Family businesses and, more in general, companies where the founder has an important interest and the company continues to run are excellent investments. There are indications that companies are owned by the long -term ownership and family businesses. But founders and family CEOs do not live forever, so what happens when they resign and hand over the reins to someone else?
In essence, there are three possible paths ahead for people who run a family business and want to retire. They can (i) name another family member as CEO (usually a child), (ii) appoint a professional CEO that is not connected to the family, or (iii) appoint a placeholder CEO that will manage the company until another family member is ready to take the role as a CEO.
A New study Focused on these placeholder CEOs but presented results for all three options. The authors of the study have investigated all listed companies worldwide since 1949 and identified around 55,000 family businesses, of which about 13,000 were run at a certain moment by a non-family CEO.
Then they looked at the transition from a CEO of a family member to the next CEO. They compared the performance of the family business in the two years before the transition with the two years after the transition. The graph below shows the differences in efficiency on assets (ROA), revenue growth and employment growth, depending on the type of CEO that it takes over.
Follow -up performance
Source: Amore et al. (2024)
The first to be noted is that if the CEO family hands over to another family member, all statistics have a tendency to take on average. Profitability and revenue growth are both increasing and employment growth. This indicates the common trope that in many cases the son or daughter is not as competent as the father or mother, and therefore at every generation the company drops a little more. It is what is known in the asset management space as ‘shirtsleeves to shirtsleeves in three generations’.
However, CEOs for temporary indications are even worse for the company, although these differences are not statistically significant. However, one must ask yourself whether the results have some truth. What motivation should a Plaire -CEOo do good work for shareholders in the long term? The incentives for a placeholder CEO are intrinsically oriented in the short term, so he or she will probably manage the company for short -term profit instead of long -term growth.
However, note that a professional CEO that is not connected to the family improves the company on average in all three statistics. And these improvements are statistically significant. It is not necessarily a CEO that has been brought in from outside the company. It can also be an internal promotion for the CFO, COO or other senior managers who are familiar with the company. The study cannot distinguish between CEOs that come from outside or are promoted internally. What the key is, however, is to professionalize the leadership of the company and to ensure that people with the best qualifications to run the company are in charge, regardless of whether they share some of the family’s genes or not.
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