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How a Family Firm Should Hire an Outside CEO

THE GLOBE AND MAIL – MANAGING – Thursday, April 8, 1999, B9

Some family members react sensitively to news that they have to look outside the family for professional management.

But it's exactly this sensitivity that requires the hired gun to possess characteristics beyond mere professionalism. It's like choosing a surrogate parent or sibling in a way, because the outside manager can't be divorced from family affairs. It's basically an adoption, family-business style.

"The family partners come to realize that wealth preservation and business performance takes precedence over ego."

When do you need one? Growth usually dictates the time to hire a professional manager. For example, the company may be creating a new product line, moving to a multi-tiered management structure or building export markets. These types of undertakings often require more sophisticated management.

Many family leaders reach a limit beyond which they realize they will need a professional manager to take them further. But the limit varies with families, business and circumstances. For some it comes when annual sales reach $5-million, and others reach it at $100-million.

Basically, the family partners come to realize that wealth preservation and business performance takes precedence over ego, and they must find an outside leader.

Where do you start? The best candidate may be right in front of you. Every family has trusted outsiders – either present from the start or adopted in the formative years. Some become non-family insiders through board membership, as advisers to the next generation or as non-family managers.

Before the search begins, the owners should first decide whether they want to keep the firm in the family or to ultimately sell it. The new leader needs to know the family's ambitions because of the implications for compensation – such as share buyouts – and career. Once the decision is made, the hiring process can begin. No scent of secrecy or hidden agendas is necessary or desirable. The danger is that family politics, family pride and shareholder ego can distort the process. Another risk is that the message of bringing in an outsider can signal that the next generation is neither good enough nor competent.

At this stage, the family is ready to begin the first practical steps toward defining the job and the ideal candidate. It's especially important that the search committee understand the difference between the skills the new leader will need to demonstrate and the personality or "fit" of the candidate.

It's this second set of characteristics that is more nebulous and difficult to assess. Try writing down a set of values and beliefs that operate within the company. A poor fit with these characteristics of the family business is the most common reason for outside professionals to leave later on.

What criteria should you look for? Your list of preferred technical skills, values and beliefs act as the first screens through which candidates must pass. But there are other common traits among successful outsiders in family businesses.

Transitions from one generation to the next are a repeating theme in family businesses. Question candidates about their experience in training or co-operating with younger or less experienced colleagues, and in taking over projects from older mentors or owners. Check on their roles in ownership changes with previous employers.

Candidates must also have a clear understanding of family boundaries. Many family businesses have sacred ground where outsiders tread at their own risk. Candidates should demonstrate some instinct or notions about the topics that are outside the purview of a professional manager. They should understand how to provide leadership to the business while supporting the family partnership. In other words, good outside managers must show diplomatic skills. They work in environments of situational power and fragile authority where they must be impartial, honest and dignified.

They must not take sides. Rather, they should be prepared to let the family resolve its own problems, but also be ready to offer help in exploring options.

That said, the non-family chief executive officer needs to be forthright and strong-willed. The professional manager often must bear unwelcome news and make unpopular decisions. A cocky know-it-all won't last long. Tact is essential, as is a thick skin. The non-family CEO cannot be a hot dog. The best ones are quietly competent with secure egos that don't need public kudos. In a family business, the outside manager must usually be satisfied with behind-the-scenes praise.

In the end, professional managers often bring two capabilities that many business families desperately need. One is the professional skills and advice that turn a limited business into a growth enterprise, particularly in financial management and organizational improvements. The second is the ability to bring closure to recurring disputes when necessary, and to open up other questions to wider discussion.

It takes an astute observer to know the difference, but it's probably the most valuable service that an outsider brings.

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