Just like a Marriage? Success Factors in the Relationship between the Non-Family CEO and the Owner Family


Master's Thesis, 2013

80 Pages, Grade: A


Excerpt

TABLE OF CONTENT

1 Introduction
1.1 Problem
1.2 Background
1.3 Purpose
1.4 Structure of the Thesis

2 Frame of References
2.1 NFCs in Family Businesses in Sweden
2.2 The Chief Executive Officer
2.2.1 Role of the CEO
2.2.2 CEO Appointment
2.3 The CEO in Family Businesses
2.3.1 The Model of Three Circles in Family Businesses
2.3.2 Working in a Family Business
2.3.3 Managing the Family Business
2.3.4 Continuity and Succession in Family Businesses
2.3.5 Non-Family CEOs in Family Businesses

3 Methodology
3.1 Research Philosophy
3.2 Research Purpose
3.3 Research Approach
3.4 Research Strategy
3.5 Data Collection
3.5.1 Sampling Method
3.5.2 Different Types of Interviews
3.5.3 Conducting the Interviews
3.5.4 Research Ethics
3.5.5 Analysing the Empirical Data
3.6 Research Time Horizon
3.7 Research Credibility
3.8 Data Presentation

4 Analysis
4.1 Learning to Step Out of the Business
4.2 Finding a New Role for the Old Generation
4.3 Succession and the Role of the New Generation
4.4 Learning to Become a Good Owner
4.5 Characteristics of a NFC
4.5.1 Background of a NFC
4.5.2 Personality of a NFC
4.5.3 Being a NFC – a Long-Term Commitment
4.6 Finding the Right Way for Recruiting a NFC
4.6.1 External Recruitment
4.6.2 Internal Recruitment
4.7 The Importance of a Strong Board

5 Conclusion, Contribution and Further Research
5.1 Conclusion
5.1.1 Mutual Agreement on Communication
5.1.2 Dedication or the Call for Stewards
5.1.3 Double-Sided Leadership
5.1.4 Achieving a Balance of Involvement
5.1.5 The Integration of the Next Generation
5.2 Contribution
5.3 Recommendations
5.4 Future Research

6 List of References

7 Appendix
7.1 Appendix 1: Company Profiles
7.2 Appendix 2: Labelling
7.3 Appendix 3: Mindmap
7.4 Appendix 4: Elaborate Recommendations

TABLE OF FIGURES

Figure 1: Three Circles Model (Gersick et al., 1997)

LIST OF TABLES

Table 1: Breakdown of Company Sources

Table 2: Company Profiles

LIST OF ACRONYMS

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1 Introduction

The relationship to non-family managers has become very important for family businesses (Chua, Chrisman, & Sharma, 2003). Especially the role of non-family CEOs (NFC) has grown in relevance. NFCs are defined as “neither a blood relative nor related to the owning family by marriage or adoption” (Klein & Bell, 2007, p. 20). The overall number of family businesses with a NFC has increased, for instance in the USA from 14% in 2002 to 20% in 2007 (MassMutual, 2007). Anderson and Reeb (2003) found out that 55% of the 141 large family business enterprises in the S&P 500 are managed by a NFC. Nevertheless, appointing a NFC is not only a topic for large family businesses anymore. Also in family-owned small- and medium-sized enterprises (SMEs) the notion has become more common. According to the recent PwC family business survey, 25% of all family businesses world-wide are planning to bring in a NFC (2012a).

Generally, the CEO position is vital for the success of every business. No matter whether in big decisions like strategic planning (Mintzberg, 1994) or small decisions about the new layout of the office, the CEO is involved most of the times. Hence, the CEO has a great impact on the well-being and performance of the business (Adams, Almeida, & Ferreira, 2005). This applies to family businesses as well; moreover, the CEO has the special role of ensuring the survival of the company (Aronoff, 2004). Since no single definition for family businesses exists (Sharma, 2004), we consider them as a business that is owned by a family and is perceived by its stakeholders to be a family business. The survival of family businesses thereby is not only important for the family itself, but also for the economy. As another PwC family business survey (2010a) states, family businesses create between 70% and 90% of the global gross domestic product (GDP). The death of family companies would therefore be a “loss to the community at large” (PwC, 2010a, p. 20). Especially for smaller cities and rural areas, family businesses are vital (N. J. Miller, McLeod, & Young Ob, 2001), since they often exhibit a strong commitment to the local communities (Bjuggren & Sund, 2001; Dunn, 1995).

In most family businesses, it is the family itself that carries on the business. However, NFCs play an increasingly important role in the survival of family businesses. Bringing in a NFC can be for instance an alternative to selling the business when there is no fit successor for taking over as CEO. So even though the issue of NFCs in family businesses has come more into focus (Sharma, 2004), both family businesses and NFCs still lack a clear understanding of the challenges and opportunities that lie ahead (Olsson & Hall, 2010). Especially the amount of research that has been directed to NFCs in family businesses is “surprisingly thin” (Blumentritt, Keyt, & Astrachan, 2007, p. 322). Much that has been written on this issue furthermore is non-scientific literature, i.e. anecdotal stories from owners, NFCs and consultants (Klein & Bell, 2007). Considering the importance of the CEO for family businesses, this is startling. Especially the relationship between owner family and NFC has not been sufficiently regarded.

