DETERMINANTS OF INITIAL SATISFACTION WITH THE SUCCESSION
PROCESS IN FAMILY FIRMS: A CONCEPTUAL MODEL
PRAMODITA SHARMA
Associate Professor
School of Business Administration
Dalhousie University
6152 Coburg Road
Halifax, NS Canada B3H 3J5
Phone: (902) 494-6742
Fax: (902) 494-1107
Email: [email protected]
JAMES J. CHRISMAN
Family Business Entrepreneurship Professor of Venture Development
Faculty of Management
University of Calgary
2500 University Drive NW
Calgary, AB T2N 1N4
AMY L. PABLO
Associate Professor of Management
Faculty of Management
University of Calgary
2500 University Drive, NW
Calgary, AB T2N 1N4
JESS H. CHUA
Family Business Management Professor of Finance
Faculty of Management
University of Calgary
2500 University Drive, NW
Calgary, AB T2N 1N4
Please address all correspondence to Pramodita Sharma.
The authors are indebted to the Family Business Program at the University of Calgary and an anonymous donor for funding this study.
DETERMINANTS OF INITIAL SATISFACTION WITH THE SUCCESSION PROCESS IN
FAMILY FIRMS: A CONCEPTUAL MODEL
Leadership succession continues to form the core of the family business literature. Numerous
studies have suggested factors that influence family members’ initial satisfaction with the succession
process, but this body of work is highly fragmented and lacks a unifying framework. In this paper, we
draw on stakeholder theory and other organizational, behavioral, and economic theories to develop a
conceptual model that integrates the findings from the literature. The research and practical implications of this integrative, ready to test, model are discussed.
INTRODUCTION
What factors influence the management succession process in family firms? To study this research question, we reviewed the family business literature on management succession from one family
member to another. We also reviewed the executive succession literature for additional insights although
intra-family succession may be quite different from transitions between family and non-family members in family firms or between unrelated individuals in non-family firms (e.g., Kanter, 1989; Morris,
Williams, Allen, and Avila, 1997).
In both areas, succession has received considerable interest in the recent past1. Between the 1970s
and 1990s, the strategic management literature shows a 250 percent increase in the number of succession articles (Kesner and Sebora, 1994). In the family business literature, the articles related to succession grew twofold in the early nineties (Wortman, 1994) and the topic continues to receive extensive
attention (Dyer Jr. and Sanchez, 1998).
1
For an overview, please refer to review articles available both in the fields of family business (e.g., Handler and Kram,
1988; Handler, 1992; Sharma, Chrisman, Chua, 1996; Welsch, 1993) and in the strategic management literature (Brady and
Helmich, 1984; Gordon and Rosen, 1981; Kesner and Sebora, 1994; Kohler and Strauss, 1983).
The family business literature contains a plethora of studies about factors that could influence
the succession process. These studies tend to focus on specific factors and, as a result, provide no
unified perspective. One exception is the model developed by Morris, Williams, Allen, and Avila (1997),
which touches on satisfaction with the succession process but concentrates on the effectiveness of
succession.2 Drawing on the premises of stakeholder theory as well as aspects of various other organizational, behavioral, and economic theories, we extend Morris, et.al.’s (1997) work to develop an
integrative model of the factors influencing initial satisfaction with the succession process in family
firms.
In studying satisfaction with the succession process, it is important to distinguish between initial stage and later stage or retrospective satisfaction because satisfaction with the process may, over
time, be affected by the post-succession performance of the family firm. We define initial stage satisfaction as perceived satisfaction before post-succession performance of the family firm is substantially
known. Later stage or retrospective satisfaction is satisfaction after the post-succession performance is
known or substantially known.
The remainder of this article discusses the importance of family business succession as a topic
for research, defines the scope of our conceptual model, and introduces the variables that directly and
indirectly influence initial satisfaction with the succession process in family firms.
SUCCESSION IN FAMILY FIRMS
Family businesses represent a significant portion of the world economy. Although national
statistics are unavailable, estimates of their number vary from 65% to 90% of all businesses in various
nations (e.g., Beckhard and Dyer, 1983). Depending upon the definition of family business used, the
estimated number of family firms in the U.S. varies from 4.1 million to 20.3 million, accounting for
12% to 49% of the total GDP, and employing between 15% to 59% of the U.S. work force (Shanker and
Astrachan, 1996). Similar figures have been reported for the Canadian economy where family firms are
found to provide jobs to over 6 million Canadians (Deloitte and Touche study, 1999). Thus, the economic impact of these firms range from very large to overwhelming (Shanker and Astrachan, 1996).
Morris et. al. (1997) did not find a significant relationship between quality (satisfaction) and effectiveness. They found
effectiveness to be influenced by variables such as the preparation level of heirs, relationships amongst family members,
and the types of planning and control mechanisms used.
1
Although family firms’ contributions to the world economy are undeniable, the source of the
value they add is only beginning to be understood. For example, Shleifer and Vishny (1997) believe
that family firms will dominate in economies or industries that lack, or cannot feasibly develop, the
cost-effective legal and political institutions to control the agency costs created by the separation of
ownership and control. If true, this implies that the family firm is an efficient organizational form for
certain economies or industries.
