Mel Stern takes a look at two family-owned businesses that have reaped the rewards of bringing in a turnaround manager
Some of the world's most successful companies and brands are the product of generations of blood, sweat and tears that contain the same DNA. And many such brands have perished at the hands of that same DNA, when an inadequate inheritor has been installed as the head of the business to prolong the family line. But there are those inheritors who, even if they haven't been bestowed with the "X factor" their predecessors had in managing and growing companies, do have the equally important skill of knowing when to bow out.
When a family business hits crisis point, those inheritors can often be co-saviours of both the company and the family's hard-won reputation by deciding to bring in a turnaround manager.
In mid-August, Lego chief executive Jorgen Vig Knudstorp announced that the Danish toy company recorded a 166% increase in pre-tax profits for the first half of 2008 to €75.6 million ($111 million), up from €28.4 million the same time last year.
This off the back of a far more modest increase in year-on-year sales, coming in net at €480 million compared with some €400 million in the first half of 2007 – against the backdrop of a continually contracting global toy market and strong indications of a European recession.
In his fourth year as chief executive, Knudstorp, who was made CEO by his predecessor and second-generation of Lego's owning family, Kirk Kjeld Kristansen, has pulled the company out of a yawning debt hole and susceptibility to hostile takeover bids by selling off non-core assets to pay down owings quickly, and galvanising a largely non-family executive to gain more shelf space in a crowded market.
It's impressive work. Fortunately for Lego, the company didn't have to look outside, as ex-McKinsey consultant Knudstorp already worked there as interim chief financial officer and so was deeply involved in and aware of the company's financial woes.
Crucially, Lego benefited from his genuine buy-in into the spirit of the brand and its classic offering; Knudstorp led the company's initiative to take Lego out of toy stores and set up its own branded shops to control sales and marketing. It was a risky, expensive experiment – and it worked.
Even so, as the company had only had one non-family CEO in its 73-year history, the decision to elevate him was a big risk. And as Jorgen conceded in an interview with this magazine in late 2005, he needed the blessing and co-operation of the Kristiansen family to enact a raft of cuts that would hurt the workforce and make one of Denmark's most loved employers a little less popular.
"One of the things Kirk often tells me is how his father's father found it difficult to step back from the business and let him take control. He wants to make sure that I don't experience this too," Knudstorp told Families in Business in Autumn 2005.
The supermarket saviour
Turnaround executives by definition come in at a crisis point for a company and as such, need superior personal skills. They often need to cull or replace senior or board level executives at the same time as they must try to instil a feeling of trust and buy-in to new, ambitious targets – and the sense of detachment required to execute this is in short supply.
In Richard Pennycook's case, drafted in to rescue family-owned UK supermarket chain Morrisons following its disastrous integration acquisition of rival Safeway, morale had bottomed out across the company.
Already well known as a serial corporate turnaround expert and more commonly than not for family businesses, Pennycook had to unpick years of Morrison family-style management for the newly enlarged, post-aquistion company.
"Blood, while thicker than water, does not necessarily pass great leadership skills or business flair onto the next generation. When a business is doing well, succession is challenging enough. When it faces tough times, the process of succession can compound the difficulties," Pennycook says.
"The dilemma of whether to hang on, pass on the baton to a family member who may not be quite up to par or take the risk on an external appointment is genuinely difficult. Too often, a failure to deal with this decisively can lead to the business going further downhill – and then a 'turnaround' situation arises."
In owner-founder Sir Ken Morrison's (pictured) case, it was only once the company was almost on its knees that his planned exit saw the arrival of the UK's top executives, including Pennycook, and in 2007 the company reported its first set of strong financial figures since pre-acquisition days.
To achieve this, blending family heritage and input without letting it dominate was a critical skill. "A particular feature of turnarounds in family businesses is that emotions can run very high – the tension will not just be in the workplace but around the kitchen table as well," Pennycook recalls. "The turnaround specialist needs diplomatic skills, and real empathy, to deal effectively with these sensitive situations."
Turnaround specialists come about more often by accident than design. For that reason locating them isn't as simple as retaining a headhunter. In Lego's case, the right man was already inside the company. For Morrisons, contacts and reputation conspired. But both those turnaround executives had sector experience relevant to the family business.
The post-turnaround phase
What happens once a family business that hired a non-family turnaround guy has, well, turned around? Do you simply get rid and get back to being a family-run entity? It's never that simple. Any company, once it has found an executive talented and dedicated enough to reverse losses as great as those experienced by companies such as Morrisons, would be tragically short-sighted to then let that person go – possibly, to a rival – after the turnaround has been effected. Many successful family businesses have learned that being insular – using non-family executives to fix something temporarily and then re-installing family dominance to grab the glory and the control – is damaging only to themselves in the longer term.
Additionally, the turnaround executive that is attracted to a family company is a rare animal and once they are engaged in the cause, may not find it as easy to walk away as they had planned to at the outset. Family businesses often infuse a double sense of purpose and meaning to their non-family executives.
"Being given this role feels a bit like being elected prime minister. If you are the CEO of a family business you need to be sure you can represent the family and their values," Lego's Knudstorp says of his position. "I can see myself being here in 20 years' time having brought the company a great deal of success. This is a company with so much potential; I feel we have a product and a brand that really does make a positive difference to the lives of children. I am committed to that and I can't see the end of my commitment anytime soon."
Pennycook says that when there is nothing left to rescue, there is no reason to stay. "For most turnaround specialists, when the job is done, it is time to move onto the next turnaround," he says.
But what he says and what he does conflict: as far as we know, he has no intention of leaving Morrisons just because it is out of the financial woods. Now that the UK supermarkets sector has some of the greatest opportunities for growth and competition in its history you can safely bet that this turnaround executive is far from done with propelling the Morrison family business even higher.
By their nature, turnaround guys love trouble, and extrapolating value from complicated, political businesses like family-owned entities practically sings to their DNA.
This is great news for any family businesses reading this who think that they need serious help from outside the owner circle, and have the grace to step aside.
Plus, by the look of economic prospects for most of the developed world in 2009 and 2010, the relationship between family businesses and turnaround guys can only develop.