Family Office – Challenges of Succession Planning
For a CEO parent, the need to pick one, and only one, descendant to lead the family company is not an easy task. It is avoidance of this extremely difficult decision that motivates many CEO parents, who deeply doubt the viability of a sibling partnership, to turn the succession question over to the board. Regardless of how compelling the arguments may be in favor of a particular successor, choosing one offspring over another for the top job can be extremely difficult and emotionally distressing for the CEO parent.
While a board of directors may rely on many different sources of information when exercising its due diligence in evaluating successor candidates from among siblings, it should always be able to rely on its independent outsider members to review the facts and render objective opinions and recommendations. For this reason, a board is in the unique position of being able to enhance the perception of the quality and fairness of the succession decision by shifting responsibility away from family members. This third-party stamp of approval significantly increases receptivity to the new company leader on the part of both key nonfamily management and family members.
An example of how this works follows. A hospitality company with $150 million in annual revenues owned and operated several restaurant and hotel concepts. It had been working on its succession process for approximately five years. The company was now being managed and operated by three brothers, who already owned a significant portion of the company stock. The second-generation CEO remained chairman of the board. The owner-managers met periodically with a family-business consultant and had initiated a family council to air and address issues pertaining to the family and its control of the business.
This firm and its owners were not short of advisors and consultants, yet they depended heavily on the board when it came to succession planning. In fact, while all the other consulting was going on, the issue of how the company was going to be managed— whether by a single owner-manager and CEO of the next generation to whom his siblings would report, or by a sibling team operating as an office of the president—was being deliberated by the board.
Sibling teams often do not work. So the board, after hearing recommendations made by the family business consultant, agreed to a trial period on the sibling team concept. During this trial period all three siblings, running two separate business units and the corporate finance function, would operate as a top team and report directly to the board. After a year of tracking the performance of the company, meeting with the siblings individually, consulting with key managers of the various properties and talking to the parent/chairman of the board, the board recommended a single CEO structure and chose one of the siblings as the best candidate to fill that position. The chairman and father agreed with, and implemented, the board’s recommendation. Ultimately two of the three siblings continued in their jobs while the other moved to a related venture as its general manager, and after the initial hard feelings subsided, all three remained co-owners and best of friends.
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