Demographic trends in North America indicate an inversion of the age pyramid with individuals 65 years and over constituting the fastest growing sector of the population (e.g., Lansberg, Perrow,
and Rogolsky, 1988). With this greying of the population, the number of family business leaders confronting succession and retirement will accelerate in the coming decades (Deloitte and Touche study,
1999; Lansberg, Perrow, and Rogolsky, 1988; Sonnenfeld, 1986). A large majority (over 90%) of these
family firm leaders in the U.S. wish to have their businesses controlled by their families in the future
(American family business survey, 1997). Evidence indicates, however, that probability of fulfilling the
wish is low; most family businesses barely outlive the tenure of their founders (Ambrose, 1983). Estimates show that only 30% of family firms survive the transition to the second generation, and only 10%
make it to the third generation (Beckhard and Dyer, 1983; Ward, 1987).
In conclusion, the sheer number of family firms, their aggregate impact on the economy, and the
potential economic losses that may result from succession processes of poor quality, and the observation that quality is important for its own sake in terms of family harmony behoove us to better understand the factors that influence family members’ satisfaction with the succession process.
The model we develop in the following sections focuses on family firms in which leadership
transition takes place between family members. While some of the determinants in our model may be
applicable to other contexts (i.e., in family to non-family member transitions in family firms, and management transitions in non-family firms), further theoretical development and empirical research are
required before such claims can be made.
SCOPE OF STUDY: SUCCESSION SATISFACTION VS. EFFECTIVENESS
Success in management succession for a family firm consists of two interactive dimensions
(Handler, 1989; Morris, et.al., 1997). One is family members’ satisfaction with the manner in which the
succession process is carried out. This is a subjective assessment of an individual about the process and
decision regarding the selection of a new top manager, based on perceptions rather than objective
criteria. On the other hand, effectiveness deals with how succession affects the subsequent performance of the firm. Thus, effectiveness is an objective determination of the impact on firm performance
following the replacement of one top manager with another.
In a professionally managed firm with widely distributed ownership, financial performance
may be the predominant goal, and success in management succession may be essentially a function of
the firm’s post-succession performance (Pitcher, Chreim, and Kisfalvi, 2000). In family firms, however, maintaining good family relationships is also extremely important. At times, family members
may give this goal higher priority than profitability (e.g., File, Prince, Rankin, 1994; Tagiuri and Davis,
1992). Therefore, understanding the factors that influence satisfaction with the succession process,
from the perspective of family member stakeholders, is an important topic of study because a lack of
satisfaction with the process may adversely influence family relationships.
A conceptual argument can be made for an interactive relationship between these two dimensions of success in management succession. Dissatisfaction with the succession process could cause
interminable conflicts that make the succession ineffective. On the other hand, if the succession is not
effective, dissatisfaction with the succession process, after the fact, could occur. In summary, studying
satisfaction with the succession process is important because of its direct impact on the relationships
among family members, an important consideration in many family firms, and because of its impact on
effectiveness.
This discussion suggests that the relationship between satisfaction and effectiveness is likely to
be inter-temporal in nature. Initial satisfaction will precede effectiveness since perceptions will be
developed long before performance is known. This satisfaction or dissatisfaction will affect postsuccession family relationships which may, in turn, color the decision-making and subsequent performance of a family firm. Subsequent performance may also alter family members’ satisfaction with the
succession process even in the absence of any changes in the relationships among family members.
These interrelationships are displayed in Figure 1. As Figure 1 shows, we portray both satisfaction and
effectiveness to be influenced by a set of independent variables, aside from their interactive relationship with each other. Some of these variables may influence both, as shown by the overlapping area.
There is clearly a need to develop a comprehensive model of the factors influencing the twin
dimensions of succession success in the family firm. It is also obvious that this is a complex task and
we do not attempt such an undertaking here. Instead, we shall deal only with the variables that influence the initial satisfaction of family members with the succession process in family firms as shown in
the shaded portion of the upper left hand corner of Figure 1. Thus, this study does not include considerations about the interactive relationship between satisfaction and effectiveness in the context of succession nor the independent variables that affect effectiveness. We believe that this decision is justified
given the preoccupation in the family business literature with factors that increase the satisfaction of,
and good relationships among, family members (Sharma, Chrisman, and Chua, 1997). We also believe
that, by integrating the findings in the literature about factors influencing initial satisfaction with family
firm succession, our development of a testable model makes a contribution to the literature. Besides,
the inter-temporal relationship between satisfaction and effectiveness suggested in our model requires
that initial satisfaction be studied first.
THE CONCEPTUAL MODEL
In this article, the succession process is defined as the actions and events that lead to the transition of leadership from one family member to another in family firms. The two family members may
be part of the nuclear or extended family, and may or may not belong to the same generation. For
succession in the family firm to occur, there must be three components: a leader who hands over the
leadership role, a successor who takes over the role, and a mechanism by which the transition takes
place (e.g. Barry, 1975; Davis, 1982). To this, Babicky (1987) adds an agreement among family members to continue the business and Handler (1992) appends an acceptance among family members of
their relative roles in the business. With respect to the last two components that are not part of the
mechanics of succession, disagreements among family members are likely to undermine the efforts to
achieve an equitable distribution of company stock, assets, and power. This discordance might slow
down or subvert decision making with regard to the succession process (Dyer, 1986).
