importance of succession to the continuity of the family business, many issues of theo- retical impact .... More pertinently, a study of computer firms by .... nal consultants to give professional advice and facilitate the succession planning process.
1042-2587-98-223$1.50 Copyright 1998 by Baylor University
The Influence of Family on the Family Business Succession Process: a MultiGenerational Perspective Peter S. Davis Paula D. Harveston The present study develops a process model of succession involving steps undertaken to prepare the family business for succession. The model examined multiple spheres of influence, including individual, group (family), organizational, and critical resource providers, as well as investigating the moderating effects of generational differences. Tests of this model used responses from a nationwide survey of family business owner/managers. The results support research expectations that various factors, especially family influence, positively affect the extent of succession planning. Further evidence is provided indicating that generation moderates revealed relationships.
amily businesses are the dominant fonri of enterprise in the U.S. constituting approximately 907c of all business establishments (Beckhard & Dyer. 1983b). Family businesses differ from traditional businesses in that they are owned or controlled by family members and thus have a great potential for the family to be involved in or to influence business matters. Because of the potential for family member influence, family businesses face many unique and complex problems not found in more traditional businesses (Davis & Stem, 1980: Handler. 1989). Conventional wisdom holds that the more family members who are employed and the more central their roles, the greater the influence these men and women will exert on critical decision processes in family businesses (Dyer. 1986; Astrachan, 1988). Allowing family members to influence organizational processes flies in the face of the advice of traditional management dogma, which tends to discourage family involvement in an enterprise, arguing that such involvement is antithetical to effective business practices, possibly leading to corruption and nonrational behavior (Perrow, 1972; Dyer. 1994). However, since the investigation of the connection between family involvement and organizational processes and outcomes is still in its infancy (Bellet. Dunn. Heck. Parady. Powell. & Upton. 1996). many conflicting claims regarding the purported effects of family member involvement remain unresolved. Amon c) C
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ENTREPRENEURSHIP THEORY a n d PRACTICE
generation firms, where the current owner/manager also was the founder. The secondgeneration group consisted of 277 firms (17.1%), where the parents of the current owner/manager had founded the business. The last group of 292 firms (18.1%) was comprised of firms founded by the current/owner manager's grandparents or previous generation. Descriptive statistics and correlations for all involved variables for the total sample are shown in Table 1.
DATA ANALYSES Total Sample Beginning with the total sample, we tested our first set of hypotheses (H1-H4) by sequentially regressing four separate blocks of variables on the scale capturing the extensiveness of the succession planning process. Using stepwise regression, we sequentially entered blocks of variables beginning with the block of individual-level (owner/ manager) characteristics: age (AGE), education (EDUCATE), income (INCOME), and percentage of worth invested in the family business (WRTHPCT). The second block consisted of group-level (family) variables, and included indicators of the influence attributed to family members involved in day-to-day operations (FAMINOPS) as well as those not involved in day-to-day operations (EAMOUT). The third block consisted of the two organizational-level attributes, the natural log of total employment (SIZE) and formality (FORMAL). The fourth and final block to be entered into the equation captured the effects of resources (capitalization), including access to capital (CAPACC) and the importance of family as a source of capital (FAMFUNDS).
Generational Sub-groups The moderating effects of generational differences among family businesses were tested by subgroup analysis (Arnold, 1982). The total sample first was sorted in ascending order of generation (i.e., first, second, and third or later). We then tested the moderating effects of generational differences (i.e., H5-H8) by repeating the analyses performed previously on the total sample for each of the three generational subgroups. Within each generational subgroup, the extensiveness of the succession planning process was regressed against successive blocks of variables beginning with the individual-level characteristics, followed by the group-level (family) influence variables, the organizational-level variables, and the resource variables, respectively. Regression results for the total sample are shown in Table 2A, while the regression results for each of the generational subgroups are shown in Table 2B.
