Interesting article in the Harvard Business Review on CEO recruitment
Family businesses seem to be more effective at recruiting a new CEO, according to the Harvard Business Review in a recent article (see source below). This article discusses interesting and relevant research on effective CEO succession strategies in family firms compared to non-family firms. The study compared the transition in leadership at 58 family businesses with that at 1,400 publicly traded companies in the USA and Canada. The conclusion is that after three years the family firms show better (cash flow) performance and significantly less risk in the variability of their performance than the non-family firms. What is also interesting is that among smaller family businesses, a family member was appointed as the new CEO in over 80%, while among large family businesses, this was the case in only 13%. Thereby, the smaller family firms did not show the improved performance compared to the large family firms. What makes family businesses more successful in their succession process?
Key insights for a successful succession process
- Many non-family companies often seek their new CEO reactively, following a (sharp) decline in performance. Family businesses, on the other hand, proactively and systematically take more time to search for the appropriate successor.
- In both family and non-family businesses, in about 70% of cases, the CEO comes from within. Separately, family businesses have more continuity and business background to select the right people. There is often simply more work experience, affinity and interwoven knowledge about the company at the executive level.
- Family businesses also score better in attracting outside CEOs. The reason seems to be motivation and drive to seek the best CEO for the company. In family businesses, the stakes are higher for the family and the choice is more critical.
- There is a big difference in the complexity and formal process of recruiting between family businesses and non-family businesses. In family businesses, the number of candidates is often lower, but the quality is better. The more candidates, the less likely the chosen CEO will be unsuccessful. Interesting read.
- Family businesses take more time to properly induct and land the new CEO. This will include greater involvement of incumbent management in order for the new CEO to be successful. In addition, with a CEO from within the company who is supported by the family, the chances of success are also greater.
Advice for CEOs of Family Businesses:
It is important for family businesses to consciously focus on strategic planning for leadership transitions, emphasizing in-depth assessment over formal and complex procedures. Involving dedicated directors in the process can provide valuable insights. Empowering new leaders early and instilling confidence in their abilities is essential to promoting successful transitions and sustaining business performance.
Personal note: a new strategy and only then a new CEO
Many family businesses cite securing continuity as one of the most important themes into the future. However, it is interesting to note that in practice in many family businesses the strategy, the long-term goals, the organization required for this and the translation to the operational processes are limited. Working with 3-year plans, for example, is often limited to the larger family businesses, while planning for the future is proven effective, especially in these times of dynamism and uncertainty.
In many family businesses, strategy formulation is given to the new CEO. He or she is then tasked with making and presenting plans for the future to shareholders after the induction period. Therein lies the great risk of appointing a CEO who may not quite fit the strategy required for the company. The company runs the risk of the CEO making a strategy that fits mostly his/her experience and less what is needed. It is better for continuity and the owners to get the strategy clear first and from there look for the CEO who has the competencies, experience and drive to realize this strategy. This further increases the chances of long-term success. However, it requires preliminary work on the part of the family, but there is time for that in most cases. As long as you start on time.
Gwynt, January 2024
Dirk Harm Eijssen, d.eijssen@gwynt.eu
Source: lessons from large family firms about choosing a CEO, Magazine, Jan-Feb ’24, reprint: F2401A
