These days many more family businesses are hiring outsiders as CEOs. Family owners increasingly want to be active owners rather than day-to-day managers. But often they hire the wrong person for the top job. Invariably, that’s because the outsider doesn’t have the culture competence to do the job.
Around ten years ago an increasing number of mid- to large-sized family businesses in Sweden started to hire outsiders to be their new CEOs. This was prompted by a number of factors, including more families wanting to be active owners, but not involved in the day-to-day management of the business. And it was also due to the next generation having, in many cases, less desire to manage the family business. So, an outsider needed to be found to do the job instead.
These trends led to a CEO hiring boom among family businesses. But, instead of making life easier for family owners, in many cases, it made it worse. A lot of non-family CEOs left quickly after getting their jobs as conflicts arose between them and the family. Often the problem repeated itself twice – and family firms were left doubly frustrated. Families were increasingly coming to us and asking: “Why didn’t the process work?”
It didn’t work because neither the family nor the non-family CEO was prepared enough to make it work. The non-family CEO were typically hired from publicly-listed, non-family businesses. And CEOs with these backgrounds thought running a family business would be like running any type of business. In many cases, they weren’t prepared for a situation where the owner is still very present as is the case for most family businesses even when the family take more of a backseat.
But in many cases, the family wasn’t prepared either. Typically, they didn’t spend enough time in preparing for a non-family CEO coming in and what it would mean for the business. They didn’t explain enough about the goals and their values to the outsider CEO. So it was easy to see why there was a clash.
These conflicts led us to ask the question: “How could both sides be better prepared for it to work in the future?” And we came up with the idea of Cultural Competence. So, in addition to the formal competence needed to get the position, like education and experience, the non-family CEO needed to have cultural competence as well. They needed to understand the cultural side of working in a family business and the values of the company.
But it also meant the family business needed to make improvements to reassure the outsider. For example, the outgoing family CEO position needed to be clarified. They could still have a meaningful role, but not a role that would come into conflict with the new CEO. And that’s where improvements in family and corporate governance needed to be made.
Family businesses needed to create an active board of directors with non-family members if the process was to work. And even if they did have a board of directors in place, they would need to change the structure of the board if they were bringing in a non-family CEO for the first time. That’s because there are different requirements for a board under a family CEO than there is for a board under a non-family CEO.
Today, the idea has caught on and more family businesses are now filtering for cultural competence when hiring a non-family CEO. As a result, family businesses are making the right hires and CEOs are staying in their positions for longer.
Of course, as the demand for more non-family CEOs at family businesses has increased their numbers are going up as well. That means there’s more of these specialist CEOs about, which often means family businesses can hire outsider CEOs with family business experience. Effectively, today there is a secondary market for such CEOs. This should make it easier for family businesses to find CEOs with cultural competence.
If family businesses pursue a hiring policy with a cultural competence approach they are much less likely to be disappointed with the outcome of their hires in the future. But family businesses themselves need to be aware that hiring an outsider CEO for the first time may require changing their family and corporate governance structures for it to work as well. It is a big undertaking for all parties involved, but one worth getting right.
Mattias Nordqvist is Professor in Business Administration and The Hamrin International Professor of Family Business and Director of Centre for Family Enterprise and Ownership at Jönköping International Business School in Sweden