Isometric paper plane, leadershipBill Marriott Jr. sat down for an interview recently with family business consultant Andrew Keyt and the Wall Street Journal’s Kate Linebaugh. The real impulse for the article was Mr. Marriott’s decision to reach outside the family for the next chief executive officer – Arne Sorenson, the first non-family member CEO in the company’s ninety-year history.

But the interview highlights an important statistic that arguably presents a greater lesson to family-owned and privately-held businesses than the underlying Marriott story.  According to Mr. Keyt, the average tenure of a public company CEO is four to six years.  The average tenure of a privately held family business CEO is twenty-five to twenty-eight years.  And some data sets have suggested the optimal tenure for a CEO is eight to twelve years.  So the capriciousness of public stockholders keeps a CEO from ever reaching his or her full potential, and the momentum and resistance to change of a family business can keep a CEO in place decades longer than he or she is most effective.

The levers to control this situation within a given family business lie with the CEO and the board of directors.  The selection of a CEO must be a robust process that considers all perspectives, but must also consider how willing the individual will be to hand over the reins at the right time.  Further – and probably more importantly – the board must be considering the potential tenure of a CEO at the time he or she is selected.

The capriciousness of public stockholders keeps a CEO from ever reaching his or her full potential, and the momentum and resistance to change of a family business can keep a CEO in place decades longer than he or she is most effective.

The problem with the optimal tenures quoted by Mr. Keyt are that they do not line up with generational timelines.  In other words, unless CEOs are having children at the age of twelve, they are not providing the Company with a potential CEO candidate of the same age and experience they were at the time they took the reins if they were to depart after twelve years.  This raises the issue of non-family member CEOs as a means to bridge gaps between generations in a family business.  This, of course, could create tension within the family.  But a healthy and functional board of directors needs to look past the immediate concerns of the family and focus on the long term health of the business. 

This entire discussion relies on the premise that Mr. Keyt’s statistics of optimal tenure are actually the same across all forms of businesses.  Without digging into the source of the numbers, it is impossible to really evaluate.  But even if there is some distinction between the optimal tenure of a family business CEO and other CEOs, we have all known family businesses for which twenty-five years is just too long a time for one individual to serve at the helm.  As Mr. Marriott said of the time he passed the baton: “I was eighty and figured nobody over eighty should be running anything.”

 

Drew Steen is a business transactions attorney at Davis Wright Tremaine, LLP.  He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings.  He also serves as regular corporate counsel for several closely-held and family-owned companies.  Drew can be reached via email at andrewsteen@dwt.com or directly at 206.757.8081.