Family firms

Intergenerational ownership and CEO transition

Changes in the management of a family business can be a contentious and risky affaire. Successors often have big shoes to fill and the weight of the family’s future success on their shoulders.

Approximately 70% of Norwegian family-owned firms that undergo a CEO transition select a successor from within the circle of the family (“family successions”) and 30% select a CEO that is unrelated to the firm’s controlling owner-family (“unrelated successions”).

Table 1 displays the relation between the outgoing CEO and his or her successor in family successions. Most successors (68%) are children of the outgoing CEO, and most of the children are sons.

Table 1 Relation between outgoing and incoming ceo.jpg

 

Researchers have investigated what happens to performance in family firms after succession. Studies on, among others, Danish and U.S. firms have persistently showed that the average family-successor underperform the average unrelated successor (“professional CEO”).

Recent CCGR research have found that this underperformance is concentrated on family-successors that have worked in the family firm for a long time prior to succession. On average, such “inside family-successors” have worked close to 10 years in the family firm prior to taking over as CEO and only one-third of them have worked outside the family firm. Family successors that are recruited from external firms (“outside family-successor”), however, perform as well as unrelated CEOs. Figure 1 displays the evolution in different measures of performance and profitability around the date of succession (date T=0) for the two types of family successors.

Figure 1 Corporate performance.jpg

The analysis suggests that successors’ lack of outside work experience has a negative effect on performance, even after taking into account the effect of other factors such as education and prior management experience.

Why does outside work experience matter for successors’ performance? One explanation is that outside work experience develops successors’ ability to think "outside the box". It is possible that that children that grow up with family businesses develop set perceptions of the best way of doing things from their parents which hamper their ability to break with past business strategies when needed. In contrast, successors with experience from different business cultures may be able to draw on a broader set of competencies. 

Another interesting question is why so many families position their children in the firm well in advance of taking over? One answer is that the secret to the firm’s success must be passed on and takes time to learn. Another is that families are afraid that their children become lost for the business and foster loyalty by involving them early in management. CCGR’s research suggest that the best family successor is one that has learned the secret to success around the dinner table but also has experiences from outside the family realm.