Family Businesses Shouldn’t Hunt for Superstar CEOs

Family Businesses Shouldn’t Hunt for Superstar CEOs

by Josh Baron and Rob Lachenauer  |   9:00 AM December 6, 2013

It’s a dilemma that faces family businesses all too frequently.

We saw it recently when we worked with a $4 billion global manufacturing business in Hong Kong. The company was managed by the founder, who turned it over to his son when he retired. The two men had created distribution channels, built a supply chain, entered profitable new markets–and, just as importantly, held the family together, ensuring that family members were well taken care of and that family disagreements didn’t harm the business.Now with the passing of the founder’s son, the third generation–a collection of cousins who are geographically dispersed, prone to disagreements, and lacking the experience necessary to run such a large and complex business–are trying to figure out what to do.

It’s a tough situation, and the third generation decided to look outside the family to find a successor CEO. They wanted someone who could reset the strategy; someone to grow the business again; someone who could broker an agreement between the factions of the family who favor reinvesting for growth versus those who favor high dividends.

They called this idealized new CEO “Mr. Wonderful.”

A worldwide search turned up two leading candidates–both of them superstars. But each person turned down the job. Neither thought the business was ready for a non-family CEO.

These rejections were traumatic, but they have proven to be a tremendous gift. No one could have done everything the third-generation cousins wanted. The candidates most likely to accept such a role would either be incompetent in not understanding the complexity involved (thus dooming the business to failure), or, even worse, they would see an opportunity to assume control and push the family aside.

The situation this family faces is all too common. They approached the problem of succession believing that what worked successfully in the past would work for their generation. It wasn’t until outsiders began rejecting the CEO position that the family realized that even the most wonderful person could not have managed a business that had now grown so complex. Certain systems and structures had to be put in place first. This was work that only the family owners could do.

Businesses don’t need to have billions of dollars in revenue before hitting this point–we see it happen to family companies of various sizes. What should you do if you find yourself in the situation of wanting to bring in an outside CEO? First you’ve got to make some changes yourselves:

Step up as owners. Even if you’re used to your parents running the show, it’s time to realize that you’re the owners now, and have the right–and the responsibility–to develop your identity as owners before an outside executive can come in. Part of the problem is that as members of the next generation, many of you have experienced “learned helplessness.”  When, over years or decades, you’ve been shut out of decision making, you may not know how to call the shots, whether the patriarch or matriarch is still living–or not. So your first step is often the most difficult: assumepsychological ownership.

Choose your ownership path. Once you’ve taken on the mantle of being owners, then you’ve all got to get on the same page about where the next CEO should drive the business. Know your agenda. Whether your goal is growth, liquidity, a turnaround, or employing more family members, your desired path dramatically affects what kind of person that you’re looking for, and the background and experience needed. The new guy can’t hit the ground running unless you reach a consensus about where you expect the business to go.

Fight the CEO’s fight. Clean up the messes that would hobble the new CEO. If there are family members all over the business that don’t belong there, get them out now. The worst thing that could happen is that Aunt Mary’s son Johnnie is high up in the business, and he’s incompetent. If you leave it to the new CEO to have to remove Johnnie, the leader will lose Aunt Mary’s 15 percent of the vote on the board. That’s a new CEO’s worst nightmare. You will also need to clean up the compensation system. One way patriarchs and matriarchs dominate family business systems for so long is that they buy people off. If someone has a special compensation deal, get rid of it.

Change the power structure. When you have a dominant patriarch or matriarch, the power structure typically gets overly centralized with the strong man or woman in the center sitting on the shareholders’ council, on the board, and running the business. It is impossible to have a successful non-family member CEO succession until this power dynamic changes. Appropriate checks and balances must be put in place. At the very least, you must clearly define and delineate roles for yourselves, the board, and the executive team. One client family reinvigorated their board in order to fill the gaps and correct the blind spots that they knew their CEO had. This strengthened the new guy and convinced the patriarch that it was safe to move aside.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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