RESULTS In general, the results support the first set of research expectations (i.e., H1-H4) regarding individual-level (owner-manager) characteristics (i.e., AGE), group-level (family) influence (i.e., FAMINOPS), organizational-level attributes (i.e., FORMAL), and resources (capitalization) (i.e., CAPACC) as drivers of the extensiveness of succession planning processes among family businesses. At the individual-level of analysis, HI A was supported. Increases in the age of the owner/manager were found to significantly (P < .01) impact the extensiveness of the succession planning processes being evidenced. Hypothesis IB was rejected. Although increases in the owner/manager's education also was significant (P < .05), contrary to expectations, it was found to exert a negative effect. Owner/manager education was the only variable to display a significant Spring, 1998
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Table 2A Regression Results for Entire Sample Entire Sample N = 1349 Variabies
Beta
Age Educate Income Wrthpct Faminops Famout Size Formal Famtunds Capacc
.175 -.060 .022 .031 .111 -.012 .014 .089 .045 .049
Adj. R-
6.458*** -2.158** .715 1.162 4.122*** -.453 .497 3.264*** 1.7f>4* 1.760*
.06
* p < .10, '*p < .05. ***p < .01
negative effect. Hypothesis lC also was rejected. No significant effect was observed for either the individual owner/manager's income or percentage of worth invested in the family business. Findings at the group-level were consistent with expectations, supporting hypothesis 2. Here, it was found that having more family members work in day-to-day operations in top management positions significantly affected (P < .01) the succession planning process. No significance was attached to increases in family members who were not in day-to-day operations. At the organizational-level, no significance was found to result from increases in organizational size, thus hypothesis 3A is rejected. However, an increase in formality was found to have a significant (P < .01) positive effect on the extensiveness of the succession planning process, supporting H3B. Consistent with expectations regarding the positive effects of resources on succession planning, both access to capital and source effects (i.e., family funding), were found to be significant (P < .10) in determining the extensiveness of the succession planning process. Thus, hypothesis 4 was supported. The results reported demonstrate that each level of analysis studied here (i.e., individual, group [family], organizational, and resources) directly impacts the extensiveness of succession planning processes. However, theory suggested that these relationships may be more complex, involving potential moderators such as the generation of the involved family business. The results of separate multiple regression analyses indicated that the relationships between preparations for succession and individual-level, grouplevel, organizational-level, and resource factors differ according to the generation (whether first, second, third or later) of the focal family business. The results support three of the hypotheses concerning generational moderation, or the lack thereof As shown in Table 2B, the significance of factors at the individual-level (e.g., the owner/manager's age), the organizational-level (e.g., formality), were found to 44
ENTREPRENEURSHIP THEORY a n d PRACTICE
Table 2B Regression Results by Generation FirstGeneration-led Family Businesses
Age Education Income Wrthpct Famout Faminops Size Formal Famfund Capacc
SecondGeneration-led FamibV Busine.sses
B
T
B
T
B
.055 -.048 -.022 .042 .035 .128 .039 .326 .045
6.52*** -1.50 -.62 1.34 1.11 433*** 1.22 3.55*** 1.42
.045 .027 .055 .012 -.044 .101 .060 .084 -.051 .380
2.74***
.019 -.074 .061 .008 -.091 .112 .029 .075 .419 .019
217
.09
*p
ThirdGeneration-led Family Businesses t
.42
.83 .84
-.72 1.94* -.96 1.35 -.82
.06
T .31
-1.16 .99 .13
-1.46 2.15** .47
1.20 2.33** .133
.04
*p < .05. ***p < .01
vary across generations. These findings support hypotheses 5 and 7 that effects of individual-level and organizational-level factors on the extensiveness of succession planning processes would be moderated by generation. In contrast to the variability that individual and organizational factors display across generations, the group-level (family) effects were found to be positive and significant across all generations of family businesses. The fmding that generation does not moderate family influence supports hypothesis 6. The only results that conflicted with our a priori expectations concerned the moderating effect of generation on resources as drivers of the extensiveness of the succession planning process. We had hypothesized (H8) that generation would not moderate this relationship. However, the results revealed that, while resources do exert a significant effect across all generations, the locus of the effect, whether vested in access to capital or in the source of the capital (the family as a provider of funds), shifts across successive generations. Among first- and second-generation family businesses, access to capital was significant (P < .01), while among third-generation (or later) firms, source effects, vested in the role of family as provider of capital, eclipsed access to capital in significance (P < .05).
