Freedom vs control: Hiring external execs in family businesses

I recently met with the seventh-generation owners of an Asian family business conglomerate. Despite their success in growing the company into a multibillion-dollar powerhouse, they grappled with challenges that are common among family businesses—challenges my team and I encounter daily.

During our discussion, one of the owners asked, “Tom, we want to understand how we, as a family, can influence our executives and the business while striking a balance between asserting the family’s influence and giving top executives free rein. We need your neutral, expert opinion on how much power to relinquish to these executives while still being able to attract and retain top talent.”

A unique challenge

Family businesses face a unique challenge: the decision to hire external executives. This decision often pits two competing priorities against one another—the need to grant freedom to outside leaders for innovation and success versus the imperative to maintain family control. Striking this balance is critical for family businesses aiming for long-term growth and sustainability.

Why are external executives necessary? What are the risks and rewards of granting them freedom? And how can families maintain control while leveraging the skills of non-family leaders?

The case for external execs:

1. Limited internal talent pool

Family businesses often lack the depth of talent within the family itself to fill leadership roles. While family members might possess the passion and commitment to uphold their business values, they may lack the necessary skills or experience to lead in today’s competitive environment. In such cases, bringing in external executives becomes a necessity to ensure the company’s growth and survival.

A well-qualified external executive can introduce best practices, enhance operational efficiency and foster innovation—qualities that may be difficult to cultivate exclusively within the family.

Case study: A prime example is Ford Motor Company, which hired Alan Mulally as CEO in 2006. Mulally was an external executive who previously worked at Boeing. Under his leadership, Ford avoided bankruptcy during the financial crisis by streamlining operations and fostering a culture of accountability. His fresh perspective was instrumental in reviving the company while preserving its family legacy.

2. Fresh perspectives

External executives bring with them a wealth of experience, new strategies and innovative ideas—all essential for staying competitive in today’s dynamic market environment. They can offer objective insights into the strengths and weaknesses of the business, providing fresh perspectives that challenge existing assumptions and drive growth.

For example, many successful family businesses have revitalized their operations by hiring nonfamily leaders with expertise in technology, marketing, or international expansion. These executives can act as catalysts for change, positioning the business to seize new opportunities.

Case study: Gucci’s turnaround. The Italian luxury brand underwent a transformation when the family brought in Domenico De Sole and Tom Ford in the 1990s. These external leaders revamped the brand image, streamlined operations and introduced iconic designs. Their success exemplifies how external expertise can rejuvenate a family business.

3. Scaling for growth

External executives often come with experience managing larger organizations or scaling businesses in new markets. Family members may lack exposure to such challenges, but seasoned executives bring processes, networks and strategies to expand operations while mitigating risks.

Case study: Tata Group. The transformation of Tata Group under Ratan Tata included key hires of nonfamily professionals who spearheaded global expansion and modernized its business units. This strategy turned Tata into a globally recognized conglomerate.

Granting freedom to external exec: Attracting top talent

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Brewed by masters

The best executives expect a certain level of autonomy to make decisions and drive initiatives. Family businesses that micro-manage or stifle innovation risk losing these valuable leaders. Offering a clear mandate and operational freedom is crucial to attracting and retaining top talent.

Case study: A positive example

Consider the Murdoch family’s News Corp. They allowed nonfamily executives significant leeway in running divisions, which helped the company expand globally. The autonomy offered to these leaders created a culture of trust and innovation. As a result, the business thrived in competitive markets, demonstrating the power of giving executives the freedom to operate.

Risks of over-autonomy

However, excessive freedom without checks can lead to misalignment with the family’s vision. This misalignment can result in reputational damage or even financial losses. For instance, external executives who prioritize short-term gains over long-term family goals might inadvertently harm the business legacy.

To balance freedom and control, families must ensure that external executives align with the company’s mission and values. This requires clear communication of long-term goals and expectations. Without alignment, the risk of conflicting priorities between the family and the executives increases.

Case study: The Reliance family feud in India. This illustrates the dangers of insufficient oversight. The lack of clarity around roles and family control led to internal conflicts and public disputes that tarnished the brand’s reputation. This example underscores the importance of maintaining clear lines of communication and governance structures to avoid similar pitfalls.

Your 5 to thrive

1. Define a shared vision and values: Clearly articulate the family’s long-term goals, mission and values. Ensure that external executives are aligned with these principles from the start. Don’t compromise!
2. Establish robust governance: Implement governance structures such as advisory boards or family councils to oversee decisions while allowing autonomy for executives. These structures ensure that external executives remain accountable while providing them with the autonomy to execute their roles effectively.
3. Measure performance regularly: Hold frequent check-ins to ensure alignment with family goals. Develop clear KPIs (key performance indicators) and hold regular reviews to assess the executive’s alignment and impact on the business.
4. Prioritize cultural integration: Design onboarding programs that immerse external executives in the family’s culture and history to minimize friction.
5. Leverage outside support: Work with external advisors to facilitate communication, mediate potential conflicts and align strategies effectively.

By following these steps, family businesses can successfully integrate external talent while safeguarding their legacy and driving sustainable growth.