In an iconic scene in Martin Scorsese’s Goodfellas, Henry Hill leads his date on a zigzagging traverse, filmed in a single shot, through the Copacabana nightclub. The couple enter through the back door, past the kitchen and chefs, and straight to the front of the club, skipping the long line of annoyed patrons. Some mobsters send a nice bottle of wine to Hill’s table and exchange “salutes.” Hill’s date was impressed with the ostentatious display and asked what he did. Hill quickly responds, “I’m in construction.”

Mr. Hill wasn’t really in construction. But Mr. Joseph A. Hardy III, who founded 84 Lumber, sure was—and far more flamboyant. The Wall Street Journal best described the eccentric building supply store tycoon, “…Hardy… tried to keep the business simple by selling building supplies to contractors and remodelers in no-frills outlets scattered across the U.S. His personal life was more complicated.” Some of his exploits included purchasing a British royal title, booking Kenny Rogers to sing at his second wedding reception, having Bette Midler at a birthday party, and driving Rolls-Royce cars.

Mr. Hardy passed away on his birthday at the age of 100 earlier this month. 84 Lumber operates more than 260 stores, component manufacturing plants, custom door shops, custom millwork shops, and engineered wood product centers in 35 states. The company hit $7.9 billion in sales in 2021. The private business is still family controlled and owned by Hardy’s youngest daughter, Maggie Hardy, who serves as president.

Outside of the interesting personal drama that followed Mr. Hardy, the WSJ write-up did remind us about the “next man (or woman) up” dilemma for many businesses. Who will ultimately take the reigns—especially following a larger-than-life founder? As highlighted previously on Family Business Director, the primary questions associated with management succession are (1) Who will be the next leader of the business? and (2) How will the transition occur?

Who’s Up?

For 84 Lumber, the original heir apparent did not ascend to command the business. Mr. Hardy’s oldest son, Joe Jr., joined 84 Lumber early on and eventually became chief operating officer. In the 1980s, Joe Jr. was diagnosed with multiple sclerosis, and the dad and son had a frank conversation about Joe Jr.’s ability to run the business. Mr. Hardy, quoted in the WSJ, simply said, “It just didn’t work out.”

In our experience, many succession struggles are rooted in a failure to distinguish between being a good family member, a good employee, and a good business leader. The combination of native ability, education, character, social IQ, technical skills, and strategic savvy necessary to run a large business successfully is rare.

The second common myth is that since certain family members have demonstrated themselves to be great employees (in whatever functional area), they will, therefore, be great leaders. Being good at one’s job does not guarantee success as the leader of a family business and the demands of the job.

While not the case here (as discussed below), it may be easier for a board to cast a wider net to find the best candidate to assume leadership of the business, even if they don’t share a last name with the founder. Having an “outside” CEO does not mean the company has ceased to be a family business any more than hiring the first non-family employee on the shop floor did. Rather, it simply means that the directors have fulfilled their responsibilities to shareholders, employees, and the community by seeking the right candidate for the job.

Why Now?

In the long run, management succession is inevitable: the proportion of managers that are eventually replaced is 100%. To Mr. Hardy’s credit, he was more proactive in succession planning than most. Mr. Hardy decided to keep control “in-house” and passed control of the business to his daughter Maggie, who shared Mr. Hardy’s bravado and strong conviction. Amidst the housing market crash in 2007, Mr. Hardy urged his daughter to file for a bankruptcy-court reorganization. Maggie took her own path and managed to restore profitability and reduce debt by closing around 50% of stores, selling off real estate, and diversifying their sources of revenue.

Mr. Hardy may have wanted to seek more “frills” not offered in running a cost-conscious, tight-margin commodities business, which helped him to make a more proactive decision in off-ramping from the day-to-day. However, there are generally three circumstances giving rise to management succession.

• Planned Retirement: When the senior executive is approaching a natural retirement age, the directors should identify potential candidates to replace the retiring leader. The appropriate retirement age for family business executives is a vexing issue. There simply is no one-size-fits-all for when a successful family business leader should step away. In our practice, we have seen examples of departures that—in hindsight—were premature because the designated replacement was not yet ready to assume leadership. Perhaps more commonly, we see examples of businesses that plateau and stagnate because an aging senior executive refuses to move out of the corner office.
• Performance-Driven Transition: If the directors determine an existing senior executive is not generating acceptable results, as Mr. Hardy rightly or wrongly did with his son, then it may be appropriate to seek a replacement. Family dynamics can make this an extremely difficult decision, and the prospect that such a decision may be in the best interest of the principal stakeholders (family shareholders, employees, local community, customers, suppliers, etc.) is one good reason to include qualified independent non-family members on the board. The independent directors can provide an objective assessment of managerial performance uncolored by internal family dynamics.
• Unexpected Vacancy: Finally, management succession may be forced upon the company because of an untimely illness, death, or other unforeseen circumstances. No business is immune to such circumstances, which underscores the need for directors to proactively think about management succession, even when the current leader is successful and expected to have a lengthy remaining tenure. When tragedy strikes, selecting the next leader should still be considered a measure-twice, cut-once project, with the organization’s long-term health taking precedence over the short-term desire to fill the position.

In the end, every management succession plan will be as unique as the family business it is designed for. But one constant for all family businesses is that now is the time to begin thinking and planning. Hopefully, it doesn’t take a yearning for fast cars or palatial estates to spur you and your family into action.

Through our family business advisory services practice, we work with successful families facing issues like these every day. Give us a call to discuss your needs in confidence.