DISCUSSION AND IMPLICATIONS In order to satisfy a perceived need for better preparation and planning for succession in family businesses, the present study proposed a multi-level approach for the study of the succession planning process. Reviewed theory supported contentions that certain individual-level (owner-manager) characteristics, group-level (family) influence, organizational-level attributes, and resources (capitalization) will affect the extensiveness of the succession planning process among family businesses. Further, it was proposed that Spring, 1998
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the relationships between these variables and succession planning will differ according to the generation of the involved firm (i.e., whether first, second, or third or later). The study's results largely supported these expectations. Of the four individual-level characteristics investigated here (age, education, income, and percentage of net worth) vested in the owner/manager, only age was found to possess predictive validity regarding critical organizational processes (Hambrick, 1989; Helmich & Brown, 1972), particularly succession (Pfeffer, 1983). Building on the findings of Rue (1973) and Robinson and Pearce (1983) in public corporations, our results provided evidence linking particular structural dimensions of organizations (e.g., formalization) to the futurity and formality of specific planning behaviors (i.e., succession) among family businesses. The findings regarding resources support the arguments voiced by Kets de Vries (1993) concerning access to capital and by Gundry and Welsch (1994) concerning the importance of capital provided by family members as considerations when family businesses prepare for succession. While certainly these fmdings are important, possibly the most important findings of this study concern the influence of family and the moderating role of generation.
The Influence of Family Among the most interesting of our findings regarding the four levels examined here, was that only group-level influences, or more specifically, the influence of family members in day-to-day operations, demonstrated an influence extending across multiple generations. In particular, the significance found for the variable FAMINOPS suggests that the more closely related family members are to the owner/manager, and the higher the role or position they occupy, the greater will be their collective influence over the extensiveness of the succession planning process. It is important to note, however, that the number of family members involved in day-to-day operations may not be the critical factor. Post hoc analysis revealed that second and third (or later) generations have significantly fewer family members in day-to-day operations than first-generation family businesses (P < .05). The results obtained here suggest that distinctions between family members as to the likelihood of their being actively involved in preparations for succession may be vested primarily in their organizational roles. In this event, bein*? included among the firm's "upper echelon" may act as an important contingency in assessing influence based on family relationships. In addition, results obtained here cast doubt over theories that would vest power and influence in family business hierarchies merely on the basis of ''kinship responsibility" (Price & Mueller, 1981). Evidence for this conclusion is provided by the lack of significant influence attributable to family members who are nor involved in day-to-day operations (i.e., FAMOUT). Of course, it could be that the influences exerted by this latter group are too subtle to be detected or perhaps they are more indirect, felt in the maintenance of social interactions outside of the workplace, which may provide the primary mechanism for maintaining the kinship network. On the other hand, it may be that these family members do exert substantial influence over organizational processes but the effects of such influence simply are not evident in planning for succession Managerially, these flndings suggest that developing an extensive organizational succession planning process rests mostly in the hands of those family members who are involved in the day-to-day operations of the family business.
