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CEO Succession Mechanisms, Organizational Context,and Performance: A Socio-Emotional WealthPerspective on Family-Controlled Firms

Alessandro Minichilli, Mattias Nordqvist, Guido Corbettaand Mario Daniele AmoreBocconi University; Jönköping International Business School; Bocconi University; Bocconi University

ABSTRACT This article extends the literature on CEO succession and financial performanceby addressing corporate owners’ mixed motives and desires to protect their interest in being inbusiness. We draw on a Socio-Emotional Wealth (SEW) perspective to investigate how thechoice of one of three succession mechanisms – relay succession, ‘horse races’ among internalCEO candidates, and hiring from outside – may effectively balance trade-offs betweencorporate owners’ non-financial SEW motives and the firm’s financial performance. We findthat implementing one of these succession mechanisms reduces the negative impact thattypically characterizes CEO transitions in family firms. We also show that family presence onthe board of directors offsets the benefits of having selected these balancing successionmechanisms, in either placing too much emphasis on SEW, or creating negative dynamics thatmake the chosen succession mechanisms less effective.

Keywords: CEO succession mechanisms, family firms, organizational context, performance,socio-emotional wealth

INTRODUCTION

Despite an impressive number of studies on the performance effects of CEO successionand various successor characteristics (Datta and Rajagopalan, 1998; Karaevli, 2007;Shen and Cannella, 2002, 2003; Virany et al., 1992; Zhang and Rajagopalan, 2004),results remain mixed (Karaevli, 2007). We believe these mixed results are found becausethe outcomes of CEO successions are dependent upon the specific organizational contextin which they occur. Recent reviews of the upper echelons perspective (Finkelstein et al.,2009; Hambrick, 2007) have stressed the need to acknowledge the role of organizational

Address for reprints: Alessandro Minichilli, Department of Management and Technology and CRIOS, BocconiUniversity, Via Roentgen 1, 20136 Milan, Italy ([email protected]).

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© 2014 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 51:7 November 2014doi: 10.1111/joms.12095

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context and have noted that ‘it is not the event of CEO succession per se, but thesuccession context that affects post-succession firm performance’ (Shen and Cannella,2002, p. 717).

Contextual influences are particularly important when emotional and social implica-tions of CEO succession are sensitive to the mechanisms through which the successionprocess is managed. This is the case for family-controlled firms (henceforth family firms),where relational contracts based on emotions and sentiments define a set of mutualexpectations among family and non-family actors that may prevail over a purely finan-cial contractual relationship (Gomez-Mejia et al., 2001). Indeed, a large amount ofresearch suggests that CEO succession is emotionally demanding in such contexts(Gedajlovic et al., 2012; Le Breton-Miller et al., 2004; Sharma et al., 2003) as a result oflong CEO tenures, strong identification with the firm, and a need to balance family withbusiness priorities (Gomez-Mejia et al., 2001; Kets de Vries, 1993). In this setting, CEOsuccession is more than just a decision in reaction to firm underperformance, as is oftenthe case in non-family firms (see Karaevli, 2007 for a review).

We draw on a Socio-Emotional Wealth (SEW) perspective to better contextualize theperformance effects of transitions at the top. According to this perspective, family ownersframe important decisions by assessing how actions will affect their SEW, that is ‘thestock of affect related value that the family has invested in the firm’ (Berrone et al., 2010,p. 82), beyond economic and financial implications (Gomez-Mejia et al., 2007; Zellwegeret al., 2012). Thus, an important goal for family owners facing a change of CEO is topreserve their SEW and not only to secure financial returns as is assumed in most studiesof CEO successions in the organization and strategic management literatures. Accord-ingly, it has also been argued that ‘socio-emotional wealth is a fundamental driver thathelps to explain a family firm’s posture towards the selection of a successor and the designof the succession process’ (Gomez-Mejia et al., 2011, p. 662). Hence, we believe SEWrepresents a suitable theoretical lens to contextualize the under-researched area ofsocio-emotional influences of CEO succession on financial performance (Gomez-Mejiaet al., 2011; Stewart and Hitt, 2012). Generally, this approach allows us to extend theCEO succession literature by taking into account the context, and especially the mixedmotives and desires that firm owners may have as they seek to protect their values andinterest in being in business (Gedajlovic et al., 2012).

Moving beyond the consideration of the CEO succession event per se, we investigatehow family owners’ concerns to protect their SEW endowment influence the relationshipbetween CEO succession mechanisms and financial performance. More in detail, weargue that the contextual tensions between financial and non-financial goals around asuccession event might be addressed by adopting succession mechanisms that, in differ-ent ways and with different intensity, are all apt to secure a better balance compared towhat would happen in their absence. To this end, we identify three major successionmechanisms: relay succession, a ‘horse race’ among potential internal CEO candidates,and hiring from outside both the firm and the family. Our choice of these mechanismshas been guided by a comprehensive review of the CEO succession literature (Cannellaand Shen, 2001; Friedman and Olk, 1995; Shen and Cannella, 2003; Zhang andRajagopalan, 2004) with the aim to identify mechanisms particularly relevant for thefamily firm organizational context (Bennedsen et al., 2007; Blumentritt et al., 2007; Hall

A. Minichilli et al.1154


and Nordqvist, 2008; Miller et al., 2003), and the SEW preservation attitude by con-trolling families (Gomez-Mejia et al., 2011).

Our results are in line with the argument that relay succession, ‘horse races’, and theappointment of an outside non-family CEO all represent mechanisms through whichowning families manage the balance between managerial competences and SEW-relatedconcerns in CEO successions. In essence, we find that these mechanisms help to balanceowners’ financial and non-financial goals and ultimately reduce the negative effect ofsuccession on financial performance.

Berrone et al. (2012) suggest that the board of directors is a key governance arena fromwhich family owners can protect their SEW and influence important strategic transitionssuch as CEO successions. To further capture the complex balance between differentgoals of family owners, we examine the moderating effect of the involvement of familymembers on the board of the firm. Our argument is that increased family involvementon the board – by enhancing concerns of SEW protection (Gomez-Mejia et al., 2011) –negatively moderates the positive effect of adopting a succession mechanism that bal-ances family and business priorities. Our results suggest a ‘double-edged’ nature of SEW:while it may mitigate the trauma of CEO succession in family firms, the presence offamily members on the board may lead to an overemphasis on SEW with the risk towillingly increase performance hazards in order to preserve SEW endowment(Gomez-Mejia et al., 2007). Thus, our results are also in line with a research on the ‘dark’side of family concerns for SEW preservation (Gedajlovic et al., 2012; Kellermanns et al.,2012), which has highlighted a potential negative impact of too much family involvementin governance on performance (Bertrand and Schoar, 2006; Minichilli et al., 2010;Morck and Yeung, 2003; Morck et al., 2005; Schulze et al., 2001).

Overall, our results contribute to the strategic management and CEO successionliterature and to the research on CEO succession in family firms, with a greater attentionto the organizational context of successions (e.g., Carpenter et al., 2004; Kisfalvi andPitcher, 2003; Shen and Cannella, 2002). They also support the use of theories comple-mentary to upper echelon and other strategic leadership frameworks (Finkelstein et al.,2009; Hambrick, 2007; Karaevli, 2007). Based on these insights, we provide practicalimplications for family owners managing a transition at the top.

