Wealth Succession and Company Performance: Evidence from Western and Asian Family-

Owned Business

Literature review: Existing studies on Western and Asian family business model and wealth

succession

The importance of wealth succession in family firms has been widely proclaimed by

previous studies since family businesses are believed to be the initial form of entrepreneurial

activity. Family businesses constitute the core of global economy and are known to be

dominating the economic landscape of the major economies in the world. For example, the

United States Small Business Administration (2011) acknowledges that family businesses

comprise 90% of all enterprises in America and provide 62% of American employment.

Similarly, in the United Kingdom family firms account for 66% of the UK small and medium-

sized enterprises population while maintaining strong presence in the economy and being

exemplary players of the British industrial sector. In the European Union, family businesses

make up more than 60% of all European enterprises with most SMEs being family firms

(European Commission Expert Report on Family Business, 2009). The Asian Family Enterprise

Forum (2007) reports that approximately 60% of Asian firms are family controlled. These facts

justify the importance of family firms as a research object. This interest towards family business

that has grown substantially over recent years thus laying sound foundations for an emerging

field in business research studies is centered on determining whether significant differences

between family-owned firms and non-family-owned businesses exist and how they manifest

themselves. This section of the paper presents a structured review of the existing studies on

family firms with specific emphasis being made on practical applications of such studies in

management. In particular, this section is focused on available studies justifying the so-called

second generation wealth succession problem widely recognized by empiricists and theorists as

well as analyzing country and regional models of family business management.

1. Theoretical foundations

At present the study of business and family is highly fragmented thus assuming that the

two social, cultural and economic institutions stand far apart from each other (Anderson et al.,

2003). While this division certainly omits the fact that previously the majority of businesses were

family-owned, it leads to emergence of scholarly interest towards family enterprises assuming

that they are distinguishable from other forms of business ownership. Scholarly studies

enumerate such distinguishing features, namely, size, profitability, long-run performance and

business culture. One of the most important theoretical foundations of such studies is the

aspiration towards a gradually coined definition of a family enterprise that is highly likely to be

employed by legislators and policymakers. However, it can readily be observed from available

literature that, first of all, each scholarly study strives to develop its own definition of the family

firm, and, secondly, that those applied definitions affect the outcome of the study greatly. Thus,

it is important to consider available dimensions of a family firm that have impacted formulation

of a definition of such type of an enterprise.

2. Towards a definition of a family firm

No universal definition of a family firm is accepted among scholars. However, there were

numerous attempts to establish an operational definition; these attempts were primarily focused

on distinguishing family firms from non-family firms assuming that the two types of enterprises

are different. The main problem is establishing a set definition that would take into account those

enterprises that are in between family and non-family businesses. Westhead et al. (1998)

assimilated existing definitions of family firms that were used in previous studies. These

definitions demonstrate that the outcome of the study and the ratio of participating family firms

vary greatly with the definition applied. There are definitions that claim that a family firm

should be determined based upon the extent to which a family is involved in the business: either

through ownership, or management, or through succession. Nevertheless, a precise definition is

hard to be determined in this case as well: some scholars claim that a family should own 100% of

shares while others state that a majority is sufficient. There are definitions based upon the

family’s involvement in management and definitions that are based on setting strategic

objectives for the business.

Research on family firms has several streams on an individual level: the role of 1st

generation CEO, women in family firms, and the role of the company’s founder. On a group

level, existent research can be divided into studies of family firm performance, wealth

succession, and challenges for future generations. Authors that shifted their perspective of

research on family firms from the external identity of the family firm to its internal “essence”

exploit the concept of “familiness” introduced by Habbershon et al. The concept defines family

business as a set of unique resources and capabilities that can become a competitive advantage.

Resources of a family firm are tangible, intangible, and specific resources that include family

culture, communication among family members, trust, and entrepreneurial ability. Therefore,

when determining an integral definition of a family business, the concept of familiness as well as

the degree of control over the company for the present and forthcoming generations should be

included. Chua et al. (1999) proposed the following definition that is based on extensive research

of scholarly literature:

“The family business is a business governed and/or managed with the intention to shape

and pursue the vision of the business held by a dominant coalition controlled by members

of the same family or a small number of families in a manner that is potentially

sustainable across generations of the family or families”.