1.1 Problem

For many family firms, it is a huge step to bring in a NFC, and indeed there is much at stake for the company. Changing the CEO in a normal business is already difficult (Charan, 2005), but the special setting of a family business seems to add to these issues (Seymour, 1993). Family businesses are not only concerned with the financial side of the business, but further with the socio-emotional wealth through holding a business. This is referred to as the ”non-financial aspects of the firm that meet the family’s affective needs” (Gómez-Mejía, Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007, p. 106). Donnelly once stated that a “[f]amily equates its long-term best interest with that of the company” (1988, p. 433), so often the family well-being is closely linked to the organizational success. Furthermore, family businesses display an inherent long-term orientation (Kets De Vries, 1993), seeing the business not only as an economic value. Business families often dream of “watching the children eventually carry on the family identity and legacy into the distant future, generation after generation” (Gersick, 1997, p. 71). Many family firms also try to build transgenerational wealth – “a continuous stream of wealth that spans generations” (Habbershon & Pistrui, 2002, p. 223) – in order to provide for their descendants. It is therefore even more important for a family business than for a non-family business that the employment of the CEO becomes a success, because for the owner family there is more at stake than just the financial well-being.

The amount of literature (for example: Aronoff & Ward, 2010; Olsson & Hall, 2010) already existing on this topic shows the clear need of both NFCs and owner families for a better understanding of the implications of working as an outsider in a family business. This is furthermore underlined through a study on challenges that family business face. Top executives in family businesses ranked the relationship between owner family and non-family managers at second place (Chua et al., 2003). The understanding of this relationship is vital since failing relationships can have devastating effects both on the family business and the owner family as well as on the NFC (Klein & Bell, 2007). As a result, oftentimes both money and socio-emotional wealth can be lost to all parties (Dyer, 1989). Klein and Bell (2007) as well as Chua and associates (2003) argue that it is therefore important to find out what makes or breaks the relationship between owner family and NFC.

1.2 Background

Over the course of the next five to ten years, many family businesses will see a change in ownership. The family business survey by the University of Connecticut (2009) displayed that more than 51% of the family business CEOs in the USA are at least 55 years old. According to another survey by PwC (2010a) around a quarter of family businesses worldwide is confronted with a change in ownership over the next five years. To these companies, the appointment of a NFC is a possible answer to the question of succession.

Succession has always been an important – if not the most important (Chua et al., 2003; Handler, 1994) – issue that family businesses face. The classical case of this is passing on both company ownership and management to the next generation. The appointment of a NFC however opens the possibility of passing on ownership, but not the management of the company in the family. Therefore, family firms are looking more and more into the option of hiring a NFC. This search for professional management however is inherently different than the call for ‘professionalization’ (Levinson, 1971) that has haunted family businesses for a long time.

Even though for hundreds of years, family businesses provided the “backbone” (Bird, Welsch, Astrachan, & Pistrui, 2002, p. 337) of economies and were the predominant business form, the intertwinement of family and business received a negative connotation over the course of the 20th century. Family businesses became increasingly associated with a pathologic state, the “notion of family members as inherently nonprofessional managers” (Hall & Nordqvist, 2008, p. 53) became the norm. The starting point of this was the beginning of the century, when Berle and Means (1932), amongst others, introduced the distinction between ownership and professional management. These were supposed to be separated with management providing “objectivity and rationality to an emotional milieu” (Upton and Heck, 1997, cited by: Hall & Nordqvist, 2008, p. 53). Most of the research on businesses in the 20th century followed this trend. When Levinson marked that “the wisest course for any business, family or nonfamily, is to move to professional management as quickly as possible” (1971, p. 98), he basically stated that family businesses should bring in external management. Until today, this view that family and professional management are contradictions can still be found (recently: Stewart & Hitt, 2012).

By now however it is generally acknowledged that family management is not inferior, since the “notion of professional management contains a number of simplistic and outdated connotations” (Hall & Nordqvist, 2008, p. 55). Depending on the objectives of the company, family management can even be superior to non-family management (Banalieva & Eddleston, 2011). Nowadays, external management is not supposed to ”defamiliarize” (Klein & Bell, 2007, p. 23) the family firms anymore but is often chosen as a way to achieve specific goals (Ward, 2004). Employing a NFC has become another option to help continuing the family business when there are no family members able or willing to take over the company (Chua et al., 2003). Therefore, taking in a NFC can be a valid way to keep the family in the business as owners.

In our thesis, we are curious to investigate the consequent relationship between owner family and NFC and to find out which factors make it successful. To us success thereby is a long-term oriented, generally harmonious and business-wise productive relationship between family and CEO. These factors in the end shall provide starting points for further research and offer recommendations for both family businesses and NFCs.

1.3 Purpose

The purpose of our research is to identify and elaborate the success factors in the relationship between a non-family CEO and the owner family.