The Moderating Effect of Generation Surprisingly, the effects of generation appeared somewhat constrained as one 46
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ENTREPRENEURSHIP THEORY and PRACTICE
moves from first generation to second. In fact, three of the four variables (i.e., AGE, FAMINOPS, CAPACC) that were significant drivers of succession planning among first-generation family businesses continued to be significant among second-generation firms. Interestingly, change in the drivers of succession planning appeared to accelerate between the second- and third- (or later) generation firms. Between the second and the third generation, the owner's age (AGE) ceased to be important and the nature of important resources shifted from access to external capital to internal sources (FAMFUNDS). Although the cumulative differences between the first and the third (or later) generations are substantial, these differences can not be attributed to variations in the emphasis each generation placed on preparations for succession. Post hoc analysis indicated that the extensiveness of the succession planning process did not differ across generations. However, while all generations emphasize succession planning to a similar extent, with but one exception (i.e., the influence of family), the determinants of the process differed across generations. Although not the focus of investigation in this study, perhaps the continuing presence or "shadow" of the founder or his/her spouse may help explain why secondgeneration firms are more like first-generation firms than third-generation firms. Post hoc analysis revealed that over 10% of all second-generation firms surveyed here remain, at least partly, under the influence of the founder or his/her spouse. In 30% of these second-generation firms, the founder or his/her spouse continues to work in day-to-day operations of the business. Another 407c of second-generation firms reported that, even when they no longer have day-to-day responsibilities, the founder or his/her spouse still exerted an influence over decision making. It is not until the third generation assumes control that the "shadow" cast by the original founder virtually disappears. Evidence of a generational effect on the succession planning process also is provided in the decline of the influence of certain variables. In particular, the decline of influence vested at the individual-level appears noteworthy. The regression coefficient for the most significant of the individual-level variables—age—showed incremental declines over generations, until, by the third generation, increases in an owner/manager's age no longer had a significant impact on the extensiveness of a family firm's succession planning processes. From this, it would appear that the attributes of the owner/manager, such as age. cease to affect succession planning after a sufficient number of such transitions (apparently two) have occurred. These results would seem to suggest that individual-level effects are unimportant in nonfounder-led family businesses. Many explanations that might account for this finding have been proposed. For example, Harvey and Evans (1995. p. 8) point out that the degree of change to the planning culture of the family business after succession would be contingent upon a number of factors including: (1) the degree of shared beliefs between the older generation and the successors; (2) the age and experience base of the successor; (3) the condition and health of the company after succession; and (4) the level of older generation involvement in the family business after succession. Unfortunately, an assessment of these factors fell beyond the scope of the current research. Another explanation could be the gradual transition to more professional and more highly trained managers. Many family business authorities and consultants advise family businesses to increase the professionalism of managers and employees (Aronoff & Ward, 1991). Some evidence suggestive of an increase in managerial professionalism across generations is provided by a post hoc examination of differences in the education levels of involved owner/managers. A post hoc Scheffe' test revealed that both the second- and third- (or later) generation managers were significantly more educated (P < .001) than were firstgeneration owner/managers. Finally, the decline in importance may be to due to maturation effects across generations. Evidence of such effects is seen in the age differences Spring, 1998
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among first-generation or founder-led firms and those led by second- and thirdgeneration or later family members. A post hoc Scheffe test showed that the firstgeneration owner/managers were significantly older (P < .001), with mean age of 54 (S.D. 11.50), than were their counterparts among the second generation, with a mean age of 48 (S.D. 11.35), or the third generation (or later) with a mean age of 47 (S.D. 11.28). Additional evidence for the moderating role of generation on drivers of the succession planning process is provided by the findings regarding organizational-level effects. For example, the regression coefflcient for FORMAL, an organizational-level attribute, was .326 (P < .01) in the flrst-generation subgroup but dropped to .08, becoming non-signiflcant, in the second-generation subsample. This flnding suggests that the transition from founder-led (flrst generation) to successor-led (second generation) attenuates the effect that the formality of an organization's structure has on its organizational activities. A plausible explanation for this flnding is that structure may vary to a greater extent among flrst-generation than among second- and third- (or later) generation firms. However, it is worth noting that no statistically signiflcant differences were found among the three groups in regard to their degree of formality. Alternatively, it may be that family businesses that are experiencing succession for the flrst time are more responsive to efforts at formalization than businesses that have previously experienced succession. Families that have already experienced one or more succession events are likely to have their own tried and tested ways and means that work for them. Hence, later-generation flrms do not flnd that the formalizing of relationships contributes to the process of planning for succession. Finally, the results support those who would argue for considering resources