Hiring a non-family CEO for a family business

The first chief executive from outside the family is one of the hardest appointments a family business makes. The difficulty usually lies with the family, which has to agree before anyone is hired how much control it is handing over and to whom the new CEO answers. This piece covers the decisions to settle first and the points where these appointments tend to fail.

Why families make the appointment

The reasons usually fall into one of four situations:

• No family successor is ready or willing. The next generation is too young, works elsewhere, or wants to own shares without running the company.
• The business has outgrown the way it is run. Growth, a second site or a larger customer base needs management systems the founder never had to build.
• A sale or outside investment is planned. Buyers and investors want a management team that does not depend on the family.
• The retiring generation wants to separate ownership from management, keeping the shares and the dividends while someone else runs the company.

The brief differs in each case. A CEO hired to prepare for a sale has a defined horizon and a clear measure of success. One hired to run the business for the family over ten years needs to fit the family's long-term intentions, which are often less clearly stated.

Settle the family's position first

Candidates at this level will ask who they report to, what they can decide alone and which family members work in the business. A family that has not agreed the answers loses the strongest candidates during the process, or hires one who leaves within two years.

Before going to market, agree:

• Who the CEO answers to. A board, a chair, or the majority shareholder. If the answer is "the family", decide which person speaks for it.
• Which family members stay in executive roles, and whether they report to the new CEO. If they do, the reporting line has to be real.
• Which decisions stay with the shareholders. These are usually the sale of the business, dividend policy, borrowing above a set limit, major acquisitions and the employment of family members.
• How disagreements between family shareholders are resolved, so that they are settled at shareholder level and do not land on the CEO.

Families with a shareholders' agreement or a written family charter usually have most of this in place. Families without one should at least write down the reserved matters before the search starts. It also makes the conversation with candidates much more straightforward.

Put a proper board around the CEO

Many family companies have a board made up entirely of family members, which works while a family member is running the business. An outside CEO needs a board that can hold them to account and protect them from informal pressure from individual shareholders.

The usual step is to appoint an independent non-executive director, often as chair, at the same time as the CEO or before. Where the former owner becomes chair, agree in writing what the chair does and for how long. The arrangement works when the former owner chairs the board and supports the CEO in public. It fails when they continue to manage the business through the chair role, and staff learn that decisions can be reopened by going to them.

Where candidates come from

The stronger candidates for a first outside CEO role usually come from:

• Managing directors of divisions within larger groups, who want full control of a business and a longer time horizon
• CEOs or MDs of other privately owned or family companies
• Leaders of private equity-backed businesses who have been through an exit and want something steadier

Candidates assess the family as closely as the family assesses them. Expect them to ask to meet the main shareholders, not only the person running the process, and to ask about any previous outside appointments. If an earlier outside MD left after a short time, be ready to explain why and what has changed since.

Authority, and the pace of change

Outside CEOs most often fail because their authority is undermined informally. Staff take problems to a family member instead of the CEO. A family director reverses a decision on the shop floor. The former owner keeps a desk in the main office and is consulted on everything.

Most of this can be prevented with a few decisions made at the start:

• Announce the appointment clearly, to staff, customers and suppliers, with the CEO named as the person in charge from a set date.
• Agree that family members who work in the business raise operational matters through the CEO.
• Give the former owner a defined role, and agree a period during which they stay away from day-to-day operations.

An outside CEO will also change things, which is usually part of the reason for hiring one. Agree in advance which things the family regards as fixed, such as the company name, its location, its values or the position of particular long-serving staff, and which are open for the CEO to change.

Pay and incentives

Family businesses often cannot or will not offer shares to an outside CEO. The alternatives include phantom share schemes and long-term cash bonuses that pay out on growth in value, growth shares that participate only in value created after the CEO joins, and a bonus payable on a sale. Each has a different tax treatment, so take specialist advice before making an offer.

Benchmark the base salary against companies of a similar size outside the family sector, because that is where most candidates will come from. Our piece on hiring a managing director so you can step back covers the incentive options in more detail.

Timing against a sale

If the appointment is part of preparing the business for sale, the same rule applies as for any succession hire: a buyer will give credit for the new CEO once they have run the business through at least one full set of results. That means starting the search around two years before a sale process. Our family business succession page sets out the timeline, and owner dependency and business valuation explains why buyers care.