Family businesses face unique challenges when it comes to leadership and management. My brother, Eric Hohauser, and I are the second generation leading our family business, Harvey Hohauser Associates, a strategic cultural executive search firm founded 30 years ago by our father, Harvey Hohauser. Handing a family business down from generation to generation is a delicate process and something that many of our clients struggle with.
The passion upon which many family businesses were initially founded can eventually become a destructive force in terms of growth, leadership, and retention. Power struggles emerge between past and current generations attempting to lead the company. It is at this point when a founder must recognize and accept their detriment to the business’s future success.
By some estimates, roughly 30 percent of family-run organizations are successfully handed down to a second generation, 12 percent remain viable for a third generation, and only 3 percent successfully operate in the fourth generation and beyond. These low numbers may result in part from the emotional and financial pitfalls of leadership hand-off between generations, which few businesses proactively address.
The appointment of new leadership in any company is always a challenge. However, succession planning in a family-run organization is different from in most other companies. In some cases, future generations are ready to assume a leadership role, while in other cases the rising generation does not yet have the right experience and skills.
A successful and smooth transition between generations is rooted in proactively establishing and defining a clear path years in advance. When I started at Harvey Hohauser Associates in 1999, my father came to me on my third day of on the job and ask, “Are you ready to takeover?” He was joking, but his intention was to start mentally preparing me for my eventual role as CEO of the business. Over the next 10 years, we implemented a plan to achieve this and gradually transfered leadership responsibilities from Harvey to me.
I have also seen scenarios where this transition has taken much longer. It has taken some of our clients nearly 20 years to transfer leadership from one generation to another. It all depends on how ready and willing that next generation is.
Hiring for the Next Generation
A family-owned operation can also seek leadership beyond the family to run the business. When we work on a search to for an external CEO to appoint to a family-run organization, the approach we take is very different than the one we take when locating a CEO for a privately owned or publicly traded company.
Throughout my career, it has been evident that family-owned businesses focus heavily on long-term visions and emphasize long-term strategies when assessing new leadership. It is not uncommon for many family businesses to have the same leadership in place for 20-25 years. This is nearly triple the lifecycle of a CEO at a publicly traded company: According to a global study published by IIC Partners in 2014, the average CEO only spends 7-8 years at a publicly traded company.
A publicly traded company or private firm will think quarter to quarter, while a family business will think generation to generation: Will this CEO be able to train and develop the next generation of leaders in the business? Will this CEO be able to steer the company through the next recession or bubble?
Leadership shifts and selections for publicly traded firms are more transactional in nature; these companies tend to hire for the short term. Family businesses characteristically maintain a sense of loyalty to their employees, and this is reflected in their hiring strategies as well.
Eliminating Power Struggles
There are many unique dynamics at play when it comes to appointing the right talent to the C-suite of a family business.
We are all born into families, functional and dysfunctional. We have an innate understanding of what it means to interact with family members; there is a behaviorally programed expectation of each relationship. For a family business, there will always be outside factors beyond business that influence decisions. If an older sibling picked on a younger sibling during childhood, those past behaviors can easily affect the business dynamic and damage a company’s growth and trajectory.
One client I worked with had seven family members on the board of directors. The client selected our firm to initiate a search and appoint a new CEO. This was one of the longest searches I worked on, lasting nearly 20 months. It wasn’t that we couldn’t find candidates – we had plenty! What stalled our progress was getting all of the siblings on the board to agree on one candidate.
In order for a family business to succeed and move forward, all leadership must unanimously agree on key decisions. The delay in we faced in the hiring decision in this particular scenario presented significant challenges for us and the client’s business.
I often explain to clients the “Three Circle Model” of a family-run business. This model represents family relationships, ownership, and business operations as three separate circles that all partially overlap. If any one of these circles is unhealthy, it will affect the other domains and result in the business failing. If decisions are made out of order, they will affect the business negatively. The values of the business must be created by the family and not the business operators.
The key to successfully maintaining a healthy approach is to separate responsibilities for family members. This division and separation of labor is key for a family-run business to survive and thrive for generations. This lessens the potential for future disagreements and limits the number of arguments that can arise when family members are working too closely together.
This article was initially published on the Fox Business site.
Todd Hohauser is the CEO of Harvey Hohauser Associates.