All in the Family, but not Always
Appointing a family CEO to the helm can be either an asset or a liability to a family firm, depending on the environment it operates in. In environments where informal rules prevail, such as industrial districts, a family CEO improves the firm's financial results, while in contexts like stock markets, where formal regulations and transparency are kings, a family CEO proves detrimental.
Carmelo Cennamo and Guido Corbetta (Department of Management and Technology) draw this conclusion in an article written with Lucia Naldi (Jönköping Business School) and Luis Gomez-Mejia (Texas A&M University): Preserving Socioemotional Wealth in Family Firms: Asset or Liability? The Moderating Role of Business Context (forthcoming in Entrepreneurship Theory and Practice). The authors warn, though, that the negative effect of a family CEO on the financial results of listed companies shouldn't be taken as the sole measure of the effects of the decision: a family CEO also plays an important role in reaching objectives that the family principals consider important and that scholarly literature summarizes as socioemotional wealth (SEW): keeping control and influence over the firm's operations and ownership; perpetuating the family dynasty, ensuring that the business is handed down to future generations; sustaining family image and reputation.
Not all family firms are born equal and this study shifts from comparing family to non-family firms (standard fare for past research) to comparing family firms with different features. The authors propose that the choice to preserve SEW by appointing a family CEO will enhance financial performance when there is a proper fit between the family's SEW objectives and the prevailing institutional logics characterizing the environment, and will hinder financial performance when such a fit is missing. Using a database of all the Italian family firms with returns in excess of € 50 million, they compare the Return on Sales (ROS) of family firms with a family CEO and with a non-family CEO either operating in industrial districts (the perfect example of a business context with informal logics) or listed on the stock exchange (the formal environment). They record both a positive, strong and significant effect of family CEOs on ROS in the industrial districts and a negative, strong and significant effect among the listed companies, meaning that "family CEOs might be an asset for managing interactions with some external stakeholders, such as other actors in their local community, and a liability with other stakeholders, such as stock market investors".
Thus it doesn't come as a surprise that the share of family CEOs is larger among family firms operating in industrial districts (48%) than among listed family firms (38%). Nonetheless, the choice of listed family firms to appoint a family CEO can't be judged too harshly when the other SEW benefits deriving from a family CEO are taken into account.