Award-Winning ECFB Research: How ‘Risky Business’ Benefits the Family Firm

When CEOs of family firms near retirement, they focus on long-term benefit to the firm – even engaging in ‘risky business’ as part of a longer strategy. This is in sharp contrast to the nonfamily firm ‘CEO Career Horizon Problem’ in which risk-averse self-interest drives the decisions of the chief executive on the cusp of retirement.

With their ground-breaking new research into the behaviour of family business CEOs who are nearing retirement, the research team of Dr. Vanessa Strike (Scientific Director of the Erasmus Centre on Family Business or ECFB), Dr. Stephen G. Sapp (Ivey Business School, Western University) and RSM alumnus <link research centres family-business education past-masters-thesis-projects _blank>Lorenzo Congiu (MSc GBSM 2011 cum laude), offer new perspectives on the long term benefits to be derived from the long career horizons of CEOs in family controlled firms (FCF).

Their paper ‘The Effect of Family Involvement on CEO Career Horizons: Evidence from International Acquisitions,’ captured the Academy of Management (AOM)  Best Family Business Paper 2013 (Entrepreneurship Division). This prestigious award, sponsored by Kennesaw State University’s Cox Family Enterprise Center, was announced as part of the Academy of Management conference on 12 August 2013. The award recognises the research team’s “efforts to advance our understanding of family business” and to stimulate “exciting intellectual exchanges” in the world of entrepreneurship and family business study, according to the AOM.

Leaving a legacy

“This paper challenges the predominant view [known in the literature as the ‘CEO Horizon Problem’] that as CEOs near retirement they forego risky long-term strategic choices and instead focus on decisions that enhance their own short-term self interests,” say the authors in the paper’s abstract. The short career horizon of nonfamily firm CEOs may lead to decision making focused on their personal reputation and financial benefit, and they are more likely to reject investments that may not benefit the firm until after their retirement – a myopic approach that can have serious impact on overall firm strategy.

The authors argue that instead, family firm CEOs “have a broader set of goals that include the optimisation of socioemotional wealth”, the non-financial qualities that distinguish family controlled firms from nonfamily firms.

Socioemotional wealth: coin of the realm in family firms

Amongst these socioemotional qualities: family control, influence, deep rooted values and the desire to leave a legacy to coming generations. In fact the desire to keep the firm alive and growing for future generations creates the long decision horizon adopted by family firm CEOs as they approach the end of their tenure within the company. This long-term, legacy-driven decision making (which may include the willingness to engage in  risks such as short-term losses from international acquisitions in service to long-term advantage to the family business) is even more pronounced when the family firm CEO is also a family member.

This attitude is clearly conveyed in the paper’s opening quote, from ECFB Advisory Board Chair Bob de Kuyper, retired CEO of De Kuyper Royal Distilleries. When challenged about a decision to expand the business into China, as he would be long-retired before seeing any return on investment, Bob replied: “We are a 315 year old family firm. 20 years is short term for us.”

Contribution to the field of family business

With their research, based on data sampled from 264 publicly held family and nonfamily firms in the US over the period  1997-2009, the authors contribute new knowledge in two areas: the first is in the realm of CEO career horizon literature, with their comparison of career horizon ‘length’ between CEOs in family versus nonfamily firms. The second contribution is to literature on socioemotional wealth in family firms, by examining whether retiring CEOs from family firms who are also members of the family, are more focused on socioemotional concerns than non-family-member CEOs in family firms.

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