Succession

The secret to being a great family CEO? Connections

The more connections the better. Image: Transport for London

The more connections the better. Image: Transport for London

New research from Thailand says that next-gen CEOs can be great for emerging market family firms, but having a good network really helps.

Family businesses dominate emerging markets, especially in East Asia. And unlike in Europe, family members also tend to take on top management roles. There are good reasons for this.

For instance, the aims of outside managers can clash with the owners’ aims, but having a family CEO sidesteps this “agent-principle” problem; family members can ensure families’ interests are being prioritised and outsiders do not appropriate assets; and in emerging markets where political and business connections often count for more than in western countries, having a family member as CEO can oil the wheels.  

All these things matter. But does having a family member in the top job damage the company’s financial performance? Plentiful evidence suggests so, and the reasons are obvious. For a start, there is no guarantee that the present CEO’s son will be good at the job, and even if you consider all family members to be candidates, you are still fishing in a shallow pool.

More obliquely, the presence of family members in positions of power can put off potential minority investors who might fear that, when push comes to shove, the CEO’s loyalties are to the family and not them. Many emerging markets have weak investor protection, meaning that minority shareholders are powerless to prevent expropriation.

Outperformance

But can these problems be mitigated? Are some family CEOs better than others? That questions is investigated in a new paper called Do CEO and board characteristics matter? A study of Thai family firms by Thitima Sitthipongpanich from Dhurakij Pundit University and Piruna Polsiri of Kasetsart University. 

They looked at the age, education and connections of the family CEOs in family-owned firms in Thailand (where such information has to be made public by law). They discovered that several characteristics offset the negative effects of being a family member in CEOs. Namely:

  • Being under 40, perhaps because younger managers “generate innovative strategies and are confident to pursue risky strategies for the growth of companies”.
  • Having outside experience, because “knowledge gained from experience is valuable and useful in making strategic choices to cope with pressures from global business competition”.
  • Being a graduate of an elite school, and have a good alumni network. “Obtaining external resources is crucial to firm value. People in the same networks established by friendship are committed to each other; thus, they would share useful information,” say the study's authors.

Three other characteristics were found to be damaging to firm value:

  • Having a PhD. CEOs with a doctorate might become fixated on R&D and “may be highly capable of creating new products, but not of making the products profitable to the firms”.
  • Being part of a network of directors. The knowledge this confers appears to have no effect on performance, perhaps because this knowledge is transmitted along other pathways anyway.
  • Having a bigger share in the company. It might be thought that owning more of the business spurs CEOs to better performance, but often the larger stake is about inheritance, not incentive.

Also interesting is the importance of the board of directors. Sitthipongpanich and Polsiri discovered that family CEO led firms whose boards of directors are diverse in ages and politically connected have higher firm value. Why?

“If boards of directors are diverse in terms of ages, family CEOs seem to obtain better advice and more varied strategic choices to compete in unstable business environments. Furthermore, in imperfect markets, the political connections of directors are useful in bringing in external resources and are valuable to firm value.”

The lessons? That having a family CEO doesn’t have to be a disadvantage at all. The difference between success and failure could be getting some outside experience; getting into the CEO job young; and most importantly having good connections - and deepening them by having a well-connected board to advise. 

Some of the conditions in the Thai study were peculiar to emerging markets. Does it stand for developed economies too? It's a question worth pondering. 

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