A surprising number of family firms have a family member running the show. How can that be a good idea? Perhaps it's a question of fitting the job to the person, and not the other way round.
What is the biggest problem with family businesses? Probably, it is nepotism, and the related problem of underqualified people taking top management roles. In the classic scenario, the boss’s son is parachuted into the CEO’s job, and he is not good enough to be in that position. This is a worry for investors, clients, suppliers and employees - not to mention family members who want the business to flourish.
That seems like a good argument for keeping family members away from important jobs. But looking at the list we compiled last week of the top 10 biggest 100-year-old family firms in the UK it was surprising to see how many of them are managed by family members. For example:
- At Swire Group, A largely Asia-focused British conglomerate, Barnaby Swire is the current chairman, and his cousin Merlin is chief executive.
- At Bibby Line, which centres of shipping but has many other interests, Sixth-generation Michael Bibby has been managing director since 2000.
- The Marshall Group, which spans motoring and aerospace/defence, is run by fourth-generation Robert Marshall.
- Building firms Willmott Dixon’s group chief executive Rick Willmott is the fifth generation to lead the business.
We might add to this some other international examples, such as Loutfy Mansour, who runs the investment wing of the Egyptian family conglomerate, Man Capital; Axel Dumas, the sixth generation of the family to run the Hermes luxury brand; and Lee Jae-yong, the third generation head of the Samsung group. There are many, many more.
Let’s assume that these people are good at their jobs - the turnover figures of their companies certainly suggests there isn’t a huge problem at any of them. So the questions are:
- Why does this happen?
- And how can it be a good idea?
There are good reasons you might want a family member as CEO. We recently reported on a very interesting piece of research from Thailand which suggested several reasons it might benefit family-owned firms to have a family CEO.
Some of these were specific to an emerging markets context - preventing non-family members appropriating money in a country where laws are hard to enforce; and sometimes having a family member at the negotiating table makes deals easier to do.
But to an extent the latter probably transfers into Western situations. Take the example of Bombardier, the family-owned Canadian plane-and-train-maker which is being propped up by the Quebec government. Deep ties probably help with that sort of thing.
In the Thai study good networks were also found to enhance CEO performance - they stressed business school connections, but it is not hard to see that all those next-gen programmes and conferences that family business members attend might also help to link family members to people from other business families too.
Secondly, a copious academic literature mulls over the “agent-principal” problems inherent in having non-family managers, namely that the aims of the owners (for example maintaining the business’s family ownership, generating enough money for the philanthropic efforts they value, keeping Auntie in the luxury to which she has become accustomed, etc, etc) might clash with those of the manager (maximising profit so that she can move to a bigger job, perhaps). Many argue that family members therefore make good CEOs, as they are owners and so they eliminate the agent-principal troubles.
Even if we accept that family members make the best CEOs, here’s the rub: how can it be possible that the next-gen is fitted to run a massive business? Is there some sort of business gene that gets passed on? Or it is just that these people are get an early training in business from being around one, and then get the benefit of top-notch business training?
Even if these two things are present, it is unlikely that the family CEO will have just the right mix of skills to fit the business at just the moment she takes over. Isn’t it far more sensible to hire someone whose skills fit what you need at that precise moment, then get someone new when conditions change, than get stuck with the same person for 20 years?
Perhaps the germ of an answer to the family CEO conundrum comes in the book Concept of the Corporation, by the great business writer Peter Drucker. In a chapter on leadership, he writes:
No institution can possibly survive if it needs geniuses or supermen to manage it. It must be organized in such a way as to be able to get along under a leadership composed of average human beings.
That seems eminently sensible. People who argue that family members can’t be CEOs have a preconception about what the role means, and the skills that the person in that role has to have.
But a family business can structure the role of CEO in such a way that it plays to a family member’s strengths, while bringing in a supporting cast to provide the skills he doesn’t have. As long as there is loyalty among the ranks - another prerequisite of successful businesses, according to Drucker, any hiccups should be overcome-able. Rather than find a person to fit a role, why not change the role to fit the person?
And in that case, you can have all the benefits of a family CEO, without any of the drawbacks.
© Business Family