When a family holds all the cards, the CEO is just a face

As communications titan Ted Rogers contemplated his mortality, he worried about how his children would adapt to having a non-Rogers succeed him as CEO of Rogers Communications Inc.

As he described this likely outcome to his family, Mr. Rogers once told me, "I get shit from the kids." By the kids, he was primarily talking about two of his four children – Edward and Melinda, then in their early 30s, both active in the company as executives, and very ambitious.

Flash-forward 15 years. Ted Rogers has been dead for eight of those years and the company has just shed its non-family chief executive officer, Guy Laurence. While Mr. Laurence's business performance was mixed, his major failure was fumbling relationships with the Rogers family, especially with Edward and Melinda Rogers, both board members.

It is tricky being the non-family CEO in a family company – especially with the founder's family is still very much involved, either in board or executive roles. It is particularly difficult when you come from outside the company, as Mr. Laurence did. You must learn to manage the family before you can effectively run the business.

You need to be aware that a ruling family exerts its influence in myriad ways, not just through its dominant voting rights. There are the old hands, the friends of the family, who still occupy key roles on the board and in senior management. There is often the residual moral authority of the founders or builders who may be officially retired – or even dead – but still exert outsized influence on the culture and decision-making.

That influence becomes more pronounced when the founder's heirs are active in management of the company. The heirs are often driven to emulate their entrepreneurial forebears, and may still aspire to be CEO themselves. The outside CEO chafes at the need to consult constantly with the founder's kids, and would prefer that they spend their time on philanthropy and hobbies.

But any move to sideline the Great Builder's children – as Mr. Laurence undertook – is fraught with peril, and in a power struggle the CEO will invariably lose.

In private family companies, the outside CEO is most exposed, but also has a clearer grasp of the dynamics. The family holds all the cards and can dismiss the CEO in a flash. A single owner, such as Arthur Irving of Irving Oil, can mow through presidents with impunity – he has employed four presidents in six years, including his own son Kenneth, whom he dismissed. Sometimes, the executive with the biggest challenge is the son or daughter who has trouble meeting high expectations.

CEOs may feel more secure in public companies, such as Rogers Communications (RCI), that have dual-class shares – the families have surrendered large chunks of their equity but held on to voting control. A CEO can take comfort from a fiduciary board with meaningful committees and a core of independent directors. But independence is a relative term, and ties to the family can be subtle. In the end, the family has the votes and the CEO must never forget that.

Family companies that survive are the ones where the families change as the business changes. Sir Graham Day, the veteran Nova Scotia lawyer, executive and director of family companies, subscribes to the belief that a family enterprise must go through three stages. The first is the entrepreneur stage, the stage of Ted Rogers, when a single individual or team creates the company and drives all its decision-making.

As the company grows, it enters the owner-manager phase, which demands a new complement of skills and more collegial decision-making. Family members still occupy the top jobs, but are supported by outside recruits.

Then comes the hard part, when the business becomes so complex and the challenges so varied that professional managers must be in charge. The family takes on the role of more detached investor, with hands off the executive suite.

No company reaches this investor stage easily, and many fail. In Sir Graham's words, "it requires shareholder maturity, the exercise of judgment and the avoidance of meddling."

RCI is clearly having trouble with this transition. Family members might feel that the sacking of Mr. Laurence was justified for business reasons. But they must ask themselves: Are they really contributing to the performance of the company or should they get out of the way?

Ted Rogers sensed this tension would pose a challenge for his family. As with most things, he was right.