THEORETICAL FRAMEWORK AND HYPOTHESES

The Socio-Emotional Wealth Perspective

SEW has recently been used to explain family firms’ uniqueness with regard to a rangeof topics, such as managerial entrenchment (Gomez-Mejia et al., 2001), executive com-pensation (Gomez-Mejia et al., 2003), risk taking (Gomez-Mejia et al., 2007), firm diver-sification (Gomez-Mejia et al., 2010), composition of top management teams (Cruz et al.,2010), corporate social responsibility (Berrone et al., 2010), and subjective firm valuation(Zellweger et al., 2012). In these studies, SEW has complemented previously used theo-ries such as agency theory (Schulze et al., 2001, 2003), the resource-based view of thefirm (Habbershon et al., 2003; Sirmon and Hitt, 2003), and stewardship theory (Corbettaand Salvato, 2004; Miller et al., 2008). Aiming to capture the essence of family firms’

CEO Succession Mechanisms, Context, and Performance 1155


decision-making choices, SEW focuses on trade-offs between the concern of managersand owners for financial performance and the concern for non-financial goals, such asthe preservation of their socio-emotional wealth and affective endowment related to afirm (for reviews, see Berrone et al., 2012; Gomez-Mejia et al., 2011).

The SEW perspective offers a theoretically grounded explanation of many family firmbehaviours, and represents an extension of Wiseman and Gomez-Mejia’s (1998) behav-ioural agency model (BAM). Based on agency and prospect theory, the BAM offers amore nuanced view of managerial risk taking than traditional agency theory does. TheBAM suggests that decision-makers’ risk preferences depend on the decision or situationat hand. Specifically, Wiseman and Gomez-Mejia (1998) argue that risk taking varieswith governance contexts (e.g., type of ownership, board formation), thus having differ-ent consequences for performance. Instead of directly setting the risk preference ex-ante,the BAM offers a dynamic view on risk taking and financial results, in which currentwealth represents a major reference point for assessing risk (Wiseman and Gomez-Mejia,1998).

Building on the BAM, the SEW perspective identifies the preservation of SEWendowment as a key reference point for family firm owners (Berrone et al., 2012). Forfamily firms, SEW, or ‘non-financial aspects of the firm that meet the family’s affectiveneeds, such as identity, ability to exercise family influence, and perpetuation of the familydynasty’ (Gomez-Mejia et al., 2007, p. 106), is an important endowment worth protect-ing for non-financial reasons (Gomez-Mejia et al., 2011). Thus, when family owners facethe risk of losing family control, they may accept greater performance hazard (Berroneet al., 2010).

Recent empirical research has, for instance, found that family owners of olive oil millsin southern Spain preferred to remain independent instead of becoming part of a co-op.This decision is motivated by the fact that becoming part of a co-op would have reducedbusiness risk and enhanced earnings prospects but at the expense of potential losses ofindependence and of socio-emotional wealth (Gomez-Mejia et al., 2007). Similarly,Berrone et al. (2010) found that family-owned firms chose to pollute less to build andprotect the family’s identity and reputation despite the higher costs of such a strategy.Using SEW as an important non-financial reference point does not imply that familyprincipals are heedless of financial performance. Rather, the will to keep family controlinduces a trade-off between SEW-protecting behaviours (eventually at the expenses offinancial performance) and the search for financial results (eventually at the expenses ofSEW preservation) in all major corporate decisions.

CEO succession in family firms is relevant within this framework because of itsimplications for both the firm’s financial performance and the family’s SEW. On the onehand, CEO succession entails a threat to the SEW due to potential weakening of familycontrol and change in the strategic agenda away from family concerns and priorities(Gomez-Mejia et al., 2011). On the other hand, it represents a potential opportunity toimprove financial performance (Bennedsen et al., 2007). In other words, the type ofCEO succession is a decision where the mixed non-financial and financial motives offamily firms create a significant tension between family principals’ two major referencepoints of economic performance and SEW preservation. In the next section, we discussthe relation between SEW, CEO succession, and performance.



SEW and CEO Succession

In the management and strategy literature, researchers have provided mixed resultsregarding the impact of CEO succession on financial performance (Cao et al., 2006;Karaevli, 2007; Kesner and Sebora, 1994). While some have argued that it naturallytends to improve a firm’s performance since the old CEO is often replaced followingpoor performance (Kesner and Sebora, 1994), others have suggested that CEO changehas little or no impact on performance (Datta and Rajagopalan, 1998). A third group ofscholars proposed a negative view of transition at the top, defining succession as an‘inevitably disruptive event that leads to organizational instability, an increase in ten-sions, and deterioration of morale and productivity’ (Cao et al., 2006, p. 564).

As noted, the view of CEO succession as negative for performance is particularlydominant and relevant in the family firm context. Family ownership usually brings along-term orientation that stretches across generations (Miller and Le Breton-Miller,2005), independence (Carney, 2005), strong culture (Dyer, 2006), and identity overlapbetween the family and firm (Berrone et al., 2010; Dyer and Whetten, 2006), which leadsto emphasizing both financial and non-financial goals (Gedajlovic et al., 2012; Zellwegerand Astrachan, 2008). Within this context, CEO succession is challenging from both theorganizational (financial) and the family (socio-emotional) sides, creating tensionbetween the family principals’ competing SEW and financial reference points.

On the organizational side, CEO succession may hurt the harmony between theorganization’s leadership and its main stakeholders, spoiling internal authority relationsand breaking up the established unity of command (Cao et al., 2006; Gomez-Mejia et al.,2001). A CEO departure tends to leave an organizational void that creates uncertaintyabout the future (Finkelstein et al., 2009; Sharma et al., 2003), leading to discomfortwithin the organization and among stakeholders, and harming the firm’s subsequentperformance (Miller et al., 2003; Schulze et al., 2001; Shen and Cannella, 2003). Fromthe family’s socio-emotional side, concerns about succession are exacerbated if the newCEO does not share the controlling family’s commitment to preserving SEW over time.Maintaining control has been identified as a fundamental goal in family firms (Lee et al.,2003; Schulze et al., 2003), and a central part of their SEW preservation (Berrone et al.,2012; Zellweger et al., 2012).

One plausible way of maintaining control is for the family to occupy the highestexecutive office of the firm. However, this approach may be detrimental to firm perfor-mance. For instance, in their study of Spanish newspapers, Gomez-Mejia et al. (2001)found that CEOs who were related to the owner-family enjoyed longer tenures and weremuch less likely to be dismissed than non-family CEOs when the firm does poorly. Theyalso found that when a CEO stays on the job longer than can be justified on the basis ofthe financial results, and thus more related to desire to maintain family control, thepositive consequences of replacing a family member are greater than the positive con-sequences of replacing a CEO who is not part of the owning family (Gomez-Mejia et al.,2001, p. 91).

Moving from these theoretical and empirical insights on the negative impact of CEOsuccession in family firms, we take into account specific alternative CEO successionmechanisms that may attenuate the negative effect on firm profitability. These



mechanisms – which have all been empirically observed as having an impact on post-succession firm performance in the CEO succession literature (e.g., Cannella and Shen,2001; Friedman and Olk, 1995; Shen and Cannella, 2003; Zhang and Rajagopalan,2004) – are particularly relevant in the family business context because, as we argue, theyhelp to secure a balance between financial performance considerations and concerns toprotect SEW during a CEO succession.

They are ‘relay succession’, a ‘horse race’ among internal CEO candidates, and thechoice of an outsider as the new CEO. Previous family firm research supports the notionthat these mechanisms help family firms balance trade-offs between SEW concerns andfinancial performance (e.g., Gomez-Mejia et al., 2001; Hall and Nordqvist, 2008; Milleret al., 2003). In our context, we expect the chosen candidate to have a varying degree ofSEW understanding depending on the succession mechanism – most in relay successions,middle in horse race successions, and least in outside successions.

