Creating the Environment Where
Non-Family CEOs Can Thrive
Andrew Keyt
Family Business Center of Loyola University Chicago
Joseph Astrachan, Ph.D.
Kennesaw State University, Cox Family Enterprise Center
Family Business Center of Loyola University Chicago
Tim Blumentritt
Kennesaw State University, Cox Family Enterprise Center
Worldwide, family businesses are the most
prevalent corporate form today. But only rarely
does a single family account for all of a firm’s
employees. Most family firms, if they are to
succeed and grow, must hire non-family
employees and leaders.
“The competition doesn’t
care that we are a
family business.”
— Family Firm Owner
When a family firm hires a non-family CEO,
unique challenges emerge. Like their peers at
other businesses, non-family CEOs are assigned
to generate outstanding business performance.
But, unlike those peers, family business executives
face potentially awkward circumstances. They often
function as superiors on organizational charts to
people who sit on their boards and evaluate their
performance. They manage, develop, evaluate
and even fire the children of the family that
owns the firm.
Given such constraints, how can a family firm create
an environment that gives a non-family CEO the
best opportunity to succeed? What combination
of structures, practices and personalities will
generate a prosperous business, a satisfied family
and a happy executive? How does a family firm
identify, evaluate and support a non-family CEO
who possesses the necessary business acumen
as well as the ability to manage the complex
web of relationships?
Seeking answers to these and other questions,
we examined existing literature and management
theories on family firms, and undertook group
interviews with 28 individuals with direct
experience in such situations. Eighteen
interviewees were current or former non-family
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CEOs or presidents, four were chairmen of family
firms, four were next-generation owners active
in their family companies, and two were a
current family CEO.
Throughout this research process, we have
used the term “professionalization” to describe
management and governance by highly qualified
individuals who are not the patriarch/matriarch.
Too often, discussions of non-family executives
imply that family firms are incapable of building
or employing sophisticated management
techniques. On the contrary, our research and
experience have shown that hiring a non-family
manager to lead a family firm is most often a
well-considered choice to augment the skills
and interests held by the family members.
This article highlights the significant findings
of our research, including the important roles
that boards of directors and family councils
play in generating support and clear direction
for the non-family CEO while buffering the
executive from family politics.
Four Factors in Successful
Relationships Between Family
Firms and Non-Family CEOs
Our research pointed to four key elements that
contribute to a non-family CEO’s success. The
executive must be highly effective in business,
and must possess the capacity and motivation
to mesh with the family’s culture, navigate family
dynamics and cultivate productive relationships.
At the same time, the firm’s principals must
provide the support and direction of a strong
board consisting of both family members and
outsiders, and must empanel an effective
family council that distills the diverse needs
and opinions of family members to deliver
clear direction to the CEO.
1. Business Acumen
Make no mistake: non-family CEOs must be
highly capable performers, regardless of the
means whereby they attain their positions.
But family firms expect character and integrity
as well. In fact, when hiring and governing
outside executives, family businesses tend
to rely more on trust and comfort than they
do on structured control mechanisms.
“If two people are pretty
close (in qualifications),
you always choose character
over competency because
character is what is going
to see you through.”
—Family Firm Owner
Such character skills are necessary for non-family
CEOs to navigate these unique environments,
where business activities mingle with family
members’ outlooks, personalities and needs to
create potentially explosive working conditions.
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Successful non-family CEOs also will influence
the nature of the firms they serve. Family
businesses often hire non-family executives
when an infusion of managerial skill is needed
or when a successful family CEO retires but no
family member is ready or willing to assume the
reins. In either case, a non-family CEO may be
looked upon to lead the business into a future
that may or may not have been envisioned by
the founder or previous CEO.
2. A Strong Board
How can a board, be it a board of directors or
an advisory board, be structured in ways that
offer the non-family leader — and therefore the
firm — the greatest opportunities for success?
Traditionally, a board governs management on
behalf of a firm’s shareholders, responds to and
approves the management team’s strategic
plans, and provides resources and networks.
In family firms, however, the relationship
between a board and a non-family CEO may
take on additional dimensions.
First, a strong board acts as a buffer between
the family and the non-family leader. A family
can deliver too many or two few opinions about
what members expect the non-family CEO to
achieve. While the voices of stakeholders and
shareholders must be given weight, no effective
CEO could reasonably spend time, energy or
social capital responding to every family member
or constantly defending his/her strategic
decisions.
To avert such situations, family members who
serve on the board of directors can step in.
As representatives of the family, board insiders
can take responsibility for communicating their
constituents’ opinions of the proposed plan.
