Lessons from Large Family Firms About Choosing a CEO

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Lessons from Large Family Firms About Choosing a CEO

Harvard Business Review Magazine | January–February 2024 Issue

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Family businesses are infamous for nepotism and infighting à la Succession, especially when it’s time to appoint a new CEO. To be sure, that’s the reality for many. But when a research team set out to help family firms improve their leadership transitions, it found that large family businesses had much better succession practices than their nonfamily counterparts did—and they outperformed on several measures after new appointees took the reins.   Drawing on the analysis and their combined decades of experience, the research team identified several factors driving those firms’ success.

First, a caveat: These practices are far from ubiquitous among family firms. When the researchers looked at CEO transitions and outcomes at smaller family businesses, they found a very different picture. 

1. Approach succession proactively and strategically. The nonfamily firms in the study hired new leaders reactively, usually after sharp declines in operating performance and steep increases in cash-flow performance risk. Their operating income dropped by a percentage point, on average, in the couple of years before the leadership transition. By contrast, large family firms undertook CEO changes independently of short-term performance issues, reflecting a more strategic focus and a longer time horizon.
2. Bring on a few highly engaged long-term directors and empower them to lead the process. The family and nonfamily firms in the study appointed CEOs from within the organization at similar rates—roughly 70% of the time. But large family firms did much better than their nonfamily counterparts in the subsequent three years, with better cash-flow performance and much lower risk. That’s because family members who lead searches typically have deeper knowledge of internal prospects than professional board members do, the researchers concluded.  The large family firms in the study were also better at bringing in successful outsiders.  And work by other scholars has shown that one of the most important predictors of competence in interviewing and assessing candidates for directors is motivation. It stands to reason that a family member, who usually has more skin in the game, would have an especially strong incentive to get this critical choice right.
3. Don’t obsess about formal planning and documentation. More important than amassing large numbers of candidates and carefully documenting your plans—the approach taken by most nonfamily public companies—is doubling down on the rigor of your assessments. 
4. Empower new leaders from the start. It’s not just that large family firms appoint more-competent CEOs; they do more to support their efforts from day one, presumably because of their deeper knowledge of and trust in their appointees.

3 key takeaways from the article

1. Family businesses are infamous for nepotism and infighting à la Succession, especially when it’s time to appoint a new CEO. To be sure, that’s the reality for many. But when a research team set out to help family firms improve their leadership transitions, it found that large family businesses had much better succession practices than their nonfamily counterparts did—and they outperformed on several measures after new appointees took the reins.   
2. Drawing on the analysis and their combined decades of experience, the research team identified several factors driving those firms’ success.  Family businesses approach succession proactively and strategically.  They bring on a few highly engaged long-term directors and empower them to lead the process.  They don’t obsess about formal planning and documentation.  And they empower new leaders from the start.
3. But a caveat: These practices are far from ubiquitous among family firms. When the researchers looked at CEO transitions and outcomes at smaller family businesses, they found a very different picture. 

Full Article

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Topics:  Leadership, Strategy, Family Businesses