"You don't need to be a member of the family to be the CEO of a family company."
This statement challenges a common belief in many family enterprises. In fact, this belief—that family businesses must be led by family members—is not only common but widely practiced. However, it can introduce significant risk into the family business system.
We recently began working with a fifth-generation family agribusiness to help them recruit their first non-family CEO. As part of our process, we spoke with both family members and non-family employees. During these conversations, one employee asked a straightforward question: "Don't you need to be a member of the family to be the CEO of a family business?"
This question reveals a fundamental misunderstanding about leadership in family enterprises—and one that can significantly impact their long-term success.
Why Qualifications Matter More Than Lineage in a Family Business Succession
Too many stakeholders depend on the family business for decisions to be made based solely on family ties:
Long-term employees who have dedicated 10, 20, or even 30 years to the company
Loyal customers who rely on the business's products or services
Communities where the family business serves as an economic anchor
Business partners whose own success is intertwined with the family company
As stewards of the family legacy that their forebears established, family owners have a responsibility to select the most qualified person to run the company. And qualifications are not determined by blood lineage.
The distinction between ownership and leadership is often misunderstood. In most cases, ownership of a family company requires being a member of the family. However, executive leadership should always be based on individuals' qualifications, not their knowledge or relationships.
The 3x3 Process: A Framework for Family Business Leadership Selection
At Stranberg, we use a process called "3x3"—three principles and three steps—to determine leadership selection in family-owned enterprises.
The 3 Principles
Leaders must be qualified for the job
Qualifications are derived from the future strategy of the company
Strategy is determined by the vision and values of the family
The 3 Steps
Establish shareholder alignment on business trategy
Your family business and legacy are important, but you are selecting a CEO to lead you forward. While carrying the legacy forward is crucial, the strategy for how your business will thrive is a forward-thinking process. Family business shareholders need to determine what they want from the business in the future.
Derive qualifications from that strategy
Once you have determined your strategy or at least the direction your business will take, you can begin to derive qualifications from that strategy. For example, if your business needs to grow through acquisitions to support a growing family, one qualification might be experience with acquiring businesses and conducting due diligence.
Measure candidate experience against the qualifications
With qualifications in place, you can objectively measure candidate experience against these predetermined criteria
This 3x3 process removes personal emotions from leadership decisions. When multiple family members are vying for the CEO position, this framework provides an objective way to evaluate candidates based on the business's needs rather than familial relationships.
When No Family Member is Qualified
Sometimes, none of the family candidates meet the necessary qualifications. In such cases, the family must consider appointing a non-family leader.
Sometimes, talented family members may simply be too young to lead the business effectively. Here, a non-family CEO can both lead the business and serve as a coach and mentor to the next generation.
In other cases, interested family members may lack the character, qualifications, or temperament needed for effective leadership. In these cases, the shareholders must make the difficult decision to bring in outside leadership.
Even when searching outside the family, the three principles still apply—but the pool of candidates expands, often necessitating the expertise of an executive search firm like Stranberg.
The Risks of Non-Family CEOs and What to Do About Them
Bringing in a non-family CEO is not without risk. A Georgia State University study showed that non-family CEOs have a 40% chance of being fired in the first year, compared to just 20% of family CEOs. This represents a significant risk for any family enterprise.
So, how can families mitigate this risk and ensure that the non-family CEO they hire aligns with their values and strategy?
Stranberg has created a CEO Succession Assessment, which includes ten straightforward questions highlighting the key risks of CEO failure in the first year.
This assessment, available for free here, provides a report that helps families understand their risk profile and address potential concerns before they become problems.
Moving Forward
Leadership selection in family businesses requires balancing respect for family legacy with the objective requirements of running a successful enterprise. By focusing on qualifications derived from strategy, which is informed by family vision and values, families can make leadership decisions that serve both the business and the family for generations to come.
Too many people depend on the success of your family business for leadership selection to be based on anything other than qualifications and strategic fit.
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