Family Business and New Leadership

From 2012 to 2017, family firms and coalition businesses in Italy saw the largest gains ever in both operating and net profits, the highest levels of liquid assets, and lower financial risk. In contrast, however, these organizations were still showing signs of certain criticalities associated with poor performance: aging company leaders; problems with generational change at the top; the concentration of power due to CEO duality; the distribution of power via multiple delegations; and the joint effect of the latter two factors. 

To counteract these criticalities and foster generational change in company leadership while shoring up governance, a critical step is transitioning from managing director to president - a non-executive role, or in any case one with limited delegations. When this process is successful, it allows the company to onboard young leaders while avoiding losing the support of their predecessors. This provides both roles with the resources and energy they require, superseding CEO duality and paving the way for smoother generational change, thanks to an ‘interregnum’ with incoming and outgoing leaders.  All this comes about more readily if outsiders sit on the Board of Directors. 

Another essential step involves the choice of corporate leadership model. Specifically, we see inferior income performance when multiple managing directors are at the helm, which serves as a warning to exercise caution in adopting shared leadership models. This form of leadership may be de facto, in particular when power is delegated equally or complementarily, or ostensible, most commonly when a single managing director has all-encompassing powers and one or more additional administrators have partial delegations. Whatever the case may be, such models introduce complexity and risks.

These are some of the most salient findings from a study by the Business Monitor of the Corporate Governance Lab at SDA Bocconi. An overview is offered in the January 2020 issue of Economia&Management in an article entitled, “Family Business and New Leadership”.

For the first time, the Monitor conducted a census of the population of Italian businesses with over 100 million euro in turnover, enterprises built on a variety of ownership structures (family firms, companies controlled by coalitions or financial corporations, and state-owned enterprises). This deep dive into the leadership models of family firms and coalition businesses underscores two of the myriad challenges that entrepreneurs are facing today. The first is to empower the presidency. Indeed, although often overshadowed by the managing director in cases of duality, various components of the role of president are taking on ever-greater importance:  heading the Board, dialoguing with shareholders and representing the company with key stakeholders. The second is to opt for shared leadership models only after carefully assessing the need (which often has more to do with the family and the owners, rather than the business itself), and above all, the sustainability of this option in light of individual, relational, organizational and governance considerations. Also fundamental is monitoring how the models in question actually work while being prepared to change course if need be. 

A prior condition for all this is to set up a governance structure in a timely fashion that is consistent with the needs of the company and of the owners, while preventing the former from undermining the latter. On the contrary, such a structure should be advantageous to both.