Successions

Succession—the passing of control to the next generation—is the defining feature of a family business. Successions are their most momentous decision and perhaps their greatest source of conflict. Should the next generation take charge, or cash in by selling their shares in the family firm and investing in a diversified portfolio?

A prime consideration is who, exactly, in the next generation should take over. Sometimes a highly qualified heir stands ready to lift the firm to new levels of success. Sometimes no one stands out, and the firm might be better run by professional managers with top-tier MBAs after the family cashes out. Sometimes an ill-qualified heir covets control, and cashing in averts catastrophe. 

Character traits associated with business success are likely unreliably inherited, and Andrew Carnegie’s contention that inherited wealth "deadens the talents and energies" and leads to a "less useful and less worthy life" challenges all business families. For the sake of his children, Carnegie gave away most of his wealth to fund public libraries, the arts, and universities. Bill Gates, Warren Buffett and others have endorsed this idea.    

Another issue is appetite for risk. Diversification massively reduces risk: having all their wealth concentrated in one firm risks disaster if that firm fails. A diversified portfolio barely moves if one firm fails. An internationally diversified portfolio can move even less. If one firm in one country collapses, another firm in another country soars, and the effects cancel out on average in the portfolio’s return. 

A third issue is status. Cashing in severs the family’s link to the social status, political influence, and economic power vested in the family firm. Those connections matter more in economies where personal connections matter more, so cashing in is less common in Latin America, Asia, and other regions where money alone carries less cachet. Cashing in is also less common in economies where professional corporate governance is less reliable, and diffuse investors consequently pay less for ex-family firms.

A family, its inherited wealth committed to one firm, or even a few firms, logically favors conservative strategies to extend corporate longevity. However, corporate longevity is not always laudable. Economic growth depends on productivity growth powered by rapidly up-scaling new firms bringing new technologies into use. Economic growth itself puts old, conservatively run firms at risk. The advent of word processing was the death knell of venerable typewriter manufacturers. The business media are currently looking for likely corporate casualties of generative artificial intelligence. In retrospect, cashing in and diversifying would have been wise for typewriter company business families.   

Cashing in or not also raises corporate social responsibility issues. Business families may feel a responsibility to employees, communities, and other stakeholders. They may feel they can exert more influence over environmental and social issues by retaining control of their family firm than by merely donating money to NGOs. That balance also depends on how effectively the government protects employees, communities, the environment, and society in general. This too can evoke conflict, for—like voters and government officials—members of a family often disagree about social and environmental issues. Cashing in lets relatives disagree on such matters without pulling their firm’s governance left or right. Holding onto the reins of the family firm empowers whoever runs it, but concentrates that disagreement.

These pros and cons add up differently for different families, of different generations, in different countries, and with differently talented family members. Carrying on a family business can be a magnificent adventure. But if not, a diversified portfolio is nothing to be ashamed of.     

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Randall Morck is the Stephen A. Jarislowsky Distinguished Chair in Finance and is a Distinguished University Professorship at the University of Alberta’s Alberta School of Business, and an ECGI Research Member.

This blog is based on a discussion held at the 2026 IESE-ECGI Corporate Governance Conference Family Firms: Purpose, Economic Performance and Social Impact. Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.