The role of governance, culture in recruitment of non-family executives
In late August, Dave Glenn, a family shareholder in Elkay Manufacturing Company — an Oak Brook, Ill.-based manufacturer of commercial and residential sinks and other products — hosted a few relatives at his home. Glenn, who doesn’t work in the company, also invited Elkay’s non-family CEO, Tim Jahnke, to the gathering.
“We had pizza, and he had to listen to all our family stories,” says Laura Gicela, a fourth-generation family member who works in the business as Elkay’s family employee engagement liaison.
How many other CEOs of industry-leading global companies with more than 4,000 employees would attend a pizza party at the home of the chairman’s second cousin? Gicela says Jahnke’s presence at the gathering was right in line with Elkay’s culture. Glenn, Gicela and Jahnke all serve on a committee working on a history book to commemorate the 2020 centennial of Elkay.
“We are one big family,” Gicela says.
Because family business owners have such strong emotional ties to their companies, corporate culture is something they take seriously — and personally. When recruiting senior executives, family businesses seek candidates who not only have demonstrated leadership capabilities but also will promote and perpetuate the culture.
Recruiting firm Egon Zehnder, in partnership with the Family Business Network International, interviewed key family members and non-family executives at 50 family firms from around the world with revenues exceeding €500 million. “When we reviewed the transcripts of our interviews, we found a 95% overlap in the language that each firm’s family members and nonfamily executives used to describe their corporate ethos,” Egon Zehnder’s Claudio Fernández-Aráoz, Sonny Iqbal and Jörg Ritter wrote in Harvard Business Review in April 2015.
John Baumann took over in 2016 as CEO of Dayton, Ohio-based Midmark Corporation, a family-controlled global manufacturer and supplier of healthcare products, equipment and diagnostic software. He succeeded Anne Eiting Klamar, a fourth-generation family member. Klamar, now chair of the board of directors, says values congruence was an essential factor in the decision to hand the reins to Baumann.
“If John were going to go out as CEO and be in the industry [as the face of the company],” Klamar says, “he had to reflect the family’s values.”
“It’s incumbent upon the [non-family] executive to understand what the family needs and what the business means to the family,” says Sharyl Gardner, Midmark’s chief administrative officer and secretary for the board of directors.
Gardner, a non-family member, started at Midmark as vice president of human resources and today oversees HR and leadership development and training as well as a variety of other areas at the company. “In a family business, it’s like the family is writing a check” to fund major budget items, she says.
The Eiting family holds the largest block of shares in Midmark; there are some additional shareholders outside the family.
Executives must understand that “the way we’re going to invest is never going to be extravagant,” Gardner says. “We’re going to make the investments that are needed for the future, but we’re not going to build the Taj Mahal in a factory.”
At Elkay, one of the company values is “We’re in business forever.” That means Elkay’s business decisions center on a long-term vision, even if the choices are painful in the near term, explains Larry Brand, non-family vice president and chief human resources officer. “That’s a huge differentiator from what you face in public companies,” where quarterly or annual results are paramount, he says.
Culture on display
In a family business, “family culture always defines some part of the company culture,” formally or informally, says Jack Ouellette, the non-family executive chairman and former CEO of American Textile Company, a Duquesne, Pa.-based manufacturer and supplier of bedding products. “Family personalities and behaviors always make up the fundamentals of the company culture: what the family says, what the family does, how the family does it.”
Families may not understand the implications, Ouellette says. “Some family cultures overpower the company culture, especially when cultures have not been thoroughly discussed,” he says. “Some family cultures are just more difficult to manage due to dysfunctional relationships. And some families are more aware of family vs. company culture and behave accordingly.”
In the early 1990s, American Textile’s revenues increased more than 40-fold, and the number of employees grew from 90 to more than 1,000. Third-generation member Lance Ruttenberg succeeded Ouellette as CEO in December 2013.
When the company was just a small business, “we never talked about culture or what we stood for,” says Ouellette, who joined American Textile in 1976.
“Not until we got more sophisticated did I come to realize that we really express our culture through a couple of major vehicles. One of them is the strategic plan. Another is our statements of vision, mission and values. Another is what we display in public places in our corporate office.”
At Elkay, Brand says, when decisions need to be made and the relative merits of alternative strategic directions are being considered, “you’ll hear employees refer to the values in business meetings to help guide our decision-making process: ‘What’s in the long-term interest of the company?’ That, to me, is the differentiator from other companies.”