1.4 Structure of the Thesis

The first part of this thesis will shed light on the special situation of family SMEs in Sweden with regard to NFCs. We will then shortly summarize the general role of a CEO before we take a closer look at CEOs in a family business context. A special focus in this part will be the existing literature on NFCs. In the second part of the thesis we will go deeper into methodology in order to describe and motivate the chosen research approach. Furthermore, we will clarify how the empirical research was conducted, how the data was gained and how themes were drawn out. After this, we will present the collected data, analyse it and present our interpretation of the success factors. Following this, we will discuss the success factors we found and place them in the recent stream of literature. Finally, we will both offer points for further research as well as recommendations for owner families and NFCs.

2 Frame of References

2.1 NFCs in Family Businesses in Sweden

In Sweden, around 54% of all companies are family-owned (Emling, 2000), which corresponds to around 500,000 businesses. Even though family businesses have a strong history in Sweden, the focus of studies in Sweden was rather concerned on SMEs in general. The interest in studying family businesses only awoke recently (European Commission, 2008). These numbers play an important role in the development of family businesses since around 30% of Swedish family firms will face a change in ownership over the next five years (PwC, 2010b). According to a report by Tillväxtverket (formerly NUTEK) (2004), the Swedish Agency for Economic and Regional Growth, this will concern around 140,000 family businesses. In the Swedish context, family businesses do not only have a big impact on the general economy, but especially on rural development (Bjuggren et al., 2012). Due to the size of the country in relation to its sparse population, rural development is an important challenge in Sweden. Since the rural regions are “more dependent on SMEs and family firms than are urban regions” (Bjuggren et al., 2012, p. 1), succession and the survival of family SMEs play an important role for the Swedish economy. Also from this perspective it is important to better understand the dynamics of appointing NFCs.

So far, it is uncommon in Swedish family businesses to employ a NFC. Whereas in the United States already more than 20% of family businesses are managed by NFCs (Klein & Bell, 2007), only less than 10% of the family firms in Sweden are managed by non-family members (European Commission, 2008). This trend is also reflected in the succession planning of Swedish family businesses. While an international survey indicated that around 25% of the family businesses plan to keep the ownership while bringing in a NFC (PwC, 2012a), this number is considerably lower for Swedish family firms where only 14% are planning to bring in a non-family CEO (PwC, 2012b). Olsson and Hall (2010) pointed out in this aspect that Swedish family businesses often do not see the appointment of a NFC as a third option to passing on the company to a family member or selling it.

2.2 The Chief Executive Officer

2.2.1 Role of the CEO

Typically, a CEO is appointed by the corporation’s board to lead the company in order to create shareholder value (Garten, 2008). Therefore, the main tasks of a CEO are to develop a long-term strategy for the company, to oversee the implementation of this strategy, to organize and staff the company accordingly, to have appropriate information technology systems in place, to act upon legal and ethical standards and finally to keep track of all risks, expenditures and stakeholders (Glick, 2011). As the highest ranked executive in the company, the CEO needs to establish, manage and lead a team of executive officers, mid-level managers and front line employees (Stata, 1988). Furthermore, the CEO needs to install a coherent vision to achieve alignment among employees on all hierarchical levels and a strategy to implement this vision into action (Hambrick & Fukutomi, 1991).

CEOs implement these strategies based on different leadership styles (Waldman, Ramirez, House, & Puranam, 2001). Most managers can be categorized as having either a transformational or transactional style of leadership. The transformational style of leadership is based on the leaders' relationships with the followers (Cannella & Monroe, 1997) while the transactional leadership style is a more guided approach of exercising direct control over the employees (Burns, 1978). Depending on their leadership style, CEOs are often attributed with special roles such as ‘hero’ or ‘steward’ (Watkins, 2009). These roles are linked to general traits of CEOs and attributes such as charisma, even though no one still can point out exactly what makes a good leader (Higgs, 2003).

2.2.2 CEO Appointment

When it comes to the appointment of a new CEO, there are two alternatives for the board of directors. First, there is the option of appointing a person that currently works within the company. The second option is to appoint a person as CEO that is not currently employed by the company and can therefore be considered as an external party.

Hiring a new CEO often comes with a strategic reorientation of the company (Graffin, Boivie, & Carpenter, 2013). Reasons for the employment can be for instance the need to innovate beyond current technology, reorganize and restructure business processes, or expand business operations. This has a huge influence towards the morale of the workforce, corporate culture and accounting outcomes (Beatty & Zajac, 1987). The new CEO is often hired as a change agent for instance in turnaround situations in companies (Garvin & Roberto, 2005) depending on the track record and knowledge about the change necessary (Glick, 2011).

The topic of changing a CEO has been widely covered in the business literature. Both the perspective of the new CEO that enters the company (for instance: Watkins, 2009) as well as organizational factors in appointing a new CEO (Withers, Hillman, & Cannella, 2012; Zajac & Westphal, 1996) have been explored. Nevertheless, the greatest part of this literature is not taking into account the variable of family. Even if it is acknowledged that for instance small family firms “face unique challenges” (Withers et al., 2012, p. 271) in the appointment of a new CEO, ‘family’ still continues to be what Dyer once described as the “missing variable in organizational research” (2003, p. 401).

