According to new research, family-owned and -controlled businesses represent 80 percent of companies worldwide, but by not retaining their corporate vision or “family gravity”, or by following a disciplined CEO succession process, many underperform or fail to survive. The lifespan of a family business is remarkably low with only 30% of them lasting into a second generation, 12% surviving into a third and 3% operating into a fourth generation or beyond.
The new research was conducted by executive search firm Egon Zehnder and the Family Business Network International, and was published in the April 2015 issue of Harvard Business Review. The study involved senior family and senior executive interviews and studies of leadership transitions at 50 family firms across the United States, South America, Europe, Asia and the Middle East with annual revenues exceeding €500 million. The study’s analysis focused on top family-led or -controlled companies — most in the third or fourth generation and all represented among the top three in their geographic markets and industries.
The conclusion of the study is that to preserve “family gravity,” family-controlled companies must have at least one key family member at the center of their organization, representing the family’s values and vision, and this family member will typically have a strong personality that can be used to align differing interests. Secondly, the most successful family controlled companies firms also approach CEO succession very proactively.
At successful family-controlled companies, the CEO selection process is clearly defined, clearly structured, and most importantly aligned with the company’s “family gravity”. The hierarchy for considering CEO candidates is family first, internal talent second and external executives third. According to the study, 38% of CEOs were family members and of the 62% that were not family members about half were internal appointees and half external appointees.
According to Joerg Ritter, Global Family Business Advisory Co-Leader at Egon Zehnder, “Ensuring continuity of ‘family gravity’ in the next generation remains a key imperative that places an even greater emphasis on CEO succession. Even looking at our exemplary sample, nearly 30 percent considered just a single candidate for their top role. A professional, fair selection system and thoughtful on-boarding process can help CEO transitions unfold smoothly, creating long-lasting value for the company.”
What are the characteristics of a family business with a well-run succession process? Two items emerged from the study – a well defined corporate governance baseline and early identification and investment in succession candidates.
- A family and corporate governance baseline should establish independent oversight and maintain a clear separation between family and business issues. Supervisory or advisory boards — with an average size of nine members — had oversight on 94% of the surveyed firms. The share of family members on these boards averaged 46% in Europe, 28% in North and South America, and 26% in Asia.
- The best family firms find their future leaders early and invest in them. Forty percent of the companies studied included potential next generation leaders on their boards and committees to develop their management and governance skills, and to ensure continuity of “family gravity.” For non-family executives, cultural fit is the most important predictor of success, in addition to assessing family business competencies, potential and values.
“Sustaining a family business across multiple generations presents complex challenges but can be very successful with the proper leadership planning and foresight,” said Sonny Iqbal, Global Family Business Advisory Co-Leader at Egon Zehnder. “The research indicates a viable roadmap grounded in recognition of the ‘family gravity’ and clearly defined processes for leadership development and succession practices. This course of action can and will position family firms for accelerated growth and more resilient, long-term performance.”
Founded in 1964, Egon Zehnder is a privately-held executive search and talent management consultancy with more than 400 consultants in 69 offices across 41 countries. The firm provides senior-level executive search, board search and advisory, CEO succession, family business advisory as well as leadership assessment and development (www.egonzehnder.com).
The Family Business Network International (FBNI) is a not-for-profit international network that is run by family businesses, for family businesses. FBNI was founded in 1989 and today has over 8,500 individual members from 2,869 family businesses across 58 countries. FBNI is headquartered in Lausanne, Switzerland (www.fbn-i.org).
© 2015 PEPD • Private Equity’s Leading News Magazine • 3-19-15