when planning for organizational continuity. While the positive influence of resources on planning was anticipated, it was somewhat surprising that the locus of resource effects shifted according to the generation of the involved businesses. Among first- and secondgeneration family businesses, access to capital was paramount, whereas among third- (or later) generation firms, influence shifted to the source of capital, seen here as the importance of family as a provider of capital. ANOVA and additional post hoc Scheffe tests showed that the first and third (or later) generations differ on access to capital (P < .001). Specifically, access to capital is improved for the third generation compared to the first. In combination, these findings support suggestions by Stinchcombe (1965) that first- and second-generation firms may suffer from the "liability of newness" in regards to access to capital, which can only be resolved via organizational longevity. However, even maturing family businesses may find their access to capital limited. The results suggest that family firms may endeavor to resolve the access issue by turning to internal sources of funds (i.e., the family). Some evidence for this type of resource substitution effect is suggested in the negative correlation between access to capital (CAPACC) and the family as capital provider (FAMFUNDS). It may be that, in providing resources to the firm in its latter stages, the family is able to reassert a significant influence over organizational activities and processes attendant to succession planning.
Managerial Implications One of the fundamental missions of a family business is to pass the business on to subsequent generations (Davis, 1968). This paper aspired to build knowledge about the succession process in the family business across generations. This knowledge will not only be a foundation for future research but also holds implications for family business owner/managers and advisors. First, and perhaps most important, the findings that the determinants of the extensiveness of the succession planning process can be vested at different levels of analysis 48
ENTREPRENEURSHIP THEORY and PRACTICE
is important not just for academics, but for practitioners and family advisors as well. From the perspective of the owner/managers of the family firm, efforts to engage in effective succession planning will be affected by factors that can only be observed at different levels of analysis. In other words, our results show each generation of family firms to be influenced by different individual, family, organizational, and resource factors. For instance, individual-level factors (attributes of the owner/manager) were influential only in first-generation-led family firms. While succession planning is important for all family firms, there are different drivers for each generation of leaders. This finding further suggests that advisors to family firms should reject "cookie cutter" approaches to succession planning in favor of approaches that are tailored to the generation of the involved business. A second important finding was that the only constant influence across generations in the family business is the family. The obvious implication is that regardless of which generation leads the business, the family exerts a constant positive influence to see that adequate planning will be performed to ensure the survival of the business beyond the current generation. However, the influence of family is not evenly distributed across generations, nor is all family influence necessarily beneficial. A potential problem in planning for succession is that conflict may arise when family and business roles have not been clearly defined, generational envy develops, or coalition politics among the family members spill over into the business arena, resulting in family conflict that overrules business reason. A good example is provided by the breakup of the multimedia empire of the Horvitz brothers, which was triggered by a battle for succession and control of the business following the death of the founder (Kets de Vries. 1993). Our evidence suggests that owners who want to ensure the continued family ownership of the business would be well advised to employ more close family members to work in the business and to ensure they occupy positions of responsibility. It appears that these family members are the voice of the family, since those family members who are not engaged in day-to-day operations did not appear to exert much influence over succession planning. This finding suggests that while family councils may be good for communications and public relations, they may not be as potent a source of influence in business decision making as some family business consultants presume. A final implication of the current research is that it may circumvent the necessity to root prescriptions in the actual relationship between family members. While our research presents the family business owner as operating within a network consisting of a mixture of kinship and business relations, many previous researchers advocated a clinical approach to examining the psychology of family businesses. For example. Handler (1992) found that the level of mutual respect and understanding between generations was a critical factor. Despite the strength of our findings, we cannot claim the results of the current study to be more than suggestive. Rather, we would agree that embedded in this foundation is a network of real and imagined psychological relationships. But. in focusing on the psychological aspects of family relationships, important questions of the determinants of variations in the structural aspects of family influence, and how such variation might affect the degree of similarity among family businesses, have been largely neglected. It is our contention that a developed conception of the structure of family relationships may provide a useful point of departure for future explorations. The main accomplishment of this study was to provide a guide and focus for future research regarding the succession planning process. The ways in which this knowledge can lead to improvement in the family business succession process are several. First, succession should not be treated as an event but as a process that is influenced by many variables both within and external to the organization. Additionally, this study has led to a greater awareness of generation-specific drivers of succession planning.