In context of the present study, it would be beneficial to accept a succession-based

definition of a family firm stating that a family firm is a type of business that is likely to be

passed from one generation of the family to another (or is sustainable across generations).

To conclude it should be stated that “family” is a multidimensional concept that is

comprised of variables like ethnicity, gender, values, and culture. Families are comprised of

individuals that have emotional as well as biological kinship. Thus, family firms have to divert

their resources to resolving issues that non-family firms do not have to deal with which may

impact their short and long run performance.

3. Process-based approach to wealth succession

There is a substantial level of agreement in the academia concerning the fact that wealth

succession should be envisioned as a process with various issues and problems arising at

different stages of it. Handler (1994) outlined several lifecycle-based approaches to wealth

succession that separate the process into stages of wealth transition between father and son. In

particular, a framework devised by Churchill and Hatten in 1987 distinguishes four stages of

wealth succession process: (1) a stage of owner management, when the company owner is the

only member of the family affiliated with the business; (2) training and development stage, when

the founder teaches his offspring of the peculiarities of the business; (3) partnership stage when

father and son are equally responsible for the business; and (4) power transfer stage when

responsibility for the business is shifted to the successor (Handler, 1994).

Other approaches to wealth succession as a process incorporated the so-called role-

adjustment paradigm, in which wealth succession process is defined through a particular type of

role behavior of the founder and his or her successors and the transition between those different

roles. According to Chang and Lin (2011) who follow Handler (1990) the adjustment process in

this case is the process of gradual fading of the founder’s influence and level of involvement in

the business. The first stage is characterized by the founder being the core of the enterprise with

the rest of the family being uninvolved with the business. The second stage is the period when

the primary concern of the founder of the business is its survival while one or more family

members may assume the roles of assistants to the founder of the enterprise; succession just like

at the first stage is envisioned as a distant future goal. Primary responsibility for the business still

pertains to its founder. The last two stages of the role adjustment process are crucial to wealth

succession: they are characterized by initiation of wealth succession plan and preparation of the

successor while the role of the founder of the enterprise is gradually fading (Chang & Lin, 2011).

Finally, the successor adopts the role of the leader and decision maker of the enterprise;

however, the founder still participates in the business (being a supervisor, a consultant, or

assuming a position on the board of directors). There are cases when founders do not move

beyond exercising full control over the enterprise or when their successors never ascend beyond

the role of an assistant (Handler, 1994).

As it was already stated, the process of wealth succession is one of the most challenging

stages in the lifecycle of a family enterprise. Thus, it cannot be expected to be smooth due to the

very reasons that precipitate succession. According to Kram and Handler (1998), who suggest

that wealth succession can be divided into voluntary and non-voluntary, primary causes of

voluntary business transfer in family firms are health problems and personality characteristics.

Non-voluntary business succession is primary caused by poor organizational performance and

“problematic environments” (Kram & Handler, 1998). Further disruptions to wealth succession

may also occur when heirs or successors refuse to accept their roles or due to force major.

4. The role of first generation CEO

Founders of family firms exercise specific influence on family firm performance, on its

culture and values. Since they typically have long tenures (for example, in the United States

tenure of family leaders is an average of 17.6 years), this influence is exercised during a lengthy

period of time and spreads beyond the founder’s tenure (Sharma, 2004). Previous studies have

shown that wealth succession to the second generation is different from further transfers

occurring in subsequent generations (Molly et al., 2010). Therefore, family-firm CEOs have

cognitive and psychological difficulties when having to exit their companies. Kram and Handler

(1998) pointed out that family-firm CEOs are, in effect, “married” to their business. Multiple

studies that were focused on psychodynamic aspects of leadership outlined traits and features of

a founder as well as provided explanation for such type of a union. Levinson (1971) pointed out

that for the founder a business has several important meanings. First of all, the business founder

is typically uncomfortable with being supervised, and starts a business to avoid being dominated

by any authority. Secondly, a founder typically envisions his or her business as his “baby” and

his “mistress”; those who work with him or for him are perceived as instruments. Finally, “for

the entrepreneur, the business is essentially an extension of himself, a medium for his personal

gratification and achievement above all” (Levinson, 1971). Thus, the process of wealth

succession is further complicated by the founder’s concerns about “the monument he will leave

behind” (Levinson, 1971). Furthermore, Handler (1994) followed Kets de Vries (1985) who

pointed out that the founder’s inability to consider wealth transition in its dynamics and establish

a set future for his company should be explained by the owner’s “desire for applause”.

