Governance

The benefit of non-family CEOs is greater than you probably think

Matthias Muller, CEO of Volkswagen. Image: Wikimedia. CC BY 3.0

Matthias Muller, CEO of Volkswagen. Image: Wikimedia. CC BY 3.0

The question of whether family firms perform better with family, or non-family, senior management is a perennial one. On one hand, family members are often thought to have a deep understanding of the business and to “get” it in a way that outsiders don’t. That might sound wishy-washy but there are concrete ways that being related to the founder can help. For example, you might have a very deep, long-standing relationship with suppliers and customers, who might be reassured by the knowledge that you don’t intend to sell the business; and you have access to the knowhow in the family, which you get for free.

On the other hand, non-family managers bring knowledge and a fresh pair of eyes to a business - they might be able to bring in expertise of disciplines that are not core to the family’s business (HR, perhaps, or a knowledge of offshoring) that can take the business to the next level.

The question for family businesses is: do you need more non-family members in the top management team? The answer could be: it depends how much of the business the family owns.

THE 25% THRESHOLD

That is the conclusion to be drawn from research by Tobias Schori, who carried out research for his masters thesis at the University of St Gallen about the characteristics of non-family CEOs from 142 listed family firms from Germany, Austria, Switzerland, and France. (Thanks to Nadine Kammerlander, Chaired Professor of Family Business at WHU Otto Beisheim School of Management in Vallendar, Germany, for publicising the research.)

Schori found that there were several differences between family and non-family CEOs, the most striking of which was their tenure: the non-family CEOs’ mean tenure was just five years, while that of the family ones was 18. Surprisingly, though, neither this nor the age of the CEOs (it was slightly higher in family firms) had any effect on performance.

What did, though, was education and “functional diversity”: the non-family CEOs tended to be slightly better educated, and to have worked in more departments at the firm. These two characteristics led to higher profitability.  That in itself is useful to know. What is possibly even more interesting is that the effect of education and experience only existed for firms with more than 25% family ownership. Below that, it made no difference.

The obvious conclusion is that when families own a large amount of the company, then it’s important to get outsiders in to make sure that there is a counterbalance to their power. What is surprising is at what a low level of ownership family dominance begins. 

© Business Family 2016