Leave the Family Firm Before You Lead It

Our recent study investigates why family firms often perform worse after appointing a family member as CEO compared with hiring an unrelated professional manager. While previous research has largely attributed this underperformance to the limited talent pool available within a family, we propose an alternative explanation: many family successors have little or no work experience outside the family business. Using comprehensive administrative data from Norway, we show that outside work experience is strongly associated with improved firm performance following succession. 

The study analyzes approximately 2,400 CEO successions in Norwegian family-controlled firms over the period 2005–2016 and distinguishes between two types of family successors: inside successors are family members who had already worked in the business or served on its board for at least three years before becoming CEO. Outside successors are family members who were not employed by or formally involved with the business during the three years prior to succession. 

The data reveal that inside succession is by far the dominant practice. Around 67% of CEO successions involve family members, and nearly three-quarters of these are inside successors. Inside successors begin working in the family firm up to 10 years before taking over and at least 45% of inside successors have never held a full-time job outside the family firm. In contrast, outside successors typically leave the family firm in their twenties, gain experience with multiple outside employers, and later return to assume leadership. 

We argue that early involvement in the family business has both advantages and disadvantages. On the positive side, it helps transfer firm-specific knowledge, preserve relationships with customers and suppliers, and strengthen commitment to the family's values. However, prolonged exposure to only one organizational environment is more likely to internalize existing beliefs, routines, and strategies, making them less likely to challenge established practices or adapt to changing business conditions. Outside work experience, by contrast, exposes successors to different management styles, organizational cultures, and business strategies that may enhance innovation and decision-making. 

To evaluate these ideas, we estimate how firm performance changes before and after CEO succession using a stacked difference-in-differences approach. This method compares firms experiencing succession with family firms that undergo succession at a later date, allowing the effect of the new CEO to be isolated. Performance is measured primarily using operating return on assets (OROA) and return on assets (ROA). 

The results are striking. Firms led by outside family successors experience significant improvements in profitability after succession, while firms led by inside successors either stagnate or decline. Moreover, outside family successors perform just as well as, and in some analyses even better than, unrelated professional CEOs. This finding overturns the common assumption that family succession is inherently inferior. Instead, the study demonstrates that the previously documented underperformance of family firms is driven almost entirely by successors who have spent their careers exclusively inside the family business. 

To understand why outside successors perform better, the paper examines changes in company policies after succession. Firms led by outside successors grow more rapidly in assets and employment, increase leverage, and display higher employee and management turnover. These changes suggest that outside successors are more willing to restructure the organization, implement new ideas, and pursue growth opportunities. Furthermore, outside successors typically gain experience in firms that are substantially larger than the family businesses they eventually manage, providing exposure to broader managerial practices and organizational capabilities. 

We also explore alternative explanations. Outside successors tend to have higher educational attainment and are more likely to have prior CEO experience than inside successors. However, controlling statistically for such differences does not eliminate the performance gap. Measures of outside work experience—such as the number of outside employers or the proportion of time spent outside the family business—significantly reduce the difference in performance, suggesting that external experience itself is a key driver of success. 

Another possibility is that more talented family members are more likely to be offered outside jobs, meaning that outside employment  signals superior ability rather than creating it. While we cannot completely rule out this explanation, we conduct several robustness tests. We examine firms where the outgoing CEO dies, making succession timing largely exogenous, and perform placebo analyses that artificially shift succession dates. These tests continue to support the conclusion that outside successors outperform inside successors and reduce concerns that the results are driven by selection bias or favorable growth opportunities. 

The paper concludes that outside work experience is an important determinant of successful family succession. Families wishing to retain managerial control should therefore encourage potential successors to build meaningful careers outside the business before returning. Even if outside employment partly reflects innate ability rather than acquired skills, it still serves as a valuable observable signal when selecting among potential family successors. Overall, the study suggests that the most effective family CEOs are those who combine family commitment with diverse external professional experience, rather than those who spend their entire careers inside the family firm.

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Irena Kustec is an Associate Professor at the Nord University Business School of Nord University.

Charlotte Ostergaard is a Professor in Finance at Copenhagen Business School, and an ECGI Research Member.

Amir Sasson is a Professor at the Department of Strategy and Entrepreneurship at BI Norwegian Business School.

This blog is based on a paper presented at the 4th Baltic Family Firm Institute - ECGI Conference, held in Tallinn, Estonia and hosted by Estonian Business School, in collaboration with ECGI. Visit the event page, Steering the Legacy: Governance and Succession in Family Enterprises, to explore more conference-related blogs.

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