Succession planning is among the rarest of the critical, and complex transition decisions faced by family businesses. The choice of who will take the helm as CEO can set the trajectory for the business's future and impact the family dynamics for years to come. This decision becomes even more challenging when the choice is between multiple family contenders who appear equally qualified, or between a single family member and an non-family CEO, or a combination of both variables. The stakes are high, and the decision must balance the needs of the business with the values and relationships within the family.
Navigating the Dynamics: Family Contenders vs. External CEO
Family Contenders: The Emotional and Legacy Considerations
Family businesses are deeply intertwined with personal relationships, legacy, and identity. When choosing a successor from within the family, these factors can complicate the decision-making process:
Emotional Attachment: Family members often have a strong emotional attachment to the business, seeing it as a continuation of the family legacy. This attachment can lead to intense competition among siblings or cousins, each vying for the leadership role. The emotional dynamics can sometimes overshadow objective assessments of each contender's capabilities.
Equilibrium Disturbance: All systems seek balance (equilibrium) and family-business systems are no exception to this principle. Enterprising families with multiple branches tend to develop patterns that include a power branch, one or more enabling/facilitating branches, and one or more marginalized branches. When a generational leadership transition takes balance, disequilibrium can occur when the leader(s) are selected from a branch(es) other than the power branch.
Identity Protection: For many family members, the business is a significant part of their identity. Choosing one family member over another can create feelings of rejection or inadequacy, potentially leading to long-term family conflicts. The decision may also be influenced by the desire to protect the family identity, which can make it difficult to consider an external candidate.
Preserving Legacy: A family CEO is often seen as the best or only avenue for preserving the family's legacy within the business. However, this can lead to the appointment of a successor who may not be the best fit for the challenges the business faces, particularly if those challenges require fresh perspectives, skills, and innovative approaches.
External CEO: The Strategic and Professional Considerations
On the other hand, bringing in an external, non-family CEO offers its own set of advantages and challenges:
Objectivity and Expertise: An outside CEO brings a fresh, objective perspective to the business, unencumbered by family dynamics and emotional ties. They often possess the professional expertise and experience necessary to navigate complex market challenges, drive innovation, and implement strategic changes.
Business Over Family: An external CEO is more likely to make decisions that prioritize the long-term success of the business over family interests. While this can lead to better business outcomes, it may also create tension within the family if members feel their interests are being sidelined. Common examples are family members being removed from roles and exited from the company or repositioned, long-term key/legacy employees being dissatisfied, and family “perks” being curtailed.
Integration Challenges: Despite their expertise, an external CEO may face significant challenges in integrating into the family business culture. They may struggle to gain the trust and support of family members, particularly if the family perceives them as an outsider who does not understand the family's values, history, and strategy. Legacy employees may resist the change required for an outside non-family CEO to achieve their mandate – maximizing shareholder value.
Risk Tolerance: Successful non-family CEOs have breadth and depth of experience the family often lacks resulting in an imbalance in appetite for risk between the family as a whole and the non-family CEO. Complexity increases when the risk tolerance has significant differences among family members. A critical governance (board/owner) function is the establishment of a documented risk tolerance framework to enable successfully navigating the transition to a non-family CEO.
When Things Go Wrong: The Role of Ego and Identity in Succession Decisions
Ego and identity play significant roles in the decision-making process for CEO succession. As discussed in previous explorations of family dynamics, the ego can drive family members to protect their status and identity within the business, sometimes leading to decisions that prioritize personal interests over the best interests of the business. Despite intentions to the contrary, humans are subject to subconscious default behaviors that drive decision making. This dynamic can manifest in several ways:
Inertia and Ego: Family members may subtly or overtly resist the idea of an external CEO because it threatens their established roles and the family's control over the business. This resistance can lead to a compromise in the selection of a leader that maintains the status quo and allows the family system (and its associated strengths and weaknesses) to continue.
Decision Paralysis and Compromise: The fear of making a decision that could cause family conflict or hurt relationships can lead to decision paralysis. In some cases, this may result in the appointment of multiple leaders as a way to avoid conflict, even if it is not the best decision for the business. This choice inevitably leads to more conflict which erodes accountability and confidence in leadership.
Power Dynamics: In families with complex power dynamics, the decision may be influenced by the desire to maintain or shift power within the family, rather than focusing on what is best for the business.
Making the Optimal Choice: Balancing Family and Business Interests
When faced with the decision of choosing between family contenders and an external CEO, it is essential to approach the process with a clear and objective framework. Here are some steps to consider:
Assess the Business Needs:
Evaluate the current and future opportunities and challenges the business faces. Consider whether the family contenders have the skills and experience necessary to address these challenges, or whether an external CEO might be better equipped. This requires objectively engaging family members, employees, and outside partners (advisors, customers, vendors) to remove blind spots by evaluating all stakeholder perspectives as possible.
Evaluate Leadership Capacity:
Conduct a thorough assessment of each family contender's leadership capacity, including their ability to navigate family dynamics, drive business strategy, and lead the organization through change. Avoid making this critical decision a “popularity context” by using objective tools and assessments to evaluate leadership potential and culture fit.
Consider the Family Dynamics:
Understand the potential impact of the succession decision on family relationships and power dynamics. Mark Twain said, “familiarity breeds contempt and children.” William Hazlett said, “familiarity may not breed contempt, but it takes the edge off of admiration.” Bias in family systems is created because we see family members through the lens of our experience with them but, we only ever see them in part. Consider working with an outside facilitator to engage in open and honest discussions with family members. Seek to understand hopes, concerns, and manage expectations. Consider the long-term implications of the decision on family unity and legacy.
Explore Hybrid Solutions:
In some cases, a hybrid solution might be appropriate, where a family member and an external CEO work together in leadership roles. While arguably the most complicated approach, this can provide a balance between maintaining family involvement and bringing in external expertise. If this solution is selected, having outside board members (advisory or fiduciary) is a critical component for success. Ensure the “rules of engagement” are clear for both parties.
Additionally, an argument can be made for shared leadership at the top among family members. We've seen this arrangement bring considerable success when roles and decision-making are clearly defined and, more importantly, the leaders focus on ensuring the health and strength of their relationship is the top priority.
Seek External Guidance:
Engage a neutral third-party advisor or consultant who can provide objective insights and facilitate the decision-making process. This can help mitigate the influence of ego and ensure that the decision is made in the best interests of the business and the family.
A skilled advisor, consultant, and/or board member will start by working with the family to establish a prioritized set of criteria for succession and develop an objective evaluation pathway.
Conclusion: Prioritizing the Long-Term Success of the Business
CEO succession in a family business is a complex and emotionally charged decision that requires careful consideration of both family and business interests. Whether choosing a family contender or an external CEO, the ultimate goal should be to select a leader who can navigate the unique challenges of the business and drive its long-term success. Prioritize the best interests of the family by approaching the decision with objectivity, transparency, and a focus on the best interests of the business. This mindset increases the likelihood of a smooth transition and continued growth for future generations.