In the Family Way

CFOs who work for family-owned companies can be invaluable advisers, but often remain on the outside looking in.
Alix StuartFebruary 1, 2012

From childhood, Stew Leonard Jr. was groomed to take over his father’s Connecticut-based dairy and retail grocery business. He started by unloading trucks and stocking shelves and moved into management roles after graduating from college with an accounting degree. After a stint away at business school, he returned to the company in the early 1980s, at which time his father decided that Stew, who had expressed some ambivalence in the past, was serious about succeeding him. He gave his son the title of “president,” not to mention a desk next to his in the CEO office.

Still, the transition was bumpy. “I had a title, but it wasn’t like I was really in charge,” says Leonard. His enthusiasm for helping the fast-growing business grow even faster was mingled with frustration at being in the long shadow of his father, as well as several uncles and other family members. His father’s shoes looked to be particularly difficult to fill, because he was a well-known and well-liked entrepreneur who once received a Presidential entrepreneurial excellence award from President Reagan and had been hailed in books and magazines as a success story.

Then, the unthinkable happened. Leonard’s father and two uncles were accused of tax fraud and ultimately convicted of evading $17 million in taxes over 10 years. Leonard’s father was sent to prison for more than 3 years. (His brother was later convicted of similar but unrelated tax charges.)

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That shock thrust Leonard Jr. into the top post overnight. He rose to the challenge; two decades after the tax problems came to light, the company is thriving and bigger than ever, with four grocery stores, nine wine shops, and 2,000 employees; revenue has grown from $147 million in 1993 (when Leonard Jr. took over) to around $400 million today.

But the story didn’t have to turn out that way, and, in fact, it rarely does. Few family-run companies make it past the first generation; even fewer make it to the third or fourth. “When you get to the point of succession — a retirement or a sudden death — less than half of all family companies have a formal plan in place,” says James Mattie, a partner with PricewaterhouseCoopers who specializes in family businesses. That can be especially devastating when family members are at odds with one another and when there are no outside board members or others who can step in to fill the gap.

CFOs can play a variety of roles in helping family businesses avoid such crises, though becoming the next company leader is not likely one of them. “You come into a family business knowing you’re not going to be the president or CEO as long as there’s someone in the family who can do it,” says Thomas Pohmer, CFO at P.C. Richard & Son, an electronics retailer, since 1991.

Mattie agrees: “Our survey found that 60% of family-business owners expect family members to assume key roles, but when it comes to the CFO post, most CFOs are nonfamily members.” While a shock may thrust a nonfamily CFO into the spotlight temporarily, finance executives at such companies can do themselves and their companies a favor by encouraging the family to plan ahead.

Hard-Won Wisdom
Today, rule number one at Stew Leonard’s is to make sure that no one joins the company out of a misguided sense of duty or entitlement. With the oldest of the next generation now in their 20s, Leonard says a new policy holds that “none of our kids can work at the company until they work outside it for three years after graduating college.”

That fits the path he took, as well as his two sisters, who are also involved in the business. One sister spent time in France studying baking and becoming a cheese expert before coming back to the business to start an in-store bakery. The other studied management at The Walt Disney Co. before returning to the family business to build out its human-resource function.

The company is currently in the process of setting up an advisory committee of four nonfamily members, including an industrial psychologist, to review job applications from family members who complete the three-year requirement. “We’re trying to make it so that family members don’t have to decide on their children; we want it to be market-driven,” says Leonard.

Whether or not family members will be required to spend time outside the business is a “major decision,” and one that families should consider before the next generation begins to go to college, says John L. Ward, co-director of the Center for Family Enterprises at the Kellogg School of Management and a consultant to Stew Leonard’s. His opinion: “A significant amount of outside work experience is important. It gives people an opportunity to learn in a different environment.” It also helps them gain credibility at the company.

All in the Family
At P.C. Richard & Son, current president and future CEO Gregg Richard, 47, says he learned the business at his grandfather’s knee, and sees no need to go outside the company for training.

In business since 1909, P.C. Richard has grown from a hardware store to a $1.5 billion company that competes with Best Buy. Gregg’s father, Gary, became president in 1980 and later CEO when Gregg’s grandfather A.J. passed away at the age of 95. Gregg, president since 2004, is now following a similar staged transition behind his own father, who “will certainly be involved in the business until the day he dies,” Gregg says, though he has already begun to lessen his involvement.

PwC’s Mattie says the “stay-inside” approach can be as successful as the one Stew Leonard’s is employing, provided the range of experiences gained by the heirs apparent is still broad. “In a larger business, making the rounds and spending meaningful time in each department can be a good second option to going outside,” he says. Serving on outside boards and other nonbusiness projects can also help to broaden a family member’s business acumen.

Looking ahead, Gregg says it’s a little early to set out a path for his own children, who range in age from 12 to 23, though the conversation at home often turns to the business. “Absolutely” his preference would be for a family member to take over, “if they have the ability and humility to run the company,” he says. “But if they’re not capable, we’re not going to put it in their hands and put us out of business.”

Alix Stuart is senior editor for growth companies at CFO.