Bringing in external advisors to run family businesses may do little for family harmony and gatherings but it can make a substantial difference to a balance sheet, according to new research by PwC, INSEAD and AvS – International Trusted Advisors.
Based on PwC’s revenue performance analysis among the 100 largest unlisted family businesses worldwide, family businesses managed by external executives grew by 7% on average between 2015 and 2019, while those managed by members of the owner family grew only by 4.9%.
Owners and senior executives of 50 large family businesses in Switzerland, Germany, France, the Netherlands, the UK, Italy, Denmark, Spain and Liechtenstein were interviewed in 2019 and 2020 to see what difference, if any, having an “outsider” made to the business.
In the current era of disruption, uncertainty and business transformation, the study found that it can make a considerable difference.
Peter Englisch, Global Leader, Family Business and EMEA Entrepreneurial and Private Business Leader, PwC Germany says: “It’s often been perceived that family businesses are stable, normally well-run and rarely rock the boat because they stay within their comfort zone – and there’s a lot of truth to this. But there is a flip side to this, and it is becoming increasingly important.
“Stable and traditional businesses – especially family businesses where the successor has been steeped in the family ways of working and thinking – often struggle to adapt to change. Now, given that we are in one of the largest periods of uncertainty and business transformation in modern history, agility of thought and action is a far better skill to have than being a steady hand at the helm.
“Having said that, there are also considerable risks to bringing in an external appointment. The key one is that they don’t necessarily grasp or understand what the company is about and, as such, the learning curve can be steep while they simultaneously try to build allies. And not only will they need allies and talent, a small ego is also essential, because at the end of the day and no matter what they do, it’s not their name associated with the business.”
Risks and benefits of external employees
There may be more potential benefits to external people coming on board but the risk can also be higher. However, Englisch believes there are ways to mitigate the risk.
‘Businesses can make it easier for external people coming in. Some steps may seem simple, but family businesses can have a habit of being run differently to other businesses. So for someone to succeed from the outside, a good, transparent recruitment process – that includes making sure the person has a clear idea of everyone’s roles and responsibilities – backed up by a professional onboarding process that starts from the moment they accept a job offer, can make the transition go a lot smoother for both sides.’
But not all external advisors were brought in because of a lack of talent. A growing issue for family businesses is that the heir/heiress apparent often does not want the job.
Schalk Barnard Family Business Leader for PwC Africa, says: Succession should not be a single event where the baton passes from one leader to the next; it is better understood as a multistage process stretching over time that is affected by many factors.
“Family businesses increasingly need to turn to an external leader to ensure the succession, with success depending critically on his or her ability to acquire their predecessor’s knowledge and commitment to the business.”
Barnard comments further: “The hiring, onboarding and integration of external executives at a family business is a complex process. Unlike a conventional company, a family business is best understood through its culture, values and people. Ensuring an external executive understands and fits with these is central to the selection process.
“Because family businesses are unique, hiring a successful external executive is not just about their skills and personality. They have to work together to create a narrative and change agenda that will serve as a solid basis for the relationship.”