These features of family-firm founders and first generation CEOs lead us to another body

of research that suggests that family-firm founders deliberately select successors that are bound

to lead the company to failure. According to Levinson (1974), CEOs choose several types of

failures to become their direct successors. The term “loyal servant” is employed by Levinson

(1974) to denote a “loyal and conscientious servant of unquestionable integrity and dedication”

who does not have any rivalry feelings towards the CEO and also is incapable of changing the

structure that is tailored to the CEOs management style. A “watchful waiter” is an outsider hired

by the CEO to become a scapegoat who is normally reprimanded and manipulated on petty

matters and who is eventually turned down. A “false prophet” is an individual “whose area of

competence is unrelated to the leadership role for which he is chosen, and who therefore cannot

deliver what is unrealistically expected of him”. Finally, Levinson (1974) pointed out that CEOs

may choose to procrastinate on the decision to nominate a successor. Kram and Handler (1998)

pointed out that such resistance on an individual level is highly determined by the extent to

which the CEO envisions his life as purposeful after retirement.

To conclude, it is necessary to emphasize that the leader’s sense of irreplaceability,

limited self-understanding, inability to perceive their own competencies, and unconscious rivalry

with potential successors as well as difficulty to “divorce” his own enterprise contribute to

problematic wealth transfer. This is further intensified by the founder’s resistance “to facing the

thought of aging, dying, or being incapacitated” (Kram & Handler, 1998). Wealth transfer

immediately suggests the loss of self-constructed monument. Therefore, successful wealth

transition in a family firm would inevitably depend on proper adjustment of the founder’s

attitudes to the process.

5. Challenges for further generations

While much of the available research is focused on the perspective of the business

founder and his role in the succession process, a significant body of research exists that is set out

to investigate the position, perspectives and challenges for those who in many studies are named

simply as “the family”. Sharma (2004) pointed out that the directions of research on family

members’ perspective in wealth succession is generally divided into three dimensions, namely,

determination of successor’s attributes from the family-firm leader’s perspective; factors

enhancing family-firm performance in lieu of wealth transfer; and determination of factors that

affect family members’ decisions to pursue a career in their family firms. Chua, Chrisman, and

Sharma (1999) stated that from the leader’s point of view, commitment to business and family

integrity are the most important characteristics of potential successors. In addition, Levinson

(1974) pointed out that the primary concern for a family-firm CEO is to determine how his heir

would “fit among the family members” in terms of conflict resolution. It is also important to

state that such qualities as ability to make decisions, self-confidence, and intelligence and outside

the company experience play an important part when determining the desirable characteristics of

a potential successor. Handler (1994) outlines several studies that analyze the perspective of

heirs in terms of accession planning. It is pointed out that several studies suggest that it is highly

desirable for potential heirs to gain experience outside the firm even if they find working for

their family enterprise a satisfying experience. Furthermore, studies analyzed by Handler (1994)

suggested that not all students who are involved with a family enterprise plan to return to it

immediately after school. These factors are directly correlated with the extent to which heir’s

succession experience would be positive.

Handler (1994) designed a descriptive framework that incorporates factors that are likely

to impact the next generation’s perspectives and potential success of the wealth transfer process.

The framework which is based on in-depth interviews suggests that in order to have a positive

wealth succession experience a member of the family firm has to achieve fulfillment of career

interests, psychological needs, and life stage needs (such as exploration, and advancement).

Furthermore, in order for the succession process to be successful for the heir, he or she has to be

granted an opportunity to exercise personal influence in the family business. The founder also

plays an important part in this process since mutual respect and understanding with the

predecessor (especially with the first-generation CEO) determine the outcome of the succession.

