businessman, businesswoman, woman-2365545.jpg

Choosing the Right CEO: Balancing Legacy and Change in Family Businesses

In the intricacies of family businesses, the process of transitioning leadership from one generation to the next presents a formidable challenge. A pivotal juncture in this intricate journey revolves around the decision to anoint either a family member or an external candidate as the successor to the role of CEO.

This choice has ignited a fervent debate, particularly within the domains of strategic management and family business research. At the core of this discourse lies the pivotal concept of “socioemotional wealth” (SEW). SEW underscores the family firm’s inclination to keep the reins within the family, safeguarding control for future generations. This inclination is deeply rooted in the significance of nurturing social connections, both within and outside the company.

Empirical research has unveiled that appointing a non-family outsider as CEO can translate into enhanced company performance. Such individuals often infuse fresh perspectives and an eagerness to initiate strategic transformations. Conversely, family CEOs may be inclined to resist such changes, aligning their priorities with family interests, which might impede progress. However, they possess an intimate understanding of the company’s existing strategies and encounter fewer barriers when implementing new ones.

Despite an extensive body of research exploring the impact of family versus non-family outsider CEOs on company performance, the findings remain equivocal, underscoring the importance of taking internal and external factors into account.

When a company’s performance falls short of its objectives, it tends to become more disposed to taking risks, exploring novel opportunities, and embracing new strategies. Within the context of CEO succession, this perspective posits that family firms establish performance targets and evaluate how appointing a non-family outsider CEO contributes to post-succession company performance. The presence of surplus resources, known as organizational slack, also exerts a discernible influence on this decision-making process.

Organisations often opt for calculated risks and more audacious strategic choices when their performance lags behind their goals. In such scenarios, family firms might lean towards more daring decisions, such as appointing a non-family CEO, even if it entails relinquishing some socioemotional wealth and control. Nevertheless, this decision is frequently underpinned by the potential infusion of diverse skills and competencies.

Conversely, the presence of organizational slack weakens the positive impact of subpar performance on the likelihood of selecting an external non-family CEO. When family firms enjoy a period of prosperity, the inclination to appoint a non-family CEO diminishes. This is attributed to the fact that, during such phases, the owning family may not perceive an immediate need to change leadership if there are alternative means to meet the company’s financial requisites. The availability of surplus resources empowers family firms to harness their existing assets and competencies, which can be effectively led by family CEOs.

Opting for non-family CEOs can indeed exert a positive influence on family company performance. These individuals often bring a broader spectrum of skills and capabilities compared to family CEOs. The choice of non-family CEOs expands the talent pool beyond the confines of family tradition or historical norms, reducing the risk of making decisions solely based on tradition. This, in turn, ensures a better alignment between the selected CEO and the genuine needs of the company. Nonetheless, the strength of the positive correlation between non-family CEOs and post-succession performance wanes in the presence of an excess of organizational slack. This aligns with the argument that CEOs may exploit company resources for personal gain, resulting in inefficiencies that ultimately undermine company performance.

In scenarios where performance falls short of targets, family firms that opt for non-family CEOs tend to exhibit superior post-succession performance, underscoring the imperative of acquiring new skills and competencies, particularly during challenging periods. However, as organizational slack increases, even in situations of subpar performance, family firms selecting non-family CEOs tend to display reduced post-succession performance, bolstering the notion that non-family CEOs may misappropriate company resources.

In summation, the process of selecting the most suitable CEO for family businesses is a multifaceted and pivotal decision, heavily influenced by an array of factors. It underscores the delicate equilibrium between preserving the family legacy and embracing strategic change for future prosperity.

Insights by: Dr Jay Wasim and Parnia Ahmed