Many Family Firms Rely on a Largely Invisible CEO -- Chief Emotional OfficerPublished: June 27, 2007 in Knowledge@Wharton
When your family business involves an extended network of 52 family shareholders, as it does for Bukit Kiara Properties, a leading Malaysian real estate development firm, simply pulling everyone together for family dinner can be hard work. But N.K. Tong, who co-founded Bukit Kiara with his father and is now group managing director, says there's just one person to call: "My auntie."
"When she picks up the phone, everyone comes running," says Tong. Her effectiveness at bringing people together was essential in the late 1990s when Tong and his father, Alan Tong Kok Mau, sold one family business and started Bukit Kiara. "My dad asked her to find out which family members wanted to join us, and over a single weekend she raised a fair sum of money from over 20 [of them]."
Tong's aunt plays a role some scholars describe as a family business's "chief emotional officer," an informal function usually filled by a family member or close advisor. But the topic is not as warm and fuzzy as it sounds: Not only can the emotional officer job be stressful and go unrecognized, it can also fall dangerously by the wayside as businesses are passed on to succeeding generations.
Nevertheless, nearly all family businesses have a person who plays the chief emotional officer role, according to Raphael "Raffi" Amit, a Wharton professor of entrepreneurship who studies family businesses. "Having worked with numerous families around the world, I have found there is always a confidant, either the patriarch of the family, a trusted lawyer or other friend of the family," says Amit, who chairs the executive committee of Wharton's Global Family Alliance, a private forum that brings global family business leaders together with researchers.
Family firms make up anywhere from 80% to 90% of business enterprises in North America, according to a 2003 research article in the journal Family Business Review, although other studies put the number much lower, closer to 50%. A 2000 study of East Asian firms, however, found that more than two-thirds were controlled by families or individuals.
John Ward, co-director of the Center for Family Enterprises at the Kellogg School of Management at Northwestern University, says chief emotional officers play a number of key roles. "Not only do they provide emotional support -- smoothing things over and keeping communication open -- but they also help acculturate in-laws, protect family traditions and values, and make sure the family gets together to socialize and have fun."
A classic example of a family member playing a chief emotional officer role, says Ward, was Iphigene Ochs Sulzberger, daughter of Adolph Ochs, who acquired The New York Times in 1896, and wife of Arthur Sulzberger, who succeeded Ochs as publisher. Iphigene Sulzberger, according to her New York Times obituary, "strove to preserve the family ties among her four children, 13 grandchildren and 24 great-grandchildren" and had a "quiet but decided influence" on the newspaper throughout her life. Said one of her children: She was "the glue that held us all together."
Iphigene Sulzberger's obituary raises an interesting question: What happens when the family glue is no longer there? "That's the Achilles' heel for family firms. When the chief emotional officer [dies or is incapacitated], there is a huge vacuum," says Ward, who is also a co-founder of the Marietta, Ga., based Family Business Consulting Group.
Unfortunately for family firms, the passing of the emotional management torch often comes at a moment of peak stress -- when the business itself is being handed down from one generation to the next. "The transition from the first or founder generation to the second generation is a very precarious time in the life of a family business," says Todd Millay, executive director of the Wharton Global Family Alliance.
Research from Amit shows why the stakes are so high. In a 2006 study that drew data from more than 60,000 shareholder firms over seven years, Amit and Harvard Business School professor Belén Villalonga indicated that when a company founder serves as CEO, the company's relative value increases. But, they write, "when descendants serve as CEOs, firm value is destroyed," particularly in the second generation.
The tumultuous nature of generational transition is reflected in the steep fall-off in family ownership over time. Only 30% of family-owned businesses survive into the second generation and a slim three percent reach the fourth-generation level and beyond, according to statistics from the Family Firm Institute, a Boston-based professional organization for family business researchers and service professionals.
"With succession in family businesses, it's not just a question of who will head the business but who will be the new patriarch of the family," says Amit. Ward notes that families pay a lot of attention to the highly visible tug of war between the founder and his or her successor, "but where families often have the greatest difficulties in succession is passing along the informal chief emotional officer role." This blind spot comes in part because the work of the chief emotional officer is often invisible to the family, he adds. "The issues are gender-loaded. Historically, the founder is a man, and his wife plays the chief emotional officer role. Her function often goes unrecognized."
While Ward notes that many founders are, of course, women, and the chief emotional officer role is not always filled by the founder's spouse, he says that those families who follow the classic pattern -- with a patriarch passing his business along to his first-born son -- face particularly acute problems. "From family theory, we know first sons have conflict with their father and a natural alignment with their mother. So a transition from the first to second generation puts mom smack dab in the middle, between her child and her spouse, and that's a horrible place to be."
The good news is that if a family business is able to navigate the rough waters of its first-generation transition, it is likely to find smoother waters on the other side. "The third generation begins again to create value, not destroy it," says Amit, a finding discussed in his 2006 paper.