These five factors form the core of our model on the determinants of initial satisfaction with
succession in family firms. We characterize them as: (H1) Propensity of the incumbent to step aside;
(H2) Propensity of the successor to take over the business; (H3) Succession planning; (H4) Agreement
to continue the business; and (H5) Acceptance of individual roles. This characterization of the determinants reflects the insights of a number of scholars (Handler, 1989; Lansberg and Astrachan, 1994;
Malone, 1989; Morris et.al., 1997). The model is developed below and depicted in Figure 2.
As shown in Figure 2, we extend our model to include what the family business literature
suggests are the most important antecedent variables that might affect the determinants of initial satisfaction. Variables that affect these antecedents are, however, not included in the model because they are
further along in the chain of causation. For example, firm size, which may affect the antecedents:
“expected payoffs from the business” and “presence of an active advisory board”, is not included in the
model.
Our model is based on the stakeholder theory of the firm. In this theory the importance of a
particular stakeholder in influencing the direction, decisions, and actions of the firm depends on that
stakeholder’s stakes, power, legitimacy and urgency (Freeman, 1984; Mitchell, Agle, and Wood, 1997).
Thus, for each hypothesized path of influence, we identify the legitimate stakeholder(s) involved. In
the development of the hypotheses, we take into consideration how a particular group of stakeholders
may affect initial satisfaction with succession by virtue of how their stakes in the firm will be affected,
the power they have to shape the succession process, and the urgency (time sensitivity and importance)
of their stakes in the present and future state of the firm (Freeman, 1984; Mitchell, Agle, and Wood,
1997).
To enrich the model, insights from other complementary theories such as agency cost theory,
transaction cost theory, expectancy theory, and bounded rationality are employed. The following sections discuss the variables and relationships that constitute the model.
Figure 2. Determinants of the quality of the succession process in the family firm.
Perceived family
harmony
H5a
Acceptance of
individual roles
H5
H2b
Fit between successor’s
career interests and the
business
H2a
H2c
Propensity of the
successor to take over
H2
Trust in successor’s
abilities and intentions
Propensity of the
incumbent to step aside
Incumbent’s interest
outside the business
INITIAL
SATISFACTION
WITH THE
SUCCESSION
PROCESS
H1a
H1b
H1
H3a
H3
Presence of an active
advisory board
Extent of succession
planning
H3b
H3c
Expected payoffs from
the business
H4
H4a
Agreement to continue
the business
H4b
Propensity of an incumbent to step aside
The two key stakeholders in succession are the incumbent and the successor. Succession is the
transfer of leadership from the former to the latter. The literature indicates that the succession process
is largely under the control of the top manager, hereafter referred to as the incumbent (e.g., Brady and
Helmich, 1984; Christensen, 1953; Lansberg, 1988; Malone, 1989; Pitcher, Chreim, and Kisfalvi, 2000;
Vancil, 1987). This key stakeholder therefore has a considerable amount of power to influence the
nature and timing of succession and whether it is a quality process or not. Furthermore, the incumbent
generally has enough legitimacy within the firm and the family to remain in power as long as he or she
desires.
In family firms, the incumbent’s inability to “let go” has been cited as the single largest problem
in succession (e.g., Davis, 1982; Handler, 1989; Kepner, 1983). In most cases, an incumbent has a
difficult time visualizing life without a significant leadership role in the family business (Kets de Vries,
1985). An incumbent may fear losing status in the family and the community as both may be closely
intertwined with his or her role in the family business.
Additionally, addressing the issue of succession requires an incumbent to coach, develop, and
plan rather than do. An incumbent must watch others make mistakes and learn from them plus accept
that others may do the job differently and be effective (Firnstahl, 1986). An incumbent may be reluctant
to step aside because that means facing his or her mortality, to confront the life changes that follow
succession, and to change management styles (Beckhard and Dyer, 1983; Dyer, 1986; Lansberg, 1988).
Combined, these factors dramatically decrease the urgency of an incumbent to exit (Kets de Vries,
1988).
When an incumbent is not willing to let go, succession may be delayed or worse, commenced
and then aborted. These delays or false starts can be extremely frustrating for members of the family
and the business, to say nothing of the negative effects on the successor. Even if succession is not
delayed an incumbent who is not fully committed to succession can make life unpleasant for the successor, as well as do real harm to the fabric of the family business. The decisions of successor may be
second guessed or even countermanded by a recalcitrant predecessor who has “officially” retired but
unofficially attempt to maintain strategic and/or operational control of the family business (Sonnenfeld
and Spence, 1989). This problem is especially serious if the retiring leader retains controlling ownership of the family firm and, hence, legitimate decision-making powers as derived from the property
rights conferred by the law on shareholders (Lansberg, 1999).