2.3 The CEO in Family Businesses

In opposite to publicly-held companies, the work of a CEO in family business is not only concerned with the notion of business. Working in a family business differs in many ways from working in a publicly-held company (Leach, 2007). Hence, it is important to take into consideration special dynamics of family firms.

2.3.1 The Model of Three Circles in Family Businesses

In order to capture the dynamics in a family business, the framework of the three circles – family, ownership and business – by Gersick, Davis, McCollum and Lansberg (1997) is a valuable tool. The circle of family encompasses the involvement of the family and its members. Ownership and its distribution is what “defines the family business” (Gersick et al., 1997, p. 29), it affects who becomes the new CEO or which long-term decisions will be made. The business circle finally includes the management of the company on a daily business. These three circles overlap continuously and are mutually influencing. The business for instance is influenced by the family (e.g. through values and a vision built by the founder), but at the same time influences the family (e.g. impact of business crises on family cohesion). Ownership on the other hand influences the business (e.g. top management decisions and long-term orientation), but is then again influenced by family (e.g. composition of the board). Furthermore, actors can occupy roles in one, two or all three circles at the same time. The model can be used for describing certain roles and responsibilities as well as “complex individual and organizational phenomena” (Habbershon, Williams, & MacMillan, 2003, p. 453).

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Figure 1: Three Circles Model (Gersick et al., 1997)

2.3.2 Working in a Family Business

There are both “good news” and “bad news” (Kets De Vries, 1993, p. 61) of working in a family business. Vallejo (2008a) found for instance that the culture in family firms in comparison to non-family differs in involvement, identification, loyalty, trust, participation and working atmosphere. Generally, family businesses have a stronger long-term orientation (Lumpkin & Brigham, 2011) which can be seen for instance in the longer tenures of CEOs (Tsai, Hung, Kuo, & Kuo, 2006). According to Miller and Le Breton-Miller (2006), the average CEO tenure in family businesses is between 15 and 25 years. Denison, Lief and Ward (2004) show in their article on family business cultures that there are several cultural advantages associated with family businesses. Their long-term orientation for instance gives family businesses the ability to tap into their often rich history, “adapting and living the founders’ vision” (2004, p. 62) on a modern basis. Nevertheless, the founder may also cast a “generational shadow” (P. S. Davis & Harveston, 1999, p. 311) on the next generations, as for instance seen in the case of Estée Lauder (Singer, 2011). Even after her death, her grip on the business seems unbroken, partly hampering the following generations.

As this example shows, family businesses have both bright and dark sides. Donnelley (1988) for instance mentions poor profit discipline or excessive nepotism – “the advancement of relatives on the basis of family rather than merit” (1988, p. 431) – as negative aspects of family business. Ward (2004) notices the weak next-generational leadership and the inflexibility to change as challenges to growth in family businesses. In terms of internationalization, the local embeddedness of family firms can also be a restriction (Gallo & Sveen, 1991).

Considering these aspects, it is interesting to see that the family involvement simultaneously can have good and bad influence. Tagiuri and Davis have understood that in family businesses “the same organizational features […] account for both their strengths and their weaknesses.”(1996, p. 206).

2.3.3 Managing the Family Business

Looking back at the three circles model, the CEO in a family business is mostly present in all three circles as the classic owner-manager. In many cases, the owner-manager is also the founder (Kets De Vries, 1993). The family CEO is so common that the notion of CEOs in family business is often used as equivalent to family CEO. For instance, Massis, Kotlar and Frattini (2013) analyse the perception of family businesses from CEOs. During their article, they constantly refer to ‘family business CEOs’, not once stating that they mean family CEOs by that; only in the last sentence it becomes clear when they refer to further research in terms of non-family CEOs.

Apart from a family CEO, family businesses can also have a non-family CEO. Klein and Bell (2007) have listed reasons for family businesses to take in a NFC in their literature review on non-family executives. Interestingly, many of the reasons are directly or indirectly linked to continuity or intra-family issues such as succession. Hence, we will take a closer look at the decisions family businesses have to take in the process of continuing the business. This will further highlight the role of NFCs in continuity.

2.3.4 Continuity and Succession in Family Businesses

As already discussed, business continuity and the long-term orientation is an important issue for family businesses (Habbershon & Pistrui, 2002; Kets De Vries, 1993). Gómez-Mejía and associates found out that family firms are placing a great importance on keeping control over the business, even if this means “accepting an increased risk of poor firm performance” (2007, p. 106). Mostly, the literature has focused on the succession process in family businesses (for example: Barach & Ganitsky, 1995; Handler, 1994; D. Miller, Steier, & Le Breton-Miller, 2003). Succession – often understood as “the transference of leadership from one generation to the next” (Ibrahim, Soufani, & Lam, 2001, p. 245) – is thereby mostly seen as “the most important issue that most family firms face” (Handler, 1994, p. 133). However, Drozdow posed in her article the question of what continuity is and argues that continuity is understood too narrowly. The underlying notion of many family businesses according to her is that “family and business must remain together for continuity to occur” (1998, p. 337). Therefore, it is helpful to see the passed-on leadership divided into management and ownership (Handler, 1994). Thus, even though the importance of succession cannot be overstated for family businesses, passing on both management and ownership is not the only option in order to achieve continuity.

