12 Mar 2014  Executive Education

Managing the Family Business: Firing the CEO

Firing a CEO is never easy—but the task gets even more difficult in a family business. John A. Davis discusses when to change out the chief executive.

 

Editor's note: This is part of a series of occasional columns on managing the family business written by Senior Lecturer John A. Davis. In this article, Davis discusses when to make changes at the top.

No one needs convincing that the right CEO matters, and that sometimes CEOs need to be changed. Even the stock market moves with changes in the leadership of a company. When the Japanese camera maker Olympus fired its CEO in 2011, its stock fell; when Air France-KLM indicated it would let its CEO go that same year, its stock rose.

But firing the CEO is a tough decision. It often suggests that something has gone very wrong and the organization could be in trouble. It implies that the person was a bad choice to begin with, which impugns the judgment of those who hired the CEO. And there's also the personal confrontation that nobody relishes. It's no wonder that owners and boards are hesitant. Yet sometimes, this is necessary. But when?

You should fire your CEO under two of these three conditions: (1) there is a weak and unfixable fit between the CEO's skills and the needs of the company, (2) the CEO disrespects the core values of the company, and (3) you have good options to replace the CEO, with manageable consequences that are generally positive.

Factor 1: Fit

High performing companies require CEOs with the right skill set, decision style, and values. They have strong credibility with key stakeholders. They build strong executive teams that can execute the strategy of the company. Good CEOs come in all shapes and sizes. Even deified leaders have weaknesses. No one is good at everything. For this reason, good CEOs surround themselves with strong executives who complement their skills, help analyze complicated situations, and chart the right course for a company.

Successful family CEOs often have the values, vision, passion for the business and abilities to build loyalty with key owners, customers, suppliers, and the employees that make them the right leaders of their companies, even if they lack certain skills. You need to look for a leader with the right package of skills, values, and abilities who can build a strong leadership team. If a family member has the right mix of strengths, having a family leader is usually the better choice. If not, find a nonfamily executive who is a good match.

The CEO is always accountable for whatever affects overall performance. Some would include company performance among the factors to consider in firing a CEO. Japanese leaders are known for stepping down when their organization performs poorly, taking full responsibility. To restore credibility to a company, a leader may need to step aside or be removed. But in a family business, interested in long-term success, poor performance may not be reason enough to fire the leader. The business leader may not be responsible for the poor results and may even be the right person to help restore good health. I recommend that you look beyond current performance to the kind of leadership the company needs to be a strong performer long-term.

If the CEO is blocked from doing his job, then let the CEO (with the oversight of the board) change what needs to be changed so he can deliver good performance. But judge a CEO on his or her fit with the needs of the company.

Given the right feedback, guidance, and support, if the CEO-company fit is good, consider Factor 2. If the CEO cannot fit with the needs of the company, then you may need to make a change.

Factor 2: Does the CEO support the core values of the company?

Companies generally claim to honor their core values. Long-term high performance family companies live by their core values: quality, customer service, environmental concern, respect for employees. Nothing is more detrimental to the core values and culture of a company than to see the CEO violating them. Telltale signs include cutting corners to boost profits when the company says it stands for excellent quality. Or disrespecting the legitimate needs of employees. A very experienced senior executive once told me: "If you want to show that you're committed to your values, fire a high performing executive who's violating them." The same goes for a CEO.

I once advised the chairman of a third-generation family business who was having difficulty with his son, whom he had recently named CEO. The new CEO was a decisive leader, smart and capable, with an MBA and a strong academic record. His analytical skills were first rate, better than his father's.

But there was a problem. The son was arrogant and made it clear to everyone that he didn't think much of his father's management style, his executive team, or the company's culture, which emphasized quality, respect for others, and patient investing. The son had a burning desire to show that he knew more than others, even though the top management team had been in place for 20 years and had helped secure the father-son transition. The son felt the business could be run in a more profitable way. He was probably right, but the company was performing well.

The chairman's wife had wanted her son to succeed her husband. But she grew increasingly convinced that her son would not support the values of the company and would harm the culture that had made the company strong and the family proud. The new CEO's arrogance and disrespectful manner eventually eroded his family's trust. The concerned patriarch finally admitted this to his board. After consulting with them and with me, the father walked into his son's office on a Friday afternoon and said, "Son, nobody can contemplate life with you as CEO. I'm very sorry to inform you that you are fired as of right now."