Hofer and Charan (1984) believe that, within the context of professional management transitions, the chances of a successful succession are “practically nil” if the incumbent is not committed to
the process. While we do not necessarily take such an extreme viewpoint, it is clear to us that without
the support of that powerful and legitimate stakeholder the chances for a satisfactory succession are
seriously diminished. Thus, initial satisfaction with the succession process in family firms will depend
on the extent to which an incumbent is willing to step aside. If an incumbent is willing to step aside, the
likelihood of a satisfactory succession process increases because such willingness indicates the
incumbent’s acknowledgment that new leadership is needed and, possibly, acceptance of the successor
as a suitable replacement. Thus:
H1: There is a positive relationship between the propensity of an incumbent to step aside and
family members’ initial satisfaction with the succession process.
If an incumbent’s propensity to step aside increases initial satisfaction with the succession process, the next question is – what boosts such propensity? In discussing an incumbent’s propensity to
step aside, the family business literature implicitly assumes that the action will be voluntary. Therefore,
we focus on antecedents that might cause an incumbent to step aside voluntarily, contending that these
will have a greater influence on the relationship between propensity and initial satisfaction than antecedents such as health, lawsuits, family pressure, etc. which lead to involuntary actions. 3
The presence of a trustworthy successor has been suggested in the literature as a major factor
that determines an incumbent’s propensity to step aside (e.g., Christensen, 1953; Handler and Kram,
1988; Sonnenfeld and Spence, 1989; Trow, 1961). Chrisman, Chua, and Sharma’s (1998) finding that
the two most important attributes of a successor sought by family firms are integrity and commitment
to the business supports this point.
Typically, the incumbent’s strong emotional and large financial stake in the family firm continues after leadership is transferred (Harveston, Davis, and Lyden, 1997). Passing control of the business
to another family member (or for that matter, to a non-family manager) creates a principal-agent relationship between the incumbent and the successor. This generates agency costs that must be incurred to
guard against adverse selection and moral hazard problems4 (e.g., Alchian and Demsetz, 1972; Jensen
and Meckling, 1976).
The same qualification applies to the antecedent variables used to explain successors’ propensity to take over.
In this context, the adverse selection problem arises if the family firm picks a successor who is less capable than
believed. Moral hazard problems occur when the successor changes intentions or behavior after succession to the
detriment of the other family members.
3
4
The principal has two alternatives to ensure that the agent acts in the principal’s best interests:
monitoring and alignment of interests. Monitoring is expensive and, in a family firm, the incumbent is
likely to think that if it is necessary to closely monitor the successor s/he may as well not step aside,
suggesting that the incumbent’s willingness to step aside will be diminished. In such instances, the
leader may start considering the possibility of selling the business or passing it on to professional
managers. Either option, or simply the fact that either is being considered, may cause upheaval in the
family and further lower the incumbent’s propensity to step aside.
On the other hand, if there is an alignment of interests between the incumbent (principal) and
the successor (agent), the incumbent will be less concerned with moral hazards and be more inclined to
trust the successor’s intentions. Furthermore, the incumbent’s confidence in the abilities of the successor should address adverse selection issues. Therefore, the incumbent’s trust in the successor’s abilities
and intentions should decrease agency costs and raise the incumbent’s propensity to step aside. Interest
alignment need only be perceived because human beings are boundedly rational and base their decisions on their perceptions of other individuals (March and Simon, 1958; Weick, 1979) whether these
perceptions are right or not. Therefore it follows that:
H1a: There is a positive relationship between the incumbent’s trust in the capabilities and
intentions of the successor and the incumbent’s propensity to step aside.
As we discussed previously, the incumbent’s life typically revolves around the family firm,
leaving little time to develop interests outside the business (Rubenson and Gupta, 1992). But for those
who have developed outside interests, retirement can be seen as a new beginning and a desirable outcome. Thus the urgency of the incumbent to initiate succession will partially depend upon whether he
or she has interests outside the business. The expectancy theory of motivation suggests that a person’s
motivation towards an action at a particular time is determined by the anticipated values of the action’s
outcomes and the person’s expectations that the actions will lead to the desired outcomes (Porter and
Lawlor, 1968; Vroom, 1964). In this context, the action is the propensity of an incumbent to step aside
and the outcome is life after retirement. There is a clear linkage between the action (stepping aside) and
the outcome (life after retirement), as the action is largely under the control of the incumbent (Christensen,
1953). Thus, theory suggests that incumbents with interests outside the business will be more inclined
to step aside. It follows that:
H1b: There is a positive relationship between the intensity of the incumbent’s interests outside the business and her/his propensity to step aside.
Propensity of the successor to take over the business
Successors are another important stakeholder group with a legitimate claim on the firm and a
legitimate concern over the succession process. In the absence of a successor who is willing and able to
take over the family business there cannot be succession within the family. Because of successors’
ability to refuse or withhold cooperation, these individuals exercise great power over succession timing
and the satisfaction of family members with the process. A commonly cited reason for a problematic
succession is lack of interest on the part of the successor (e.g., Barry, 1975). A reluctant successor will
not be fully committed, may project resentment towards other family members, and may not co-operate
in the leadership transition (Bowen, 1978; Goldberg and Woolridge, 1993). Additionally, a candidate
may attempt to use his or her power to extract extra concessions that reduce the satisfaction of the
incumbent and other family members with the process. Empirical evidence shows that the presence of
a willing successor significantly influences the quality of succession in family firms (Morris et.al.,
1997). Thus, it can be hypothesized that:
H2: There is a positive relationship between the propensity of the successor to take over the
business and family members’ initial satisfaction with the succession process.