In passing on the business, the family generally has several options. The PwC family business survey (2012a) has lined out three different options; according to them the options are to sell the business, pass on both leadership and ownership, or pass on ownership but bring in external management. Leach (2007) adds another option, the division of the business for several siblings, while Mertens (2004) proposes the establishment of a foundation as a further option. Nevertheless, we will keep to the three options lined out by PwC since they display the most common options – keeping management and ownership in the family, keeping ownership but not management in the family, or selling the business.

Passing on Ownership and Management in the Family

Passing on ownership and management in family businesses can be seen as the classical case of succession. This intra-family succession is often associated with nepotism (Kets De Vries, 1993). However, despite this “popular belief” (Lee, Lim, & Lim, 2003, p. 657), the criteria for choosing a successor in the family have become more objective over the last years (Brockhaus, 2004).

Succession in the family is not a single event, but a “multistaged process that exists over time” (Handler, 1994, p. 134), starting sometimes even before the possible successors enter the business. Gersick and associates (1999) used the model of the three circles for a developmental model whereby all three circles develop and evolve over time. From the beginning, when the simple owner manager is still in control, they move to “more complex later-generation forms” (1999, p. 288) such as a sibling partnership or even a cousin consortium. Sometimes these controlling systems also evolve back to a less complex state. Not only the children of the founder are possible new CEOs, also the spouse of the recent CEO could take over the business (Poza & Messer, 2001). Furthermore, family CEOs can also be the in-laws to the family such as the daughter’s husband (Lee et al., 2003)

Selling the Family Business

Selling the family business in many cases has primarily to do with ‘non-business factors’. Family businesses often decide to sell the business when the next generation does not want to take over, does not have the right skills or simply is too young (PwC, 2012a). The prime case of selling is of course when there is no family member to take over. Also in cases where the owner sees the family business purely “as a way to increase […] wealth” (Cisneros, Genin, & Peerally, 2012, p. 46) the sale of the business is quite likely. Moreover, owners might see the sale of the company as a way to finance retirement (Leach, 2007).

Furthermore, in case there are too many children in the next generation, a sale of the company could also become quite likely, since buying out too many family members might destroy the company. However, business owners often build their identity out of their involvement in the business (Hall, 2012), or vice versa build their company according to their personality. Especially family firm founders are likely to see their business as an “extension of themselves” (Dyer & Whetten, 2006, p. 789). Having invested a “huge amount of emotional capital” (Leach, 2007, p. 164), the business owners are often reluctant to sell their ‘baby’. Therefore, the sale of a family business can often end “traumatic[ally]” (Leach, 2007, p. 165), since for owners the “nonfinancial aspects of owning a firm” (Zellweger & Astrachan, 2008, p. 347) play a prominent role.

Retaining Ownership and Bringing in a Non-Family CEO

Interestingly, many family firms are contemplating about the options of selling or family succession, often overlooking the possibility of retaining ownership while bringing in a NFC; this applies especially to the case of Sweden (Olsson & Hall, 2010). Nevertheless, the option of employing a NFC while keeping the ownership of the business in the family has many advantages. First of all, in many cases there are no qualified, willing or accepted members in the family to take over the company (Klein & Bell, 2007). Oftentimes, the right successor is not yet ready to take over the company. In these cases an NFCs can act as “bridge managers” (Le Breton-Miller, Miller, & Steier, 2004, p. 315) or as a “caretaker managing director” (Leach, 2007, p. 166). Furthermore, NFCs are often employed in order to professionalize the business, providing “objectivity and rationality to the family firm” (Hall & Nordqvist, 2008, p. 52).

Even though the appointment of a NFC can be a great challenge for family businesses (Olsson & Hall, 2010), it is still a good choice in order to retain control over the business. Therefore, in the next part we will give a short overview of the current state of research on NFCs in family businesses.

2.3.5 Non-Family CEOs in Family Businesses

Although, as initially stated, the research on non-family CEOs is “surprisingly thin” (Blumentritt et al., 2007, p. 322), this does by no account mean that there is no literature on NFCs. This literature review shall give a short overview of several streams of research on NFCs, highlighting articles in every stream. Many studies only touch the issue of NFCs casually, focussing on the bigger group of non-family managers (for instance: Block, 2011; Dyer, 1989; Sonfield & Lussier, 2009). We decided to include some of these articles as well since we believe that their findings at least partly apply to NFCs as well and hence strengthen our understanding.

