Succession planning in family firms: The bright side of governance and the dark side of emotions

  • External
  • nl
2021
Dr. Ine Umans
Type
Article
Organisation type
Family Business

Failing to plan is planning to fail

From academia and practice, we learn that most family firm owners strongly prefer to pass the torch to their offspring one day. One often hears expressions such as 'I would like to see my son or daughter at the head of this company one day'. In theory, we would expect that this intense desire to pass the family firm to the next generation results in a well-thought-out succession preparation. A process in which the family firm will invest a lot of time and resources to ensure the family firm's successful longevity. This succession planning process includes selecting and training a successor, deciding on the post-succession strategy, exploring potential roles after succession for the leaving CEO, and communicating succession decisions to relevant stakeholders.

However, evidence from one of our studies [1] on nearly 400 family firms in Flanders tells another story. The evidence shows that almost 20% of the family firms that expect a succession within the next five years are not yet concerned with the preparation of the succession. These numbers are pretty worrying since it is known that succession planning is a critical factor for the survival of the family firm. Indeed: 'Failing to plan, is planning to fail'. Family firms that are not well prepared for the succession seem to struggle more often to survive.

So, in theory, we would expect that family firms make sure that the succession will be prepared to the best extent possible to ensure the longevity of the family firm. Still, evidence tells us that this is not always the case. For years, this intrigued us, family business researchers, and led us to search for the family firm and CEO characteristics that encourage or discourage succession planning in family firms.

The bright side of governance

One of our studies [2] explores the potential benefits of suitable governance mechanisms in the family firm as a stimulator of succession planning.

Our results show that active use of family governance practices such as a family charter, family council, and informal family meetings help the family firm to address succession planning. Think about stipulations in the family charter on the qualifications of the successor such as 'the successor should have a master's degree in, e.g., economics'; or discussions in the family council on 'potential career opportunities for family members'; or even informal talks during family excursions about retirement plans of the CEO. These stipulations and discussions clearly stimulate the thinking of and, eventually, the planning of the succession process.

Family governance will serve as a framework for decision-making on succession-related topics. Its results should be that decisions are based on shared values among family members and a collective vision for the family's future and the firm's future. This collective vision can then be communicated to the board of directors, whose duty is to deal with succession planning. The board of directors can then assist in planning the succession and report any problems concerning the succession process. The board should provide objective advice to the family firm to solve any conflicts or difficulties regarding succession.

The dark side of emotions

The results of our article [2] are based on implementation intention theory. Based on this theory, we argue that family governance and the board of directors have the collective intention to ensure the continuity of the family firm. This intention needs to be implemented, and these governance mechanisms will do so by helping the family firm in planning the succession.

But there is a dark side to this story. From our own lives, we know that our emotions influence our decisions and the decisions others make. Suppose, for instance, you decide to implement a vast, weekly dinner menu: always fish on Monday, meat on Tuesday, veggie on Wednesday, Belgian fries on Thursday, etc. If your partner or kids are not happy with this menu, they will show emotions of sadness. As a reaction, you will likely change your implemented vast menu and variate somehow in what you will have for dinner on weekdays. The emotions of your partner and kids have hampered you in implementing your decision on the weekly menu.

The same holds in family businesses. Although active governance mechanisms support the initiation of the succession planning process, succession planning still seems to remain absent in many family firms. Evidence from our sample firms shows that there is an emotional obstacle on the road to succession planning: the family CEO's struggle to let go of the family firm. This struggle is the result of the upcoming succession and results in a resistance to retire. Family CEOs often see the family business as their child and would like to keep control of the business forever. They encounter emotions of fear: the fear of retirement, the fear of facing mortality. They experience feelings of sadness: the sadness of losing status and leaving their legacy behind. These emotions make it difficult for family CEOs to let go of the family firm when they have to. Importantly, they may prevent the well-intended governance decisions and advice on succession planning from effectively being implemented according to plan. So, the emotions of the crucial player in the succession process, the leaving CEO, will hamper the well-intended succession decisions as proposed in family governance and the board of directors.

What about the impact of the family CEO's gender?

We know from prior studies that differences between male and female CEOs can vest themselves in how the company is organized. In a follow-up study [3], we, therefore, explored whether the family CEO's gender has implications for the family firm in the context of succession. Applying relational theory, our results suggest that the differences between male and female CEOs affect the relationship between the family CEO's emotion of being unable to let go of the business and the succession planning process. The results show that female CEOs can more easily disentangle themselves from the feeling of being unable to let go. This means that in a family firm led by a female CEO, the negative effect on succession planning of emotions related to letting go of the family firm is smaller than in a family firm led by a male CEO.

To conclude

Based on our research at the Research Center of Family Firms and Entrepreneurship (RCEF) at Hasselt University, we conclude that succession planning is a must to ensure a successful succession. Therefore:

  • It is essential to sensitize the active use of family governance as it is the first step in encouraging succession planning.
  • An active functioning board of directors (or advisors) is key! The board assists in planning the succession and, if necessary, convinces different stakeholders of the need for this planning activity.
  • Family firm CEOs have to recognize that emotions can hinder the benefits of good governance to the succession planning process. The CEO's emotions of being unable to let go of the family firm shed light on why governance structures can successfully assist in the succession planning process in some family firms, while in others, they are not. Further, earlier studies have shown that external directors -as a neutral third party- might help the family (firm) by addressing and reconciling all (competing) interests and supporting the patriarch during the challenging succession process. As a neutral third party, the goal of these external directors is purely the continuation of the family firm. One can imagine that external directors might help the family firm by tempering the dark side of the CEO’s emotions.
  • Since female CEOs are characterized by more interpersonal and relational skills and can easier disentangle from the emotion of being unable to let go vis-à-vis male CEOs, we encourage all family CEOs to recognize that these soft skills are important during the succession planning process.

Contact

Dr. Ine Umans, Research Center for Entrepreneurship and Family Firms (RCEF), UHasselt, ine.umans@uhasselt.be

 

References

[1] Umans, I., Lybaert, N., Steijvers, T., Voordeckers, W., and Laveren, E. (2020). Succession planning practices in private family firms: Survey evidence from Flanders. Accountancy & Bedrijfskunde, p. 1 – 15.

[2] Umans, I., Lybaert, N., Steijvers, T., and Voordeckers, W. (2020). Succession planning in family firms: family governance practices, board of directors, and emotions. Small Business Economics, vol. 54, p. 189-207. https://doi.org/10.1007/s11187-018-0078-5

[3] Umans, I., Lybaert, N., Steijvers, T., and Voordeckers, W. (2021). The family CEO's effect on succession planning: founder status, difficulties with letting go and gender differences. Gender in Management, vol. 36, p. 659-673. https://doi.org/10.1108/GM-01-2020-0007