A new blog deep dives into the fascinating interplay between family-owned business and their leaders, finding that non-family CEOs are inherently held to higher standards of performance than executives with familial bonds to the firm.
Family Firms Governance: Something Very Special
Family-owned businesses are an integral part of our national economy, with 59% of private sector work directly associated and partnering in 35%some capacity with Fortune 500 organizations. But these companies typically operate more stealthily, which may play a role in why they have less public detail built out on corporate governance and decision-making nuances.
One popular interest for researchers has been the leadership succession within family firms. These businesses are notorious for “keeping it in the family” when selecting a CEO, often favoring control or loyalty over other dimensions. What if a non-family member is the best successor? However, the upcoming research of Cecilia Gu and colleagues from the J. Mack Robinson College of Business at Georgia State University fills this gap.
Family & Non-Family CEO Accountability Levels
Looking at family run companies based in Taiwan between 1995 and 2015, Gu and her colleagues analyzed two decades worth of data to explore how accountability standards can differ among family CEOs vs. non-family CEOs.
What they discovered is quite unexpected: family CEOs are less likely to be held liable for the financial performance of their firm compared with non-family CEO counterpart, and this exemption was much more pronounced during the mid-stage of a CEO’s tenure (5-7 years into the CEO position). The financial outcomes of nonfamily and family CEOs are both scrutinized during such a crucial time, but if unexpected performance declines, there is more than double the likelihood that a non-family CEO will be discharged vs. his or her counterpart which has caused a massive vacancy level among this buried pool (approximately 40%+) over nearterm period when business turns south compared to less than 20% in family firms.
The stark contrast reflects the distinct system that family owned corporates use to assess leadership. Family-owned firms are often less focused on short-term results, and they’re not actually relying as much on financial performance to justify their turnover decisions,” Gu says. But, we discovered that when financial performance does become important, it’s most often in the middle of CEO tenure.
Conclusion
This research enriches our understanding of the complex leadership processes that take place over time in family firms. Although her study did not specifically address the widely held belief that family-owned firms give preference to family members when appointing leadership positions, it found the situation is more nuanced. The financial performance demands on non-family CEOs being even greater during this span of their tenure magnifies these governance structures and priorities, unique to family-centric organizations. Because of the continued importance of family firms in the global economy, an understanding of these dynamics is beneficial to executives looking at leadership succession and accountability in both family firms and externally owned companies.
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