Is hiring professional CEOs from outside the family the only way to improve family businesses in the second generation?
"Indeed, the major challenge is how to attract and retain top-notch professional managers. In family business, compared to non-family business, there are very few ways you can provide incentives. In particular, outsiders always know the family members can get the top job, so there is less incentive to go to the company; also if it’s not publicly traded, you can’t get compensation [by way of] options or shares in the company, so there needs to be a big pay-off for the work of these guys.
Family business is struggling with these issues and there is no doubt about it. But there are some creative solutions for the family firms to attract professional managers. For example, phantom stock option plans work exactly like those stock option plans, except they are phantom because the stocks are not publicly traded. But they [mirror] the increase of the value of the firm. So there are ways family businesses can attract professional managers, and there are ways family businesses can work with professional managers in the firm.
All in all, I believe this is a big challenge for the family: Those who are open and willing to accept professional managers can succeed.”
But maybe the family owners are worried that the professional manager will take over the company?
“Or hijack the firm. I had a conversation with some local people and found they are afraid that a professional manager might hijack the company from the family. But these concerns do not have support in the data. Proper corporate governance can alleviate this concern. As long as the family sits on the board, they can fire the CEO if that person doesn’t perform.
I think the risks are not that high. I understand the emotional feeling and the fear, but if you think about it rationally – you know, you don’t hire the guy just off the street, you look at his track record. And if she or he does something that’s not good, they have a lot to lose as well. I think if there is proper corporate governance and a proper contract in place, the risk of stealing or hijacking companies from the families is minimum. And the data is very strong in suggesting that the value of a family business goes up when professional managers are brought in.”
Do you think there has to be a policy on the succession issue?
"I think that it is primarily up to the family to make that decision, it is the will and desire and the leadership of the founder to have sufficient foresight and desire to ensure that the legacy she or he created continues. It’s in the best interest of the family unit, in the long term, to maintain a structure that would be embraced by the entire family through family meetings.
So, creating the family mission, the family charter and the family constitution are all activities that families have to embrace, and they have to internalize and ask questions such as, who are we? What do we stand for? What is important to us?”
If you had to answer these questions in your own business, what would the answer be?
Dr Amit has published extensively his empirical and field research on a broad range of issues that relate to Families and their businesses and is frequently quoted in the press. For the full story, read The Cost of Control: Managing the Growth of Family Businesses.