Torn between being a good leader and a kind father, he protected the core values of his company and endured serious conflict in his family. The son went on to start another company and did well as an entrepreneur. The father stepped back into the role of CEO. After a couple of years, he recruited a cousin from the junior generation and passed the business to him. The company stayed in the family and continued to be well run. Eventually the strained family relationships healed.

Factor 3: Do you have good options?

Of course, you should have options ready if you fire your CEO. Family companies should always develop CEO alternatives-at least for emergency situations. But they rarely do.

In a fast-growth economy like Brazil's, with a scarcity of available top management talent, companies are reluctant to fire any senior executive, let alone their chief executive. In these circumstances it is even more important to make sure you provide the CEO clear expectations, useful feedback, good guidance, and the understanding that he or she must be accountable to the owners. I'm sure if economic conditions were different, if you had comfortable options, and if the CEO's fit and values were worrisome enough, you would be more willing to consider firing your CEO. It would still be a tough choice but you need to be ready for this move. I hope you never have to make it.

Other articles in this series

Managing the Family Business: It Takes a Village

Managing the Family Business: Leadership Roles

2014 by John A. Davis. All rights reserved. A version of this article first appeared in Portugese in HSM Magazine.

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Comments

    • Peter McCann
    • Consultant, McCann Corporate Consulting Associates

    Fit, values and alternatives are good considerations. However, the alternatives are usually not considered fully. It is not only a question of who might be an alternative CEO and of what the impacts might be on staff, customers and suppliers; there is also the question of the cost, in money and non-financial terms, of keeping an under-performing CEO in place. Commonly, directors postpone a decision beyond prudence; in family businesses, the decision is often postponed until after irreparable damage is done to the business and the family's wealth. Better that a decision is made judiciously and implemented fast - as the anecdote illustrated.

     
     
     
    • Lisa
    • Huetteman, Black Diamond Associates

    Excellent advice not only for the CEO, but for every employee in the company. Each of your three points should be observed when considering any position. Too often, hiring / firing over willingness to honor core values is absent and the company's culture (the therefore their profits) suffer. For more examples of companies that are successful because they live their core values, see www.thevalueofcorevalues.com

     
     
     
    • Nicolas T
    • CEO, Sucafina

    Inspiring document , should be in the by laws of family companies ......

     
     
     
    • Cathy Carroll
    • President, Legacy Onward

    Thank you for the thought-provoking article!

    In the story of the Chairman who fired his arrogant CEO son, I wonder how the results would have differed had the CEO hired an Executive Coach. A good leadership coach may have helped the CEO see how his behaviors were perceived by others, and how derailing they could be to his career.

     
     
     
    • Noman Ahmed Khan
    • Assistant Professor, BiMS College

    Excellent in a word. Anyone can develop a beautiful understanding of a family business. The father-son story is unforgettable, I will certainly give this example in my classroom.

     
     
     
    • Antonio Minondo
    • Director, Pantaleon Sugar Holdings

    The article is very insightful, but firing the CEO may be difficult or impossible if the executive has a strong personal relationship with the shareholders. In a family business, the number of key shareholders is usually small, especially if the company has been recently founded, the shareholder base has not expanded, or the company has not been able to create a corporate governance structure that allows for proper evaluation of the CEO and succession programs are not in place.

     
     
     
    • Arlene Isaacs
    • Executive Coach

    Today's read, as usual, was very provocative. Deposing a CEO in a family owned business requires delicacy if all ties to that family member, and his off-spring are not severed with seething hostility.

    AWARENESS that delicacy is crucial in order not to destroy the family AND impact the harmony and productivity of the entire team.

    I am an Executive Coach. A 27 year old graduate of the Harvard Business School approached me with a dilemma: "I'm going into my family's energy business...being groomed to take over. Shortly I will be traveling overseas - Dubai, Abu Dhabi, London....to introduce myself to the teams that have been successfully growing and running our company, some for decades. I am apprehensive. I'm not sure how to gain their respect and their trust."

    I identified two issues and created strategy to successfully deal with them.

