External managers: searching for outstanding talents with low egos

An interview with Peter Englisch, Partner and Global Family Business Leader at EY

by Andreas von Specht and Felix B. Waldeier

AvS – International Trusted Advisors: To ensure long term success, family businesses face a growing need to recruit external top managers. What changes and developments in entrepreneurial families are responsible for the fact that a family’s own offspring are often not interested in becoming the company leader?

Peter Englisch: One of our worldwide studies amongst the biggest family businesses in 2015 shows that young people are becoming less and less interested in joining their own family’s business. From my experience, parents should talk to their children at a very early stage about the possibilities of joining the family business. Young people seek clarity and perspective for their own lives and often do not even know what opportunities – also including opportunities for change – the family business has to offer. After all, it is not about pursuing the parents’ path, but also about catering for new trends, technologies and changes in the market. This is where the next generation is needed.

If the offspring decides against joining the family business, it’s usually an external manager that needs to step in. How can business owners determine if an external manager meets the company’s needs? Is there a typical competency profile?

Family businesses, German ones in particular, are often characterized by modesty and restraint – and hence put company interests over personal matters. Family businesses therefore principally look for decent and competent personalities with a strong track record especially in strategy and leadership topics. Or in other words: They are looking for outstanding talents with low egos.

However, there are many “strong egos” especially in large corporations. Are external managers, without prior experience in family businesses, therefore second choice?

No, external managers are not per se second choice. What really matters is to determine the right person to transfer the family’s values and culture into sustainable company growth. This can also be done by external managers and there are many examples of large family businesses whose operations are successfully lead by external managers. When it comes to operations and executive management within a company, competency is king – no matter if it comes from within or from outside the family.

Or, asked the other way around: might external managers even be the better solution when it comes to leading a family business?

Appointing external managers definitely offers advantages. Managers that are not family members will always and only be judged by their qualifications and performance, as well as the way in which they lead the company – and not by their origin or family background. That allows a more objective view and unbiased management of the company – provided that the owning family indicates the long term direction and defines clear competencies.

Why is this of a particular importance in family businesses?

External managers should act within the limits of clearly defined fields of competences. This notably includes and requires a separation of company matters and the personal interests of individual owners. External managers should not therefore become involved in topics such as personal tax or financial investments, nor be compromised with requests for e.g. company cars for non-active family members.

Once an external manager has been successfully appointed, the idea is to retain him/her for the long term. However, this often does not work. What do company owners need to bear in mind in order to avoid an early and unintended exit of the external manager?

An efficient culture of communication with regular and open exchange is crucial to build additional trust. The conversations should take place in a disciplined and coordinated manner to avoid that the external manager constantly has to justify his/her decisions and actions towards family members. In addition, it is extremely important that the family owners sufficiently communicate their values so to successfully introduce the external manager to the characteristics of family businesses.

Are you talking about the much quoted “Family Business Spirit”?

“Family Business Spirit” describes the strong connection between the owning family and the company, as well as the “role model function” that creates a special company culture. Whether the “Family Business Spirit” really exists in the company, and has a positive effect on the workforce, strongly depends on the actual behaviour of the family.

On the other hand, what should external managers bear in mind to ensure that they are accepted by the owning family and to lay the path for successfully leading the business?

To me, it is crucial that an external manager sees himself/herself as part of a bigger “family”. And this requires the identification with the company and the values of the family. Nevertheless, it is important to keep a certain professional distance towards the owners. In a company, roles and expectations are clearly defined, facts and rational choices matter. In the family environment it is also about emotions, appreciation and (sometimes unclear) mutual expectations. This is a difficult terrain for non-family members. Wrong expectations, incorrect behaviour, and a lack of clear competences, as well as the mingling of company matters and private interests of the owning family, are common mistakes when appointing external managers.

That sounds like a demanding and difficult path. Are there even more risks that could lead to failure?

Another risk are objectives that focus too much on short term goals and on financial aspects. Bonus and compensation systems usually reward short term success instead of supporting the long term generation of values and sustainable profits. Long term goals are especially important in family businesses.

Are compensation systems of family companies less attractive, or in other words: do family businesses pay significantly less?

In principle, family companies pay adequately. However, since stock options and other remuneration components usually do not exist, the total compensation can be below that of comparable listed companies. In exchange, statistics show that jobs in family businesses are much safer and that the average family company affiliation is more than three times longer than in similar positions in listed companies.

Besides security of employment, are there other non-monetary components in family businesses that attract external managers?

Company culture, taking over responsibility as well as long term company values and goals are very attractive characteristics of a family business and definitely appealing for external managers. These characteristics are much more present, and lived more intensely, in family businesses than in large public corporations.

Can you point out further differences between publicly listed companies and privately-held family businesses?

The “Shareholder Value” model, still highly praised until a couple of years ago, primarily focuses on increasing the shareholders’ wealth so they won’t invest elsewhere. This means that shareholders are investors looking for the highest returns. A strong shareholder orientation is a typical management style in publicly listed companies. Family businesses, in contrast, focus much more on “Responsible Ownership”. This concept is about much more than short-term financial incentives: it is about creating long term values and actively living the company’s responsibility for employees, customers, suppliers and other stakeholders. This concept obviously differs a lot from the shareholder value approach – and successfully proved itself during the crisis.

Looking at the advantages and disadvantages of family businesses, one could ask: do publicly listed family businesses combine the “best of both worlds” for external managers?

This cannot be said, in general. There are a variety of reasons for family businesses to go public, e.g. access to capital markets to finance growth, introduction of Governance Systems, succession planning or to facilitate the compensation of a withdrawing shareholder. Needless to say, a regulated environment also creates more clarity for external managers. However, the Chair and the control of the Supervisory Board usually stays with a family member.

“Good Governance”: over recent years, Corporate Governance has become more and more important for larger corporations. What role does it play for family businesses?

There is a unique challenge in family businesses: corporate governance systems have to be adjusted to the rules and guidelines agreed within the family. This is often called the “Family Governance” – and it defines the long term goals and values of the family, creates clarity with regard to leadership and control, criteria for employing family members, and for dealing with withdrawing shareholders etc. This not only helps the family, but also the external managers, to understand and respect the reciprocal expectations and fields of responsibility. The subject of Corporate Governance is constantly developing and will be of increasing importance in the future – also for family businesses.

Peter Englisch, thank you very much for your insights!