Relay Succession

In family firms, CEO succession is often the outcome of a process that starts with theidentification of an heir apparent inside the firm (either a family or a non-familymember). Through this mechanism the successor is identified well in advance, with theretiring CEO usually exerting a strong influence over the selection and then groomingthe designated successor (Zhang and Rajagopalan, 2004). The incumbent CEO worksclosely together with the heir apparent, allowing him or her ‘adequate time to acquirethose skills and become familiar with the firm’s task environments before fully takingcharge’ (Shen and Cannella, 2003, p. 192). As a result, given that the successor has beenworking side-by-side with the incumbent CEO (Shen and Cannella, 2003; Zajac andWestphal, 1996), he or she has become socialized into the family culture and sharesmany of the previous CEO’s values and priorities (Vancil, 1987).

Family firm researchers have pointed out that careful succession planning is essentialfor a smooth transfer of the CEO position (Kets de Vries, 1993; Le Breton-Milleret al., 2004), also because this socialization process leads to a more in-depth under-standing of the importance of the family’s SEW endowment (Gomez-Mejia et al.,2011; Hall and Nordqvist, 2008). From a SEW perspective, family firms may seek toappoint an heir apparent from the inside to limit the generally disruptive nature ofCEO successions (Shen and Cannella, 2003), since he or she comes to understand thefamily’s concern for protecting their endowment of SEW as a result of the groomingperiod. Through careful planning, the retiring CEO works to support the successor’sunderstanding of the importance of the delicate yet crucial balance between SEW andfinancial objectives. Without this guidance, gaining the understanding of the role ofthis balance would absorb most of the incoming CEO’s time and energy once in office,distracting him or her from other strategic business issues. Altogether, thanks to thisunderstanding, relay succession enhances the new CEO’s latitude of action, giving himor her considerably more freedom to focus on financial performance instead of spend-ing time and effort into understanding fully the role of the SEW endowment for thefamily. Thus,



Hypothesis 1: There will be a positive relationship between relay succession and finan-cial performance in family firms.

‘Horse Race’ Succession

When more than one internal candidate is available within the firm, regardless of beingfamily or not, it is less likely that one of them will be appointed as an heir apparent(Zhang and Rajagopalan, 2004). Instead, the firm will prefer to wait until the time ofactual succession to select a new CEO, creating a ‘horse race’ among internal contenders(Vancil, 1987). This competition is explicitly encouraged by key decision-makers such asthe incumbent CEO or family owners; typically, candidates are ‘told that they will begroomed, their progress will be observed, and that whoever performs best over a periodof time will be chosen as the new CEO’ (Friedman and Olk, 1995, p. 151).

We expect a horse race to improve post-succession firm financial performance, formanagerial as well as for family-specific reasons. First, competition between candidatesoften results in ‘extraordinary levels of performance’ (Friedman and Olk, 1995, p. 148),since insiders have the opportunity to understand requirements and expectations of theCEO job (Shen and Cannella, 2002) with lower risks of adverse selection (Zajac, 1990).In the family firm context, and similar to what we argued for relay succession, we alsoexpect a horse race to enable selected candidates to get acquainted well in advance into thetrade-off between SEW concerns and financial performance (Gomez-Mejia et al., 2007),avoiding over-concern on SEW once in office.

Additionally, to be considered a potential successor, and to win the race, an internalcandidate needs to have a strong power base (Zhang and Rajagopalan, 2004) as well associal skills and technical abilities. During the horse race, candidates and their supportersfurther lobby and build personal relationships to define the rules and requirements thatwill determine who is selected (Ocasio, 1999). The internal political power accumulatedduring the competition will allow the race winner to care relatively less about intra-familysocio-emotional dynamics, and will entitle him or her with enough legitimacy to divertthe attention to financial performance. Consequently,

Hypothesis 2: There will be a positive relationship between ‘horse race’ succession andfinancial performance in family firms.

Outside Succession

Outside CEOs are less emotionally attached to an organization or a specific strategicdirection, especially in a family firm, than family CEOs (Gomez-Mejia et al., 2001,2007). This is true in the context of our study, where we go beyond the traditionalinside/outside dichotomy (Shen and Cannella, 2002; Zhang, 2008) to define an outsideras an individual who is outside both the controlling family and the firm. We expect outsideCEOs to be more committed to a new strategic direction targeting financial perfor-mance. While inside successions are characterized by a ‘maintenance strategy’, outsidesuccessions tend to foster organizational change and reduce commitment to the statusquo (Romanelli and Tushman, 1994). Outside CEOs are typically less inclined to frame



strategic decisions with reference to protecting the family SEW endowment(Gomez-Mejia et al., 2001); instead, they will be more concerned about his or her ownmarket value for future employment (Cruz et al., 2010). At times, only an outside CEOcan deal with the affective and emotional pressure associated with strategic shifts thatchallenge the dominant values, interests, and strategic paradigm of the family and its firm(Blumentritt et al., 2007).

Therefore, we argue that an outside CEO will act on a generally weaker understand-ing of the owner-family’s SEW priorities, being less oriented towards the family’s trade-off between SEW protection and financial performance. More in detail, hiring an outsideCEO may be an appropriate succession mechanism when the owning family sees a riskof excessive focus on SEW-related goals if a family member is selected as the new CEO.Also, appointing an outside CEO may help to deal with situations in which potentialheirs from the family feel the pressure to take over as CEO even against their own desire,and would have felt abused if convinced to become CEO (Kellermanns et al., 2012).Hence, we hypothesize that:

Hypothesis 3: There will be a positive relationship between the appointment of anon-family CEO from outside the firm and financial performance in family firms.

Family Involvement on the Board of Directors, SEW Protection, andSuccession Mechanisms

Gomez-Mejia et al. (2001, 2011) suggest that family involvement on the board of direc-tors is key to how controlling families seek to protect their SEW and manage its impacton financial performance. Similarly, Berrone et al. (2012) indicate the board as thecentral governance body during important governance and strategic transitions. Thus,whereas according to conventional corporate governance literature based on agencytheory the board is expected to secure shareholder financial wealth, an underlying argu-ment in the SEW literature is that boards in family firms might also be expected to securecontrolling shareholders’ socio-emotional wealth.

In line with the arguments we developed earlier, we believe that boards character-ized by a large share of family directors will offset the positive effects of the above-mentioned succession mechanisms on financial performance. On the one hand,increased presence of family members inside the board – regardless the type of suc-cession mechanism adopted – will increase disproportionately the attention on familyneeds. On the other hand, a high family involvement on the board can also drivediverging behaviours amongst family members, for example due to self-serving behav-iours whereby family members use the board as a tool to extract personal benefits atthe expense of other stakeholders (Kellermanns et al., 2012). A limitation of the SEWperspective is indeed to assume that all family members are equally oriented andmotivated towards protecting SEW endowment as their ultimate goal (Gomez-Mejiaet al., 2011), while they may in fact diverge on both goals and affection to the firm(Zellweger and Dehlen, 2012).

With respect to our specific hypotheses, the beneficial effects that a relay successionoffers in terms of the successors’ understanding of SEW priorities of the family can



turn to a disadvantage when an increasing number of family members serve on theboard of directors. Although they may have reached a consensus on the heir apparent,family members may start to develop disruptive jealousies against the one who hasbeen selected to lead the company (Le Breton-Miller and Miller, 2009), creating nega-tive emotions towards the successor, which may in turn even result in an explicitopposition to his or her agenda. While political struggles are prevalent in most organi-zations (Ocasio, 1994), in family firms they can be masked behind concerns for SEWpreservation (Kellermanns et al., 2012), which can be used as a way to challenge theincoming CEO’s strategic initiatives, and even to argue that he or she is unfit for theposition.

Similar concerns occur in horse races, with negative emotions and political contests(Ocasio, 1999) among board members who backed the ‘winning horse’ and those whobacked the ‘losing horse’, leading to a lack of universal support for the new CEO. Thismay induce potentially diverging views among family members on how to protect thesocio-emotional aspect of the family, with the consequence that the new CEO will needto focus his or her attention on balancing family needs instead of focusing on financialaspects.