Gardner explains executive recruitment at Midmark this way: “We want someone who can work effectively in the culture but not lose what they bring.”
Once the family decides to bring a non-family executive aboard, how can they assess candidates’ cultural fit (or lack thereof)? Behavioral interview questions, aimed at discovering how candidates acted in specific situations, can help predict whether their instincts are in alignment with the family mores.
Brand notes, for example, that all candidates will give an affirmative response to the question, “Do you have integrity?” Instead, he suggests the following: “Give me an example of a time when you violated your own integrity values. Why did you do that, and how did you rectify it?”
BUILDING TRUST WITH NON-FAMILY EXECUTIVES
The success of a top non-family executive in a family business depends on mutual trust between the executive and the family. How is trust achieved and maintained?
• The family speaks with one voice. Anne Eiting Klamar, fourth-generation chair of the board of directors at Dayton, Ohio-based Midmark Corporation, says “clarity and consistency of communication” between the family ownership group and non-family executives is key to building trust.
“If the family doesn’t speak with one voice, there’s confusion,” Klamar says. “When you have confusion, the decision making gets bogged down, and you can even engender negative emotion.”
• Boundaries are set and respected. Family members must respect the chain of command and let non-family executives do their jobs without interference.
Larry Brand, non-family vice president and chief human resources officer at Oak Brook, Ill.-based Elkay Manufacturing Company, says, “One of the things that I appreciate most about being at Elkay is that family members will say, ‘We’re sixth-generation family-owned and professionally managed.’ That makes me smile with a sense of pride, because it tells me that the family trusts the executive team to make sure that we’re doing what we’re supposed to do for the benefit of the business and the family.”
Boundary issues are particularly likely to arise when a non-family CEO succeeds a family member, who assumes the role of chairman.
Linda Doyle, an independent director on Midmark’s board, recommends creating “decision rules” to clarify which decisions fall under the purview of the CEO and which will be made by the chairman.
Non-family member John Baumann took on the CEO role at Midmark in 2016. Klamar, who had been CEO, became the chairperson.
“I think if the boundaries get crossed, there needs to be an ability to reset the boundaries,” Klamar says. “John and I have gotten sideways on a few things. I crossed into his territory unknowingly, and he’s crossed into my territory unknowingly, and then we have to sit down and get un-sideways.”
• The family always does the right thing. “The family must be known for always doing the right thing, even if it’s painful for the family,” says Jack Ouellette, the non-family executive chairman and former CEO at American Textile Company, based in Duquesne, Pa.
For example, Ouellette says, there may be a year when the company doesn’t achieve budget goals for reasons outside the senior executives’ purview. On several occasions at American Textile, “we paid bonuses out when it hurt the family,” he recalls. “They didn’t make the income numbers they wanted, but they felt that the senior leaders did their share.”
• The family and the executive get to know each other. “Spending time together is important,” says Klamar. “Certainly, trust flows from that time together.”
Board meetings present a good opportunity for executives and family directors to build understanding. “Trust comes from having a family seat on the board,” says April Katz, a fifth-generation director of Elkay.
Elkay’s non-family CEO and executives who give presentations at board meetings “know how my mind works,” Katz says. “If I wasn’t allowed in the board meetings, that dynamic wouldn’t be there. They wouldn’t see the skills that I can bring to the table, even though I’m not a senior executive in the corporation.”
Laura Gicela, a fourth-generation family member who works in the company as Elkay’s family employee engagement liaison, attends board meetings as a guest. Family employees who attend board meetings “know what’s going on at a lower detail level,” Gicela says. When executives present to the board, “we’re kind of keeping everybody in check.” An executive wouldn’t give a rosy presentation about a struggling program in front of family employees who know the real story, she explains.
Gicela says she will talk to non-family executives about their presentations before board meetings, “just making sure that we’re all on the same page, because obviously I don’t want to call anybody out. It’s building those relationships, that trust.”
• The executive remembers they’re not family. No matter how high a position a non-family executive holds in the family business, “they never should present themselves as if they were equal to family,” says Ouellette.
“To be successful as a non-family executive, I think it’s important to always remember that at some point, family will win over non-family,” Ouellette says. “I can’t define that point. And in many instances, it may not come on your watch.