Handler (1992) suggests that the fit between the career interests of a successor and opportunities in the family firm is important in determining whether a potential successor joins the family business. If the fit is less than desirable, successors will make changes to align the firm more closely to their
competencies and aspirations (Goldberg, 1996). From an agency cost perspective, the other stakeholders may rationally anticipate this moral hazard problem, unless there is pre-succession agreement regarding such changes, and insist on additional monitoring mechanisms. These mechanisms will, in
turn, increase the successor’s discomfort with taking over.
Thus, misalignments of the successor’s career interests with the business will not only increase
agency costs but may cause the successor to balk. These observations cause us to hypothesize that the
better the possible fit between the successor’s career interests and the family business, the higher the
stakes and urgency, and thus, willingness on the part of the successor to take over the leadership role.
H2a: There is a positive relationship between the successor’s perception of a fit between her/
his career interests and the family business and the successor’s propensity to take over.
Financial benefit is one of the main stakes of all stakeholders in a family firm. Thus, a firm with
potential to generate high financial payoffs is more likely to be attractive to the potential successor
(Malone, 1989). Conversely, a family business that has low expected financial payoffs may be of limited interest to the next generation of family members (Ambrose, 1983). Evidence shows that nextgeneration family members who are more optimistic about their company’s future prospects are more
committed to maintaining long-term ownership within the family (American Family Business Survey,
1997). This enhanced commitment on the part of a potential successor should raise her/his urgency and
propensity to take over.
H2b: There is a positive relationship between the expected financial payoffs from the family
business and the successor’s propensity to take over.
Individuals are attracted to organizations that offer a desirable work environment. In the family
firm with a number of family members working together, such a desirable environment is possible only
when family members are clear about and agree upon their individual roles in the business (Handler,
1989; Lansberg and Astrachan, 1994). Agreement about roles enhances the successor’s legitimacy. If
this leads to greater acceptance of the successor’s decisions and plans, it also increases the successor’s
power.
As a group, family members are the most important internal stakeholders in the family firm.
The successor will be involved in a large number of financial and social transactions with them. Family
members who do not accept their roles and the roles of others in the family firm are more likely to
engage in opportunistic behaviors that increase the transaction costs for the firm and its managers (cf.,
Donaldson and Preston, 1995; Jones, 1995; Williamson, 1975). As the potential successor weighs the
benefits and costs of assuming the leadership of the family firm, any perceived increase in costs without a commensurate increase in benefit will lower the attractiveness of the opportunity, thereby de-
creasing the overall attractiveness of becoming the successor. Therefore, we believe that acceptance of
roles raises the successor’s propensity to take over.
H2c: There is a positive relationship between the degree to which family members accept
each other’s role in the business and the successor’s propensity to take over.
Succession planning
The importance of succession planning has been widely recognized in the literature. In the
absence of such planning, the sudden departure of the founder-manager can cause major upheavals of
power and authority, conflict among heirs, and thorny estate issues (e.g., Lansberg, 1988). Thoughtfully developed succession plans can increase the likelihood of co-operation among stakeholders in the
business, thus enhancing the chance of a smooth and satisfactory succession (e.g., American Family
Business Survey, 1997; Hayes and Adams, 1990; Morris et.al., 1997).
The rationale is obvious but powerful. A succession plan may involve input from a number of
family stakeholders. Having a voice in the process may provide a sense of ownership to family members, increasing their feelings of legitimacy, power, and stakes in the success of the business. Such
involvement may therefore positively affect their initial satisfaction with the process. Furthermore, the
development of a plan implies that the process will be conducted in an orderly fashion with allowance
for preparation before, during, and after the succession event, as well as the development of specific
criteria for the selection of a successor. Finally, the development of a succession plan implies communication at one or more stages in the process. A process that is conducted in an orderly fashion with
allowances for communication as events unfold is, all else held equal, more likely to be viewed positively than a process lacking these characteristics. Based on this reasoning, it can be hypothesized that:
H3: There is a positive relationship between the extent to which a family firm engages in
succession planning and family members’ initial satisfaction with the succession process.
We have previously discussed the psychological and behavioral reasons why an incumbent may
not be willing to step aside as well as the incumbent’s power to shape the succession process for better
or ill. It is difficult to imagine a leader opposed to an action enthusiastically planning for it. Christensen
(1953) notes that “the first and foremost barrier that stands in the way of some provision for retirement
planning, is the top manager himself” (p.129). Therefore, it is not surprising to find the degree of
succession planning in family firms to be directly related to the owner-manager’s plan to retire (Mass
Mutual Survey, 1994). In the Survey, 74% of the owner-managers planning to retire within five years
had chosen their successor, but only 37% of those not planning to relinquish control within ten years
had done so. Consistent with Steiner’s (1979) conclusions with respect to strategic planning, we argue
that the incumbent’s support is a critical determinant of whether succession planning occurs or not.
H3a: There is a positive relationship between the incumbent’s propensity to step aside and
the extent to which the family firm engages in succession planning.
