When family business CEOs step down

Family businesses and, more generally, businesses where the founder owns a significant stake and continues to run the company are excellent investments. There is evidence that founder-owned and family-owned businesses are more profitable in the long run. But founders and family CEOs don’t live forever, so what happens when they step down and hand the reins to someone else?

Essentially, there are three possible paths forward for individuals who run a family business and wish to retire. They can (i) appoint another family member as CEO (typically a child), (ii) appoint a professional CEO not connected to the family, or (iii) appoint a placeholder CEO who will manage the company until another family member is ready to take on the role as CEO.

A new study focused on these placeholder CEOs but presented results for all three options. The study authors examined all listed companies worldwide since 1949 and identified approximately 55,000 family firms, of which around 13,000 were run at some point by a non-family CEO.

Then they looked at the transition from a family member CEO to the next CEO. They compared the performance of the family business in the two years before the transition with the two years after the transition. The chart below shows the differences in Return on Assets (ROA), sales growth, and employment growth depending on the type of CEO taking over.

Performance around succession

Source: Amore et al. (2024)

The first thing to notice is that if the family CEO hands over to another family member, all metrics tend to decline on average. Profitability and sales growth both drop, and employment growth follows suit. This indicates the common trope that, in many cases, the son or daughter isn’t as skilled as the father or mother, and hence, with every generation, the business declines a little bit more. It’s what is known in the wealth management space as ‘shirtsleeves to shirtsleeves in three generations.’

However, placeholder CEOs tend to be even worse for the business, though these differences are not statistically significant. However, one must wonder if there is some truth to the results. After all, what motivation does a placeholder CEO have to do a good job for the shareholders in the long run? The incentives for a placeholder CEO are intrinsically short-term oriented, so he or she will likely manage the business for short-term gain rather than long-term growth.

However, note that a professional CEO who is not connected to the family, on average, improves the business across all three metrics. And these improvements are statistically significant. It is, by the way, not necessarily a CEO brought in from outside the company. It can also be an internal promotion for the CFO, COO, or other senior managers who are familiar with the firm. The study is unable to differentiate between CEOs who come in from outside or are promoted internally. However, what is key is to professionalise the leadership of the company and ensure that the people with the best qualifications to run the business are in charge, regardless of whether they share some of the family's genes or not.