“I think it’s important for a non-family person to remain humble and appreciative that the family has chosen them. The first commandment is: Always support the family in public, and only challenge the family behind closed doors.”
— Barbara Spector
In addition to learning about candidates through behavioral interviewing, “We also can get a pretty good feeling when we tell them our values and get their reaction,” Ouellette says.
“Most importantly, as they talk, I look for whether they mention things that are part of our values and part of our mission. And they won’t be the same words, but it gets to it.”
Such strategies, however, aren’t foolproof. Klamar recalls a Midmark hire who, along with his spouse, responded with “all the right words” in conversations about values. But after the executive had been on the job a few years, he took an action that violated Midmark’s values. “A choice was made of money over people and doing the right thing,” Klamar says.
April Katz, a fifth-generation director on Elkay’s board, says emotional intelligence helps her family assess whether someone is a good fit for the organization. “Through the interview process, you get that feeling,” Katz says. “If someone’s rubbing you the wrong way, it’s probably for a reason.”
Top non-family candidates use the interview process to determine whether the company culture is in line with their career goals.
“Even among the leading companies in our study,” the Egon Zehnder researchers wrote in the 2015 Harvard Business Review article, “a quarter of the nonfamily executives we interviewed said they originally had governance-related concerns about joining a family business: uncertainty about levels of autonomy, hidden agendas, lack of dynamism, and the potential for nepotism and irrational decisions.”
Jennifer Pendergast, who leads Egon Zehnder’s U.S. family business advisory, lists some questions candidates would like to have answered:
• How many executives from outside the organization have joined the company in the recent past?
• Why does the company want to bring in an outside professional now?
• How does the family interact with the business? Are they very engaged? Would owners not working in the company feel entitled to contact me directly with questions?
• Have there been family issues in the past that have created challenges for management?
• Will the board chair role always be held by a family member, or would a non-family chairman be considered?
• Would young family members be working under my direction?
Ouellette says candidates are wondering if there is uniform buy-in to the culture and if family members are held to the same culture compliance standards as non-family members.
Candidates need information from the hiring organization not only about the family culture, but also about their vision for the business, Pendergast says. One candidate she’s worked with had been happily employed at a family business for only a year when the company was sold. He was apprehensive about facing a similar situation if he joined another family firm.
Pendergast says families should be clear about what they mean when they say they are committed to their business for the long term. Do they mean they are committed to their operating company, or are they simply committed to being in business together as a family?
Prospective non-family CEOs should understand whether the family shareholder group is engaged or disengaged, Pendergast says. In a less engaged family, the CEO has “an important shareholder relations function,” developing ways to communicate with family owners so they understand what’s going on in the business.
Face-to-face with the family
Brand, who joined Elkay in 2016, recalls that during the interview process, “I probably met over a dozen people.” He estimates that before he met with Elkay’s chairman, Ron Katz, he had spent 20 to 22 hours in interviews.
Self-aware candidates who become frustrated by such a lengthy interview process will likely recognize that the job is not a good fit for them, Brand says.
“It’s really important that the external candidate meet us,” says April Katz, who is Ron Katz’s daughter. “They have to know what they’re getting into. They have to know that they’re going to have to communicate with us, be engaged with us, have lunches with us.”
Candidates for executive posts at Midmark are taken to Versailles, Ohio (2016 population: 2,608), where the company was based until 2013 and still maintains its largest facility.
“We bring them in and they get ‘the full Midmark experience,’ as we call it,” Gardner says. “They see all of the things that make us unique. We have a conference center, and we have an inn, and we have our own jet. It’s an amazing experience.”
Candidates’ reactions to what they encounter in Versailles, and the questions they ask, provide insight into whether they would fit into the Midmark culture, Gardner says.
Klamar has invited executive candidates and their families to dinner at her home. “I don’t know if this is a standard practice,” she says, “but it just made sense to me to see how they treat their spouse, to see how they treat their children. To just assess them on a different social level.”
“I always prefer, if I get the chance, to see somebody interacting with people at various levels,” says Linda Doyle, an independent director on Midmark’s board. “Not [just] the people who are in the power position, but how they interact with peers, and particularly with people who are in support roles. Because I’m vastly suspicious of anybody who treats somebody who’s below differently from how they treat people sideways and upwards. So I like to be able to watch people’s behavior to try to figure out if there’s a match between the lyrics and the music.”