Outside of the immediate family, advisory boards are seen in this article as one of the most
important stakeholder groups in the succession process.5 Their position in the governance of the firm
provides them with considerable legitimacy and power. Furthermore, members of advisory boards
have claims on the firm that are important and demand timely action.
It is generally agreed that family business managers can benefit from the objective counsel of
outsiders, individuals beyond the immediate management group (e.g., Christensen, 1953; Danco, 1975).
The prescriptive literature strongly suggests that the presence of an active advisory board can influence
the succession planning process (e.g., Ward, 1991). These boards may be either formal or informal; the
most important condition is the degree to which the advisory board is active both in terms of the
frequency of its meetings and exerting its influence over the strategic direction of a business. According to this literature, psychological deterrents make it difficult for incumbents to initiate succession
planning but an active advisory body can help them initiate the process and make sure that it receives
continued attention (Christensen, 1953; Ward, 1991).
An indirect piece of evidence suggests that an active advisory board may increase the extent to
which a family firm engages in succession planning. Harveston, Davis, and Lyden (1997) found a
positive link between the extent of formality in a firm (measured using four items:
In this article, the term advisory board includes both formal boards of directors and less formal advisory bodies. Members
of either type of board may include family members, non-family managers, and outsiders. The most appropriate type of
5
advisory body for a firm will depend upon a variety of factors such as firm size, type of business, family goals, etc.
written job descriptions, fixed compensation plans, formal employee performance reviews, and holding regular board meetings) and succession planning. Thus, we hypothesize that:
H3b: There is a positive relationship between the presence of an active advisory board and
the extent of succession planning the family firm undertakes.
Obviously, families that do not wish to continue the family business will not do any succession
planning. Instead, the children will pursue careers outside the firm (e.g., Wong, McReynolds, and Wong,
1992). On the other hand, family stakeholders highly committed to the business will intricately link the
well being of the family and the business. This provides the necessary supportive environment for such
families to undertake the emotionally straining process of succession planning. Such families view
succession planning as “an activity that must be undertaken for the greater good of the family” (Lansberg
and Astrachan, 1994: 46). Therefore, the extent of succession planning undertaken should increase
with the level of agreement among the members of the family to continue the business.
H3c: There is a positive relationship between the degree to which the family members agree
to continue the business and the extent of succession planning undertaken.
Agreement to continue the business
Stakeholder theory suggests that managers should consider the financial and non-financial needs
and objectives of all stakeholders when making business decisions (Freeman, 1984). Mitchell, Agle,
and Wood (1997) argue that stakeholders with legitimate, powerful, and urgent claims on a firm demand and get the most attention. In the family firm, family members, even those without an ownership
stake, have the most potent combinations of legitimate, powerful and urgent stakes. Consequently,
their views are likely to command a great deal of attention. If some family members are strongly opposed to retaining ownership in the family, their opposition may disrupt the succession process to such
a degree that it detracts from family members’ initial satisfaction with the process. Thus, the likelihood
of a satisfactory generational transition is enhanced when family members are committed to keeping
the business in the family (Babicky, 1987).
H4: There is a positive relationship between the degree to which the family members agree to
continue the business and family members’ initial satisfaction with the succession process.
Axelrod (1984) shows that, in a game theoretic situation, cooperation emerges only if all parties
perceive gains from such behavior. Thus, in the family business context, the possibility of high payoffs
from the business should increase both the stakes and urgency of family stakeholders with regard to
actions that will ensure the continuation of the business (Malone, 1989). For example, research on first
generation immigrant family businesses indicates that these families may view the business as a means
to provide professional education for their children instead of as a family legacy (Dean, 1992; Wong,
McReynolds, and Wong, 1992). One explanation for this could be that the businesses started by members of first generation immigrant families are generally small and do not promise sufficient payoffs for
the next generation family members. Thus:
H4a: There is a positive relationship between the expected financial payoffs from the business and family members’ agreement to continue the business.
It is believed that family firms do not operate with the single goal of profit maximization (e.g.,
Rosenblatt, deMik, Anderson, and Johnson, 1985). For example, family firms have been found to employ family members in order to maintain family harmony, although this practice may lead to suboptimal financial performance (Dunn, 1995). A family business, by definition, suggests some sharing of a
vision, as well as the responsibility for implementing that vision through the management, governance,
and/or ownership of the business by members of a family (Chua, Chrisman, & Sharma, 1999). Stated
differently, family businesses are highly concerned with balancing the needs of their key stakeholders
(cf. Freeman, 1984).
As a consequence, the more harmonious a family is, the more likely it will be that its members
will want to continue to pursue a shared vision in the interests of all concerned. Lack of harmony, on the
other hand, either suggests substantial discord on important aspects of the current vision and/or the
manner in which it is to be realized, or suggests that personality differences are difficult to reconcile.
Whatever the reason for the disharmony, it can spill over to the decision about continued involvement
in the business, reduce the perceived stakes of family members, and cause stakeholder power to be
exercised in dysfunctional ways. Therefore, family harmony is an important determinant of family
members’ agreement to continue the business.