Amit's conclusion parallels Ward's observation that by the third generation, families have usually managed to institutionalize family leadership. "Successful business families do this with teams of people, often through a family council or council of elders," says Ward. "They put a system in place and there is a conscious passing on of leadership roles."
For one 30-year-old family shareholder -- whoasked to remain anonymous -- in the fourth generation of her family's manufacturing and natural resource extraction business, the lessons of the past are clear. In the last generation, her father ran the company, a mid-size regional corporation, together with an in-law, who insisted on a series of poor investments. "It was a bad family dynamic. No one was able to blow the whistle on him," she says.
With a restructuring and with help from family business consultants, she adds, the majority of her generation of shareholders now attends quarterly board meetings in addition to regular family council meetings. "We get to sit around the room and hash things out. Otherwise, those conversations wouldn't happen."
Going Outside the Family
While identifying a chief emotional officer from within the family ranks may be convenient, such an internal solution to family leadership brings its own problems. "It's extremely difficult for family members to be both 'inside and outside' theirown family system and manage themselves and others through challenging circumstances," according to Leslie Mayer, a psychologist, business consultant and senior fellow with the Wharton Global Family Alliance.
Taking on such a mediating role as a family member can be especially difficult in moments of stress, says Mayer, president and CEO of the Radnor, Pa., based Mayer Leadership Group, which advises leaders of family businesses and CEOs. "In hard times, family systems need rules, yet in times of upset, families often give themselves license to violate those rules. They often feel, 'I'll just say what I have to say.' People who have to manage their own family in times of even mild stress can feel unfairly put upon."
If a family member does take the role, some recognition is in order, says Ward. "If leadership arises organically in the family, that is great, and it should be continued, but the family better support and recognize those people, giving them some 'attaboys' at the family meetings," he says.
For many family businesses, a solution can come in finding a chief emotional officer who is not a family member. Christopher Po, CEO of his family's Philippines-based Century Pacific Group, a food and dairy enterprise, says the very presence of an outside advisor during sometimes tense family meetings can be beneficial.
"Familiarity does breed contempt. In family situations, emotions can run high and family members can sometimes be too open and let it all hang out. But if there's a third party in the room, that forces everyone to behave a bit more and watch what they say, or at the very least choose their words more carefully, which can facilitate better listening and communication," says Po, who also set up the Asian office of Guggenheim Partners, a financial services firm that caters to families and institutions.
In Po's family business, the chief emotional officer role is filled by a non-family academic who initially consulted for the family 15 years ago. "The chemistry was very good, and as personal problems came up, he was someone family members would go to for advice," says Po. "Over the years he has developed close personal ties to each of us." He is now paid as a permanent advisor to the family council and executive committee.
But not every family will warm to the idea of trusting an outsider with intimate family details. As Millay of the Global Family Alliance notes, "Bringing in someone from the outside to play a chief emotional officer role can feel somewhat artificial. The nature of the role requires buy-in from all family members, and that's hard to create from scratch." Amit sees a cultural dimension as well. "In Asian countries, there is a reluctance to bring an outsider in to advise the family business, because that trust is not there."
Mayer suggests a practical solution to this dilemma. "Families that respond positively to the ideaof incorporating a outside chief emotional officer are the most likely to benefit from having one. Their very openness to the idea suggests it is in harmony with their family culture and orientation. If the front-end reaction is negative, then it's unlikely to work," she says. The main take away for families in business together, she adds, is that family leadership requires some thought and advanced planning, whether it involves hiring an outsider or identifying an insider. "You don't want to go looking for a doctor when you need to go to the hospital."
Family Businesses Come of Age
The types of family dysfunction a chief emotional officer addresses are part of what has traditionally given family businesses a bad name. As Ward puts it: "There is still a prevailing assumption that family businesses are paternalistic, unprofessional and uninteresting."
James Grubman, a psychologist and family wealth consultant, recalled a major Boston-based consulting firm that "hated" working with family business clients. "They felt there was no such thing as a well-run family business, and they had a covert agenda to bring in non-family management," says Grubman, who runs his own Massachusetts-based consulting practice.
But those assumptions are changing, he adds, as the field of research on family business broadens and more professionals specialize in serving these companies. The Family Firm Institute reports its membership numbers have doubled since 1996; today, they have an international network of 1,500 family business advisors, consultants, educators and researchers.
"Most of the businesses in America and around the world are family run or owned. That goes from mom and pop stores, where their kids work on the weekends, to major conglomerates," says Grubman. As the study of family businesses advances, "families realize they can manage the stresses they thought were an inevitable part of working together."
Mayer is encouraged to see several new joint MBA/PhD programs in psychology and business, because a multi-disciplinary approach is essential for working with family businesses. "There has to be a dialogue between the head and the heart of family business."