Chapter 7 The Critical Role of Nonfamily Managers Family Business, First Edition, by Ernesto J. Poza Copyright © 2004 South-Western/Thomson Learning

Nonfamily Managers . . . Provide critical skills to the business Establish benchmarks for managerial performance Help govern the relationship between family and management Are essential to the health and continuity of family-owned businesses

Consider Nonfamily CEO When. . . There are no qualified successors Potential successors need training from interim manager Nonfamily manager can be both bridging president and mentor of next generation May sometimes serve as bridge across entire generation of owners Family can’t agree on succession Business needs a dramatic change

Value of Other Nonfamily Managers Entrepreneurs often poor trainers of successors They bring unique and complementary skills to firm management Children may lack dedication and commitment to business Sibling rivalries lead to power struggles Founder/CEO can’t choose between children

Other Nonfamily Managers, continued They create a benchmark for merit-based compensation Co-CEOs, management by committee of family members may lead to paralysis Family successors may not be trusted by nonfamily employees or other family members

Perspective of Nonfamily Managers Nonfamily managers tend to regard their firms positively Perceptions of business differ from those of family members in areas of Management and governance Capacity of firm for innovation and change Qualifications of potential successors Their own positions in company

Compensation Issues Nonfamily managers less satisfied than family managers with compensation and benefits Nonfamily managers generally paid less than counterparts in public corporations Other issues include benefits, inflexibility, and lack of career opportunities Drawbacks may be offset by rewards and advantages of working in family business

Motivation and Retention How can you Motivate top-flight executives who realize leadership positions may go to family members with fewer qualifications? Retain top-flight executives who could earn more in other companies? Motivate them without their involvement in setting the direction for the business? Keep them committed in the absence of equity participation?

Sources of Motivation Active involvement in planning Performance measures—scorecards—such as P & L, revenues, profit margins, market share, etc. Clear understanding about succession issues Compensation and benefit plans bench-marked to others in industry

Other Actions to Take Provide active leadership during transition Involve nonfamily managers in business plans, succession plans, and strategy Build family/nonfamily management teams Hold meetings between nonfamily managers and shareholders to build understanding Provide opportunities for nonfamily managers to assume important responsibilities

Other Actions to Take, continued Recognize level of maturity, self-confidence necessary to be nonfamily manager Review goals vs. results in managerial performance and reward performance Provide flexible benefits, work schedules, and vacation policies Educate family in management principles