H4b: There is a positive relationship between the level of percived family harmony and the
agreement among family members to continue the business.6
Acceptance of individual roles
Rosenberg (1991) believes that most individuals want clearly defined roles and responsibilities,
which she calls “specific territories”. Clarity of roles and responsibilities helps individuals identify
with their contributions and responsibilities (Rosenberg, 1991) and helps establish a sense of fairness
in the workplace (Organ, 1990). In her study on the perspectives of next-generation family members,
Handler (1989, p.163) found that “sibling accommodation” — “agreement on their relative position of
responsibility and power” — had a major effect on the quality of succession. When each stakeholder in
the family understands and accepts her/his role in the business, the possibility of jealousy, interference,
and lingering animosity about the succession decision decreases. This alignment of roles increases the
chances that stakeholder power and urgency will not be used for cross-purposes. As this occurs, the
likelihood of a satisfactory transition increases.
Role acceptance makes it easier for family stakeholders to work harmoniously together by providing an umbrella to accommodate different kinds of relationships among siblings as well as among
incumbents and successors. As noted earlier, without this acceptance, the possibility of opportunistic
behaviors, and the associated financial and non-financial costs of transactions, increase. For example,
some family members may attempt to undermine the efforts of others in order to achieve a redistribution of company stock, power, assets, or decision making. Political in-fighting has a detrimental effect
on both the succession process and family members’ initial satisfaction with the process (Dyer, 1986).
Furthermore, these problems are more likely to linger after succession occurs because of such dissatisfactions (Harvey and Evans, 1995). As Davis (1982) observes, family members’ acceptance of everyone’s
post-succession level of involvement (ownership as well as managerial) in the business determines
their initial satisfaction with the succession process.
There may also be a relationship between both expected financial payoffs from the business (H4a) and level of perceived
family harmony (H4b), and family members’ agreement to sell or liquidate the business. Since such agreements would not
lead to succession we do not treat them directly in this article.
6
H5: There is a positive relationship between the degree to which family members accept each
other’s role in the business and their initial satisfaction with the succession process.
Malone (1989) suggests that perceived family harmony includes mutual respect, trust, understanding amongst family members, and the presence of open lines of communication. These family
relationship variables have also been deemed important by other researchers (Handler, 1989; Lansberg
and Astrachan, 1994; Lundberg, 1994). Similar to the ways in which a positive social context facilitates
succession from one management to another in mergers and acquisitions (e.g., Jemison and Sitkin,
1986), mutual understanding, respect, and trust in the context of family relationships plays an important role in the level of acceptance of business related roles of family members (Malone, 1989). Thus,
harmonious relationships among family members provide a conducive atmosphere for their acceptance
and appreciation of the roles each member plays in the context of the business. This reasoning leads us
to our last hypothesis,
H5a: There is a positive relationship between perceived family harmony and family members’ acceptance of each other’s role in the business.
DISCUSSION
This article makes a significant contribution to the family business literature by presenting a
model of the factors that determine initial satisfaction with the succession process in family firms.
Although various elements have been discussed in previous studies (e.g., Davis, 1982; Handler, 1989;
Lansberg and Astrachan, 1994; Malone, 1989; Morris et.al., 1997), this is the first to integrate these
elements into a single model grounded on a well-accepted theory of the firm. The model should be
useful in helping researchers decide what to observe in family business successions, how to organize
the observations, and how to interpret them. In addition, this two-level model makes it possible to test
the relative importance of each determinant and the antecedents affecting the determinants.
Implications for future research and theory development.
Future research and theory development on family business development must proceed in at least
two general directions. First, it should be clear from our description of the dimensions of the success of
the succession process that more theoretical attention needs to be given to the determinants of the effectiveness of succession, as well as the relationships between effectiveness and satisfaction. As explained
earlier, however, engaging in an extended discussion of the overall success model of satisfaction and
effectiveness, or of the determinants of effectiveness, is beyond the scope of this article. In this respect it
is sufficient to reiterate the key relationships displayed in Figure 1.
As discussed, individuals, family relationships, and organizational attributes are expected to influence initial satisfaction with the succession process which, in turn, is expected (along with a variety of
variables related to leadership, strategy, industry structure, etc.) to influence the effectiveness of succession. Effectiveness and initial satisfaction should then influence the retrospective satisfaction of family
members with the succession process. Thus, the success of a succession in family firms is a function of
both the satisfaction of family members, and the subsequent effectiveness of the organization measured in
terms of economic performance. Furthermore, any study of overall succession success must consider the
multiple and often conflicting goals family firms seek to achieve through the succession process since the
decision that maximizes initial satisfaction may not be identical to the decision that maximizes subsequent effectiveness or satisfaction. Scholars are encouraged to build on the model and its theoretical
foundations by more completely specifying the antecedent and determining factors of succession success.
Second, it should be equally clear that the model of initial satisfaction with the succession process
must be tested. While additional field research is certainly necessary and desirable, to test a model as
complex as the one put forward in this article large-scale studies are necessary. Ideally, one would want
such studies to have a longitudinal design to ensure one was capturing cause and effect relationships and
to account for the inter-temporal relationship between initial satisfaction, effectiveness, and retrospective
satisfaction. To verify this interactive relationship, satisfaction should be measured at least twice, the
first time as close as possible to the actual succession event and the second time after post-succession
performance has stabilized. In this way the researcher will be able to obtain an initial measure of
satisfaction before it is influenced by performance. It will then be possible to assess the impact of
initial satisfaction on subsequent performance as well as the impact of effectiveness on retrospective
satisfaction.
