Family-Business Issues

Family-Firm Dilemma--Naming a New Leader

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The leadership ranks at smaller companies are about to turn over big time, and many of these businesses don't have clear succession plans.

NEW YORK -- To the scions of the leaders of the nation's family-owned businesses: Time to start wowing your elders.

While the boards of big publicly traded companies have plenty of work these days hunting for replacements for executives forced out by scandal or poor performance, there's another kind of leadership vacuum occurring at family-run firms. Specifically, the leadership ranks are about to turn over big time, and many of these businesses don't have clear succession plans. And in a worst-case scenario that means the family could lose the business.

The problem at these private businesses is compounded by the fact that many departing executives are expected to name their own replacements - except that some of them don't want to leave or haven't given any thought to a successor.

Of 1,143 family-run firms that responded to a survey, 39% expect their leadership to change within five years because the current chief executive will retire or semi-retire. The survey was sponsored by the MassMutual Financial Group and the Raymond Family Business Institute, a not-for-profit foundation.

Of those CEOs expected to depart in five years, 58% have chosen their successor, while 42% haven't. But of the CEOs aged 61 or older who are expected to depart within five years, 55% haven't chosen their replacement.

And here's an extra headache for the offspring who thought they'd never get their parents or other older relatives out of the corner office: You may be right, because around 13% of firms surveyed said that their CEO will never retire.

"Failure to plan effectively for leadership transitions is one of the major reasons families often lose control of their companies after the first or second generation," said Joseph Astrachan, a Raymond research fellow. "While the survey findings clearly show the die-hard commitment of many family-business leaders, they also point up the difficulty that's likely to occur when the company postpones dealing with the inevitable."

Turning outside the family may be unthinkable for many of these firms, but it's an option that the survey suggests shouldn't be dismissed: Of family businesses that hired non-family members as CEOs, 71% reported a successful experience.

Do family firms share any other problems now plaguing non-family businesses? One finding suggests governance is a concern: Almost half of the boards of family firms meet only once or twice a year, while 13% say their boards never meet. And only 30% of firms that have board subcommittees say their boards include an audit subcommittee.

Another finding of the survey sets these businesses apart from the blue-chip big leagues: 13% report that their family firms have two or more CEOs, and 35% say they believe their companies may have co-CEOs in the future. But the surveyors suggest such firms would be well-advised to have an outside adviser or other process for breaking decision logjams. After all, relatives have been known to spat from time to time.

Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved

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