News & Insight
September 2012

Hiring and Developing Leaders: Lessons from Family Businesses & Private Equity-Backed Companies

In his best-selling book Good to Great, author Jim Collins points out that companies that go from good to great begin

not with where are we going, rather who are the right people for the trip. They start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats. And they stick with that discipline—first the people, then the direction—no matter how dire the circumstances.

If you agree, what are the challenges of achieving that goal? Having advised family businesses and early-stage companies backed by private equity investors (also known as portfolio companies) on human capital issues for the past 30+ years, I believe that there are lessons to be learned from both regarding the selection and development of leaders.

In my experience, a family business typically offers a good living for the involved family members while they share the pride of growing the business with the intention of passing it to the next generation. However most of these businesses don’t continue past the first or second generation because of poor or non-existent leadership succession plans.

With family businesses, there are emotional and other life issues to manage when developing leaders. For example, a CEO with eleven siblings (!) in his business states, “when you operate a family business you have to work twice as hard. You have to capitalize on one another’s strengths and you have to bring in back-up if one of your siblings is weak.”

I once advised the founder of a medium-size technology company that his eldest son and successor could broaden his experience and perspective if he worked for a larger customer or supplier. While that suggestion was perceived as a radical notion, sometimes family members (and the company) benefit from full-time or temporary assignments at other organizations and in different positions, especially at other companies in the value chain or related industries. It’s hard to see opportunities when your career is within a narrow segment of an industry.

Similarly, portfolio companies feature a unique blend of risks, rewards, challenges and opportunities and leading them is not for everyone. For entrepreneurial executives, however, the lure of a portfolio company includes the opportunity to break free from the traditional corporate structure along with the potential payoff following a successful sale or initial public offering.

Most private equity investors agree that management team quality is the single most important factor when evaluating an investment opportunity. Their criteria typically includes “been there, done that” experience, openness to coaching, cultural fit with the investor firm, demonstrated ability to scale a business and navigate ambiguity, and emotional and social intelligence. As private equity firms prefer to exit their investment in 3-7 years, they typically act quickly to replace leaders who fail to deliver short-term results.

Clearly family businesses and private equity firms and their portfolio companies have strengths and risks in their hiring and development practices. Comparing typical practices may help identify improvement options worth considering:

Process Stages Family Businesses Portfolio Companies Improvement Options
Hiring Leaders
Candidate Pool Preference for family, friends and their referrals, organic leadership development, may under-hire or promote due to internal relationships Preference for prior start-up or rapid growth experience, tend to hire or “rent” external talent rather than organic development, may fire incumbent executives Create knowledge, skills, ability, and cultural fit profiles to match candidates with opportunities, identify and fill gaps in leadership depth
Selection Less formal due to social ties, promotion from within the company Overdependence on “gut” instinct” and references , tendency to hire external “stars” Screen for cultural fit – is a family business or portfolio company the right match for the candidate? Adopt “due diligence” perspective and practices
Focus Build a company that can be passed to the next generation Accelerate performance to reach full potential for short-term investor exit Adopt practices for sustainable business growth, regardless of exit timing
Developing Leaders
Early Experiences Focus on socialization, may begin with entry-level tasks to learn business basics Focus on early wins, demonstrate immediate value Create and manage to a 6 – 12 month plan that balances early wins with learning the business
Performance Management Second and third chances Non-performers rapidly removed Define requirements, timing, and success factors
Development Mentoring by other family members, grooming for succession Advice from board members, investors, and advisors, groomed for post-exit opportunities Encourage family members to work outside the business before joining the company, ideally within the industry value chain. Engage coaches that supplement existing advisor experience and skills.

Each of us can remember leaders that had the right skills but were tone deaf managing others or leaders who were ineffective because they were in a work environment that didn’t fit their strengths and ambitions. While both types of companies justly resist bureaucracy, company culture appropriate hiring and development tools and coaching can capitalize on strengths while reducing business risk

WJM Faculty Member, Mark Walztoni’s background includes senior HR management, executive coaching, consulting, and business development roles in companies led by founding entrepreneurs, corporate leadership teams and private equity firm sourced executives. He has served as a human capital advisor to venture capital firms and as a board member of a large angel investment group and has developed, modified, or managed global leadership hiring and development processes for the past 30+ years.

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