Research Management

Succession at the Top of Family Businesses Is an Opportunity If Well Managed

, by Andrea Costa
The 15th edition of the AUB Observatory contains a detailed analysis of economic data on Italian family businesses from different perspectives

The crisis situation due to the pandemic has led to a significant acceleration in the turnover at the top of Italian family businesses. In fact, if in the decade from 2013 to 2022, an average of 4.7 percent of family businesses had a change in each year, considering only the last three years it was as much as 6.9 percent. Against this backdrop of more frequent turnover at the top, a greater openness to managers from outside the families has been observed: if between 2013 and 2019 the difference between incoming and outgoing family leaders had been only minus 65, in the 2020-2022 three-year period alone this difference has jumped to 315.

These are some of the findings of the 15th report of the AUB Observatory, which will be presented today at 5 p.m. at Palazzo Mezzanotte, headquarters of the Italian Stock Exchange (Borsa Italiana). This is not a sample survey, but a study of all Italian family businesses with a turnover of at least €20 million, that is 11,635 family-controlled companies. This edition, edited by Fabio Quarato and Carlo Salvato, with scientific supervision by Guido Corbetta, confirms the reasons of interest of the last edition by illustrating the features of the recovery after the pandemic crisis.

The recovery of Italian family businesses after the pandemic is proving to be stronger than the one which followed the 2008-2009 financial crisis. Italian family businesses have made a remarkable rebound in two years, growing sharply in turnover and profitability. The turnover of these companies, in particular, grew by more than 14 percent in 2022 compared to the previous year in which a quite extraordinary jump had already taken place, while the average ROE (Return On Equity) has more than recovered its 2019 levels at 13.4 percent. Significantly, this recovery also led to an increase in the number of people employed, up 7.3 percent from before the pandemic (up 4.5 percent in non-family businesses).

The capitalization of family businesses continues to improve too: the debt ratio (total assets/shareholders' equity) has further decreased to 3.9. Just 10 years ago, the corresponding value was 6. Similarly, the number of firms with weaker capital position has also dropped: family businesses with "critical" or "alert" parameters as defined in the report are 19.7 percent, a decrease of as much as 15 points from 2011.

The governance of family businesses is shifting toward more structured models than the Sole Director. Fabio Quarato explains, "It is not that the Sole Director is disappearing, although companies with this model have been slowly declining for a few years. The point is that companies of this type are no longer those which do best. Collegial leadership is associated with better performance in this post-Covid three-year period, especially in larger companies that usually anticipate trends that eventually become commonplace." And it's not just a matter of corporate form, because how diverse boards are matters, too. Companies with Boards that are more open to women, young people and members from outside the owner families perform better than others in both turnover and profitability.

The presentation event of the AUB Observatory goes under the title "Change at the Top: Threat or Opportunity?" referring to a critical passage in the life of a family business: the turnover at the top, to which a specific focus is devoted. In the top management changes that have taken place in the last decade, the incoming leader (family or non-family) is younger than the outgoing boss, on average, by more than 7 years. But this in itself is not enough to tell whether change at the top is a problem or an opportunity for growth. The Observatory's data, however, show that top management succession that occurred in the 2008-2019 period had a positive impact on the growth rates of family businesses: +3 points of growth in the three post-succession years compared to the previous three years. The positive effect of top management turnover, however, is higher when the outgoing leader is over 70 years old and the successor is under 50 years old, pre-succession board was already open to non-family members, the incoming leader is a woman, and if the transition occurred between family members (outgoing family member and incoming family member).

According to Carlo Salvato, "Historically, succession at the top was a traumatic event, partly because in general it was not a carefully prepared transition. Sometimes, this is still the case, but we definitely see that successions are better managed and also that this wiser attitude among family businesses is starting to pay off. Possibly, the difficult pandemic season favored predecessors' decisions to step aside without improvising."

As Guido Corbetta adds, "At least looking at listed family businesses for which an ESG rating is available, we have seen that a new CEO means on average an increase of 4 rating points in the three following years, rising to 8 if it is a female CEO. This focus on sustainability and diversity is a feature of great interest that we will continue to monitor. Whichever way you look at it, we can certainly conclude that we are entering an era in which succession at the top of a family business is no longer a threat but an opportunity."

Massimiliano Mastalia, Head of Wealth & Large Corporates at UniCredit, says, "The accurate snapshot of the 15th AUB Observatory confirms how, in the 2020-22 "Covid period," Italian family businesses have outperformed the previous decade, as shown by various indicators of growth, profitability, and solidity. The analysis also points to a strong acceleration compared to the past in top management turnover, with greater participation by external managers, new leaders under 50, and improved diversity indicators. The recovery of the Italian economic system has occurred much faster than in past crisis situations, and family businesses have been, even in recent years, the driving force of Made in Italy, representing more than 65 percent of the total number of Italian companies with a turnover of over €20 million. Our role is to work alongside companies and entrepreneurs on strategic issues too, building together innovative and tailor-made solutions to guide and support the management of sensitive issues such as family governance, dimensional growth (both internal and by external) and diversification in the private market."

"Once again, this 15th edition of the AUB Observatory (an important anniversary for family business research) confirms that employment, growth and profitability of the family businesses studied are registering very positive rates," comments Cristina Bombassei, President of AIDAF. "These data tell us once again not only about the solidity and the drive to invest and innovate (even in the Covid period) of Italian family businesses, but also about their leading role in the transition towards ethical and sustainable business models. This paradigm shift, necessary to address the complexity of global challenges, is certainly happening as a consequence of the generational renewal taking place. The most interesting element, in my opinion," continues Cristina Bombassei, "is the correlation between positive results and a more advanced governance, often collegial, in which multiple generations, complementary genders and cultures, family members and non-family members are given space and voice, integrating in a diversity that enriches dialogue and improves performance. AIDAF has long and passionately worked on this evolution, although there is still a long way to go."

According to Barbara Lunghi, Head of Primary Markets at Borsa Italiana - Euronext Group, "The AUB Observatory highlights how healthy Italian family businesses are and the positive evolution of their governance, which involves the adoption of more structured leadership models, to become better equipped for the greater complexity in which they operate. The task of Borsa Italiana, now part of the Euronext Group, is to stand by these companies to prepare them for the challenges markets involve, encourage them to access capital to finance growth, and assist them in the crucial generational transition. The Exchange can and must offer family businesses increasingly efficient markets, geared to meet different needs, giving access to a diversified pool of liquidity, so that companies using the Exchange are increasingly significant and able to compete in global markets."