Leadership transitions are never easy. Regardless of whether the transition occurs at a Fortune 500 company or a small, privately held organization, relinquishing and assuming authority is rarely a friction-free process.
But, for family-owned and founder-led businesses, turning over the operational reins can be a particularly complex – and emotionally fraught – experience. This is especially true for family businesses with immature governing structures.
Unfortunately, underdeveloped governance is common among family-owned businesses. Many organizations put governance on the back burner – which means owners often retain operational decision-making authority. When the time comes to transfer that authority, the lack of distinction between owner and operator can become an existential issue.
Here’s how your family business can approach governance – and lay the groundwork for a smooth transition of power.
Family Business Governing Structures
Hard and fast rules don’t exist when it comes to governing structures. Every family business is different – which means no one-size-fits-all solution or timeline exists. Individual governing structures generally fit into one of three broad categories: origin, early governance and mature governance.
Origin
In the “origin” phase, the organization’s owner and operator are one and the same. The owner has both business and executive decision authority.
The vast majority of family-owned and founder-led businesses begin in this phase. It’s an appropriate starting point – and can even be a suitable longer-term solution for some. For example, a single, childless entrepreneur with no employees likely doesn’t require a more evolved model of governance.
But if that entrepreneur were to start a family, grow the organization, and hire employees, issues could arise if they retain this rudimentary governing model. Now, the entrepreneur must consider their family’s legacy and financial future and their employees’ well-being, in addition to their own needs. If all decision-making authority still flows from the founder, they may struggle to find the distance needed to effectively transfer power when the time comes.
Early Governance
In this more evolved governing structure, separation exists between those who own the business and those who operate it. The founder or family has business decision authority, in the form of a family council or board of directors. Members of the C-suite have executive decision authority.
Mature Governance
In the most evolved model of governance, the founder or family retains familial authority through a family council (or similar) but is largely removed from decisions about how the organization is operated. A board of directors has business decision authority, and the C-suite has executive decision authority. The inclusion of independent directors provides stability and guidance through periods of leadership transition.
Evolving from one model of governance to another isn’t always linear. Some businesses may transition from the origin phase directly to a mature governing structure. Others may never need to evolve past a more primitive form of governance.
Why Immature Governance Can Hamstring a Leadership Transition
A successful transfer of authority requires some amount of separation between those who operate the organization and those who own it. New leaders cannot be empowered to succeed in their role – or lead the business effectively – if they lack legitimate executive decision-making authority.
When a business transfers authority prematurely, the owner may have difficulty removing themselves from the business. In turn, the new CEO may feel micromanaged and quit – and leave the business in a precarious position. The churn can impact employees, who may leave in search of greater stability. As a result, the business might experience significant financial and reputational damage.
How to Prepare Your Business for a Leadership Transition
The best time to have a mature governing structure in place is before it is needed. While every organization differs, it’s generally recommended that family businesses take steps to mature their governing structure five to ten years before any planned leadership transition. Before action is taken, it’s important to normalize conversations about change and the family’s future role in the organization.
How a CEO Succession Planning Service Can Help
Even if your family business has a mature governing structure and appropriate boundaries in place, you should expect leadership transitions to be challenging. A CEO succession planning service can help your family navigate the change.
Regardless of whether your business is still in its “origin” phase or has a robust governing structure, Stranberg’s CEO succession planning service can help ensure authority is transferred to the right external hire (or internal placement) the first time. Our team will assess what works in your business and determine what is needed. We’ll work with you to clearly define the role and responsibilities of the position (or positions) to be filled. Once clarity is reached, we’ll identify the highest quality candidates and streamline the inboarding/onboarding process through our executive search process.
If your family business is ready to plan for what’s next, contact us or take our CEO succession planning assessment to determine your readiness.
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