Unfortunately, such an ambitious research program has several drawbacks and difficulties, perhaps the least of which is the time it would take to be completed. Cross-sectional research designs are
more feasible to implement, but have obvious limitations in their ability to fully address succession is-
sues. Both longitudinal and cross-sectional designs must take into consideration the difficulties involved
in gaining access to primary or secondary data on family businesses, most of which are not only privately
held and traded but jealously protective of their privacy. The facts that succession is an infrequent event
and that the succession process can extend over a very long period of time further complicates the issue.
For example, if one assumes that succession occurs only once every 20 years and takes five years to
complete from beginning to end, then one could expect that, on average, in any given year only about 25
percent of any sample of family firms will be engaged in the process, and only about five percent will be
at an identical stage in the process (e.g., the stage in which the successor takes over).
To obtain a sufficiently large number of responses, given these obstacles, one must either increase the number of firms in the sampling frame or increase the time frame ¾ in the sense of a firm’s
involvement in the succession process ¾ over which a firm may qualify for inclusion in the study. For
example, one approach would be to contact a very large (preferably random) sample of businesses in
North America (or elsewhere) to obtain data on the relatively infrequent phenomenon of family business succession. Although costly, this approach was used successfully by Carter, Gartner, and Reynolds
(1996) in their study of nascent entrepreneurs.
An alternative approach would be to include firms in the study that are at various stages in the
succession process or have recently completed the succession process. It is entirely possible if not
likely that, given our theoretical discussion, perspectives will vary according to a firm’s stage in the
succession process. To counteract this problem the stage of the process could be used either as a control
variable or as a moderator to determine if it has direct or indirect effects on satisfaction. Although such
an approach would not provide as clean of a test of our model of initial satisfaction as the first approach
described above, it would permit an assessment of whether intervening factors, such as succession
effectiveness, influence succession satisfaction. A lack of a succession stage effect would suggest that
satisfaction as a dimension of succession success may not be sensitive to effectiveness, and, therefore,
that the differences between initial and retrospective satisfaction are smaller than what we suggest they
might be in this article. Such a finding would be consistent with Morris, et. al.’s (1997) finding that
there was no significant relationship between succession quality (satisfaction) and effectiveness.
In any event, neither approach would preclude follow-up studies of the perceptions of family
members after they undergo leadership transition. Thus, a cross-sectional design could provide preliminary insights into the issue of initial satisfaction and follow up studies could be used to more fully
investigate issues such as effectiveness and the overall success of the succession process after the posttransition performance of the business becomes evident.
Once a population of firms is identified, it will be important to collect data from various family
members involved in the business as previous research has indicated that the perspectives of family
members can vary significantly (Poza, Alfred, and Maheshwari, 1997). Moreover, the multiple perspectives will allow for a thorough understanding of the succession process in family firms. Additional
information can be gained by using other data sources, where available, such as interviews with nonfamily employees, company documents, newspaper articles, etc.
Attempts should be made to develop multiple indicators for each variable in the model as that
would help in improving the construct validity of the measures used. While some support for scale
development can be found in the literature (e.g., Handler, 1989; Lansberg and Astrachan, 1994; Malone,
1989; Morris et.al., 1997), many other scales will have to be developed from scratch. In addition to
developing indicators for each variable in the model, data related to some other contingency variables
should be collected for control purposes. For example, data on variables such as ethnicity of the owning
family, genders of the incumbent and the successor, generation managing the family business, size, presuccession performance, and health of the incumbent, should be collected. Such data would enable
testing for any kind of prevalent systematic biases in the data and provide the controls needed to ensure
contingencies do not bias the testing of the model. Once data are collected, multiple regression, path
analysis, and/or structural equation modeling may be used to test the model and hypotheses. While
multiple regression and path analytical techniques would help to assess the validity of the model and
test the hypotheses developed in this article, structural equation modeling allows testing of reverse
causal relationships as well as other relationships not hypothesized. As this analytical technique allows
for a richer testing of the model, its usage is recommended.
CONCLUSIONS
Managing the succession process in family firms is a challenging task that imposes a variety of
significant changes simultaneously on the family, ownership, and management structures of family
firms (Handler, 1992). The cumulative effect of a large number of such transitions occurring throughout
society will be significant ¾ both in terms of the number of individuals involved in such transitions and
the effect on the economy as a whole. This paper has attempted to convey that succession in family
businesses is an important issue that warrants systematic research, and that it is, indeed, researchable.
We present a model that consolidates existing findings from the literature. It can form the basis for
empirical studies of what determine family members’ initial satisfaction with the succession process in
family firms. By identifying the factors that influence the succession process, this model will help family member managers understand their own situations better. An empirical test of the model should
provide additional valuable insights on the relative importance of the factors and help family business
managers decide which factors deserve the most attention when planning for and managing the succession process in their firms.
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