Even when a transition is unhurried, new bosses at family businesses tend to fail. How to make them thrive instead

Originally published on Canadian Family Offices on May 8, 2023

Article written by Sarah B. Hood on Canadian Family Offices.

Perhaps no anecdote illustrates the importance of succession planning better than that of Canadian cryptocurrency CEO Gerald Cotten. Back in 2018, his unexpected death left QuadrigaCX’s digital assets worth $190 million in limbo because no one else held the virtual keys. The company declared bankruptcy soon thereafter.

Loss of corporate knowledge is only one of the challenges in replacing a key senior executive when no successor is in place. What are the best recruitment strategies, and how can new hires be set up for success?

Even when the transition is unhurried, it’s common for new executives to fail within 18 months. According to the Corporate Executive Board, 50 per cent to 70 per cent of new chief executives fail in Canadian-owned family business, whether internally or externally hired.

“Those numbers are fairly shocking, but it’s a fixable problem,” says Marty O’Doherty, partner and professional headhunter at the business advisory firm B. Riley Farber in Toronto.

“The big contributing factor to the success or failure was not their ability, but rather their non-fit with the culture of the family enterprise, their lack of EQ [emotional quotient] and leadership style, and their misalignment with the family about the direction of the business.

“All three are fixable,” O’Doherty says.

His firm recommends finding executives who are “big-company trained and small-company proven.” Successful executives have the technical skills to execute and, more importantly, the EQ and cultural fit to add value to the company, its people and its culture.

He recalls the time he was called in to assist a company after the unexpected death of both the owner and their successor. Apart from addressing the grief of the rest of the team, he says, the first priority was to ask: “What does the business need over the next one to three years? Once you start to talk about this, you create a scorecard of outcomes.”

O’Doherty offers four ways to make sure an executive hire is set up for success:

  • Be specific about the expected outcomes.
  • Take time to assess the technical, personal and cultural needs of the executive to reach those outcomes.
  • Be clear about what is expected.
  • Work with the executive proactively to ensure he or she is aligned and supported.

“With these four steps, our clients have seen an improvement from 50 per cent to 94 per cent in retention and success rate after two years,” he says, adding that “being diligent is much cheaper than hiring the wrong person.”

Carolyn Cole, founder and CEO of Cole & Associates, who divides her time between Toronto and Vancouver, says, “The primary challenge of hiring for replacing legacy executives, in my view, is the lack of experienced talent in the space relative to the evolution of that family office or that family business.”

Cole, like O’Doherty, says the incoming executive must be a good cultural fit, which means that the family and its advisors need to honestly assess their own culture. “A legacy executive for a family business carries a tremendous amount of family history,” she says.

“It always amazes me how many very successful businesses, when you go behind the scenes, are very unsophisticated. It’s critical to document things.”

Sheldon Cutler, Tipping Point Global Executive Search

“When there is a transition, family members often have not had a chance to consider what the new roles should be in comparison to what the former executive was delivering, and be clear in their expectations.”

Cole recalls watching a single-family office go through three people in four years after losing a legacy leader who had held the position for a decade.

“They were all incredibly qualified talent, but the cultural fit was not there,” she says. “There was a mismatch between what the family office expected and what was on the job description.”

Part of the solution is “setting clear expectations: plenty of clear communication about who they report to,” she says. To further support the incoming executive, Cole recommends matching them with a pair of “champions” during the first year, one who is part of the family and one who is not.

“That will help the new hire with the dynamics from both sides,” she says, noting that “enterprises as a whole suffer from corporate memory loss, but family businesses typically have an advantage in that regard because of family corporate memory.”

Sheldon Cutler is president of Tipping Point Global Executive Search, based in Hamilton, Ont., which operates across North America and the U.K. He says a first step in bringing in a replacement executive is making sure that family members are on board for the hire, and recruiting a good listener who understands how to negotiate family dynamics.

“It’s important for a new senior executive not only to meet the person they’re replacing, but the key stakeholders in the business to get buy-in from the whole leadership team and to really let them get a feel for the whole executive team.”

Family members need to show the candidate “the business and where it’s working well. You set them up for success by sharing knowledge,” he says.

While resources such as psychometric testing can identify the candidate’s strengths and weaknesses accurately, they’re useful only once the position has been clearly defined. For instance, Cutler says, “is it a maintenance role, or is the business ready for high growth?”

Another quality to be considered is experience in a business of similar size. Someone who has worked only within larger corporate structures may struggle when they find themselves expected to wear many hats, Cutler says.

But the best strategy for succession, when it’s possible, is planning. “It always amazes me how many very successful businesses, when you go behind the scenes, are very unsophisticated. It’s critical to document things,” Cutler says. “Everybody’s so worried about the day-to-day, but truly the best business leaders are the ones who say, ‘I can leave tomorrow and the business would be just fine.’”

Most family offices are probably better prepared for future exigencies than QuadrigaCX, but regular reviews are always prudent, since a solid recruitment strategy can mitigate the effect of almost any sudden executive departure.