By the same token, having been selected through a highly competitive process, the newCEO may be over-concerned about financial issues. During transition, the new leaderwants to impress with his or her results and may need time to fully learn how to balancebetween financial performance and protection of SEW endowment (Gomez-Mejia et al.,2007). Being aware of this tendency, family members on the board might be excessivelyvigilant in order to preserve their SEW (Gomez-Mejia et al., 2011) at the expense offinancial outcomes.

This SEW protection attitude will be paramount when coming to outside CEOsuccessions. When a new outside CEO comes into office, a family dominated board ofdirectors may be more concerned to protect SEW than to exploit the new CEO’squalifications to improve financial performance. As Gomez-Mejia et al. (2010) noticed,the advent of outside non-family managers diminishes the family’s SEW endowment ifthe family does not have effective control mechanisms to counteract the threat. Anoutside CEO will likely not completely understand the importance of the family and firmspecific SEW, even if he or she has had previous general family firm experience (Hall andNordqvist, 2008; Stewart and Hitt, 2012). In this circumstance, the family board willwant to ensure that the overall family strategic goals and visions are guiding the prioritiesof the new CEO (Schulze et al., 2001, 2003). Hence, family board involvement willconstrain the new outside CEO’s possibility to implement organizational changes andnew strategic ideas that may improve financial performance but threaten SEW(Gomez-Mejia et al., 2011).

Based on these arguments, we hypothesize that:

Hypothesis 4: The increasing presence of family members on the board will negativelymoderate the positive relationship between: (a) the relay succession; (b) the horse race;and (c) the succession of an outside non-family CEO, and financial performance infamily firms. The higher the presence of family directors, the lower the benefits forfinancial performance of the chosen succession mechanisms.



METHODS

Sample and Collection of Data

Our study combines archival and survey data (Cruz et al., 2010). The survey method wasused to gather information on CEO succession, such as departing and arriving CEOs’characteristics, which are not available from archival sources for non-listed firms. Thesample frame for the survey consisted of the top 1000 private and listed Italian family-controlled firms for turnover, identified from public sources such as AIDA (Italian DigitalDatabase of Companies – the Italian branch of Bureau Van Dijk databases). Wecollected data on ownership and governance structures from Consob (Italian Commis-sion for the Stock Exchange) for the listed firms, and from the public official filings of theItalian Chamber of Commerce for the non-listed ones. These represent widely usedsources of information for private firms in Italy (see, e.g., Amore et al., 2011, 2014; Milleret al., 2013). Using these data sources, we reconstructed year by year all the ownershipand governance characteristics for each firm. Financial and other firm-specific data, suchas ROA, revenues, and firm age were collected from the AIDA dataset.

There is no agreement on how to define family firms. However, there is a growingconsensus that every operational definition should be context-specific rather than gen-eralizable (Gomez-Mejia et al., 2011). Factors such as national context and the privatevs. listed nature of the firms are important to take into consideration when determiningfamily control in a given study. The key issue here is that family owners are in theposition to exercise decisive influence over key governance choices and the strategicdirection of the firm (Chua et al., 1999). Thus, our definition of family control is basedon the power to appoint the board of directors, both directly and through financialholdings (Gomez-Mejia et al., 2011). Following this definition, we considered a privatefirm to be in family control when the majority stake was in the hands of one family(Westhead and Cowling, 1998). For listed companies, we tailor the threshold to the stockmarket under consideration (Minichilli et al., 2010) and put it to 30 per cent.[1]

Survey responses were collected from the chairman of the board, to whom we askedquestions about CEO successions that happened in the period 1998–2007. Traditionally,governance research relies on primary data from a single respondent for each firm (e.g.,Pearce and Zahra, 1991; Zahra, 1996). We considered the chairman as the best possiblekey informant concerning past CEO successions for two reasons. First, chairmen arealmost always members of the controlling family[2] and possess an extensive knowledge ofthe family and the firm. Second, since chairmen usually have long tenures (11 years onaverage in our sample), they are in a good position to report on past CEO changes.

We believe the use of retrospective accounts, despite some criticism (Golden, 1992,1997), fits our research design, because the data to be recalled were objective (Milleret al., 1997) and we likely addressed the most knowledgeable informant. Also, in thiscase, the use of a single informant seems not to raise a problem of common methodvariance (Doty and Glick, 1998; Podsakoff et al., 2003) because our analyses rely on bothsurvey and archival data, thus excluding the possibility of internal correlation betweendifferent items from the same respondents.

In order to increase the response rate, the completeness of data, and their reliability,we assured confidentiality in a cover letter that accompanied the survey. Moreover, all



survey questions were short, specific, and simply worded to avoid ambiguous and vagueformulations (Dillman, 2000). Data collection started with an initial electronic mailing toall 1000 chairmen of firms in our sample at the beginning of 2008. We sent electronicreminders to non-responding informants after one and two months, and made finalphone calls to non-respondents in the following two months. Data collection was com-pleted in mid-2008, with answers from 161 firms, for a response rate of 16.1 per cent,which is acceptable if compared with other survey-based research on top executives orboard members (Daily et al., 2003). To rule out the possibility of biases in respondingfirms, we performed a non-parametric two independent samples test using theKolmogorov–Smirnov procedure on firm size. We compared size, measured as annualturnover or number of employees, of both respondent and non-respondent firms (Siegeland Castellan, 1988). The results of that test provide evidence that those sub-samplescome from the same population.

Merging our survey data with governance and financial information throughout theperiod 1998–2007, we build a longitudinal dataset including 1610 firm-year observa-tions, although the absence of data for financial measures – especially going back in time– often reduced the usable number of observations.

Variables and Analytical Technique

The dependent variable for our study is return on assets (ROA) as an accounting measure offirm financial performance. ROA is widely used in studies on the impact of top execu-tives’ characteristics on firm performance (see, e.g., Cannella and Shen, 2001; Finkelsteinand D’Aveni, 1994; Geletkanycz and Hambrick, 1997; Henderson et al., 2006; Milleret al., 2014). This measure has also been used in studies testing the ‘family effect’ on firmperformance (see Dyer, 2006), and in CEO succession research (e.g., Bennedsen et al.,2007; Cucculelli and Micucci, 2008; Datta and Rajagopalan, 1998; Perez-Gonzales,2006; Shen and Cannella, 2002; Zhang and Rajagopalan, 2004). Following empiricalstudies on CEO succession (e.g., Bennedsen et al., 2007; Karaevli, 2007;Perez-Gonzales, 2006), we adjust for industry effects by subtracting from the firm ROAthe annual average ROA of the 2-digit industry in which the firm operates (excluding thefocal firm itself ).[3]

Independent variables cover information on the firm and CEO succession. We first asked,‘Did your firm experience a CEO succession event in the past 10 years (1998–2007)? Ifyes, in which year?’ Eighty-nine firms – approximately 55% of respondent firms –answered positively to this question. We then constructed three succession mechanisms.Relay succession was identified by asking the chairman, ‘Was the successor CEO an heirapparent?’ (Zhang and Rajagopalan, 2004). Eighteen firms responded positively to thisquestion. Horse race was identified by asking, ‘Were there several internal candidates atthe moment of succession?’ (Finkelstein et al., 2009; Zhang and Rajagopalan, 2004).Twenty-three firms responded positively to this question. Outside non-family (NF) incomingCEO was computed as a dummy variable coded as 1 if both of the following questionswere answered ‘no’: ‘Did the successor CEO come from within the company?’ and ‘Is thesuccessor CEO a family member?’ Nineteen firms responded positively to this question.Hence, out of the 89 firms undertaking successions, 29 firms undertook a succession that



was classified not as relay succession nor horse race, and in which the incoming CEO didnot come from within the company nor was he a family member. Given that our dataspan over a 10-year period, we are able to observe the average firm undertaking asuccession for a few years before and after succession. Overall, the 89 firms undertakingsuccessions represent approximately 890 observations in our sample.