Once a plan is accepted, the non-family CEO
then can defer to the board any second-guessing
by family members.
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Second, an effective board will support the CEO
on unpopular but necessary decisions. Non-family
CEOs are hired to make strategic decisions that
promote success. But when a non-family CEO
deems it necessary to eliminate a business
line managed by a family member, enter a
new market, fire a family member, or move
in directions not envisioned by the founder,
that CEO may need the support of the board,
particularly the non-family directors, to gain the
family’s acceptance. Chosen for their business
acumen and networks, outside directors likely
will exhibit the wisdom to guide the CEO’s
decisions and assure family members that such
actions will benefit the firm’s shareholders.
“I don’t think I would ever accept a nonfamily CEO position without an
agreement by the family to have a
formal board of directors … (I)f you
haven’t got the right CEO, families
will accommodate that (problem)
way beyond when they should, and it
can end up damaging the business. A
board of directors will be much more
forthright and objective in evaluating
the CEO’s performance.”
—Non-Family CEO
3. Comfort with Family Dynamics and Values
While non-family CEOs are hired to move the firm
forward, they also must be adept at navigating
interpersonal dynamics while gathering support
for their business decisions. Successful non-family
CEOs will share the family’s values and will strive
to understand what the family expects of them,
while avoiding entanglements in family politics.
“I think compassion is a key element
in terms of dealing with people.
(You also need) the ability to build
consensus among family members
so that you can get your programs off
in the direction they need to go …
You have to be able to persuade and
convince, sell your concepts and ideas
to move forward. Sometimes that’s
very frustrating because you can’t
move as fast as you perhaps would
(prefer).”
—Non-Family CEO
Beyond generating profits, families may expect
the non-family CEO to contribute to the firm’s
legacy, enhance its standing in the community,
or keep a struggling business line afloat simply
because it was the activity on which the firm was
founded. So important is the cultural and character
fit in evaluating and retaining the non-family
CEO, our research suggests, that lack of such
may trump good business performance.
Understanding the life stage of the firm and
the non-family CEO’s role in that history is also
crucial. A non-family CEO chosen as a bridge
between a retiring family CEO and the ascension
of a junior-generation CEO, for example, will
likely be expected to prepare the future leader
in addition to running the company.
“I would argue that missing quarterly
earnings in a family-owned business is
often times much more tolerated than
in a publicly held business.”
—Non-Family CEO
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4. A Family Council.
A family council is a representative governance
group elected to deal with family issues, draft
family policy, and adjudicate and execute
charitable and other distributions. A council
provides a structured forum for airing family
issues and opinions about business activities
in ways designed to minimize impact on the
firm’s competitive performance and intrusion
on the CEO’s role.
Families who own businesses typically bring
with them strong emotions and jealousies
based on tradition, intra-family sects and rivalries
(among siblings or cousins, for example), and
divisive interpretations of events. Given the
significant amounts of money at stake when
the business does or does not perform to
expectations, such emotions often intensify.
The non-family CEO who is dropped into the
midst of a family where such conflicts thrive
unchecked will face a mighty struggle indeed.
An effective family council will act as the voice
of the family, distilling input from members and
developing a cohesive set of expectations that
are communicated to the non-family CEO in
ways that help the executive align business
goals with the family’s priorities. A good
council also will train family members to think
and act as owners rather than as managers.
“A procedural aid to the success of a nonfamily CEO is having some mechanism
to separate the family disputes
from the business issues. That’s not
to say that you don’t deal with the
family issues, but (the family must
understand) they are separate.”
—Non-Family CEO
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Agent or Steward? A Successful
Non-Family CEO Must Be Both
To date, much research has focused on identifying
the management style that is best suited to family
businesses. Our interviews show that, while
agency theory surely is at work in most family
firms, stewardship theory holds special importance
in the ways that family companies operate.
If you don’t have a genuine regard
for the family and the belief that
the family’s continued ownership
of that business is better for all the
stakeholders … then it won’t work.
Sooner or later, the family will sense
that the CEO is strictly in it as a job.
He’ll never be believed to have the
same depth of commitment as family
owners to the longevity and success of
the business.”
—Non-Family CEO
According to agency theory, individuals are selfinterested; therefore, a firm’s principals must use
control mechanisms to ensure that its managers
(agents) act in the best interests of the firm and
its stockholders rather than their own. Hallmarks
of agency theory include contracts, monetary
and extrinsic rewards, clarity of direction from
principals, and a defined set of expectations.