Apart from the succession process per se and successful outcomes of this process for the

heir, studies have extensively focused on factors that impact the decision to stay with the family

firm rather than seek employment outside. Vincente (2011) outlined factors that determine the

family member’s decision not to become involved with the family business, namely, a desire to

build a career outside the family company (determined by other interests or search for

independence); limited number of available positions in the business (or their absence);

avoidance of responsibility; and lack of compliance with the requirements to enter the family

firm. Thus, it becomes apparent that lack of interest or motivation towards pursuing a career in

the family company is one of the decisive factors when determining the decision of a family

member (even a potential heir) to stay with the company. Following Iannarelli (1992), Handler

(1994) listed factors that are crucial to developing interest towards family business, namely,

exposure to various aspects of the family business in early age; skills development in the family

company; encouragement of the parents; individual and recognized contribution to the business;

and the right time to present an opportunity to join the business.

Several studies within this direction have assessed the role of gender and, specifically,

pointed out to the factors that determine successful wealth transfer to female heirs. According to

Vera and Dean (2005), numerous studies demonstrate that historically daughters have not been

considered to fulfill the leading position in the family firm. Vera and Dean (2005) refer to

Keating and Little (1997) who found that gender was one of the main factors impacting the

successor, and males were typically preferred to females. Moreover, even first-born daughters

were hardly ever considered for leadership positions in family businesses, with many owners

preferring to sell the company rather than nominate a female heir. Both Vera and Dean (2005)

and Handler (1994) cite a study by Dumas (1992) that found that daughters were primarily

brought into family business to complete lower-level tasks. A term “invisible successor” was

coined by Dumas; the term is used to describe daughters who were not considered for managerial

positions in family firms. Handler (1994) emphasized that daughters considered entering a

family business when they were forced to do so by a crisis or unforeseen circumstances of a

similar nature. This may lead us to the conclusion that little or no attention is being paid by

family firms in terms of preparing daughters for assuming a leadership position. Although

multiple studies on gender inequality in the world suggest that the gap between men and women

in leading positions in major global companies is closing, and the “glass ceiling” phenomenon is

gradually ceasing to exist, family firms are a bitter exception of this trend. Vera and Dean (2005)

suggest that many families seek to protect their daughters from problems that may arise when

managing a business. Other factors that affect preventing daughters from succeeding their

parents in CEO positions include work-life balance issues.

Quite contrary to previous studies, Higginson (2010) suggests that female CEOs are

being drawn to business ownership; however, the study by Higginson omits important statistics

on family firms. Nevertheless, Higginson (2010) suggests that based on previous studies female

owners are more focused on succession planning and treat this process more diligently than male

owners: they seek information, are less hierarchical, and are more likely to consider daughters as

heirs. Therefore, female and male CEOs in family firms have different approaches to succession

and different motivation.

6. Factors determining successful wealth succession

Handler (1994) follows Ward (1987) who pointed out that failure to plan strategically

may be the major reason for wealth transfer process in family firms to become a failure.

However, there are factors that limit succession planning and preparation for wealth transfer

inside and outside the company. Kram & Handler (1998) developed a model of resistance to

succession in family firms. They outline a list of factors that promote resistance on an individual

level that would cause a family firm owner or CEO to avoid planning for wealth succession such

as good health, lack of other interests apart from the business, and identity with the business. On

the contrary, they suggest that resistance to wealth transition planning is reduced if a family-firm

owner or CEO has health problems, envisions his or her retirement as an opportunity for a new

life. Kram & Handler (1998) suggested that “interpersonal and group dynamics within and

between family, firm, and founder” could also reveal factors that would promote or inhibit

succession planning. For example, when the owner and his successors have high levels of trust,

or when heirs are actively involved in the business, it is highly likely that succession planning

would not face high resistance. Moreover, there are organizational characteristics that are likely

to impact wealth succession within a firm. For example, Kram & Handler (1998) followed

Schein (1985) who stated that organizational culture would determine whether wealth transition

is viewed as evolution or revolution. If the structure of the organization promotes financial

delegation, wealth transition is likely to occur smoothly. Finally, there are factors that are likely

to inhibit or facilitate successful wealth transition planning on an environmental level. For

example, when the environment presents itself as problematic, organization may evolve through

wealth succession, and resistance to succession planning would be reduced.