The moderating variable representing the family’s will to protect SEW (board familyratio) was constructed year by year as the percentage of the board made up by familymembers. In order to identify whether board members belonged to the controllingfamily, we relied on surname affinity with the controlling family (see, e.g., Amore et al.,2014; Miller et al., 2013).

Our set of firm controls includes firm size, measured as a logarithmic transformation ofannual sales (Boeker, 1997), which has often been used as a contextual variable that mayinfluence consequences for organizational members and ultimately firm performance(Beatty and Zajac, 1987; Friedman and Singh, 1989). As in other studies on CEOsuccession (e.g., Bennedsen et al., 2007; Cucculelli and Micucci, 2008; Karaevli, 2007),we also include firm age, computed as a logarithmic transformation of the number of yearssince the firm’s founding. To absorb the effect of unspecified time-specific factors, weinclude year dummies (Karaevli, 2007). Again, as in other succession studies (e.g., Amoreet al., 2011; Cucculelli and Micucci, 2008), we include firm fixed effects to focus theanalysis on within-firm variations and effectively control for all time-invariant firmcharacteristics, such as industry and geographic location, thus mitigating concerns ofomitted factor bias.

Exploiting the longitudinal structure of our dataset, we tested our hypotheses bymeans of generalized difference-in-differences (DiD) models, estimated using ordinaryleast squares (OLS) regressions and heteroscedasticity-adjusted standard errors. Born asa program evaluation method (e.g., Card and Krueger, 1993), DiD models have recentlybeen extended to management research (e.g., Huang and Murray, 2009; Valentini,2012; Wennberg et al., 2011). In our context, one important advantage of these modelsis that they identify the specific effect of the succession characteristics of interest on firmoutcomes while absorbing the general effect of succession and other common shocks. Forthis reason, they have been widely adopted in the empirical analysis of CEO successionin family firms (e.g., Amore et al., 2011; Bennedsen et al., 2007; Cucculelli and Micucci,2008; Perez-Gonzales, 2006). Following the typical design of DiD models, we con-structed a dummy succession equal to one from the succession year onwards and zero forthe years before (as well as non-succession firms). Then, extending the model to multipletreatments, we encoded each of the main succession characteristics as an interactionbetween this dummy and another dummy equal to one if the firm had experienced thesuccession type in question and zero otherwise.[4] Thus, for example, relay succession isequal to one from the year of a relay succession onwards, and zero for the pre-successionperiod as well as for non-relay successions and firms that did not experience a successionwithin the period studied. This variable isolates the impact of relay succession on firmperformance, after controlling for the general effect of CEO succession, common shocks,and time-invariant differences between firms in each succession group and non-succession firms (via firm fixed effects). The interaction relay succession*board family ratioidentifies how the effect of relay succession on firm performance varies depending on the



presence of family members on the board of directors. Horse race, outside NF incoming CEO,and their interactions with board family ratio work in similar ways.

RESULTS

Table I presents means, standard deviations, and correlations among all variables usedin the regression analyses, excluding the interactions between main succession mecha-nisms and SEW moderator, which present high correlations with the respective origi-nating variables. Except for a few cases, the table shows acceptable levels of correlationbetween all the variables. We assessed multicollinearity problems by analysing thevariance inflation factor (VIF) and using the commonly used threshold of 10. Althougha high correlation among regressors is quite common in longitudinal data, none of themain succession characteristics or interactions with the SEW moderator had a VIFabove 10 in our models. Our results are also robust to mean-centreing both mainsuccession characteristics and the SEW moderator to create the interactions (see, e.g.,Zhang and Rajagopalan, 2004). Thus, multicollinearity is not a severe problem in ourcase.

Table II shows results for all regressions, considering industry-adjusted ROA as depend-ent variable and including explanatory variables hierarchically. Model 1 reports theresults using only the firm controls together with the firm and year fixed effects. Model2 adds the main succession characteristics and SEW moderator. Finally, Model 3reports the results from the full model, including the interactions between the mainsuccession characteristics and the SEW moderator. While the adjusted R2 for Model 1is already high, arguably owing to the presence of fixed effects, we notice a significantincrease in explanatory power (p < 0.05) after we include the main succession charac-teristics, the SEW moderator (Model 2), and the full set of interactions (Model 3). Inline with results on CEO succession having a negative impact on financial perfor-mance (e.g., Cucculelli and Micucci, 2008), we find that successions reduce firm per-formance, as is indicated by the negative and significant coefficient of the successiondummy in Model 3 (p < 0.05).

Hypotheses 1, 2, and 3 predict that all three succession mechanisms improve firmperformance. These hypotheses are tested in Models 2 and 3. Results in Model 2 indicatethat relay succession displays a positive and statistically significant coefficient (p < 0.01),as do horse race (p < 0.05) and outside NF incoming CEO (p < 0.1). Furthermore, thesecoefficients remain positive and significant (p < 0.01) in Model 3 once we include all theinteractions. Therefore, Hypotheses 1, 2, and 3 are supported.

Hypothesis 4 is tested in Model 3. Specifically, Hypothesis 4a predicts that thepresence of family members on the board mitigates the beneficial effect of relay succes-sion on firm performance. In line with this hypothesis, we obtain a negative coefficientfor the interaction between SEW protection and relay succession, but it is not statisticallysignificant. Hence, Hypothesis 4a is not supported. Hypotheses 4b and 4c predict thatthe presence of family members on the board negatively moderates the positive effect ofhorse race and outside non-family successions on firm performance. The negative andsignificant interactions in Model 3 (p < 0.01) indicate that our predictions are supported.



Tab

leI.

Mea

ns,s

tand

ard

devi

atio

ns,a

ndco

rrel

atio

ns

Mea

nSD

12

34

56

78

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djus

ted

RO

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081

6.98

11

2L

nsa

les

12.0

661.

363

−0.0

241

3L

nfir

mag

e3.

171

0.74

00.

016

0.16

0*1

4Su

cces

sion

0.18

20.

386

−0.0

490.

146*

0.07

5*1

5R

elay

race

0.04

20.

200

0.05

00.

078*

0.00

20.

443*

16

Hor

sera

ce0.

077

0.26

7−0

.021

0.06

7*0.

050

0.61

4*0.

031

17

Out

side

NF

inco

min

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0.04

00.

197

−0.0

72*

0.11

5*0.

089*

0.43

5*−0

.043

0.35

1*1

8B

oard

fam

ilyra

tio0.

611

0.31

40.

018

−0.3

17*

−0.1

47*

−0.0

70*

−0.0

490.

017

−0.0

94*

1

*p

<0.

05.



Robustness Checks

Our focus on multiple succession mechanisms may narrow the control group to specialcases of successions (e.g., unplanned inside successions due for instance to sudden death ofthe current CEO) and to the large group of firms that did not experience succession withinthe period studied. To show that our results do not depend on the inclusion of non-succession firms, in Table III, Model 1, we remove from the sample firms that did notexperience a CEO succession. In line with previous results, we find that relay succession,

Table II. Regression coefficientsa

Dependent variable: industry-adjusted ROA

Model 1:Baseline I

Model 2:Baseline II

Model 3:Main effects

Firm controlsLn sales −0.105 −0.099 −0.079

(0.438) (0.441) (0.444)Ln firm age −2.273* −2.572** −3.066**

(1.263) (1.300) (1.351)Succession 0.553 −1.945** −1.686*

(0.618) (0.889) (0.861)Main succession characteristics

and sew moderatorRelay succession 3.401*** 5.031***

(1.193) (1.946)Horse race 2.436** 7.092***

(1.200) (2.027)Outside NF incoming CEO 2.733* 4.723***

(1.402) (1.806)Board family ratio 0.865 1.514

(1.909) (1.941)Interactions

Relay succession * boardfamily ratio

−2.685(2.762)

Horse race * board familyratio

−8.118***(2.608)

Outside NF incomingCEO * board family ratio

−7.767***(2.925)

Adjusted R2 0.588 0.592 0.601Adjusted R2 change − 0.05 0.006Significant F change? − <0.01 <0.01Year fixed effects Yes Yes YesFirm fixed effects Yes Yes YesNumber of observations 1134 1134 1134

Notes: a Values are unstandardized regression coefficients: values in parentheses are heteroscedasticity-adjusted standarderrors.* p < 0.10, ** p < 0.05, *** p < 0.01.



