
When considered as a whole, it is easy to see that it takes a team of people in different leadership positions to make the family successful for another generation or more. The CEO of the core business is a critical position, since the business often represents the most important source of income and networking relationships for the family; but that leadership position isn’t the only one in the system. If the family wishes to renew entrepreneurship in new areas, or to build social enterprises or a philanthropic foundation, additional kinds of leaders could be needed. If the real estate portfolio is poised to grow, a different need for leadership might emerge. New initiatives and ventures offer new opportunities and call for different skills.
When families look together at the total family enterprise, and envision where it is today and where the family wants it to be in the future, members of the next generation often respond to the visioning process with relief: they are able to play an active part in thinking about and designing the future of the family enterprise. They see an array of options where they can contribute in active roles, even if this means that some of them will not enter or lead the core business.
When this overall picture becomes more limpid, the future role of CEO of the core business also becomes clearer for many family members and owners. Then the senior generation leader can enter a strategic process for anticipating the future needs of the company and the skill sets required from the next CEO in ways that better respond to future imperatives.
When to Begin the CEO Succession Process, And How Long to Take
The succession process for the business begins earlier than one might think. On the family side, the next generation’s interest in joining the business, or not, is shaped when they are young and hear their parents’ conversations or feel the impact of the company’s life on their family life. Is the family business a source of tension or joy? Is the business an expression of the family’s creative drive and sense of purpose and identity, or is it an obligatory activity? Does the business enhance family relationships, or does it create divisions?
Therefore, members of the senior generation should take care in how they represent the business to young members of the family, and depict a world where there is room for senior and junior generations to work together. At the same time, it is important to instill a sense of professionalism required for the company’s success in the minds of the next generation. Children should know that the company needs to have the best leader possible to maintain its healthy growth. Start early by engaging the younger generation around both the challenges and the positive benefits of the family business, including the business’ constant need for excellence in people, products, client relationships and so on. This will go a long way toward clarifying some of the fundamentals of the transition process many years down the line.
As for the active succession process for CEO renewal, it should start at least three to five years before the current CEO steps down and no longer serves full-time in the CEO role. Exactly how much time is needed depends on many factors, such as:
- How prepared the next generation is to eventually move into leadership roles
- Whether non-family member candidates will need to be considered because of age or skills gap in next generation family members
- How ready the current generation is to depart the CEO position
- How complex the organization is
In less complex contexts, a few years may be sufficient; in larger more complex systems, a minimum of five to ten years is often needed. But the important principle that applies to all family businesses of any size or generation, when aiming to keep ownership and leadership within the family, is the following: The most effective succession transition occurs not when the senior generation is ready to leave, but when the next generation is ready to lead.
Succession is a Dynamic Process
When executed well, succession is a dynamic process, not a pre-determined decision. In the best of cases, if the successor is a family member, there is partnering between the senior and next generations for several years, sometimes for a decade or more. The departing CEO often transitions to the Chair of the Board role as the next generation takes the helm as CEO. In these two positions, the two generations can often partner for many years.
In rare situations, the senior generation is of the mindset that the next generation must lead without the oversight of the senior generation, which lends itself to a clean and abrupt transfer of leadership at a given moment in time. But this is more and more uncommon, particularly at the founder or controlling owner stage. Except under extraordinary circumstances, we advise against it. There is profound benefit potential of the two generations leveraging each other’s skill sets and views of the world to make better strategic decisions for the company, as long as each individual’s roles and decision-making allocation are clear.
STAGE 1: PREPARATION AND PLANNING
The succession process for executive leadership is focused on the long-term needs of the business. In other words, succession transitions are made for where the business is going.
Develop the Family’s Vision for the Business
Begin by developing your vision for the future of your business, even depicting a few very different scenarios of where the business may go. Understand where your business is now, how important some of the headwinds may be in the future, and also what kinds of new opportunities for healthy growth may open up in your core business and into some adjacent or non-related businesses. Changes to your business, your industry, and the business environment are inevitable; carefully analyze these, and envision a few configurations and paces of change into the future. This allows you to depict different options for future corporate needs, including the talent needed in the future leadership team.
- What is the potential for your business to continue to grow and be commercially relevant?
- Where is your industry now, and where is it moving?
- Who or what are the disruptors to your industry and business model?
- How must your business evolve to remain competitive?
- How can you leverage the unique competencies and skills that the business has mastered over time to develop new business opportunities?
- How are your customers’ tastes and behaviors changing?
- How are global mega trends (such as globalization, technology, and demographics) affecting your industry, your region and your company?
- Are you ahead of these changes, or lagging behind them?
- Is there enough room to grow in your current business, or do you need to expand into different business lines, or even sell your current business?
- What are the owners’ financial needs from the business? Can the revenue and profits generated by the business meet those expectations?
- What does your company need in order to thrive and to achieve the family’s long-term vision for the company’s growth and development?
- What does your company need in order to achieve the family’s long-term vision and mission?
Develop the Profile for the next CEO
Given your analysis of these important areas, hone in on the pertinent questions related to CEO succession:
- Given where our industry and business are going, what are the leadership needs of the company into the near future (2-4 years)?
- And from a longer-term perspective (5 years +)?
- What do we expect of our next CEO?
- What are the objectives for the next CEO (as an individual and for the company)?
- What kind of mandate will we give to the next CEO? Squeeze costs? Grow through some acquisitions? Divest some activities?
As you ask yourself these questions, begin to create a profile for the leader based on the company’s needs—irrespective of any individual candidates.
Develop the Vision for the Family’s Role in the Business
Then, develop your vision for the potential continued role of the family in the future business.
This is a wonderful time for family members to talk about their future together. The family owns a common asset – the business – or they will own it together once some ownership is acquired by, or shared with, next generation members. And even if some family members are not owners, they might receive income from working in the company as an employee, or leverage the networks and reputation developed by the company to help their professional career outside of the company. How does the family want to care for that asset collectively? How do they want to nurture it? What do they want from it? Or does the family feel that selling it might be an option that needs further investigation?
Initiate important conversations about the family’s highest and bes