Existing studies point out that there are multiple factors that determine success of wealth

transfer in family firms. First of all, succession planning should begin with selecting and

grooming the suitable candidate. The candidate in turn should envision working for the family

firm as an opportunity to fulfill his or her career needs, personal needs and life stage needs.

Grooming of the candidate may take form of a specifically designed training program, or may

take place as on the job learning. Secondly, it is essential to determine whether the heir’s

personal skills, ambitions and abilities are adequate to the suggested position. This process of

determination may take place through assessment in formal and informal terms. Finally, in order

for the owner’s knowledge to be transferred to the heir effectively, mentoring has to take place.

Scholarly studies remain inconclusive as to whether mentoring by a relative or a family member

is the optimal way to conduct such training; however, it may readily be inferred that the former

CEO and leader of the family firm is the best source of knowledge on the company affairs.

Dyer (1986) outlined business, family and board conditions that determine success of

family firm wealth transfer. Business conditions that are likely to lead to successful wealth

transition are the following:

1. Wealth transfer occurred in a “healthy” company;

2. The owner (or first-generation CEO) gradually resigned from being involved in

organizational matters;

3. The potential successor received adequate training and preparation;

4. Founders and successors developed an involving and mutually dependent relationship

that was based on respect and interest in company matters.

Family conditions determining successful wealth transfer are the following:

1. The family shares views and opinions concerning equity and capital management;

2. The family is prepared to emergencies;

3. The family has well-established conflict resolution mechanisms;

4. The family has high level of trust.

To conclude on this section, it should be stated that succession is the outcome of multiple

factors. Effective successions are determined by close cooperation between the former CEO and

his potential heir. Significant investment of time and effort is required from both sides of the

equation. Handler (1994) indicates that there are two outcomes that indicate a successful wealth

transfer. First of all, next generation control of the company’s stock can serve as a symbol for an

effective wealth transfer. Another indicator of successful wealth transfer is the amount of time

that the heir was in his successor’s position. Naturally, success of wealth transfer can be

measured through the reputation of the company, and its further financial performance.

7. Wealth succession and its impact on family firm performance

It is emphasized that family ownership may result in better company performance due to

several reasons. First of all, family-owned companies may be making better investment decisions

because families have more firm specific knowledge. Secondly, family ownership mitigates the

classical principal-agent model since in family firms there is better alignment of the interests and

incentives of management and shareholders (Feng-Li and Tsangyao, 2010). However, Feng-Li

and Tsangyao (2010) pointed out that family ownership may also be detrimental for company

performance since, first of all, family owners may extract private benefits from the firm;

secondly, family-controlled businesses may tend to be excessively risk-averse; finally, family-

owned businesses may be criticized for hiring people for their family status and not for their

qualifications; it is specifically true for family CEOs that are selected from a limited pool of

managerial talent (Bennedsen et al., 2007). These negative effects on business performance may

be explained by the notion that decision-making process of the firm may be impacted by non-

economic goals of the business owners (Olson et al., 2003). On the other hand, family CEOs

could perform better than external managers since family CEOs may have higher non-monetary

incentives to which external managers are not exposed (Bennedsen et al., 2007). Thus, the

impact of family ownership on business performance is a variable resulting from balance of

impact of positive and negative forces.

Wealth succession like any business transfer is one of the most difficult steps in the

lifecycle of a family firm. According to Molly et al. (2010) who cite numerous previous studies,

approximately 30% of family businesses survive to the next generation while 10% to 15%

survive to the third generation. As an intergenerational transfer takes place, changes in debt rate

and performance of a family firm occur (Molly et al., 2010). Therefore, succession planning is

decisive in survival of the firm from one generation to another (Kram and Handler, 1998).

Wealth succession is recognized to impact the company’s financial performance. Existing studies

on family business succession and its impact on capital structure are inconclusive. For example,

several studies quoted by Molly et al. (2010) suggested that as family companies pass from one

generation to another they become more reluctant to use external sources of capital and, in

general, their attitude to debt financing becomes more risk-averse. Furthermore, successors tend

to be more risk averse than their predecessors since their primary task is wealth preservation

compared to wealth multiplication pursued by first-generation CEOs. This suggests that wealth

transfer results in limiting potential sources of capital for a family company thus becoming

potentially deteriorating for its future performance. Other studies are controversial to this

position pointing out that successful wealth transfer results in improved relations with external

stakeholders such as banks that automatically leads to an improved status of a reliable debtor

thus resulting in increased levels of external funding.