Candidates vying for executive positions previously held by a family member should expect the interview process to take longer, Pendergast says. “They’re going to have to meet more people [at the family company], and they’re going to have to meet with them multiple times to really get a comfort level.”
Laying the foundation
It’s incumbent upon the family ownership group to do its governance work before the hiring process begins, to ensure all family members agree on the company mission, vision and values as well as their goals and expectations for the business.
Klamar says her family engaged a consultant and began working on governance two years before non-family member John Baumann succeeded her as CEO. At first, those efforts seemed frivolous, she recalls. Her brother and sister both work at Midmark.
“ ‘Why do we have to waste time articulating mission, vision, values?’ ” she remembers thinking. “ ‘We know them, we all work in the company. This should be really easy.’ Well, guess what? It wasn’t.
“While my brother may have the same core values, or my sister may have the same core values, we all live different lives for different reasons. So I felt really good that we had done that work up front.”
The change from a family to a non-family CEO is a huge step for an organization, and few families realize all the ramifications until the evolution is imminent.
When Klamar was Midmark’s CEO, family governance “was pretty darn easy,” she says. “I had the respect of my siblings, and they trusted me. The decisions were always aligned with the family’s values. But when you take that away, the family governance has become incredibly more important. And one of the surprises was how time-consuming it is to get it right.”
Baumann has approached the family for answers to questions they hadn’t considered before, Klamar says. “[He] came to me earlier this year and said, ‘I need an Eiting family shareholder group statement of risk. I need to know what levels of debt you might be comfortable with.’ And that was something we had never, as a family, talked about.
“We had to really start exercising a few governance muscles to provide the company with what was needed through the non-family CEO’s eyes. It’s the family’s responsibility to serve the non-family CEO by doing this work.”
Good governance helps convince skeptical candidates that the family runs its business professionally, Pendergast says.
“Putting in place that infrastructure is very attractive to non-family management, because they want the security of knowing that there’s a support system to make sure that they can do their job well.”
Pendergast says it’s an advantage when a search firm can tell top candidates, “This family actually has a family council. They’re organized. They’re thinking about developing their next generation. They have policies in place so that they don’t just hire anyone from the family. They’ve had independent directors on their board for 15 years.”
Families planning to bring on a non-family CEO to succeed a family leader “absolutely” need independent boards, Pendergast says. “Otherwise, you don’t have a good oversight mechanism. You need the infrastructure to support” the dramatic change, she says.
“I give my board a ton of credit,” Klamar says. “As the family’s kind of finding its way to serve the board and the company through better and clearer governance, the board has been right there to ask questions and provide support and make sure that there is the clarity that’s needed by a non-family CEO and management.”
Developing internal candidates
Companies increase their odds of choosing the right successor by developing leaders internally.
“In a privately held enterprise, the ability to develop internal succession is really important to the future of the business,” Gardner says.
Executives now working at the division president level (“P-level”) at Elkay are being groomed for C-suite positions.
“They’re aware of it, they’re getting training on it, they’re getting education and whatever it is that they need,” Katz says. “And I’ve started to have lunches with them, to start building that relationship before they become an executive, because that’s part of the deal. It gives the executive at the P-level an opportunity to learn more about the family.”
Family CEOs whose successors are likely to be non-family members should start five years in advance of their retirement date by bringing in executives to serve in developmental positions such as division president, Pendergast says.
“It’s just a huge risk” to hire an outsider directly into the chief executive post when “they’ve had no exposure to the family and the family’s had no exposure to them,” she says. “Ideally, you’d like to be thinking with a time horizon.”
“People can say anything in an interview, but it’s watching them under fire, under pressure, when values are called into question — that’s when the rubber really meets the road,” Klamar notes.
Baumann joined Midmark as an independent director in 2009 and became chairman of the company’s board in 2013. When he was named CEO in 2016, Klamar took on the chairman’s role.
“We were extremely lucky because we had the right runway of time to know our new CEO and his values,” Klamar says. “I think it’s a lot trickier to bring in a non-family CEO after a relatively short or less robust process.”
Before Baumann was named chairman in 2013, Klamar recalls, she spent several months considering what each director would bring to the culture if they were elevated to board chair.
“Knowing that that bedrock of cultural fit and values was there was incredibly important in my decision-making process,” she says.