Stewardship theory, on the other hand, assumes
that both manager and organization perform
optimally when the manager (steward) and
the firm’s principals share a relationship based
on intrinsic motivation, high organizational
identification, and a philosophy of involvement
rather than control. Hallmarks include character
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issues, trust, cultural compatibility, mutual
emotional bonds, and a dearth of strict
control mechanisms.
At the same time, the following examples from
our interviews show the importance of stewardship
theory in the management of family firms:
Our research suggested that successful non-family
CEOs must be both good agents and good stewards.
Evidence illustrating the applicability of agency
theory in family firm governance emerged in
the finding that, because most families seem
to prefer that a family member hold the CEO
post whenever possible, a non-family member
would have to possess noticeably superior
business skills just to obtain the job. Similarly,
under performing managers are more likely to
be removed if they’re not family members.
• Successful non-family CEOs often develop
a heartfelt affinity for and identification with
the family. Non-family CEOs who lack that
affinity — in favor of an exclusive focus on
business performance and compensation
— will likely experience a disappointing tenure.
• The family can improve the non-family CEO’s
odds for delivering solid performance by
using the council structure to insulate the
CEO from the potentially messy process of
distilling individual preferences into a coherent
set of objectives, and clearly communicating
those objectives and expectations to the CEO.
“ … (I)f you begin to see the family’s
ownership as an obstacle to
success (rather) than an underlying
requirement for it, you’re just not
going to be successful. And that
requires the willingness to stick your
ego in the closet from time to time,
honoring the family’s ownership, the
legacy, the history.”
—Non-Family CEO
The finding that strong non-family CEOs bring
needed skills or experience to their employers
— thus supporting agency theory — bears out
earlier research by G. Filbeck and S. Lee, who
reported that larger family businesses with a
non-family presence used more sophisticated
techniques than did smaller family businesses.
Similarly, M.A. Gallo and A. Vilaseca found that
family businesses with non-family CEOs achieved
higher returns than did family businesses with
family members in that role.
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• During a generational transition, a non-family
CEO may be asked to help instill in younger
family members the skills important for eventual
ascension to the CEO position. Successful
non-family CEOs in a mentorship role will require a very clear sense of their place in the family firm’s history, and a willingness to be subservient to the longer-term processes of which they are a part.
Challenges in Selecting
a Non-Family CEO
The pool of possible non-family CEO candidates
— those who are both good stewards and
good agents — will be influenced by several
realities. Executives who have worked for more
demanding public firms may not adapt to the
quirks of a family business culture. At the same
time, non-family members who have worked
with a family firm for a long time and therefore
know the culture may not have the breadth of
experience necessary for successful leadership.
“I’ve stressed very, very strongly with
my children that their number one
responsibility is to be owners and not
to be managers (but) to find the best
person to run the businesses and
give them the room to run those
businesses.”
—Family Firm Owner
To begin evaluating candidates, a family can
develop a framework by analyzing its life stage
and current needs. A company facing a business
crisis may require a CEO with certain skills or
experiences that family members do not possess.
A business seeking a leader to act as a bridge
between generations will likely want a candidate
who can also mentor the future family CEO.
While a bridge CEO may come from among the
long-time employees in the firm, a crisis CEO
likely will not. Still other families may chose
to hire a permanent non-family CEO, reducing
or eliminating their participation in active
management in favor of their ownership role.
Conclusion
To be sure, not all family businesses treat their
non-family managers the same, nor expect the
same things from them. Families vary in their
level of cohesiveness or degree of fragmentation.
Some are naturally more oriented toward business
matters; others lean more toward family matters.
We do not mean to suggest that any single right
type of manager exists — with the specific training,
personality, experience or other attribute that
will guarantee success as a non-family CEO.
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What our findings do show is that family businesses
can structure themselves and govern their non-family
CEOs so as to bolster the non-family CEO’s ability
to move the firm forward while interacting with
the family in productive and rewarding ways.
In closing, we suggest thinking of successful
non-family CEOs as guests at Thanksgiving dinner
who are asked to prepare the turkey. They are
invited into something dear to the family and
are trusted with a key part of its activities, but
they remain guests. The best non-family CEOs
will have the personalities, skills and motivation
to thrive in such settings — generating financial
and emotional rewards for all involved.
“ … As we grew to trust (our nonfamily CEO) he assumed more and
more responsibility, and he was
very comfortable with my family and
with employees. We watched him
really grow people. People
that had been stagnant just kind
of came alive and took on
tremendous responsibility.”
—Family Business Owner
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© 2007 Family Business Center of Loyola University Chicago