Recruiting your first external CEO is a big decision for any family business. Often, it can take years to decide to recruit from outside the company. Most family firms don’t embark on an external search until after the painstaking process of evaluating a range of internal options (both family and non-family) and weighing the interests of the various stakeholders who will be affected by the decision.
While making the decision to recruit an external CEO may be an accomplishment, it is just the beginning of the succession journey. The hard part is next: identifying, attracting and hiring your next CEO. In our experience, the most overlooked step in CEO recruitment is stakeholder management. The human aspect of the recruiting process, including how to best work with stakeholders, is vital to a smooth transition.
Before the Search Begins
In our experience, most families underinvest in the “pre-search” phase. This is the best opportunity to surface concerns, explore options and achieve alignment; a good process here will save time — and pain — later. First, it is critical to identify the relevant stakeholders and understand their motivations and priorities. This demands thoughtful communication and an open mind. We advise clients to consider the search process from several perspectives.
Specifically, there are typically a wide range of lenses through which different stakeholders may view the CEO succession process. Some may be thinking about succession purely from a business standpoint: how to maximize enterprise value or dividends. Others may focus on family legacy or on continuing as a family-owned and -operated company. Others may take a more personal point of view — for example, they may want the role themselves. And there are external perspectives to consider: employees, customers, vendors, even the community. These various viewpoints influence individual goals around succession and, if left unexamined, can lead to misalignment and friction later in the process.
Another perspective to consider is context — both the family context and the business context. What is the current composition of the family, including experience and interest in the business, and what relevant skills and capabilities are there? This may affect the process and the type of CEO the business needs. For example, you might seek a different kind of CEO if there is a NextGen family member who has the potential to take the reins in a few years. Likewise, business context (business performance, strategy, competitive dynamics, etc.) will impact the type of CEO needed. The intersection of business context and human context is an important consideration when recruiting a CEO, and alignment is crucial before launching a search.
All of the above are critical data points that will inform the recruitment process. But how you gather the data is equally important, and often more challenging. We recommend the following best practices as you prepare to engage in a search for an external CEO:
- Clearly define and communicate the CEO selection process to all stakeholders. This will help manage stakeholder expectations about their voice and/or vote. For larger and more established businesses, best governance practice dictates that the board of directors appoints the CEO. Even better, the board may create a subcommittee to lead the process, particularly to avoid potential biases on the board. A dedicated committee can help ensure stakeholders view the process as fair and unbiased, increasing the likelihood of buy-in once a CEO is selected.
- Seek input from all relevant stakeholders. “Relevant” is subjective, and there are very few hard and fast rules about who should have a say in the process. The list of stakeholders almost always includes the significant shareholders and the board, but it can sometimes also include retired family members who no longer have voting rights, as well as the outgoing CEO, spouses and outside advisors who know the family well. What is most important is distinguishing between input and decision rights. Seeking someone’s input during the process does not necessarily mean they get a vote, and this should be clearly communicated.
- Proactively work to uncover unspoken assumptions. Ask open-ended and even provocative questions. Test the boundaries of conventional wisdom about background and experience requirements, personality and style, among other possible characteristics. For example, do they need to come from your industry? Is this a search for an entirely new type of leadership? Or is there an unspoken assumption that the new leader will be a “Mini Me” of the outgoing leader?
- Engage people in a variety of ways. Some people are more comfortable opening up one-on-one, while others do well in a lively group debate. It often takes a neutral third party to objectively facilitate group discussions or to allow some individuals to feel comfortable sharing their perspectives. Most importantly, communicate openly, honestly and often.
- Finally, budget plenty of time. We typically budget at least one month to identify stakeholders, align on a fair selection process, and gather and consolidate input from key stakeholders. Whenever we launch a CEO search, we conduct intake calls, visit our clients’ offices, facilitate group meetings and engage in 1:1 stakeholder conversations. Then, we consolidate the input and share it back with the family to openly discuss areas of alignment and misalignment. These conversations enable greater trust in and alignment on the process and, subsequently, the outcome.
During the CEO Recruitment Process
Once the CEO search is under way, there are several human elements that will demand the attention of the company leaders and recruitment team. For example, there may be non-family employees who had hoped to be considered for the position. They will need to know where they stand now that an outside search has been launched. If you are considering both internal and external options, be honest with your internal candidate(s). That way, if you end up recruiting someone from the outside, it won’t be a surprise. And if you promote your internal candidate, they will know it is because they deserve it, not because they are the default choice.
Of course, recruiting an executive includes evaluating their fit for the role, the company and the family. But the human aspect of the interview process can often be overlooked. We often see clients overemphasize the “paper filters” of a candidate’s resume (titles, companies, industries and tangible business results) but fail to consider the candidate as an all-around human. For example, what kind of leader are they? How does a potential hire draw energy? Does the candidate thrive in a bit of chaos, or do they prefer structure? Is the individual a team player who is willing to consider the opinions of multiple stakeholders on key decisions, or do they prefer to keep the board and shareholders at arm’s length? Are they passionate about developing people? Understanding these energy levers will be important to ensuring the family business and the new CEO are a good “energy fit.”
Finally, the candidates themselves represent a critically important human aspect of the search process, yet they are a surprisingly overlooked constituent. Hiring is a two-way decision. As the search progresses, family business leaders will need to consider whether the candidate needs more “courting” to feel comfortable. This can be a surprise to many family business owners. But the truth is, hiring an executive is a bit like dating. Were you ready to get married after one date? Probably not, and your spouse probably wasn’t, either. Similarly, a CEO candidate will need plenty of information about the business, the family and the team before saying “I do.” Common questions include: Can I see recent audited financials and/or board presentations? What is the company culture? Can I spend more time with the board and owners? Will I have the latitude to make strategic decisions? What is the family employment policy? Does the family intend to own the business for the long term?
We’ve seen some family leaders become offended by these questions. Why is the candidate even going through the recruiting process if they don’t know for certain that they want the job? But becoming a non-family CEO of a family business can be seen as risky, particularly for the first non-family CEO. It is a courtship and often takes time for everyone to get comfortable with the match.
Post-Hire
When the new CEO has finally been chosen and hired, a new set of challenges begins. Like the pre-search stage, the integration phase often doesn’t receive the time and attention it deserves. According to our research, the most common reason new leaders fail in their first year is not related to lack of skills, knowledge or experience. Instead, it’s most often a failure in building internal relationships: They do not understand all the interpersonal dynamics and unwritten rules in the company.
The key to a successful transition to an external CEO is building trusted relationships with a more diverse range of stakeholders than we typically see in a public company. In addition to cultivating a rapport with the team and customers, the incoming CEO may need to navigate complex relationships with owners, individually or collectively, That means building trust. From experience, we have found that trust is built in different ways. It is built through behaviors — creating an atmosphere of transparency, delivering results and working through challenges together. It is also built through mindset — maintaining a low ego, creating a common bond around vision and investing in long-term relationships. When a leader and the family business owners invest time to build trust upfront, it creates a strong foundation for long-term success.
Recruiting an outside CEO is never a simple process for any company, and it is often more complex in a family business. The transition from family leadership to a non-family CEO will have many moving parts. But investing in the human aspects across all stages of the recruitment process will help ensure the new leader is the right person for the job and is set up for success.