We the Family: The Benefits of Creating a Family Constitution

Nearly all successful business owners eventually find themselves needing to hire senior executives. The owner may be stretched too thin or in need of specific expertise not currently resident in the business, or there may be a leadership gap between generations at a family-owned business that necessitates hiring executives from the outside to groom the next generation. Though there are many reasons to bring on experienced executives, attracting and retaining senior-level talent is easier said than done for private business owners trying to balance skills and experience with shared values and cultural fit. It is particularly difficult for closely held businesses to compete for talent against publicly held companies offering lucrative pay packages that include company stock.

Establishing a specific hiring need based on the company’s long-term strategy is an important first step before embarking on a search. The strategic plan is the basis upon which owners can identify the qualities and talents needed in an executive. The plan is also an important tool in pitching the candidate on the opportunity. In many cases, top talent can be just as motivated by the challenge as by the compensation.

While there is no one-size-fits-all approach to hiring executives, this article discusses key considerations for owners to identify, evaluate, attract and retain experienced executives who will not only be great contributors to the business’s success, but also serve as great stewards for many years.

Identifying Qualified Candidates
In this age of mobility and online job boards, it may seem like there is a boundless pool of qualified available talent at the push of a button. However, the challenge is identifying which candidates possess the intangibles. Often, the best place to look is internally, as promoting from within is an effective and low-risk strategy. Existing employees have the benefit of being known quantities who have already demonstrated their value and potential to the organization. It is incumbent upon owners to carefully consider the talent available within the organization when identifying candidates.

For owners who decide to broaden the search, there are several forms of outreach available. Social media and job boards are low-barrier avenues for identifying talent; sites such as LinkedIn and Indeed have search tools with extensive filters that allow owners to generate a curated list of executives. While online recruitment was once used primarily to recruit entry-level professionals, it is now a major platform to source and hire senior talent as well, underscoring the importance for businesses to have a social media presence.

Executive search firms, though expensive, often have access to a deeper pool of senior-level talent and can save owners time by screening resumes and conducting due diligence before introducing a candidate. A less structured but more cost-effective version of this strategy is utilizing one’s own network. Owners should let their professional and personal networks know that they are hiring and provide sufficiently detailed job requirements to ensure they receive the most appropriate recommendations. Irrespective of the form of outreach, utilizing very specific criteria to qualify candidates is an important step in narrowing the list.

Evaluating and Selecting the Best Candidate
Candidate evaluation goes beyond technical skills, academic qualifications or prior experience. In fact, what is often most critical is whether a candidate shares the company’s values, is a good cultural fit and has a shared vision for the company’s future. This is especially true for family businesses, which maintain a much longer-term outlook and plan to keep control of the company within the family for future generations. The business is often the largest part of a family’s net worth, so bringing in an external executive is essentially opening the door to the family home. As such, succession is a highly sensitive topic given the commingling of personal and professional roles, making advanced planning and open communication among executives and family members critical. The right candidate will recognize and be comfortable with these dynamics. Additionally, executives should understand – and appreciate – the company’s history and be role models and trusted stewards for rising generations. While skills and experience are certainly important, it is critical that candidates demonstrate an appreciation for the mission of the business and align with its culture and values.

Attracting the Right Candidate with a Compelling Offer
Compensation is the first thing that comes to mind when hiring because it is quantifiable and important to candidates on a personal level. There are typically three components of executive compensation: (i) annual salary; (ii) short-term incentive compensation, such as cash bonuses; and (iii) long-term incentive compensation, such as equity, which is tied to the organization’s longer-term goals. Salary and short-term compensation are often used to attract executives, while long-term compensation is used to retain and motivate.

Though it is important to offer a competitive package, compensation alone is not everything. This is especially true at closely held businesses, which may not be able to compete with larger, potentially public, companies when it comes to salary and bonus. Businesses can instead differentiate themselves in several ways. Culture tends to be the most effective method through which to do so. One example is being more entrepreneurial and offering exposure to responsibilities that are often distributed to various individuals in more hierarchical organizations. An executive often has the ability to have a bigger impact at a closely held firm – for instance, a senior finance professional at a large company may be attracted by the opportunity to be the CFO of a smaller firm where the position involves not just managing the books but providing meaningful input on the company’s long-term strategy. It is important to remember that the role and nature of the work should truly matter to candidates. If owners sense that it does not, then the candidate is likely not the right choice for the position.

