Last year, Patrick Thomas announced that Axel Dumas would succeed him as CEO of Hermès, the luxury goods company known for its trademark silk scarves and Birkin bags.  Thomas has been the first non-family member to lead Hermès; Dumas, 43, is a member of the sixth generation of the Hermès family and nephew of Jean-Louis Robert Guillame Frederic Dumas-Hermès, the last family member to occupy the top corporate role.  Thomas’s announcement, which was overshadowed in the press by the ongoing fight between Hermès and LVMH, marks a notably successful leadership succession process at the august luxury goods manufacturer.

 

Paving the Way for Success

As the Hermès story illustrates, when a family business faces a leadership vacuum at the top, appointing an outsider can pave the way for business success and still leave open the possibility of future family leadership.  Outside management can bring the business to a new level by bringing new skills and experience – Thomas resolved supply chain problems that had limited Hermès’ growth – and can mentor younger family members who show aptitude but aren't ready for the top job.  Outsiders can also take care of dirty work that might spark family conflict if handled by an insider– during his tenure Thomas reportedly let go two family members who weren’t performing. 

But bringing in an outsider as CEO isn’t as simple as hiring a recruiter and cleaning up the corner office.  Heading a family-owned business raises issues that an executive groomed in a public company environment isn’t accustomed to handling.  Very often, a family business has been successful precisely because it isn’t a public company – the growth of the business has been driven by the unique worldview of the founding family.  That family will have its own vision for the future and its own way of doing things.  If the family isn’t transparent about its needs, vision and values, or if the outside executive attempts to dismantle the existing system without regard for the family’s world view, the effort to bring in an outsider will fail.  How, then, can family businesses replicate Hermès’ success?

 

1. Know Thyself

A family business seeking to bring an outsider into the top job needs to be able to articulate the family owners’ vision of success.  The CEO will need to know and accommodate the family owners’ expectations on all kinds of matters – family employment, constraints on investment capital, dividend and distribution requirements, mentoring obligations – as well as how much leeway the CEO will be granted in these areas.  Has the family already determined that a family member will succeed the outsider, and is it the outside CEO’s job to prepare that individual?  Or perhaps there’s a pool of potential candidates, and it’s a critical part the CEO’s job to evaluate them?  Or is the family considering a possible sale?  Is the family seeking to update or change aspects of the business, such as financial reporting or production systems?  Conversely, are certain changes off the table – for example, in product development, branding or advertising?  Are the family owners allergic to debt?  Politically active?  Focused on a specific geographic area and opposed to expansion or moving?

Another key difference between family-owned and publicly-held businesses is the composition and role of the owners.  Public company executives generally will have had no experience working with trusts and trustees.  Particularly when the trustees have a specific expectation for company performance – as with a grantor retained annuity trust  or charitable lead annuity trust – an outside CEO will require a detailed briefing.  When a discretionary trust owns shares for the benefit of a group of family members, the outside CEO will need to understand the role, rights and obligations of the grantor, trustee and beneficiaries.  (This may also be a good opportunity for the family owners to undertake a review of company ownership and trust governance.)

 

2. Do Your Homework

Hiring an outsider for the top job is a multi-step process.  Once the family and owners can articulate their expectations, the next step is to engage a recruiter with experience matching outside executives with family businesses.  Listen carefully to the recruiter’s advice regarding compensation, bonus, deferred compensation, vacation, perks and other components of the package.  Joining a family business is a difficult and potentially risky decision for an executive who’s come up through the public company ranks.  To get access to the best talent, the family business will need to offer a package that’s attractive enough to offset those risks.

The interview process will need to include plenty of time for senior management, the board and owners to get to know the top candidates – and vice versa.  If the CEO will be expected to participate in social functions with the family owners, it would be a good idea to test compatibility via a dinner or two.  The goal isn’t to find a CEO the family would want to adopt, but rather to make sure that values, attitudes, assumptions and behaviors are sufficiently aligned to minimize friction.

 

3. Trust but Verify

Once a candidate has accepted the job, the work has only begun.  Using the family owners’ vision as a baseline, the board will want to articulate clear expectations for CEO performance in line with the strategic plan for the business.  Particularly in the first years of the CEO’s tenure, the board will want to schedule formal and informal reviews of CEO performance.  If the CEO is tasked with changing aspects of the business as part of the strategic plan, the board and owners will need to coordinate with the CEO so that all speak with one voice – any differences may trigger disengagement by staff members who may see following the new CEO’s directions as a mark of disloyalty.

If the time comes that a family member is ready to step back into the top job, the family owners will want to recognize the outgoing CEO for successfully achieving the vision.  Here, too, Hermès sets a good example: CEO Patrick Thomas will reportedly receive a non-compete worth more than $10 million over the next decade.