There are several streams of research contemplating about the challenges and opportunities of NFCs in family businesses. Many studies on NFCs tie their involvement to measurable quantities in the business such as profitability (Bloom & Van Reenen, 2007) or the return on investment (Eklund, Palmberg, & Wiberg, 2012). Other studies rather focus on non-quantifiable aspects such as the effect of a NFC on internationalization (Banalieva & Eddleston, 2011). Sonfield and Lussier (2009) for instance show that the appointment of non-family manager positively influences several factors such as a more sophisticated financial management while reducing several negative effects such as family member conflicts. Interestingly, mostly all articles in this stream of research combine their efforts with a comparison between family and non-family management. Pérez-González (2006) for example examines succession and inherited control in family business and argues that NFCs are better suited to lead the business due to their superior education and experience; promoting family CEOs however would “significantly hurt[…] performance” (2006, p. 35) of the business. Smith and Amoako-Adu (1999) show in their study that the appointment of a family member decreases the stock prices of the company, whereas this effect cannot be observed for non-family members. Another study by Chittoor and Das (2007) links the succession from a family member to a non-family manager to an increase in performance. Many of these articles argue thereby that family businesses suffer from a “limited pool of potential replacement candidates” (Cater & Schwab, 2008, p. 39), a problem that could be circumvented by bringing in non-family managers.

Another stream of literature about NFCs is concerned with their remuneration (for instance: Gomez-Mejia, Larraza-Kintana, & Makri, 2003; Park, 2002). This comes as no surprise, since the appointment of a non-family member opens up the classical principal-agent conflict. Therefore, several articles about remuneration are directly linked to agency conflicts. Michiels, Voordeckers, Lybaert and Steijvers (2012) for instance found that firm performance is positively related to the remuneration of the CEO in family firms. This applies both to family and non-family CEOs, however the correlation to NFCs is stronger. McConaughy (2000) found similar results in his study on incentive-based pay in family businesses. According to him, family CEOs are paid less because they possess superior incentives and thus are not in need for further incentives, i.e. a higher remuneration. Yet, in case of NFCs, family businesses have to pay more “to get what a family CEO would do” (2000, p. 130).

Not all authors however focus on the principal-agent situation between owner family and NFC. Vallejo (2008b) for instance shows in his article that non-family employees who exhibit a strong commitment for the family business can rather be seen as stewards instead of agents. According to Vallejo, the attachment and fondness that the family feels for its business is transmitted to non-family employees “through the latent values in the firm’s organizational culture” (2008b, p. 387). Furthermore, he presents a strong relationship between commitment and both profitability and survival of the family business.

Looking at the diverse terms for non-family CEOs, another aspect comes into light. The general term NFC, for instance used by Blumentritt, Keyt and Astrachan (2007), has a rather neutral connotation. Other authors however also use the terms ‘external CEO’ (Bennedsen, Nielsen, Perez-Gonzalez, & Wolfenzon, 2007) or even ‘outsider CEO’ (Gomez-Mejia et al., 2003). Especially the latter designation already carries some kind of judgement in it. If there is an outsider, there must be insiders as well – in this case the owner family. How do these insiders work with the ‘outsider CEO’? To us, it was surprising to see how little this relationship was researched so far and how little many of the before-mentioned articles considered this. Even though Chua and associates (2003) showed in their study that this relationship is of high importance to family businesses, only little scientific research was committed to this issue.

In one of his early works, Dyer (1989) wrote about the integration of professional management into a family-owned business. A good part of his study was dedicated to issues in the relationship between the NFC and the owner family, for instance showing the importance for owner families to “socialize the professional manager in the ways of the family and the business” (1989, p. 231). Also Hall and Nordqvist looked at the relationship between owner and NFC, finding out that professional managers in family businesses need “both formal and cultural competence” (2008, p. 62). Cultural competence hereby refers to the managers understanding of specific values and norms of the culture in the family business. In another work, Olsson and Hall (Olsson & Hall, 2010) present 15 factors that contribute to the success of a NFC in a family business. Blumentritt and associates (2007) focus especially on relational aspects that “make […] for successful NFCs” (2007, p. 321). Using agency and stewardship literature, they identified several aspects such as family awareness and the role of the board that contributed to a healthy relationship between owner family and NFC. Many of these aspects can also be found in the literature review on non-family executives by Klein and Bell (2007). Concluding, they call for more research on reducing the failure rate of NFC appointments, since the topic is of major importance for family businesses (Chua et al., 2003). Our thesis aims at following this call by focusing on success factors in the relationship between owner family and NFC. As requested by Klein and Bell (2007), we hope to thereby advance the understanding of this problem in both a theoretical as well as practical sense.

3 Methodology

The methodological part discusses the purpose of the research and its underlying research philosophy. Furthermore, it describes the research approach over the course of the thesis as well as the research strategy and the tools which were used. Finally, it also highlights the limitations of the research.

3.1 Research Philosophy

The purpose of our study is to draw out success factors in the relationship between the owner family and the NFC. We thereby believe that “social action can best be understood from the accounts and perspectives of the people involved” (Schwandt, 2007, p. 21f.), drawing from the “world of experience as it is lived, felt and undergone” (Robson, 2011, p. 24). Trying to understand how members in a family business “experience the world” (Hammersley, 2003, p. 816) we adopted a rather phenomenological stance which is concerned with how humans view “themselves and the world around them” (Robson, 2011, p. 151). Therefore, from an ontological point of view which is concerned with “what makes up reality” (Blaikie, 2003, p. 768) we do not see the social world as objective. We reject the positivistic view that human behaviour is a necessary response to “empirically observable, measurable and manipulable stimuli” (Gill & Johnson, 2010, p. 57). On the contrary, we see the world as an enacted environment, “interpreted or constructed by people” (Williamson, 2002, p. 30). Hence, understanding or ‘verstehen’ as used by Max Weber (1968) in opposite to explaining or ‘erklaren [sic]’ (Outhwaite, 1975) is at the core of our research. Our research philosophy thus follows the call of Nordqvist, Hall and Melin (2009) for a more interpretative approach to family business research. Taking this interpretative stance allows us to understand what makes the relationship between owner family and NFC work from a micro perspective.

