Why the Best Person to Run the Family Business Isn’t Always Family

By Kerry J. Sulkowicz
Featured on BNET Insight | BNET Blog

The announcement in the New York Times that the Rothschild banking family had named Nigel Higgins its new CEO was not only a sign of intelligence and far-sighted wisdom on the part of Baron David de Rothschild, it was welcome news for those of us who advise family-owned businesses.

One of the biggest mistakes made by family businesses  and one that may be directly related to why so many of them fail at the transition from one generation to another  is that many believe they can only be led by a member of the clan. What Baron Rothschild did underscores the idea that family businesses, like any other business, should be led by the person most qualified to do so. Period, end of story.

As an advisor to several large family businesses around the world, I often speak with patriarchs about their passionate and understandable desire to keep the business in the family. They’re all aware of the statistics that show how the majority of family businesses fail during the second or third generations.Paradoxically, I tell them, sometimes the best way to preserve their legacy is to give up control and select an outsider as their successor, rather than clinging desperately to their mistaken notion of control at all costs and looking only within the family for succession candidates. Choosing an outsider can also mitigate some of the natural competition among siblings who are vying for control.

One of the main reasons it’s so hard for a patriarch to hand the keys to an outsider (even if, as in the case of the Rothschilds, the “outsider” has been working in the business for 27 years!) is that they have a very hard time trusting people who aren’t in their family. This despite the fact that members of their family may have demonstrated over and over again just how untrustworthy they are. Only considering family members constitutes a paranoid choice, rather than a sound business decision. A deeper, darker reason why patriarchs, particularly founders, choose an unqualified family member has to do with their narcissism: some of these founders believe that they are ultimately irreplaceable  “nobody could possibly run this but me”  so they unconsciously choose a successor who is destined to fail, thus proving their point, albeit from the grave.

All things being equal (which occasionally they are), then sure, it makes sense to anoint a member of the next generation to run the business. Presumably the son, daughter or cousin shares in the patriarch’s family values and takes a similarly long-term view of the business. But there’s nothing that says an outsider can’t also hold these perspectives. Handing the reins over to a family member can be done for several wrong reasons, too, including a desire to please one’s child or spouse (or, to be more accurate, a fear of displeasing them), or the mistaken belief that, once turned over to an outsider, the family will lose control forever (there are plenty of legal and financial ways to insure this doesn’t happen).

Ultimately all situations of CEO succession, in family businesses and in public companies, should be based on a meritocracy rather than the gene pool. The right leader keeps the family business thriving; the wrong one just adds to the statistics.