There is arguably no better connection and bond than the ones we have with family. Through thick and thin, blood ties remain to stand the test of time. Challenging endeavors and rewarding moments of your life are shared with those you love. The advantage of having that inherent trust and understanding can especially come in handy when mixing family with business.
When you think of family-owned business, a local coffee shop or restaurant might come to mind. However, many successful corporations that account for over half of America’s gross domestic product are family businesses. Walmart, Chick-Fil-A, and Comcast are just a few examples of companies that started out by one person but continued through generations.
The intertwining of family and business can be a powerful force for success. Firms are reflections of their executives, and when their CEO is a family member of the company, there are certain characteristics that can impact the success of the firm. “The family business CEO: A review of insights and opportunities for advancement” analyzes family firm literature. University of Arkansas Associate Professor Oleg V. Petrenko and his coauthors, Vitaliy Skorodziyevskiy, (Louisville), Jeffrey A. Chandler (North Texas), Professor Dr. James J. Chrisman (Mississippi State), and Associate Professor Joshua J. Daspit (Texas State) research the relationships among CEO characteristics, strategic choices, and firm performance drawing from upper echelons theory (UET), which argues that a firm’s outcomes can be somewhat predicted by characteristics of the firm’s senior management or executive team.
The researchers used UET as a foundation to illustrate the impact of CEOs on the strategies and performance of their organizations. They extend the framework to consider the willingness, ability, and capability of family firm CEOs to select and execute certain strategies aimed at achieving family-centered non-economic goals (FCNE) and generating socioeconomic wealth (SEW). By continuing to use and test the UET framework, researchers will be able to fully understand how CEOs impact companies and then pass along these insights to firms.
CEO characteristics
The observable characteristics of a CEO, such as age, gender, tenure, position, skills, etc., and the psychological characteristics, such as personality, traditionality, interest, etc., can impact the choices made by a family CEO. Family members might prioritize things differently than a non-family CEO, which can impact the firm's performance.
The psychological characteristics of CEOs can play a significant role in fostering innovation and knowledge development in family firms. CEOs with more autonomy tend to act more like stewards, emphasizing the long-term interests of the firm over short-term gains. Unlike nonfamily firms, financial performance is not the main driver of CEO satisfaction in family firms. The literature suggests the willingness and ability of CEOs in family firms are positively related to innovation, and the affective, conative, and cognitive capabilities of CEOs positively impact knowledge creation.
When older family members are involved, there is a much more conservative orientation in the firm. For example, older family CEOs are less likely to participate in internationalization initiatives, whereas millennial family CEOs are likely to increase internationalization and innovation activities.
Family businesses are less likely to participate in techniques like earnings management that could be detrimental to the company’s long-term interests. CEO tenure accentuates this relationship. Longer-tenured executives tend to place a higher priority on the preservation of socioemotional wealth, which includes reputation, social capital, and transgenerational sustainability. Family CEOs also place a higher emphasis and concern for corporate social responsibility (CSR), which can affect their decisions to opt-out of certain strategies used by nonfamily CEOs.
Family CEOs, particularly first-generation members, or those with university-level education, tend to implement more formal HR policies. Employee treatment is usually better in family firms, especially under founder CEOs or with family board members. The size and independence of the board are negatively related to CEO ownership in family firms. The duality of CEOs (where the CEO also serves as the chair of the board) decreases the likelihood of employing outside directors.
When CEO duality does occur, the family CEOs are often held more accountable for firm performance but less likely to be replaced following poor performance despite evidence suggesting replacing family CEOs could improve organizational survival. This hesitance to replace ineffective executives explains why entrenchment is such a difficult problem to solve in family firms. Family CEOs also typically make more drastic layoff decisions when the company’s performance drops.
When it comes to their compensation, family CEOs tend to receive less than professional CEOs, especially when multiple family members are involved in the firm. Pay-for-performance sensitivity, a measure of how closely compensation is linked to performance, is typically lower for family CEOs when compared to nonfamily CEOs. In family firms where ownership and control often intersect, family CEOs might be willing to accept lower compensation to increase the firm's value. Since they are often owners or future owners, their willingness to forgo excessive compensation may be motivated by expectations of greater financial wealth or the preservation of socioeconomic wealth (SEW) in the future.
How Characteristics Shape Strategic Choices
The future of the firm’s success and sustainability largely depends on who the CEO will be and who will take over the responsibilities when the time comes. Succession planning was the largest topic the researchers found when studying the impact of CEO characteristics on strategic choices. The ability, and particularly the willingness, of incumbent family CEOs have a notable impact on succession choices.
Researchers found that family firms with long-tenured CEOs are more likely to have a successor in mind and a succession plan approved by family members. A gender bias exists, however, with male successors more likely to be selected than females. When it comes to first-generation family firms, CEOs typically draw from the family pool. The preference for hiring family members is often driven by inherent trust; this can lead, though, to incumbent leaders overlooking a family successor’s lack of experience.
Certain psychological characteristics are significant when it comes to succession planning in family firms. Research suggests a strong relationship between owner-managers and successors fosters better preparation for succession. A strong relationship is also important for the CEOs' willingness to relinquish control, but only if they are psychologically prepared to transition out of the firm.
The willingness and abilities of the CEO, as driven by psychological characteristics, significantly impact the success of transgenerational succession. For example, CEO traditionality positively influences the willingness for intrafamily succession. The ability and willingness to create non-economic wealth is also important to the CEO when it comes to transgenerational control and picking a successor.
Firm Performance
One of the central questions in family business literature is whether family CEOs outperform nonfamily CEOs. The researchers’ analysis yielded mixed results. The evidence suggesting the presence of a family CEO improves firm performance is contingent on several factors such as firm size, professionalization, and the attributes of the CEO. As firms grow and professionalize, the beneficial attributes of family CEOs become less important.
Some scholars, however, have found evidence that suggests family CEOs do not positively impact family firm performance. Particularly, one study found family CEO successors in the U.S. generally perform worse than nonfamily CEOs unless they have “high ability,” which was measured by education from elite universities.
There is inconclusive evidence on whether poor performance in family firms is due to strategic choices or CEO acumen. Replacing family CEOs with professional CEOs or vice versa can lead to changes in firm performance. However, what ultimately matters are not whether the CEO is a family member, but rather their abilities and vision. After all, a failing CEO should be replaced by a CEO – family member or not – with greater abilities and a new, better vision.
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