The key for closely held business owners is to find someone who genuinely cares about and aligns with the company’s core principles and values. It is important to sell candidates on culture and role and paint a realistic picture of opportunity. The right candidate will balance these factors with the compensation package offered in making the career decision.

Motivating and Retaining for the Long Term
In addition to short-term compensation in the form of salary and cash bonuses, closely held businesses need to reward management for value creation over the long term in order to retain them. Effective long-term incentive plans link executive compensation to value creation, typically tied to the achievement of specific financial performance. Incentive programs can be an effective tool to focus an executive’s behavior and performance and align his or her interest with shareholder interest.

While the equity in a private company cannot be traded on a stock exchange and may not otherwise be marketable, there are various means by which private companies can provide long-term equity incentives. Four common types of long-term equity incentives are stock options, restricted stock awards, stock appreciation rights (SARs) and phantom stock (see nearby table). Stock options (or profit interests for an LLC) grant the right to purchase equity in the company at a predetermined exercise price during a set time period in the future. Restricted stock awards are a grant of stock that is typically subject to forfeiture if certain future conditions are not met (e.g., continued employment or performance goals). Both awards typically involve the issuance of equity and as such are dilutive to common ownership. Phantom stock and SARs, on the other hand, allow owners to reward executives with equity-like compensation tied to a company’s stock performance and specific trigger events (for example, the sale of the company) but do not require the issuance of actual shares. These can be particularly useful for 100% family-owned companies, as they likely do not dilute ownership or affect corporate governance. No matter which option owners select, what is critical is that the right incentives are created such that executives are focused on achieving the clearly established long-term performance targets. When deciding on the best long-term incentive program, owners should consult their accountant, attorney and/or financial advisor, as there are numerous tax, legal and accounting issues to consider to ensure the programs are designed to properly meet company goals.

Attracting_and_Retaining_Executives

Intangible incentives also affect retention. In family businesses, for example, owners should maintain an honest, ongoing conversation around a succession plan and expectations for executives as time passes and the rising generation grows older. Furthermore, closely held business owners should recognize executives’ successes and follow through on promises of career development opportunities and greater authority, as fostering personal career growth will reduce the desire to seek new outside opportunities.

Conclusion
Making the decision to hire an outside executive is just the first step for a closely held business. A number of considerations accompany finding, attracting and keeping the right talent. When hiring executives, Brown Brothers Harriman (BBH) stresses the importance of being collaborative and team-oriented, as this aligns with our partnership structure. We look for individuals who can naturally network so that they can grow and develop beyond their roles and seek candidates who are loyal and think long term, among other qualities. Most important, though, is finding people who fit with our culture and share our values, such as maintaining the highest standards of integrity and prioritizing clients’ best interests. When attracting executives, the opportunity to get involved in philanthropy, our commitment to diversity and the development opportunities we provide have all proved to be very attractive to candidates and often a leading driver of why they choose to work at BBH.

In summary, for closely held business owners, choosing executives who share the company’s values, believe in its mission and possess the skills and experience needed to accomplish the strategic plan is one part of the equation. Once hired, it is necessary to provide both tangible and intangible short- and long-term incentives that align with the business’s culture and goals, creating a professional environment that motivates the executive to achieve the firm’s long-term objectives.

The Corporate Advisory Group (CAG) is dedicated to building and expanding relationships with clients and prospects of BBH Private Banking through an objective long-term corporate finance dialogue. CAG operates outside of the traditional transaction-focused, success fee-based investment banking model. As a result, CAG is able to approach clients’ unique needs without bias for any particular outcome and provide advice to best help clients achieve their business and personal goals and objectives. For more information on CAG, please contact your BBH relationship manager or Charles Shufeldt, Head of Corporate Advisory, at Charles.Shufeldt@bbh.com.



This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ("BBH") to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ("EEA"), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. © Brown Brothers Harriman & Co. 2016. All rights reserved. 2019. PB-03209-2019-11-27