A Shock When the CEO Changes for Family Businesses

It is believed that the succession of a CEO represents one of the most important events – if not the most important – in the management and governance organization of a family business. The results of CEO Succession, Organizational Context and Performance: A Socio-Emotional Wealth Perspective on Family Controlled Firms, a working paper by Alessandro Minichilli and Guido Corbetta (Department of Management and Technology) with Mattias Nordqvist (Jonkoping International Business School), demonstrate how this represents a particularly traumatic moment in family companies, with considerable declines in the assessed profitability in the three years following the change in top management.

Family business literature usually attributed the decline in family business profitability following succession to the difficulties in identifying a successor with abilities and competencies in line with the outgoing leader, especially if chosen from among the controlling family members. Contrary to this widespread interpretation, this study was based on the emerging theoretic position of what is known as Socio-Economic Wealth, which has taken on particular importance in recent years. According to this position, family companies are guided not only by objectives of an economic nature, but also – and more importantly – by non-financial objectives connected to specific needs. Among these needs are the sense of belonging that family members have with the company, the possibility to wield the family's influence on company decisions and the continuation of the family dynasty over time. As a consequence, every decision is faced by attentively evaluating the impact on the family's social and emotional legacy, with considerations which go well beyond pure management rationale. The large presence of non-public companies in the survey sample – which, it is believed, can pursue these objectives more than others – further reinforces the results described hereinafter.

Based on data from a survey completed in 2008 on the largest 1,000 family businesses in the country based on size, the study considered the impact of CEO succession on profit results (measured in terms of ROA and ROE) in a sample of 161 responding companies with family control, both public and private, outlined for a period of 10 years (from 1998 to 2007), for a total of 1,610 observations. In the theoretical position used, results regarding the negative impact of CEO succession on company performance were explained by the controlling family's desire to place emphasis on the preservation of the family's social and emotional legacy during such a delicate transition. It is believed that this legacy is placed in discussion after each change in company leadership, due to the diverse set of values that each leader brings. This appears even more evident when considering how successors determine an even more negative impact on company performance if there is a substantial presence of family members on the board of directors, testimony of a greater attention of family members on the preservation of their values.

Further analysis demonstrates how the outgoing leader's characteristics and those of the incoming leader have considerable weight on financial results during the period following the change in top management. In particular, if the outgoing leader has held the position of CEO for a long time (too long), and if the incoming leader is external and not a part of the controlling family, positive aspects tend to prevail. In the first case, this is due to advantages connected to the substitution of a leader who is by then only true to his/her past (and successes), without the ability to innovate (and take risks) for the future; in the second case it is due to the contribution of talented management resources, who are more oriented towards financial objectives and less "bound" by the necessity to preserve the family's values. However, even during these last two circumstances, the presence of a board of directors with a large number of family members reduces positive effects connected to the substitution of a leader who is too senior (in the role), as well as the entrance of external management. These facts reinforce the idea introduced before, that the family's main objective, especially during critical times for their existence, should be the preservation of the legacy of values, seeking a continuous balance with the necessary profit goals.