Tab

leII

I.A

ltern

ativ

esp

ecifi

catio

nsa

Dep

ende

ntva

riab

le:

indu

stry

-adj

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Mod

el1

:

Onl

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sion

firm

s

Mod

el2

:

No

cont

rols

Mod

el3

:

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dom

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cts

Mod

el4

:

Ran

dom

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cts

and

lagg

edR

OA

Mod

el5

:

Pro

pens

ity

scor

ew

eigh

ting

Firm

cont

rols

Ln

sale

s1.

873*

−0.0

400.

823*

*−0

.064

(1.1

18)

(0.3

44)

(0.3

76)

(0.5

15)

Ln

firm

age

−1.5

41−0

.076

1.98

8***

−2.0

54(2

.242

)(0

.572

)(0

.690

)(1

.489

)Su

cces

sion

−1.7

00*

−1.5

68*

−1.7

22−1

.666

*(1

.007

)(0

.830

)(1

.080

)(0

.882

)M

ain

succ

essi

onch

arac

teri

stic

san

dSE

Wm

oder

ator

Rel

aysu

cces

sion

4.90

0**

3.65

5**

6.49

7***

5.39

5**

5.25

6***

(2.0

36)

(1.7

66)

(2.0

15)

(2.4

00)

(1.9

18)

Hor

sera

ce7.

211*

**5.

601*

**5.

967*

**6.

297*

**6.

028*

**(2

.173

)(1

.836

)(1

.939

)(2

.336

)(1

.928

)O

utsi

deN

Fin

com

ing

CE

O5.

003*

**4.

312*

**5.

394*

**4.

409*

*4.

759*

*(1

.775

)(1

.627

)(1

.700

)(1

.833

)(2

.164

)B

oard

fam

ilyra

tio5.

462*

*1.

956

−0.4

716.

278*

*2.

855

(2.2

03)

(1.9

00)

(1.5

20)

(2.7

46)

(2.1

16)

Inte

ract

ions

Rel

aysu

cces

sion

*bo

ard

fam

ilyra

tio−2

.647

−2.4

62−4

.406

−3.1

28−2

.534

(2.8

54)

(2.7

65)

(2.9

43)

(3.7

11)

(2.7

15)

Hor

sera

ce*

boar

dfa

mily

ratio

−9.1

96**

*−7

.876

***

−7.0

68**

*−8

.830

***

−7.2

69**

*(2

.720

)(2

.506

)(2

.507

)(2

.917

)(2

.729

)O

utsi

deN

Fin

com

ing

CE

O*

boar

dfa

mily

ratio

−8.1

97**

*−8

.125

***

−8.0

04**

*−5

.929

*−8

.143

**(2

.949

)(2

.912

)(2

.952

)(3

.373

)(3

.475

)A

djus

ted

R2

0.63

90.

585

−−

0.59

6Fi

rmfix

edef

fect

sY

esY

esN

oN

oY

esY

ear

fixed

effe

cts

Yes

Yes

Yes

Yes

Yes

Num

ber

ofob

serv

atio

ns48

411

7511

3440

911

24

Not

es:

aV

alue

sar

eun

stan

dard

ized

regr

essi

onco

effic

ient

s:va

lues

inpa

rent

hese

sar

ehe

tero

sced

astic

ity-a

djus

ted

stan

dard

erro

rs.

*p

<0.

10,*

*p

<0.

05,*

**p

<0.

01.



horse race, and outside incoming non-family CEO, even when non-succession firms areexcluded, significantly improve firm performance, while the SEW moderator dampens thepositive effect of horse race and outside incoming non-family CEO.

In Model 2, to mitigate multicollinearity concerns, we estimated our baseline regres-sion without any control. In Model 3, we estimated the model using random effectsinstead of fixed effects. An advantage of using random effects is that our identificationdoes not necessarily rely on changes in the family involvement on the board. Further-more, in Model 4, we retained the sample of succession firms and augmented the randomeffect specification with pre-succession firm performance (coefficient unreported), measured bytaking the average of the industry-adjusted ROA for two years before the successionoccurred. Results largely confirm our hypotheses.

In Model 5, we address the concern that succession firms might differ from non-succession firms before succession, for example because the leaving CEO may delay thesuccession until firm performance reaches a given level. First, we compute the propensityscore by taking the predicted values of a logit regression where the dependent variable isa dummy equal to one if a firm undertakes a CEO succession, and the explanatoryvariables are industry-adjusted ROA, logarithm of sales, logarithm of firm age, a dummyequal to one for listed firms, and year dummies. For the succession firms, we retain thethree years before succession. Second, we estimate OLS regressions, weighting observa-tions by the reciprocal of the propensity score (Hirano and Imbens, 2001) within thecommon support. This procedure ensures that before succession, each succession firmresembles non-succession firms as closely as possible, and thus enables us to mitigateendogeneity in the timing of CEO successions. Results, reported in Model 5, are con-sistent with our previous findings.

We confirmed our findings by means of several additional tests. First, we included thefraction of equity held by the family as a control. Second, we considered 1-year lagged firmcontrols, to avoid the concern that successions may simultaneously affect firm sales used onthe right-hand side of the model. Third, we excluded 1 or 2.5 per cent of observations onthe left and right tails of the ROA distribution (that is, potential outliers). Fourth, weexcluded from the analysis firms older than 30 years old in the starting year of our dataset.Because old firms may involve multiple generations of family members, using surnames toidentify family members on the board may underestimate the family representation. Ananalysis restricted to a subsample of young firms, in which only one generation sharing thesame surname is typically involved, is less subject to this criticism. Fifth, we dropped thefew firms operating in financial and utility sectors, which are subject to specific regulationspotentially affecting profitability. Finally, we adopted alternative constructions of thedependent variable, such as standardized (Z-score) unadjusted ROA. All results from thesetests (unreported) provide statistical and economic support for our findings in Table II.

Dynamic Effects

In Table IV, we present a set of additional analyses testing our hypotheses for the shortand long runs. In Model 1, we restrict the post-succession period up to three yearsafter succession. This restriction is likely to identify the abrupt effect of succession



characteristics and SEW moderators on firm performance. In Model 2, we identify thedelayed effects by considering a post-succession period that spans from the fourth yearafter succession onwards.