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LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH The present study is unique in several respects. First, it represents a rarely seen large-scale study of succession planning processes among family businesses. Second, its examination of the group-level (family) influence exerted by family members is almost unprecedented. Third, it provides a significant advancement in the measurement of family influence beyond the simple numerical counts proposed previously by Gundry and Welsch (1994). Finally, the study provides a bridge that fills an important gap in our knowledge concerning the role of generational effects in the succession planning process. In interpreting the results of this study, certain limitations should be observed. First, while the sample was large and the issues examined were germane to succession, many issues that might be pertinent to succession planning processes were not addressed as part of the original research design. Second, the effects of certain variables included here, (e.g., size) may have been masked by the limited power of the tests employed, the less than perfect measures employed to assess size, or because of differences in some third (unexamined) factor to which both size and the succession planning process may be related. Finally, while a key informant methodology (Phillips, 1981) was utilized so as to ensure accessibility to appropriate information, future research may gain additional insights by including multiple respondents from the same organization as part of the data-collection process. Two observations concerning the cross-generational effects observed here are worth pursuing because they impact future research. First, while each of the four levels examined here (i.e., individual., group, organizational, and resources) were found to be significant among first-generation firms in explaining the extensiveness of the succession planning process, the number of factors found to be significant declined with each succeeding generation. This finding suggests there may be practical limits to the explanatory power vested in these levels and/or particular variables. Perhaps future researchers might extend the theoretical base to incorporate additional levels of analysis. For example, research incorporating institutional theory would seem to be in order, as other organizations affect internal processes, perhaps via mimetic behavior. Second, only influence exerted at the group-level by family members involved in day-to-day operations consistently remained significant across all generations. Perhaps future researchers might find it worthwhile to investigate power and conflict relationships among family members as they affect the relationship between the leader (owner/manager) and the succession planning process. One approach may be to describe specific family-level influences, such as family culture, family dynamics, and functionality, and the degree of communication and sharing of information within the family. In conclusion, this study has illuminated some key determinants of succession planning processes. In particular, some factors that drive the extensiveness of the succession planning process were found to be unique to particular generations, while other factors were common to all generations. Clearly, our results can only be generalized to family businesses. However, all businesses face the problem of survival and therefore, to the extent that we have articulated processes pertinent to succession issues, all businesses may benefit.
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Farquhar, K. A. (1989). Employee responses to external executive succession: Attributions and the emergence of leadership. Unpublished doctoral dissertation, Boston University, cited in W. Handler, 1994, Succession in family business: A review of the literature. Family Business Review, 7, 273-286. Fischer, E., Reuber, W., & Dyke, L. (1993). A theoretical overview and extension of research on sex, gender and entrepreneurship. Journal of Business Venturing, Winter, 151-168. Gundry, L. K., & Welsch, H. P. (1994). Differences in familial influence among women-owned businesses. Family Business Review, 7(3), 273-286. Hambrick, D. C. (1989). Putting top managers back in the strategy picture. Strategic Management Journal, 10, 5-15. Handler, W. (1989). Managing the family tlrm succession process: The next-generation family member's experience. Unpublished doctoral dissertation. School of Management, Boston University, cited in, W. Handler, 1994, Succession in family business: A review of the literature. Family Business Review, 7, 273-286. Handler, W. (1990). Succession in family firms: A mutual role adjustment between the entrepreneur and next-generation family members. Entrepreneurship Theoiy