    1. The task of showing their VALUE. Acknowledge their considerable value, their contributions, their loyalty. (TACT)
    2. The task of showing RESPECT. Reassure them that "a new broom does NOT sweep clean". (CONFIDENCE)

    "Our team is in place and we will go forward, together."

    As a result of our work together he is infinitely more confident and has gained the respect of all. He is NOT perceived as a Millennial interloper who thinks he learned it all and in short order will replace the seasoned professionals who have helped build a huge and successful company.

    I do believe that this case history will be valuable to your readers.

    http://www.arlenebisaacs.com/

     
     
     
    • Frank Fabela
    • Professor, Management Consultant, University of La Verne

    I had the responsibility of analyzing a family owned business with many problems. The first thing I did was set up a board for the owners, then the second thing was to advise the board that the son leading the business was unfit for leadership. It is very hard to demote a family member who is the leader but it is sometimes necessary.

     
     
     
    • Margot Larson
    • Partner & Human Resource Consulting, KardasLarson, LLC

    These are great points.

    I would like to add additional perspectives from my experience working with small privately held firms and family businesses.

    A common denominator of family businesses is the same as many small businesses: The weakness is in their hiring practices.

    They hire people they know without a keen assessment of qualifications, fit and personal interest. There is such a strong drive to bring the next generation into the business, that it becomes a form of inheritance. Succession planning is not viewed objectively nor in a timely manner, so from the beginning, it becomes an ill-suited partnership.

    A parent-owner wants to pass on the business to his child and wants it to run just as he/she has run it, often with total disregard of the changing industry, economy and workforce.

    A family business owner who wisely looks objectively at family members' leadership qualifications (other than just the blood line) and chooses a CEO or General Manager who has the experience and talent to guide the company into the future will have a greater chance of success and perhaps not have to face replacing an ineffective CEO family member.

     
     
     
    • Tony A Rose
    • Managing Member, Rose, Snyder & Jacobs, LLP

    There is much to consider in this piece. As a CPA firm who deals in Family Business issues, we see in a very practical way the power of effective leadership. We also see the erosion that happens when bad or uninformed family leaders slowly destroy the goodwill and power of a once thriving enterprise. In these situations the concept of core values of the family is not clearly matured. Values are simply slogans but not examined for the true nature of how the they must be lived in major and minor decision making. Working with professionals that can guide a family on what values are resonate with them is a good first step. More importantly, understanding how these values come alive in a family owned business makes have power.

     
     
     
    • Edward John Mrosso
    • Founder & CEO, Mrosso & Associates Advocates & Amani Group

    I take note and totally agree with the article, especially father having to fire a Son.

    African experience - Tanzania, many family companies have failed to successfully, pass to another generation mainly because of poor management from above 'CEO'. Because of strong culture, trust in particular parents will by all means ensure the sons and daughters takes over the businesses as CEOs irregardless of the competence or if they are competent the parents don't want status quo to change, i.e. want same old management style and culture while the young MBA CEO wants to change the culture with time, including manpower and technology.

    Therefore, usually there is a clash, and firing a son/daughter isn't the best option culture wise, as its treated as the failure of the parents to mentor not the son/daughter.

    This has been the major cause of failure, i wish they read more such articles.

    My experience i am in early thirties, founded several companies from scratch from real estate, logistics, Micro finance and consultancy my kids are less than 10 years but i have two brothers who are lawyers.

    My biggest challenge is the successor CEO, so am trying to groom two people one family member a younger brother and another an old friend and employee.

    Fingers crossed.

     
     
     
    • Naveen Khajanchi
    • Director, NKH Foundation P Ltd

    I resonate with your thoughts and advocate that along with Best Fit emphasis on Culture Fit is very important . This can make both hiring and firing easy as the message is very clear on both sides . Positive disruption is very useful at times.

     
     
     
    • Dr Shadreck Saili
    • Management Consultant

    Great points indeed John, however in institutions that are directly under government controls and mainly in africa, the change of government leadership at political level entails firing of CEOs regardless of their peformance. Patronage counts and becomes a measure for hire and fire.

    As for Family CEOs, they are normally seen as the business themselves and it becomes challenging to seperate emotions of family bonds from business operation more especially when the family CEO may have been the centre of creating the business.