Hypotheses 1–3 are confirmed for both the short and the long run. Interestingly, we findthat the economic effect of each succession mechanism is larger in the long run. Hypothesis4a is never confirmed in the short run, while there is a weakly significant effect in the longrun; family board dominance does not seem to dampen the positive effect of relaysuccession. The interaction between horse race and SEW moderator is negative, signifi-cant, and of equal size in the short and in the long run. Finally, in accord with the idea thatoutside CEOs may pursue abrupt organizational changes that improve financialperformance but harm the SEW endowment over time, we find that the moderating SEW

Table IV. Dynamic effectsa

Dependent variable: industry-adjusted ROA

Model 1: Short-run Model 2: Long-run

Firm controlsLn sales −0.108 −0.145

(0.447) (0.442)Ln age −3.892*** −3.164**

(1.272) (1.579)Succession −1.470* −3.367***

(0.856) (1.111)Main succession characteristics and SEW moderators

Relay succession 3.981** 8.062**(1.810) (3.350)

Horse race 7.450*** 8.867***(2.059) (3.234)

Outside NF incoming CEO 4.681*** 7.152**(1.766) (2.797)

Board family ratio 1.319 0.985(1.980) (2.044)

InteractionsRelay succession * board family ratio −1.128 −8.066*

(2.492) (4.706)Horse race * board family ratio −8.757*** −7.268*

(2.558) (3.807)Outside NF incoming CEO * board family ratio −7.942*** −11.633***

(2.978) (4.043)Adjusted R2 0.615 0.583Firm fixed effects Yes YesYear fixed effects Yes YesNumber of observations 1072 1016

Notes: a Values are unstandardized regression coefficients: values in parentheses are heteroscedasticity-adjusted standarderrors.* p < 0.10, ** p < 0.05, *** p < 0.01.



effect on outside incoming CEOs is high and significant already in the short run (p < 0.01),and remains of similar size and significance in the long run (p < 0.01).

DISCUSSION

This article extends previous management and strategy literature by focusing on the roleof organizational context for the relationship between CEO succession mechanisms andfinancial performance. We have drawn on the SEW perspective and argued that firmsmay not only prioritize financial performance, as is assumed in most strategic manage-ment and CEO succession literature (Gomez-Mejia et al., 2011; Karaevli, 2007). Rather,we acknowledged that the most common form of organizations – family firms – oftenutilize a non-financial reference point in making important decisions that entail risk,threatening SEW endowment and firm survival (Berrone et al., 2012; Gomez-Mejiaet al., 2011). These arguments suggest, in general management and strategy literature, topay more attention to socio-emotional dynamics around CEO succession and to takemore into account company owners’ mixed motives and desire to protect their valuesand interest in their business (Gedajlovic et al., 2012).

In this article, we have argued conceptually and shown empirically that CEO succes-sion in family firms is a disruptive event likely to harm financial performance. However,we have also suggested that family owners face both a SEW and a financial referencepoint when making decisions regarding CEO succession. Specifically we found that thethree CEO succession mechanisms in focus (relay succession, ‘horse race’, and theappointment of a non-family CEO from the outside) can mitigate this generally negativeeffect of CEO succession on financial performance, by reaching – in different ways – abalance between financial and non-financial concerns. These results are important asthey increase our knowledge regarding the circumstances related to the organizationalcontext under which CEO succession is positive or negative for financial performance.

One way to interpret our results is to distinguish between inside and outside successionmechanisms. Inside succession mechanisms (heir apparent and horse race) are bothbased on some form of ex-ante SEW understanding, although to a varying extent. In relaysuccession, the heir apparent is selected early and typically from inside the family, withthe purpose of securing a well suited understanding of family SEW and needs. Con-versely, being focused on managerial aspects of competition, the winning candidate inhorse race succession develops a somewhat lower understanding of the importance of theSEW for the family, which is however counterbalanced by a stronger power basedeveloped by the competition itself. In other terms, the ‘winner’ of the race does notnecessarily have the best knowledge of the family’s concerns for their SEW endowmentbeforehand, but he or she was the one who showed understanding to devote attention tofamily-related needs, as well as sufficient inside political connections to effectivelymanage the balance between financial and non-financial goals.

In the case of outside successions, with CEOs arriving from both outside the familyand the firm, the new CEO is less prepared with regard to the family and firm’s specificway of balancing concerns for SEW protection and financial performance. Certainly, thenew outside CEO may have previous experience with other family firms, and might beseasoned enough to understand the family firms’ tendency to be interested in goals



different to financial ones.[5] At the same time, the family business literature has high-lighted a general lack of preparedness of outside non-family CEOs entering the familyfirms (e.g., Hall and Nordqvist, 2008; Stewart and Hitt, 2012). Outside non-family CEOstend to be hired from different organizational contexts, and often one reason for bringingthem in is to introduce a new ways of thinking to the firm (Blumentritt et al., 2007). Froma SEW perspective, this means that outside non-family CEOs may lack the specificknowledge of the idiosyncratic priorities and values that characterize family firms(Stewart and Hitt, 2012), meaning that they will focus more on improving financialperformance measures than balancing financial and non-financial objectives. Such atti-tude is more plausible in the short run, unless the new CEO immediately understands theimportance to respect such family-business balance of priorities. This argument is sup-ported empirically by our results, which show that long-run effects of an outside CEO onfinancial performance are weaker than his or her short-term impact. This might also bedue to the fact that outside CEOs are likely over time to be more tightly controlled by theowner-family, enjoying less discretion due to the ownership concentration (Tosi andGomez-Mejia, 1989). More generally, this finding also suggests the existence of differenttemporal effects of CEO succession on the firm’s performance under the differentsuccession mechanisms.[6]

Additionally, the SEW perspective identifies the board of directors as a key govern-ance structure that the controlling family can use to protect its SEW endowment(Berrone et al., 2012; Gomez-Mejia et al., 2011). Our findings show that a high familypresence on the board decreases the positive effect of horse race succession, and of anoutside CEO. These results are consistent with the ambivalent view of family membersserving as ‘monitors’ on the board of directors: while a high family representation on theboard should allow for a better SEW protection, making the transition at the top lesstraumatic, insider dominated boards may place excessive emphasis on family rather thanbusiness concerns. On occasion, CEO successions can be surrounded by political con-tests by family directors who were not hired for the CEO position themselves, orsupported a candidate who was not selected as new CEO. Also, family domination on theboard may provide over-concern for SEW protection at the expense of financial perfor-mance goals. Taken together, these circumstances will have the consequence of turningthe effect on financial performance of CEO succession negative.

According to this logic, the empirical finding of a non-significant role of a family boardfor relay succession is not surprising. The careful and long term grooming of relaysuccessions to secure the heir apparent’s alignment with the family’s SEW, indeed,reduces the risks of divergent views on family concerns for SEW protection. Hence,family boards of directors may obstruct the new CEO only as a consequence of a politicalfight for internal family leadership and succession, and the wish of some of them toimpose a different SEW agenda from the one pushed by the new CEO.

Implications for Theory

Our study extends the CEO succession literature by addressing recent calls to take intogreater account contextual elements surrounding a CEO succession (Finkelstein et al.,2009; Karaevli, 2007), and to add new theoretical resources for a richer understanding



of this key strategic and organizational event (Carpenter et al., 2004; Hambrick, 2007).Only a few articles on CEO succession have explicitly considered the role oforganizational context (e.g., Friedman and Singh, 1989). We also respond to calls forbringing socio-emotional factors into research on CEO succession and into strategicmanagement research at large (Delgado-García and De La Fuente-Sabaté, 2010; Huy,2002). The SEW perspective, which is sensitive to context and the importance ofbehavioural aspects of managerial actions (Wiseman and Gomez-Mejia, 1998), relaxesagency theory’s assumptions and makes emotional attachment, social identification, andbelongingness critical to CEO succession. The SEW perspective and the family firmcontext are promising routes to better contextualizing management theories by studyingimportant types of businesses such as family firms (Gedajlovic et al., 2012).