Molly et al. (2010) resolve this controversy in their own study. The study discovers that

wealth transfer negatively impacts financial leverage of the business; however, in later

generations this negative effect is reversed. Moreover, the study reveals that growth rates decline

significantly after succession from first generation owners to second generation. Finally, their

study suggests that a company’s profitability is not impacted by wealth transfer.

8. Country-specific studies

Issues discussed above cover a vast body of research outlining potential complexities that

are likely to occur in lieu of wealth transition process. Country-specific studies discuss

differences in challenges for successful wealth transfer with respect to national and economic

environments of different countries; additionally, cultural and ethnic factors impact family

business management. It is widely recognized that the major body of existing research has

focused on companies that are of Anglo-Saxon origin. This segment of the literature review

section will outline main findings for companies of Asian origin (countries such as Pakistan and

Malaysia) as well as analyze succession issues in Italian companies.

A study by Afghan (2011) points out that 80% of employment in Pakistan is generated by

family-owned companies. Afghan (2011) pointed out that existing literature on wealth transition

in Pakistan is rare. However, his study provides a valuable insight into what can be defined as

successful wealth transition. Namely, Afghan (2011) cites several studies that define successful

wealth transition as either subsequent successful performance of the business, or stockholder

satisfaction with wealth transition, or relevant company reputation and turnover, or business

profitability combined with family harmony. In his study Afghan (2011) stated that culture

(which in Pakistan is highly masculine, collectivist, and highly power distant, referring to

Hofstede’s famous dimensions of culture) plays an essential role in family business operations

and is decisive in determining success of wealth transfer. Apart from cultural norms that in

Pakistan emphasize family bonds and the role of the elderly, Islamic inheritance laws also shape

wealth transfer. Under these laws, sons receive twice the share of the daughter in the inheritance

(however, this situation is only applicable to the death of the business owner); a father can make

a gift to his son or daughter without referring to any religious norms and laws. In his research,

Afghan (2011) focuses on General Fan Company, a privately held business, established in

Pakistan in 1954. In his analysis Afghan (2011) states that wealth transfer was impacted by

kinship cultural norms, in particular, by rivalry between cousins that eventually caused division

of the business during wealth transfer. Since successful wealth transfer is referred to as business

success and family harmony, this type of succession cannot be considered efficient.

Amran and Ahmad (2010) researched wealth transition and company performance in

Malaysia. They pointed out that 70% of listed companies in Malaysia are family-owned

businesses. They used panel data for 975 companies for the year 2003 to 2007 to find out

specific features of family succession that determined company performance. Amran and Ahmad

(2010) show that average shareholdings by family members in Malaysia are approximately 43%.

24% of Malaysian family-owned companies in the sample are managed by non-family CEOs.

Amran and Ahmad (2010) found that the higher the percentage of shares owned by the family,

the better is the firm’s performance; additionally, younger generations enhance firm performance

due to the fact that younger family members are more risk-loving, innovative, and aware of the

current business environment. Thus, it can be suggested that wealth transfer to younger

generations in Malaysia is positively affecting the future of the business.

Cucculelli and Micucci (2008) studied the impact of the founder-CEO succession in

Italian family firms. Their study was based on a survey of 7,500 Italian family-owned companies

for the period 1994-2004. The study finds that for the whole sample, post-succession

performance declines with heir-managed firms experiencing a greater decline in ROA and ROS

compared to unrelated-managed companies. Heir-managed companies underperform more

significantly in terms of ROA than unrelated-managed companies after succession takes place.

Cucculelli and Micucci (2008) pointed out that when a poor-performing family-owned business

is transferred to an unrelated manager, subsequent restructuring takes place; heirs do not

necessarily restructure the business. Additionally, their study finds that wealth transfer

negatively affects company performance in sectors characterized by intense competition (calling

for high managerial competence of the successor). Post-succession sales also tend to decline.

Thus, inherited management hurts business performance.

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