Succession: The Next Generation and Non-Family Executives

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In Expert Q&A David Jackson – Corporate Governance

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[mk_dropcaps style=”simple-style”]Q:[/mk_dropcaps]

Three questions. First, what factors do you think enable some privately held business families to transition through multi-generations where other such families fail to do that? Second, do you think non-family executives are an important factor improving private company corporate governance? Third, what do you see as the advantages to private company owners of introducing non-family executives into their business?

[mk_dropcaps style=”simple-style”]A:[/mk_dropcaps]

Training the next generation of managers

One approach that I have seen succeed is to have the younger generation work in the business in meaningful roles, where they are not the boss’s child but are employee who are learning to and then actually performing a real job. If this is coupled with a legitimate review process which treats the younger family member in the same way as the other employees and assesses whether the person is capable of working effectively in the business, there is a better chance that the next generation will be able to lead and direct the business effectively.

Over time, the parent or senior family members cede more and more operating responsibility and authority to the younger generation, until the turnover is complete.

The need for brutal honesty

However, this model requires the parent or senior family member to be brutally honest when assessing the capabilities of the younger generation.

It also requires avoiding treating them as favorites and, perhaps even more difficultly, when there are two or more members of the younger generation, avoiding treating them equally where such treatment is not warranted by their abilities or their contribution.

If the younger generation is not capable of assuming the operating and leadership responsibilities, the parent or senior family member must decide either to adopt a different model, such as introducing professional management, or sell the business while it still has value.

A family business, or a business owned by family members?

Another model that I have seen work is to progress the enterprise from being a “family company” to a “company owned by a family”. This model often results in few or no family members being employed in the business where they move to being the owners, with the business being run by professional managers. The owners then exercise the supervisory role of directors, often with independent non-family members as additional directors.

Non-family executives and corporate governance

I believe that in the right circumstances, the introduction of non-family executives into the management of a private company can provide improved corporate governance and enhance the value of the business.

This is particularly the case where the successor family members have not yet had the opportunity to grow into the position of leadership at the time that the senior family members are transitioning out of leadership or are unable to continue to lead.

In that circumstance, a seasoned veteran executive can advance the transition process and provide strength in the leadership role.

I have seen in several family-controlled public companies an illustration of strong outside executives making a meaningful contribution, and in some cases enhancing the value of the enterprise tremendously. I have seem the same situation occur in private family businesses.

Non-family executives – potential issue

Conceptually, the introduction of a non-family executive into the management of a private company could be problematic, or worse, if the result is the creation of factions and hostility or internecine warfare between the executive and the younger family members. This risk arises particularly when the younger family members believe that since their name is on the business, they should be running it. That kind of situation could result in very serious harm to the value of the business and possibly to its very viability.

Non-family executives – significant potential benefits

The idea of bringing in outside non-family executives to participate in the leadership of the management of the family business is a very challenging one. The senior family member(s) must consider a range of factors in deciding whether or not to pursue this alternative.

In my view, it presents real risks, but offers significant benefits, to a family business. Socializing the concept with the younger generation and presenting it as an opportunity for them to grow and learn, rather than conveying the message that they are not capable of growing into the management and leadership of the business is essential.

Equally important is the selection of the executive to be invited into the business. This could well be a situation where the effectiveness of an outside executive is enhanced by the existence of one or more non-family directors who can assist in overseeing and guiding the interaction between the family members and the outside executive.

David Jackson

The former Chair of Toronto based law firm Blake, Cassels & Graydon LLP, David Jackson has had a long and distinguished career and experience in business acquisition and sale transactions, business law, public company corporate governance, family business corporate governance, issuer bids, public and private financings, and take-over bids. Among other things David worked in the preparation and review of the draft bills that led to the current Ontario Securities Act, and provided recommendations to the Ontario Securities Commission during the development of Canada’s uniform take-over bid code.

David continues to serve on Boards of both public and private sector corporations and non-profit organizations, and to render advice to major Canadian and international corporations.

You can reach David at david.jackson@blakes.com, or by telephone at 416 863 2636.

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