Who Gets the Job? CEO Successions in Family Firms

Few decisions shape the future of a family firm more than choosing the next CEO. Yet surprisingly, little research looks at how families actually make that choice. This gap in research is striking because CEO successions matter even more for family firms than for non-family firms. Indeed, the succession decision itself has the potential to change the very nature of the firm, as the family will have to decide whether the firm will remain under its control. If the family decides to keep control, who should take over as CEO? Should this be a family member, or should a professional CEO be appointed? CEO successions are even more important for firms with founder-CEOs, given that their impending retirement gives rise to these questions for the first time.

By contrast, we know a lot about the effects of CEO successions in family firms. An extensive body of research focuses on the financial performance consequences of CEO successions, often distinguishing between CEO successors who are members of the controlling family and professional CEOs. Research has also studied the effects of CEO successions on other corporate outcomes, such as innovation and corporate social performance.

Given the importance of CEO successions for family firms, it is not surprising that a recent survey undertaken by Deloitte found that 85% of family firms agree that succession planning is critical. Indeed, succession planning enables the family to pass the baton from one generation to the next. It also allows the family to deal with the greater complexity of CEO successions in family firms. The succession planning will not only involve the usual key stakeholders (such as creditors and outside shareholders) but also multiple family members. The relationship between these family members likely has a major impact on the succession planning. Finally, careful CEO succession planning also allows for the heir apparent to be trained by the incumbent CEO. Yet, the survey found that only 57% of firms have such a plan in place, with only 23% of them actively implementing one. 

The real surprise is not that succession planning is difficult. It is that so many family firms still postpone it. What could be the possible reasons? One reason is that CEO successions in family firms are rare, as they happen on average every 20-25 years. It is then tempting to leave succession planning until too late. Other reasons are that the incumbent CEO may find it difficult to let go or that a suitable successor cannot be identified. 

Succession planning usually involves three stages. The first stage of succession planning is to understand the firm’s needs and identify a suitable candidate from within the family or outside the family. For the latter option, the CEO could still come from inside the family firm or be appointed from outside. If the CEO successor is chosen from within the family or the firm, the next stage of succession planning is about preparing the candidate for their leadership role. By contrast, external candidates already tend to possess the required skills. During the final stage of succession, the successor takes up their post.

The timing of succession is rarely random. It often depends on the firm’s financial performance. While family CEOs are less likely to leave their job due to weak performance, new family CEOs are more likely to be appointed after a period of good performance. Family CEOs have also been reported to engage in earnings management[SM1]  during the period preceding their reappointment.

So, who gets the job? Bad past performance makes it more likely that a professional CEO is appointed. However, badly performing professional CEOs in family firms tend not to be replaced by family CEOs but by other non-family CEOs. In turn, a family CEO is more likely to be appointed in small or young firms, firms where the family owns more votes than cash flow rights, and in firms whose family’s first-born child is male. When it comes to the gender of the family CEO, female family CEOs are rare. They account for only 23% of the CEOs of German family firms. This is the case even though female family CEOs outperform their male counterparts. The appointment of female family CEOs also depends on the industry – with some industries being more male-dominated – and firm size. If the incumbent family CEO is female, her successor is also more likely to be female. 

Unfortunately, existing research frequently does not distinguish between founder-CEO successions and other CEO successions in family firms. Founder-CEOs are not just another type of family CEO. Their relationship with the firm is fundamentally different. They are more attached to their firm, their involvement in the firm often continues after their retirement, they have greater equity ownership in the firm, and most of them are succeeded by professional CEOs. Replacing a founder often means professionalising the firm for a new growth phase. This would be the case after a successful product development, with the new stage requiring new skills that the founder-CEO is unlikely to have. A new round of financing, especially if the round is aimed at existing investors who already hold large stakes in the firm, may also require a professional CEO.

Ultimately, CEO succession in family firms is not only about choosing the next manager. It is about deciding what kind of company the family wants the firm to become. This calls for more research.

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Marc Goergen is a full professor of finance at IE Business School, and an ECGI Research Member.

Svetlana Mira is a Reader in Finance at Cardiff 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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