As family businesses have grown, they have focused on professionalising their operations and implementing key corporate governance measures to ensure business continuity.
A critical step in making that change is the recruitment of non-family members into strategic management roles. Bringing outsiders into a family business poses unique challenges and requires the employment aspects of the process to be carefully considered and well-documented. This article covers the steps family businesses can take to cover the risks involved in recruiting outsiders into the business.
Create detailed job descriptions
Senior personnel are often headhunted through executive management companies which can serve as a useful intermediary to potential candidates and ease the negotiation process. However, care needs to be exercised to ensure that any agent or intermediary used is considering a wide range of networks and sources for potential candidates. Defining the brief will also be critical to success and will require specifying the attributes and criteria the business views as essential.
Job descriptions are therefore integral to the process of securing the right candidate and also managing them after they join the business. It may seem counter intuitive to have a job description for a strategic management role but defining the scope of the appointment, the authorisations attached (both in terms of authorised signatory status and decision making remit) and the way the role will interact with other senior management is critical to success. It is also likely to inspire confidence in a non-family member in the business and the seriousness in which the family views the role and its remit.
Perform due diligence & background checks
Where you are recruiting a non-national or non GCC national, the immigration authorisation process will often involve the candidate submitting a variety of background documents such as attested educational and professional certificates and in some countries a certificate of good conduct as well as a medical examination. Any senior manager should be asked to agree to the company carrying out additional background checks including taking references (both professional and personal), information on his financial situation and medical condition.
Checking the candidate's online profile is also advisable but care should be taken with regard to only accessing publicly available information. Also depending on where the candidate is being recruited, some jurisdictions may outlaw certain online profiling e.g. checking a candidates' Facebook page.
Where references are taken orally or views are sought on a candidate's ability, care should be exercised in terms of what information is sought, how it is documented (if at all) and what use is made of any views obtained. Defamation can be a criminal offence in the GCC.
Whoever is ultimately chosen to join the company should also be asked to sign an on-boarding form verifying the information given so that any non-disclosure or provision of false information or omission can form the basis for a managed exit in the future if necessary.
Carry out extensive interviews
Conducting panel interviews as well as one-on-one meetings with key decision makers is useful to achieve consensus on the hire. It is also important to be clear about the process and what it involves as well as the timeframe. Good candidates can be lost if the decision making process is prolonged. Maintaining scorecards to demonstrate that all candidates were equally assessed and graded will help support any final decision, especially if the candidate is recruited from a jurisdiction where the ability to show a clear-cut and unbiased decision making process is legally important.
Invest in a thorough employment contract
Once the candidate is chosen, negotiations on the terms of entry will begin and it is important that these are truly reflected for both the business and the manager in the employment contract. These contracts will need to be aligned with any information or documents registered with the relevant authorities.
Of absolute importance is that any written agreement is clear on payments to be made (when and how), any qualifying conditions (e.g. that the individual must be in active employment at the time any payment is due or that it is subject to qualifying periods of service), and clear rules for forfeiture.
The job description should ideally be annexed to the contract and form an integral part of it. The contract will also need to set out the general duties the manager will owe the business in his role, and set out the fiduciary nature of the role and his duties. It is wise to provide the general statutory duties that can apply to a manager under the relevant companies' law (which can involve personal liability and criminal liability).
Define compensation & benefits from the start: shares, bonus or commission
A critical factor in bringing in an outsider to a family business is ensuring engagement and commitment to the business goals which typically is achieved through incentive schemes. Many international companies offer sophisticated employee or key man share schemes to tie individual performance to financial return.
Whilst it has become a little easier for publicly listed companies to offer such schemes in the GCC, the subject of pre-emption rights remains an issue for privately held companies. This, together with independent valuation of privately owned companies (which can be a costly exercise) means that many family-owned businesses are advised to opt for shadow bonus schemes or commission schemes.
Shadow schemes can be linked to the company's financial targets and measurements which would be reported in audited accounts, relevant factors are EBIDA (earnings before interest, depreciation and amortization), net profits, and qualitative targets. A key measure is also profitability.
As with any written agreement, clarity is essential regarding qualifying conditions, when and how payment will become due and be paid as well as rules for forfeiture; commonly referred to as bad leaver rules.
Opt for fixed term engagements
Finally one potential mechanism for managing an 'outsiders' involvement in the family business is to engage individuals on fixed term contracts. This provides a clear timeline for the achievement of a defined agenda and a natural exit date.
Fixed terms can always be renewed, however if they are terminated prior to completion, compensation would usually be payable (within the GCC, fixed term contracts by law should not usually have a notice period).
An increasingly accepted school of thought is that individuals' occupation of key management and strategic roles have a shelf-life. The average life of a successful CEO in a company is increasingly being accepted as a five year term.