“This means to take the point of departure in everyday interaction between individuals and to understand the complex and dynamic organizational reality that family businesses constitute.” (Nordqvist et al., 2009, p. 295)

3.2 Research Purpose

Saunders, Lewis and Thornhill (2009) generally distinguish between three research purposes – explanatory, descriptive and explorative. Our research does not, as previously mentioned, aim at explaining or ‘erklaren [sic]’ the relationship between owner family and NFC as we are unsure of the “precise nature of the problem” (Saunders et al., 2009, p. 139). An explanatory approach aiming to “provide causal explanations of phenomena” (Robson, 2011, p. 525) is thus not expedient. A descriptive study which aims to “ portray an accurate profile of persons, events or situations” (Robson, 2002, p. 59) is also not suited for fulfilling our purpose since the ‘verstehen’ of the success factors and not the pure description shall be at the centre of our research. Our purpose therefore can be best accomplished through an explorative study which aims at finding out “what is happening; to seek new insights; to ask questions and to assess phenomena in a new light” (Robson, 2002, p. 59). This approach is comparable to a journey during which the researchers have to be open for changes of direction (Saunders et al., 2009).

3.3 Research Approach

As a consequence of choosing an exploratory study our research approach is consequently shaped. Generally, research approaches can be distinguished between deductive and inductive. A deductive reasoning is mostly concerned with developing theory and hypotheses (Saunders et al., 2009). The beginning point of a deductive approach therefore is an “abstract conceptualization” (Gill & Johnson, 2010, p. 46) that is derived out of current research and general observations. These theories will consequently be tested during the research (Williamson, 2002). Due to the fact that the success factors in the relationship between owner family and NFC are not well researched, a deductive approach would be neither productive nor feasible.

The second research approach of induction on the contrary is not concerned about theory testing, but theory building (Saunders et al., 2009). Research questions are not generated through literature, but derived from collected data (Williamson, 2002). Since most often no prior theory in this special field exists, the researchers’ sense-making is a way to deal with the “ambiguity and uncertainty” (Weick, 1995, p. 91) of the situation. An inductive approach allows the researcher to react more flexible on the empirical findings without being hampered by the “air of finality” (Saunders et al., 2009, p. 126) that oftentimes is inherent in the choice of theory in the deductive approach. Due to these reasons we have chosen to apply an inductive approach to our research since our aim is to generate both research questions and practical advices.

3.4 Research Strategy

Saunders et al. (2009) present a myriad of different research strategies, including for instance case study approaches, surveys and experiments. In order to achieve our research purpose we chose a strategy inspired by ‘grounded theory’, first introduced by Glaser and Strauss (1967). This strategy is concerned with “discovering theory from data” (Glaser & Strauss, 1967, p. 1) and is often considered as “the best example of the inductive approach” (Saunders et al., 2009, p. 148). It provides a systematic and coordinated way of doing research that nevertheless is still flexible. Grounded theory is mostly linked to qualitative methods whereby interviews are the most common form of data collection (Robson, 2011). Nevertheless, also quantitative methods could be used in accordance to grounded theory. Still, in our research we believe that interviews are the most appropriate form to generate new theories on the relationship between the owner family and the NFC, since they allow us to investigate the relationship from several points of views. We will later go more into detail about the structure of the interviews.

In grounded theory the researchers go out ‘into the field’ to collect data which is analysed in-between the visits. Suddaby refers to this simultaneous collection and analysis of data as “constant comparison” (2006, p. 634), one of the two main points of grounded theory. During the analysis the researchers derive categories out of their sense-making which are consequently confirmed through further data collection. The data collection continues until the point where the categories found during the analysis are ‘saturated’ (Robson, 2011). The signs of saturation are thereby not determined by the amount of interviews, it is rather the reoccurrence of information and the confirmation of previously developed categories (Suddaby, 2006). Robson refers to the point of saturation as the “diminishing returns” (2011, p. 148) of data collection. The second important aspect of grounded theory is ‘theoretical sampling’ whereby the decisions for which data to collect next are taken in accordance to the theory that is being built (Suddaby, 2006). Thus, the sampling of which interviews to undergo next is set so that “additional information can be obtained” (Robson, 2011, p. 148).

Generally, relying on grounded theory as our main influence allows us to react flexibly to the data we collect. It fits our purpose the best since we are not sure about the nature of success factors that play a role in the relationship between owner family and NFC.

