Business Psychology - Latest Findings

Article No. 145
Business Practice Findings, by James Larsen, Ph.D.

Passing the Torch

Researchers find reasons for concern in a study comparing CEO succession in family and nonfamily firms.

Stanley Sands, president of Standard Meat Company in Lincoln, Nebraska, is a rarity in management. His business was begun by his grandfather, and he took over the firm from his father. The Sands family has managed to successfully transfer the business from father to son twice. And that's pretty rare.

Keeping ownership and control of a business in the family is probably the second most important thing on the minds of most entrepreneurs as they prepare to retire. The most important thing is to insure their business remains successful so the next generation can inherit a healthy company.

Companies not owned by families are different. These firms choose new CEOs much more frequently, so the topic is more often on the minds of their CEOs and controlling boards. So, do nonfamily companies do it better because they have more practice? Do they do it differently than family-owned firms?

Mark Fiegener, of Oregon State University, is interested in CEO succession in small companies, and he found a surprising neglect in research that compared CEO succession in family and nonfamily firms. So the first step, he reasoned, should be to learn if these two kinds of firms follow different patterns.

Fiegener identified 236 family owned and operated companies and 121 nonfamily firms. All these companies had CEOs who were preparing to pass responsibility on to another person. All of them had successors in mind who already worked in the business, and all of these CEOs-in-waiting had undergone a period of grooming and preparation in anticipation of this transfer of power and authority.

Fiegener and his collaborators questioned each of the CEOs of these firms in telephone interviews, and they asked them to rate the importance of 2 groups of preparatory tasks and experiences. Fiegener carefully noted which ones stood out as most and least important. Then he checked to see if importance ratings of CEOs in family and nonfamily firms differed. They did. Of 19 preparation activities, 15 were rated very differently between family and nonfamily CEOs.

Fiegener found five striking differences, two involving education and three involving supervision. Nonfamily CEOs regarded executive development seminars and university coursework as much more important than family firm CEOs. Conversely, family CEOs regarded supervising successor's tasks, tutoring successors informally in skill and knowledge areas, and managing successor's relations with customers and vendors as much more important than nonfamily CEOs.

There were also two areas family and nonfamily CEOs agreed were crucial: managing relations with stockholders, lenders, and other key outsiders, and evaluating the performance of the new CEO.

Fiegener believes these findings reveal significant differences between the CEO successions of family and nonfamily firms. Nonfamily firm CEOs rely upon outside sources to prepare successors while family firm CEOs take on the job themselves. And that worries Professor Fiegener.

Business writers often criticize entrepreneurs for insisting upon rigid control of their businesses. They use labels such as "authoritarian," and "paternalistic" to describe entrepreneurs, and these writers even blame business failures after initial periods of success upon this drive to maintain tight control. Reluctantly, Fiegener sees substantial evidence in his research of this rigidity and he believes it contaminates the process of preparing CEOs. For example, his findings revealed that involving new CEOs in strategic planning is one of the least important preparatory activities for family firm CEOs, much lower than nonfamily firm CEOs rated this activity.

Fiegener believes planning business strategy should be one of the more important activities new CEOs should experience. Neglecting this function protects existing business strategies so they can continue after the CEO retires, but it also handicaps the new CEO who may not understand how these strategies were formulated and will be unpracticed in formulating new strategies. That's something to worry about.

Reference: Fiegener, Mark K., Bonnie M. Brown, Russ Alan Price, and Karen Marie File (1996). Passing on Strategic Vision. Journal of Small Business Management, July, 1996, 15-26.

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