Our study extends the SEW literature in several ways. First, while previous studieshave mostly focused on non-financial performance, we explore the search for a trade-off between economic and non-economic reference points when owning families aremaking critical strategic decisions (Berrone et al., 2012; Gomez-Mejia et al., 2007).Our study supports theoretical insights, according to which emphasis on SEW at theexpense of financial performance is unlikely to be ‘monotonic’ in any situation; rather,SEW concerns dominate under particular contingencies and are often temporary (Berroneet al., 2012; Gomez-Mejia et al., 2007), as well as specific of given governance arrange-ments. In this way, we offer a test of the SEW theory itself. This insight seems to bein line with recent theorizing in the BAM and SEW literature where the concept ofmixed gamble has been introduced (Martin et al., 2013). Most research assumes thatfamily firms act to preserve family SEW, since their principals are sensible to potentialSEW losses. However, in taking key governance or strategic decisions, the controllingfamily can also be motivated by the potential gains they see in specific investments,such as further growth of their existing SEW endowment as an outcome of R&Dactivities (Gomez-Mejia et al., 2013). Indeed, our study seems to indicate that it ispossible to see the CEO succession decision as a mixed gamble, where the family mayrisk their SEW, but also potentially expand their SEW thanks to the performance ofa new CEO.

We also provide preliminary insights that SEW is a ‘double-edged sword’. While thesearch for balance between financial and non-financial objectives through the variousmechanisms we explored is beneficial for firm performance, SEW orientation canbecome harmful if the family oversight in the boardroom becomes overly concernedabout socio-emotional priorities. The emphasis on SEW protection may be intensified ifa strong presence of family board members leads to different priorities amongst familymembers, which may develop into an improper use of SEW priorities for personalinterests. The dual attention to SEW as well as financial performance goals by familyowners speaks to the possible ‘dark sides’ of organizations driven by mixed financial andsocial/private goals (Gedajlovic et al., 2012; Kellermanns et al., 2012). This is in linewith the current debate in the family business field about the ‘bright’ and the ‘dark’ sidesof family involvement in governance and managerial positions (e.g., Gedajlovic et al.,2012; Minichilli et al., 2010; Schulze et al., 2001). Our evidence is also consistent withcontributions in the economics literature, which have pointed out negative consequencesfor the firm when family owners’ behaviours are driven by motives other than firm



financial performance (e.g., Bertrand and Schoar, 2006; Morck and Yeung, 2003; Morcket al., 2005; Schulze et al., 2001, 2003).

Based on these arguments, while taking socio-emotional concerns into account inpreparing the succession to the CEO seems to be rewarding in smoothing the negativeorganizational consequences of change in the top leadership, family pervasiveness on theboard of directors may intensify potential trade-offs and tensions between SEW andfinancial concerns, and different views of SEW when too many family members serve onthe board. In doing so, this study not only stresses the importance of contingencies inwhich SEW concerns have influence, but also qualifies positive and negative propensitiesof family actors that may arise in given situations when these actors do not share one viewand one agenda in the boardroom.

Limitations and Future Research

Our study has a number of limitations, which could represent opportunities for futureresearch. First, it should be noted that our sample is based on large and medium-sizedfamily firms from Italy, suggesting caution in generalizing our results to samples in othercountries and/or different firm sizes. Also, in spite of the many advantages in terms oflongitudinal structure and richness of information, our sample contains a somewhatlimited number of successions. Future research should consider analysing larger datasetsin different institutional contexts. Second, the fact that we had to ask respondents torecall information about events up to 10 years past has been pointed out as a potentialproblem in research design (Golden, 1992, 1997), although reliance on objective factsinstead of opinions limits potential biases (Miller et al., 1997). Third, although our modelspecification controls for time-invariant heterogeneity across firms, there may be time-varying firm characteristics not fully controlled in our specification that drive the choiceof a given succession model.

Another limitation relates to the use of established proxy variables that do not capturethe full complexity of what they are supposed to measure (see, e.g., Hambrick et al.,2008), such as the decision to proxy SEW protection through the ratio of family directorsinside the board. While this is an established method of capturing SEW concerns, futurestudies should use more detailed and fine-grained measures to capture and even directlytest different dimensions of SEW (Berrone et al., 2012). This will give possibilities toinvestigate and understand more in-depth behavioural and emotional processes amongowners, directors, and managers. However, there is still no established measure of SEWthat provides the needed robustness. Berrone et al. (2012) suggest testing SEW along fivedimensions summarized in the concept of FIBER – Family control and influence, familymembers’ Identification, Building social ties, Emotional attachment, and Renewal offamily bonds to the firm through dynastic succession. While it may be difficult to includeall five dimensions in a single study of SEW, FIBER offers useful guidance regarding howto increase robustness in future studies.

Using a more robust SEW measure, it is important to consider that most businessfamilies consist of multiple members that may have different motivations (Wiklund et al.,2013). If family members associated with the business are motivated to protect SEW tovarying degrees, researchers should collect data on SEW attitudes from different family



stakeholders. Multiple respondents seems to be particularly important in large and oldfamily firms where multiple generations and family branches are likely to be involved andhave different SEW attitudes.

A more robust measure of SEW would, for instance, allow scholars to study in moredetail whether succession can lead to improvement in performance because familymembers are able to make the deliberate choice to put SEW aside and replace the CEOwith the purpose of paying more attention to economic criteria in the choice. It wouldalso allow for researchers to build specifically on the concept of mixed gambles where thedominant principals see CEO succession as decision associated with both potential lossand potential gain of SEW (Gomez-Mejia et al., 2013; Martin et al., 2013).

Finally, our theorizing and measurement of relay successions did not include thepossibility of heir apparent coming from outside the family firm. This is a limitation ofour study even if such cases are quite rare in the samples like the one used here, and itwould not be entirely consistent with previous research on relay successions (e.g., Shenand Cannella, 2002; Zhang and Rajagopalan, 2004).

Implications for Practice

Our results also have relevant implications for practice. First, owners and managersshould carefully consider the most appropriate mechanism of succession in light of thefamily’s SEW. Due attention should be given to the candidates’ understanding of andrespect for the controlling family’s socio-emotional interests and priorities. CEO candi-dates in family firms should carefully consider whether they are suited to work in anorganizational context where non-financial goals related to an idiosyncratic familyagenda may coexist with financial performance goals. Conversely, family owners shouldopt for the succession mechanism that maximizes firm’s as well as family’s utility, also inlight of different temporal effects on performance that different succession mechanismsseem to show.

Our results also have implications for risk consciousness among family owners. Whilesome studies argue that family firms are inherently risk averse (e.g., Morck and Yeung,2003; Zahra, 2005), we agree with Gomez-Mejia et al. (2007) that they can be risk averseand risk taking at the same time depending on whether the situation involves a financialor socio-emotional stake. We show that controlling owners and family decision-makersare willing to accept lower financial performance to protect their SEW endowment if theCEO succession mechanism threatens it. Family owners should be aware of the need toconsciously adjust their risk propensities during a CEO transition.

Finally, the double-edged sword nature of SEW indicates the need for an appropriatebalance of family and outside board members during important transitions such as CEOsuccession, to secure a balanced attention to both financial and socio-emotional wealth,as well as to avoid destructive disagreements between family members and familyself-serving behaviours.

NOTES

[1] Under Italian legislation, a shareholder having more than 30 per cent has to tender an offer on thecompany, and for this reason investors usually consider this threshold to distinguish between financialinvestments and controlling stakes.



[2] In 2008, 86.6 per cent of all the largest Italian family firms had a family chairman, and even non-familychairmen in family firms usually develop a trust relationship with the family that makes them veryknowledgeable about the firm, the family, and their mutual development.

[3] We use the 1-digit industry average for the few cases in which a 2-digit industry contains only one firm.However, our results are robust to dropping these cases.

[4] We estimate the effect of relay succession, horse race, and outside non-family incoming CEO by relyingon an omitted group formed by firms undertaking successions in which the incoming CEO is appointedfrom inside the firm without a planned succession, or from outside the firm but inside the controllingfamily.

[5] We thank an anonymous reviewer for bringing this point to our attention.[6] We thank an anonymous reviewer for bringing this point to our attention.

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