3.5 Data Collection

3.5.1 Sampling Method

In order to shortlist appropriate family businesses with an external CEO for our interviews we set up several formal criteria which the companies under investigation had to meet.

1. Ultimate Ownership
All companies had to be directly owned by an ultimate owner family who holds more than 50 % of total ownership voting rights. This is in line with our definition of family businesses.
2. Geographical Region
We selected Sweden as the country of analysis. We solely focused on Sweden because we wanted to diminish the influence of cultural factors that may arise if we take several countries or cultural regions into account.
3. Number of employees
Regarding the number of employees we were looking at small and medium-sized companies as already mentioned. Hence, we were searching for companies with 20 to 500 employees.
4. Year of incorporation
We decided to only investigate companies which were founded in 2003 or earlier. We did so because we think that the underlying culture and values of being a family business can only develop over time.
5. Exclude subsidiaries
The company under investigation cannot be a fully or partially owned subsidiary of another company. The ultimate owner therefore has to be a legal person, no legal entity.
6. External CEO
As our research is concerned about the success factors of NFCs in family businesses, we only included family businesses which had experience in dealing with a NFC.

Firstly, we tried to find appropriate companies through the help of the AMADEUS database, a database of comparable financial information for public and private companies across Europe (AMADEUS, 2013). The search resulted in 657 hits, which have been investigated manually by comparing the database entries for congruence with the filter criteria described above. Finally, 43 companies had been shortlisted. Thereafter we further investigated these 43 companies by visiting their corporate websites and validated the AMADEUS results by the use of external resources publicly available on the Internet. 15 companies remained shortlisted which we thereupon contacted.

Another method we used was convenience sampling (Salkind, 2010) whereby we scanned publications such as local newspapers, magazines and advertisements for family businesses with a NFC. Our thesis supervisor Annika Hall also supplied us with further contact details from several family businesses with NFCs in Sweden. This method resulted in 34 additional companies. In addition, we used a snowball system. As one of the last questions during our interviews we asked our interview partners if they knew other family businesses with NFCs.

illustration not visible in this excerpt

Table 1: Breakdown of Company Sources

In general, we had expected to find more companies through the structured approach using AMADEUS. This system however does not seem prone to find family businesses, since on several occasions it failed to deliver family businesses even though the perimeters were set correctly. Furthermore, there is no option to distinguish between family and non-family management. Contacting the companies through telephone calls yielded more results than the official E-Mail contact out of which we got no positive response. It seemed easier via phone to already build up some kind of relationship with the family business and the NFCs and to explain our research focus.

3.5.2 Different Types of Interviews

We decided to conduct interviews as a method of empirical data collection. Current literature distinguishes between three different types of interview methods which are the structured, the semi-structured and the unstructured interview approach (Given, 2008). A structured interview, also referred to as standardized or research-administered, relies on predefined questions to answer quantitative research problems. It is designed to generate results for statistical reasoning between sample groups and utilize them for generalization purposes (Lindlof & Taylor, 2002). The semi-structured interview approach is more open than the structured counterpart and therefore allows the researchers to adjust to the interviewee during the interview (Hollway & Jefferson, 2000). Some predefined questions provide a roughly guided structure in order to tackle all areas of interest. This allows the interviewee to answer freely and the researcher to directly follow up on interesting points that come up. Questions and follow up questions might differ from interview to interview. Last but not least, the unstructured interview does not follow any guided principle at all. Interviewer and interviewee enter a conversation wherein the interviewer takes the passive role of the listener (Given, 2008).

Since we want to gain an in-depth insight into the success factors of the relationship between NFC and owner family, we decided to adopt a semi-structured interview approach which gave us the opportunity to investigate interesting aspects further while still providing us with an overall structure. Because our interview structure was influenced through consecutive findings, the structure of interviews constantly changed.

3.5.3 Conducting the Interviews

We personally met all participants at their offices or homes and conducted face-to-face interviews with them. We believe that personal meetings are the best way for our research since an explorative research approach is heavily based on personal stories. We felt that people might not open up over the phone or during a videoconference. Therefore, a good access to the family “might lead to the revealing of experiences, thoughts and emotions which individuals would normally not voice” (Nordqvist et al., 2009, p. 304). During our interviews we saw that this assumption proved to be correct as many interviewees shared private details and anecdotes with us. Also, it allowed us to address delicate issues such as the eventual death of a family member.

[...]

Excerpt out of 80 pages

Details

Title
Just like a Marriage? Success Factors in the Relationship between the Non-Family CEO and the Owner Family
College
Jönköping International Business School
Grade
A
Authors
Year
2013
Pages
80
Catalog Number
V214925
ISBN (eBook)
9783656431282
ISBN (Book)
9783656438724
File size
1273 KB
Language
English
Notes
Tags
Family Business, Non Family CEO, CEO, Succession, Ownership, Recruitment, CEO Recruitment, Relationship in Family Business, New Generation
Quote paper
Martin Pinhack (Author)Matthias Christian Waldkirch (Author), 2013, Just like a Marriage? Success Factors in the Relationship between the Non-Family CEO and the Owner Family, Munich, GRIN Verlag, https://www.grin.com/document/214925

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